The American Gas Association (AGA) told FERC it probably would be wise not to open a whole other can of worms by addressing the recent recommendations of the Virginia Industrial Gas Users’ Association (VIGUA). AGA said the VIGUA suggestions, in particular that FERC prohibit local distribution companies from simply transferring control of their firm transportation capacity to affiliates, go far beyond the scope of the Commission’s proposed rulemaking on a marketer Code of Conduct.

AGA said there is no connection between the issues raised by the industrials in their recent comments and the Federal Energy Regulatory Commission’s proposed rulemaking, which among other things is designed to prohibit gas sellers from engaging in wash trading or transactions that attempt to manipulate the market prices.

“The VIGUA proposal to restrict how LDCs manage their pipeline capacity entitlements clearly implicates the Commission’s capacity release rules and policies that plainly are outside the scope of this proceeding…,” AGA said. “Moreover, questions relating to an LDC’s management of its capacity or regarding its decision to use an affiliated marketer as its agent are matters for state commissions…”

The industrials, however, clearly disagree. Late last month they brought to FERC’s attention what they believe are capacity release abuses by a local distribution company, Virginia Natural Gas (VNG), and its marketing affiliate, Sequent Energy. VNG owns all of the primary firm capacity to the citygates serving its service territory in southern Virginia, but it has assigned that primary firm capacity to its market affiliate, Sequent (formerly Atlanta Gas Marketing).

“Under their deal, Sequent acts as VNG’s ‘agent’ and generally keeps half of the profits that can be generated from ‘off-system’ sales that utilize VNG’s transportation capacity,” VIGUA said. “Although the arrangement has been dressed up as an ‘agency service’ agreement, it is really an assignment of transportation capacity.” VIGUA said the LDC even told state regulators that an “assignment” would be made with all charges paid by the marketing affiliate to be rebated by the LDC — “a clear violation of this Commission’s rules that assignments have to be implemented through the capacity release program and that discounted releases must be subject to posting and bidding,” according to VIGUA.

“As a result of the severe capacity constraints on pipelines feeding VNG, Sequent is able to exercise market power over delivered natural gas that extracts high premiums for the firm transportation that Sequent controls,” the industrials explained.

They said that the exercise of market power on interstate transportation, extraction of revenues by refusing to release the capacity and tying it to gas sales through an affiliate are “just as much a threat to the integrity of natural gas markets as the other issues considered by the [rulemaking].”

VIGUA indicated that this also is not an isolated case. There are abuses like it on other interstate pipelines in which market power is being transferred by other LDCs to their marketing affiliates in complete circumvention of “both FERC-approved maximum transportation rates and the Commission’s carefully constructed capacity release program,” the association said.

As a remedy, VIGUA urged the Commission to prohibit the assignment of interstate pipeline capacity by LDCs to their marketing affiliates unless the LDC first offers the capacity to shippers behind the citygate or marketers who would serve citygate customers. The association also said the Commission should require all LDCs and their marketing affiliates to report to the Commission at least quarterly all their arrangements that “have the effect of transferring effective control over 30% or more of the LDC’s firm rights to any interstate pipeline capacity” along with significant details regarding the arrangements.

In reply comments to FERC, VNG defended its arrangement with its marketing affiliate. It said such arrangements were “relied upon by the Commission as critical support for the upstream unbundling requirement — a key element of the Commission’s restructuring of the interstate natural gas industry.”

The LDC also said the Commission already reviewed the agency agreement between VNG and Sequent’s predecessor in the agreement, Enron North America. “Its examination of the agreement’s terms and conditions left the Commission untroubled by the relationship,” VNG said. “Certainly, the Commission saw no reason to pause to question the overarching concept of LDCs using agents to manage their supply and transpiration portfolios.”

VNG said the industrials’ real motive is to gain access to the best capacity, the “first pickings” of prime seasonal capacity and “leave behind undesirable capacity that is difficult or impossible to market. It is entirely inappropriate for VIGUA to attempt to hijack this proceeding for purposes of trying to obtain preferential access to capacity and the Commission should reject VIGUA’s effort to do so.”

The AGA added that VIGUA’s proposal also would impose significant new reporting requirements on LDCs for capacity release when such releases already are subject to “extensive oversight and reporting.” Nevertheless, AGA said, the Commission cannot implement such reporting requirements without reissuing the proposed rulemaking to “provide appropriate notice to affected parties and instituting a review process at the Office of Management and Budget.”

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