After 18 months in the making, FERC yesterday unveiled itsmuch-anticipated mega-rule that tackles a full plate of post-Order636 reforms designed to promote greater efficiency and fairness inan ever-changing natural gas market.

The centerpiece of the final rule is the Commission’s decisionto lift the price caps on short-term transactions (less than oneyear) in the secondary market on an experimental basis for two anda half years — until Sept. 30, 2002, at which point it willdecide either to extend the pilot or eliminate it altogether.Another key initiative offers pipelines and their customersalternative pricing options in the form of seasonal andterm-differentiated rates.

Noticeably absent were two of the most controversial proposalsthat FERC had considered — allowing interstate gas pipelines andtheir customers to individually tailor the terms and conditions ofservice, and mandating that pipelines conduct daily capacityauctions in return for the removal of the price caps in thesecondary market.

The final rule “may be the most important generic decision theCommission has made in the gas industry since Order 636,” whichwent into effect eight years ago, said Chairman James Hoecker. But,he cautioned, “this is not 636 or [Order] 888. It does notfundamentally re-order the commercial relationships in the marketin the way those orders did…..This order represents what industryand public policy-makers must do ‘after’ a competitive market hasbeen established.” The rule essentially is the next step in atransitional gas market, where the commodity is fully deregulatedand transportation is only partly deregulated, a FERC staff membersaid.

The rulemaking incorporates a number of measures that were partof the notice of proposed rulemaking (NOPR) on short-term gasmarkets and the notice of inquiry (NOI) addressing the regulationof long-term pipeline services, which were issued in July 1998(RM98-10, RM98-12).

Remarkably, none of the commissioners dissented Wednesday, butthat didn’t mean they supported everything in the rule. “This isnot a perfect rule, I don’t think. I would have strongly preferredlifting the price cap on the release market for longer or perhapspermanently,” Hoecker said. Despite the limited timeframe, “I thinkthe less-inhibited secondary market will prove itself as a veryeffective way to discipline and reduce the price of capacityoverall, but especially in the short-term market.”

Commissioner Curt Hebert Jr. said he considered dissentingbecause he didn’t think the final rule went far enough. He decidedto concur in the end “because I think the removal of the pricecaps…provides multiple benefits to the market,” especially toconsumers. But he found the decision to lift the caps for only atwo-year period “unacceptable.” Hebert said data provided to himjustified “clear[ly] and convincing[ly]” the permanent removal ofthe caps.

FERC said it would “actively” monitor the effects of the removalof the price caps to determine whether any changes may be neededbefore September 2002, when the waiver expires. “As the waiverperiod progresses, I will be particularly watchful for market-powerissues, such as the withholding of capacity and price spikes,” saidCommissioner Linda K. Breathitt.

She believes the Commission’s action will have a number ofpotential benefits. “Uncapped capacity release rates may encourageshippers to make more firm capacity available. Parties releasingcapacity also can benefit by receiving full market value for theircapacity during peak periods. Finally, releasing the pricing capcould act to make peak-period transactions more transparent.”

The American Gas Association (AGA), which represents LDCs,quickly hailed the decision, saying it provides for utilities to be”compensated more fairly for the valuable capacity they” resellinto the secondary market.

The LDC group also applauded the “creative compromise” that FERCreached with respect to seasonal ratemaking, which will permitpipelines to collect a greater amount of their reservation chargesduring peak demand periods. The AGA was concerned the seasonal-rateproposal would shift to traditional gas consumers some of thepipeline costs associated with meeting electric generators’ peaksummertime load.

But FERC “appears to have permitted pipelines to file for peakand off-peak rates to accommodate seasonal demand of certainsegments of the market, without harming utilities and theircustomers,” said Roger Cooper, AGA’s executive vice president forpolicy and planning. He noted a provision requiring pipelines tocredit 50% of excess revenue from seasonal rates will provide”benefits to gas utility customers who pay for pipeline capacitythroughout the year.”

In addition to seasonal ratemaking, the final rule givespipelines the flexibility to charge term-differentiated rates,which essentially permits them to charge lower rates for longerterms, and higher rates for shorter terms. FERC believes this mightinduce pipeline customers to contract for longer terms.

The Interstate Natural Gas Association of America (INGAA), whichrepresents interstate pipelines, yesterday was uncharacteristicallysilent on the gas initiatives in the final order, saying itwouldn’t comment until it had a chance to better review thedecision.

FERC’s decision not to award pipelines the authority tonegotiate terms and conditions of service was a big letdown forinterstate pipelines, which lobbied hard for it. CommissionerWilliam Massey said his own reservations on the issue “were echoedby a number of [industry] commenters who viewed the concept asproviding flexibility that would lead to discrimination.” In theend, FERC concluded that “this is an issue that warrants furtherdeliberations both within the Commission and externally withpipelines, their customers and affected interests.”

The much-dreaded initiative calling for daily auctioning ofpipeline capacity also failed to make the final cut, according toMassey. However, he noted it does provide for a “voluntary auctionprocess that I hope will lead to creative proposals.”

Many of the less controversial issues, which Breathitt hastouted, were included in the final action. FERC adopted “newregulations to require equality in scheduling…..between releasedcapacity and pipeline capacity. This is an important step inplacing capacity-release transactions on a more equal footing withpipeline services,” she said. Also, the rule “standardizes andcodifies the Commission’s policies concerning segmentation rights.This change should increase shippers’ alternative capacity sourcesand, therefore, enhance competition.”

Additionally, the rule encourages pipelines to rely less onpenalties and operational flow orders. It “move[s] away from thepipeline ‘command-and-control’ penalty scheme towards a system thatis intended to provide the correct incentives for pipelines andshippers to avoid the need to impose penalties,” Breathitt said.

It also imposes real-time reporting requirements on all pipelinecapacity transactions. This is intended to give market participantsaccess to more information so they can make “informed decisionsabout how to structure their supply capacity portfolios,” Masseysaid. “These enhanced posting requirements will result in the kindof transactional transparency that is necessary to allow theCommission and market participants…..determine whether marketsare functioning free of interference, affiliate abuse or theanti-competitive withholding of capacity.”

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