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FERC Temporarily Re-Adopts Pipe-Marketing Affiliate Rule

Responding to a court decision striking down the agency's expanded affiliate rule as it applies to interstate natural gas pipelines, the Federal Energy Regulatory Commission Tuesday temporarily readopted its former slimmed-down affiliate rule, Order 497, that restricted the relationship solely between interstate gas pipes and their marketing affiliates.

The Commission issued an interim rule readopting Order 497, which was first issued in 1988, following the U.S. Court of Appeals for the District of Columbia's ruling in November vacating and remanding a 2004 order by FERC that expanded the restrictions on the relationship of interstate gas pipes with a wide sphere of energy affiliates, not just marketing affiliates (see Daily GPI, Nov. 20, 2006).

In its ruling vacating Order 2004, the expanded affiliate rule, the court said FERC had failed to provide record evidence of abuse to justify its decision to broaden its standards of conduct to include affiliates other than marketing affiliates.

Order 2004 significantly broadened Order 497 regulations that barred pipeline providers from giving preferential treatment solely to their marketing affiliates. It extended the FERC restrictions against preferential treatment, information disclosure and employee sharing to a number of other affiliates of regulated pipeline providers, including traders, producers, gatherers and processors. In vastly expanding the reach of the standards, FERC relied on both a "claimed theoretical threat" of pipes granting undue preference to nonmarketing affiliates, and indicated that abuse by pipelines and nonmarketing affiliates was a "real problem," according to the court ruling.

"The interim rule repromulgates the standards of conduct that were not challenged before the court on an interim basis while the Commission considers how to respond to the court's decision on a permanent basis," the agency said [RM07-6, Order 690]. The interim rule will help "eliminate any uncertainty" about how the standards of conduct apply to interstate pipelines while the Commission develops a final rule that takes into consideration the court's concerns. FERC noted that it plans to issue a notice of proposed rulemaking -- the first step in the process -- in the "very near future."

Given that FERC rescinded Order 497, the pipeline-marketing affiliate rule, prior to adopting the expanded affiliate rule, Order 2004, there currently are no existing regulations governing the relationship between interstate pipelines and their marketing affiliates, FERC noted. This prompted the Commission to dust off its former pipeline-marketing rule, which was upheld in court, and readopt it. The interim rule is expected to remain in effect until the agency completes a final rule on the standards of conduct for interstate pipelines.

"The interim regulations will make clear that the standards of conduct apply to the relationship between natural gas transmission providers and marketing affiliates, and that the standards of conduct will not govern the relationship between natural gas transmission providers and their other energy affiliates. Because Order 2004 defined marketing differently than Order 497, the Commission [also] is revising the definition of marketing consistent with Order 497," the agency noted.

The interim rule will even take into consideration the challenged parts of Order 2004 that the court did not consider, according to FERC. "Specifically, for natural gas transmission providers, the interim rule will omit restrictions on shared risk management activities and employees, and revise the requirement to post all discretionary acts."

In addition, "the Commission will allow natural gas transmission providers to treat lawyers as permissibly shared employees, and [will] not require newly certificated natural gas pipeline transmission providers to observe the standards of conduct until they commence transmission services," the interim rule said.

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