Pipelines and LDCs have urged FERC to take an”if-it-ain’t-broke-don’t-fix-it” approach to its Order 497regulations that are designed to keep interstate pipes fromfavoring their affiliates, but gas producers believe changes arelong overdue.

The Commission’s current regulatory approach for weeding outabuses between pipelines and their affiliates “is not effective”because it places the “burden of policing the market largely onmarket participants,” but it doesn’t provide them with the”adequate market information” to carry this out, said theIndependent Petroleum Association of America (IPAA) in commentsfiled at FERC last Friday.

Until now, FERC has attempted to correct affiliate-abuseproblems on a “case-by-case basis…long after the fact,” said theindependent producer group, adding that this approach will nolonger do. It urged the Commission to scrap this “reactive” methodto curbing affiliate abuses in favor of a more proactive approach.Significantly, it also asked that FERC’s regulations be applied toall types of pipeline affiliates, not just marketing affiliates.

Although the Commission’s existing code of conduct governing thebehavior between pipelines and their affiliates has been “generallyhelpful in curbing widespread clear” violations, the Natural GasSupply 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 reportactual usage and non-usage of scheduled capacity; FERC monitor onan ongoing basis a reasonable number (perhaps 200) of criticalpaths or critical receipt points on pipelines for evidence ofaffiliate abuses; FERC conduct frequent random audits of pipelinesand affiliates; pipeline bidding procedures be revised to cap theterm of affiliated bids at five years; rate caps be restored oncapacity releases by marketing affiliates that control a largeportion 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 the comments in advance of apublic conference scheduled for Jan. 31 during which FERC will heardiscussion on the need for changes to its pipeline-affiliateregulations.

Surprisingly, industrial gas customers — who note they havebeen under “severe economic pressures” due to high natural gasprices this winter — said they would be “wary of any proposalsthat would significantly disrupt the current regulatory framework,”including existing pipeline-affiliate rules.

However, industrials were concerned that much of the informationbeing publicly filed by pipelines was receiving “little broad-scaleanalysis by either interested third parties or the Commission.” Asa result, they called on the Commission to step up its efforts to”monitor the incoming information to screen for patterns ofimproper behavior.”

Further, industrials said affiliates should only be barred fromholding, or limited in their ability to hold, capacity on theiraffiliate 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 ofaffiliates or dealings that may escape the current rules orotherwise require additional scrutiny.”

National Fuel Gas Distribution, an LDC affiliate of NationalFuel 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 pipelinecapacity-holders a “forum to challenge instances of improperaffiliate activity,” while, on the other hand, they allow “rationalbusiness structures to continue without significant additionalcosts,” National Fuel said.

While it’s good practice to take a “fresh look” at regulationsfrom time to time, the LDC said it “is extremely concerned withsome of the questions to be taken up by the Commission at theconference, including whether there should be prohibitions onaffiliates holding capacity on affiliated pipelines, limitations onan affiliate’s capacity market share, or broad applications of thestandards of conduct to all affiliates.” It contends such changes”would, at the very least, cause upheaval to a company like[National Fuel Gas Distribution] and impose significant systems andadministrative costs on its customers.”

As expected, interstate pipelines contend that the currentpipeline-affiliate rules do not require changes. “The currentstandards of conduct, reporting requirements and complaintprocedures have been shown to be, and continue to be, more thanadequate to monitor affiliate transactions, and address any allegedaffiliate abuse,” said the Interstate Natural Gas Association ofAmerica (INGAA), which represents interstate pipes. Any move tostiffen the existing pipeline-affiliate rules would be harmful tothe entire gas industry, it contends.

Before “further prohibitory rules” can be imposed on affiliatetransactions, INGAA said three things must be conclusivelyestablished. “First, it must be proven that a significantindustry-wide problem actually exists. Second, it must beestablished that a proposed regulation will actually remedy thatindustry-wide problem, and that the remedy proposed and adopted isthe ‘least competitively restrictive alternative.’ Finally, it mustbe determined that the benefits of imposing the new remedy outweighthe costs.”

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