Debate over Pipe-Affiliate Rules Shapes Up
Pipelines and LDCs are urging FERC to take a measured approach
in its review of Order 497 regulations that are designed to deter
abuses between interstate pipes and their marketing affiliates, but
natural gas producers believe it's time to make some major changes
to the rules.
The Commission's current regulatory approach for weeding out
abuses between pipelines and their affiliates "is not effective"
because it places the "burden of policing the market largely on
market participants," but it doesn't provide them with the
"adequate market information" to carry this out, said the
Independent Petroleum Association of America (IPAA) in comments
filed at FERC on Jan. 5.
Until now, FERC has attempted to correct affiliate-abuse
problems on a "case-by-case basis...long after the fact," said the
independent producer group, adding that this approach will no
longer do. It urged the Commission to scrap this "reactive" method
to curbing affiliate abuses in favor of a more proactive approach.
Significantly, it also asked that FERC's Order 497 regulations be
applied to all types of pipeline affiliates, not just marketing
Although the Commission's existing code of conduct governing the
behavior between pipelines and their affiliates has been "generally
helpful in curbing widespread clear" violations, the Natural Gas
Supply Association (NGSA) called on FERC to take further steps to
"expand and enhance safeguards against affiliate abuse."
Specifically, it proposes that pipelines be required to report
actual usage and non-usage of scheduled capacity; FERC monitor on
an ongoing basis a reasonable number (perhaps 200) of critical
paths or critical receipt points on pipelines for evidence of
affiliate abuses; FERC conduct frequent random audits of pipelines
and affiliates; pipeline bidding procedures be revised to cap the
term of affiliated bids at five years; rate caps be restored on
releases by marketing affiliates that control a large portion of
capacity on a given pipeline; and FERC consider ordering "complete
structural separation" in cases where "egregious" violations of
pipeline-affiliate rules occur.
The IPAA and the NGSA submitted their comments in advance of a
public conference scheduled for Jan. 31 during which FERC will hear
discussion on the need for changes to its pipeline-affiliate
Surprisingly, industrial gas customers --- who note they have
been under "severe economic pressures" due to high natural gas
prices this winter --- said they would be "wary of any proposals
that would significantly disrupt the current regulatory framework,"
including existing pipeline-affiliate rules. They urged the
Commission to "tread softly in embarking on any significant
regulatory changes and, first and foremost, to do no harm."
FERC's current regulatory approach governing pipelines and
affiliated marketers "appears to [be] working properly to limit and
discourage the instances of overt abuse..." However, industrials
were concerned that much of the information being publicly filed by
pipelines was receiving "little broad-scale analysis by either
interested third parties or the Commission." As a result, they
called on the Commission to step up its efforts to "monitor the
incoming information to screen for patterns of improper behavior."
Industrials believe affiliates should only be barred from
holding, or limited in their ability to hold, capacity on their
affiliate pipelines in cases where "extremely egregious behavior"
has occurred. However, they cautioned FERC to be on the lookout for
"areas and industry relationships that produce new type of
affiliates or dealings that may escape the current rules or
otherwise require additional scrutiny."
National Fuel Gas Distribution, an LDC affiliate of National
Fuel Gas Supply Corp., believes the Commission's regulations
"strike the right balance for dealing with pipeline affiliates."
The Commission's affiliate standards, on one hand, give pipeline
capacity-holders a "forum to challenge instances of improper
affiliate activity," while, on the other hand, they allow "rational
business structures to continue without significant additional
costs," National Fuel said.
While it's good practice to take a "fresh look" at regulations
from time to time, the LDC said it "is extremely concerned with
some of the questions to be taken up by the Commission at the
conference, including whether there should be prohibitions on
affiliates holding capacity on affiliated pipelines, limitations on
an affiliate's capacity market share, or broad applications of the
standards of conduct to all affiliates." It contends such changes
"would, at the very least, cause upheaval to a company like
[National Fuel Distribution] and impose significant systems and
administrative costs on its customers."
As expected, interstate pipelines contend that the current
pipeline-affiliate rules need no changes. "The current standards of
conduct, reporting requirements and complaint procedures have been
shown to be, and continue to be, more than adequate to monitor
affiliate transactions, and address any alleged affiliate abuse,"
said the Interstate Natural Gas Association of America (INGAA),
which represents interstate pipes. Any move to stiffen the existing
pipeline-affiliate rules would be harmful to the entire gas
industry, it contends.
Before "further prohibitory rules" can be imposed on affiliate
transactions, INGAA said three things must be conclusively
established. "First, it must be proven that a significant
industry-wide problem actually exists. Second, it must be
established that a proposed regulation will actually remedy that
industry-wide problem, and that the remedy proposed and adopted is
the 'least competitively restrictive alternative.' Finally, it must
be determined that the benefits of imposing the new remedy outweigh