Expressing concern that the Federal Energy Regulatory Commission’s proposed rule on affiliate bidding could block bids that are entirely appropriate, the American Gas Association (AGA) urged the agency to revise the proposal to specifically target collusive behavior by affiliates during an open season that relies on pro rata allocation.
While supportive of the Commission’s efforts to prevent manipulation in open seasons, “AGA is concerned…that the Commission’s proposed rules would unnecessarily limit conduct by affiliates that is entirely appropriate. AGA believes that the proposed rules would also unnecessarily burden participation in pipeline open seasons and disrupt the capacity release markets,” said the group, which represents natural gas utilities.
The notice of proposed rulemaking (NOPR), which FERC issued in early April, would bar multiple affiliates from bidding in an open season for capacity allocated on a pro rata basis unless an affiliate has an “independent business reason” for submitting a bid (see Daily GPI, June 2). It also would prohibit affiliates from releasing capacity obtained in an open season on a pro rata allocation to another affiliate, or allow an affiliate to acquire such capacity from another affiliate [RM11-15].
Saying this could restrict legitimate bidding, AGA called on FERC to change the proposal to specifically bar affiliates from participating in an open season in which a pipeline may allocate capacity on a pro rata basis, if the intent is to obtain a “larger allocation of capacity for one affiliate than that affiliate could acquire for itself.”
If the NOPR is not altered, it would as an unintended consequence “unnecessarily limit or chill conduct by affiliates that is entirely appropriate,” AGA said.
“The proposed rules would unnecessarily burden participation in pipeline open seasons. At best, every market participant with affiliates would be required to document an independent reason each time it bids in a pipeline open season with a pro rata allocation method in case any other market participant with whom it might be considered affiliated sought to submit a bid.
“In many cases, a market participant would have no way of knowing whether some of its affiliates intended to or did submit a bid in the same pipeline open season with a pro rata allocation method,” AGA said.
Under the NOPR, “an affiliate bidder that is successful in a pipeline open season with a pro rata allocation method [also] would…need to establish procedures to ensure that none of its affiliates receives the capacity [via a release] at any time for as long as the affiliated bidder has rights to the capacity. Such procedures would be disruptive to the capacity release market,” the utility group said.
“The capacity release market may thus become skewed as market participants with affiliates that would otherwise offer or bid on capacity to meet their legitimate business needs are driven from the market in order to ensure they do not run afoul of the regulations.”
AGA called on FERC to offer guidance on how affiliates can establish an independent business reason for bidding. “In particular, the Commission should clarify that entities, such as gas distribution utilities, that operate in multiple jurisdictions either as affiliated entities or as a single corporate entity with multiple operative divisions, may submit multiple bids on behalf of two or more affiliates or divisions in a pipeline open season with a pro rata allocation where each affiliate or division has its own need for the capacity,” AGA said.
The Natural Gas Supply Association raised concerns that the proposed rule could cause some affiliates with legitimate, independent business reasons to miss out on bidding for capacity, and it called on FERC to provide an additional explanation of what constitutes an “independent business reason” for the purpose of bidding in an open season.
The AGA suggests the Commission should narrow the focus of the proposed rule to zero in on conduct that is considered manipulative. FERC’s NOPR stems from an Office of Enforcement investigation into a 2007 open season on Cheyenne Plains Natural Gas Co. pipeline. FERC at the time received a number of calls from Cheyenne open season participants claiming that some marketers submitted bids on behalf of multiple affiliates in order to “game” the pro rata allocation method relied upon by Cheyenne. Calls to the agency’s hot line triggered a FERC investigation of bidder conduct during the Cheyenne open season and similar open seasons held on Colorado Interstate Gas and Northern Natural.
Following an 18-month investigation, the Commission in early 2009 approved four stipulation and consent agreements, requiring marketers and other energy firms to pay more than $8 million in civil penalties and disgorge approximately $4 million in unjust profits for allegedly engaging in fraudulent open season bidding for transportation capacity on the Cheyenne Plains pipeline (see Daily GPI, Jan. 16, 2009).
“The inappropriate conduct in the March 2007 open season involving Cheyenne Plains Gas Pipeline…is that two or more entities worked together to secure a greater share of pipeline capacity for one entity [than] that entity could have otherwise obtained for itself. The gravamen of the manipulative conduct…is collusion to secure a greater share of capacity for one entity than that entity could otherwise acquire for itself…AGA contends that the remedy [in] the proposed rules is not tailored to address the conduct considered to be manipulative. Accordingly, AGA recommends that the Commission revise its proposal to specifically prohibit the conduct considered to be manipulative.” the utility group said.
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