FERC to Audit Pipeline Affiliate Transactions
Following a year in which allegations of affiliate-abuse violations
topped the headlines, FERC disclosed it is developing plans to audit as
many as 10 pipelines this year to determine whether they are complying
with the standards of conduct that place limits on the extent of their
dealings with marketing affiliates.
"We are in the process of putting together a list from which we
will select" six to 10 pipeline companies as targets of FERC audits
in 1998, said John Delaware, the Office of Chief Accountant's (OCA) project
manager. A final list of the companies to be audited should be out in a
week or so, he told NGI last Thursday.
For potential candidates, the Commission will be looking at pipelines
that have a large percentage of their transportation capacity dedicated
to their marketing affiliates, and at those that have a large percentage
of discounts, he noted. Three pipelines - KN Interstate Gas Transmission,
Williston Basin Interstate and KN Wattenberg - already have been picked
for audits, according to Delaware. The Commission has "some questions
about organizational procedures" at the companies. FERC's Chief Accountant
Debbie Clark said Carnegie Natural Gas also has been notified that it will
In a recent letter to gas pipeline companies, FERC informed the industry
of its plans to step up its auditing of transactions involving pipelines
and their marketing affiliates that took place between January 1996 and
the present. The FERC auditors will be looking for "systematic problems
and will take the appropriate course of action," Clark said. The audit
reports will be made public once completed.
For Delaware, the job will be "kind of like being a cop" in
one respect. But he sees it as more than that. The other part of his job
will entail finding pipeline companies that do certain things better than
others, and passing that information along to the Commission. Clark agreed,
noting the goal of the audits is not just to be "punitive" but
to help pipelines and their affiliates get into compliance on standards
Clark said the OCA does not plan to hire additional auditors to carry
out the stepped-up oversight program. It will use its existing staff of
73 employees, the majority of whom are auditors, for this effort. Each
audit, she noted, will have a team of three to four OCA staffers, plus
a manager. FERC's decision to shift OCA's focus away from solely auditing
the financial records of energy companies will enable it to assume the
additional workload with existing staff. "We will still look at the
high-dollar areas," but the financial audits won't be as "comprehensive"
as they have been in the past.
The OCA has set its sights beyond the auditing of interstate pipelines
and their relationships with their marketing affiliates. "As we get
going, we'll get into [auditing] other things, such as terms and conditions
of tariffs. Our intent is to not just do affiliated type relationships,"
she told NGI.
FERC's stepped-up audit program comes in the wake of a staff audit report
last July that substantiated allegations made by Amoco Production that
Natural Gas Pipeline Company of America (NGPL) showed preference to its
marketing affiliate, MidCon Gas Services Corp., over non-affiliates when
awarding firm capacity on its system. Although the two parties reached
a settlement, the case still is pending before FERC. Clark credited Chairman
James Hoecker for the renewed focus on pipeline audits.
The Interstate Natural Gas Association of America (INGAA), which represents
pipelines, had a measured reaction to the news. "We view this as a
step towards light-handed regulation" of pipelines, said spokeswoman
Anne Roland. The Commission is "setting up a structure that allows
them to monitor pipeline activities and take care of problems as they occur
rather than [using] command-and-control" tactics, she noted.
Gas producers and LDCs, on the other hand, praised FERC's move. This
is an "important first step in deterring the pipelines from preferentially
treating their affiliates," and it hopefully will become a "permanent
feature of the FERC's audit and enforcement program," noted Philip
Budzik, director for regulatory affairs and technical analysis at the Natural
Gas Supply Association. While this "hasn't been a burning issue"
for LDCs, the American Gas Association is supportive of FERC's efforts,
said Brian White, director of gas transportation. "We just want to
see a level playing field for everyone."
A producer source, who asked not to be identified, said the Commission's
action was akin to putting more police on the streets. "It's the difference
between having a police function that operates strictly through 911, and
the analogy here would be the complaint process, or having a police function
that operates by patrolling the streets. If the police were to solely rely
on 911, there are a lot of violations of the law you'd never catch. And
by having the police visible on the street, you deter a certain amount
of crime that would have otherwise happened," he said.
"I think [this will be] good for the industry. I think it's something
that FERC needs to engage in not just as a one-time activity, but as an
ongoing activity just as much as the SEC audits investment companies on
a regular basis."
FERC auditors should be aware of two things, however. "The problem
[of affiliate abuse] extends beyond just pipelines and marketing affiliates.
Pipelines also have a host of other corporate affiliates - power generation
affiliates, gathering affiliates, LDC affiliates and storage affiliates.
There's always the temptation to give your own corporate affiliate a break
where you wouldn't have given other people similar discounts or deals or
free hookups," the source said.
In addition, "the reality is going to be that through the audit
function you're not going to catch everything. One of the things that's
going to happen over time is the parties are going to become a little bit
more sophisticated in terms of leaving a paper trail or phone records that
would be audited."
As for the Amoco-NGPL complaint, "I think it will be hard for the
Commission to walk away [from the alleged affiliate-abuse violations] because
it was so systematic," the producer source said. "It wasn't something
that just sort of happened accidentally or once. Apparently, it had been
going on for sometime."
FERC reportedly is making headway in the hot-button case. In fact, it
held a closed-door meeting on it last Wednesday. The Commission has a number
of options before it: it could approve a request by Amoco, which was made
after reaching a settlement with NGPL, to drop the complaint entirely;
it could reject it in favor of further investigation of Natural's pipeline
practices; or it could expand the FERC probe to include other interstate
pipelines besides Natural. Several pipeline customers insist they might
have been victims of Natural's alleged practices as well as Amoco. In addition,
they claim Natural's practices are commonplace in the industry.
In a filing at the Commission last week, Natural Gas Clearinghouse and
LG&E Natural Marketing Inc. urged FERC not to drop the case. "The
stakes in this proceeding are high. The integrity of the Commission's competitive
regulations, as well as the Commission's commitment to enforce them, are
on trial." It "simply cannot, as Natural and Amoco have repeatedly
argued, forgive and forget Natural's unlawful behavior merely because Natural
has reached a private settlement with Amoco..." To do so would "send
a message to the public that pipelines can buy their way out of unlawful