A decision last month in which FERC reversed its policy on negotiated rates by allowing pipelines to enter into transactions tied to natural gas basis differentials "has now unleashed again a regulatory regime which will permit market manipulation," BP America Production Co. and affiliate BP Energy told FERC last week.

Expressing their opposition to the policy shift, the BP companies criticized the Federal Energy Regulatory Commission's decision to permit negotiated-rate agreements based on basis differentials that are not capped at pipelines' maximum tariff rates. At the very least, the Houston-based producer and its marketing affiliate said the Commission should have adopted mitigation measures [PL02-6].

"If the Commission permits negotiated-rate contracts using basis differentials that can exceed maximum tariff rates, the Commission should adopt...minimum conditions to prevent pipelines from withholding capacity from the market in an effort to manipulate prices." For example, pipelines should be required to post their negotiated-rate agreements on their bulletin boards prior to the execution of contracts; and pipes should be required to offer the capacity, and/or a portion of the capacity, for competitive bids by third parties, the BP companies said.

"The failure to adopt adequate mitigation measures will: 1) permit pipelines to exercise their market power to withhold capacity in order to artificially manipulate gas prices...; 2) create a disincentive for the pipeline to expand (by masking the true value of capacity); and 3) undermine the pro-competitive goals of Order 636," BP said.

The BP companies asked FERC to reconsider its decision last month reversing a July 2003 order in which the agency barred the use of basis differentials in negotiated-rate agreements between pipelines and their shippers. The Commission, in its January ruling, said that the generic policy against the use of gas basis differentials in negotiated-rate agreements had been overly restrictive. In the event FERC should decide to uphold its order allowing basis differentials that are not capped at maximum tariff rates, BP asked the agency to consider adopting its proposed mitigation measures.

The American Gas Association (AGA), which represents gas utilities, asked the Commission to clarify that its January decision also extends to releases of capacity. Specifically, it "seeks clarification that releasing shippers have the ability to price capacity releases using natural gas basis differentials, despite the fact that this may mean that the release price may at certain times exceed the pipeline's maximum tariff rate."

Absent this clarification, "interstate pipelines will enjoy greater pricing flexibility than will those releasing the same capacity into the secondary market," the AGA told FERC. "Given that capacity release is an important tool to help interstate pipeline customers reduce the cost of capacity to captive customers and spread revenue recovery over more shippers, including those who contract only for short terms, there is every reason to permit this same flexibility in pricing as offered to the interstate pipelines."

Pacific Gas and Electric echoed similar concerns. Without clarification by FERC, "firm shippers engaged in capacity-release transactions will be denied this opportunity, and instead will be limited to prices for their released capacity at or below the pipeline's maximum rate tariff," the utility said. Shippers engaged in capacity-release transactions should be allowed to charge the replacement shipper a contractual rate that is based on basis differentials, uncapped by the pipeline's maximum tariff rate, it noted.

The Natural Gas Supply Association (NGSA), however, asked FERC to confirm on rehearing that its policy supports basis differential deals in the secondary market that are capped at maximum tariff rates.

The producer group cited "significant policy concerns" with the agency's decision to allow pipes to enter into negotiated-rate agreements using basis differentials. To resolve these concerns, the NGSA asked FERC to clarify the method pipes should use to evaluate bids for capacity made available at index-based rates; actively monitor implementation of the agency's modified negotiated-rate policy and issue a public report after the policy has been in place for one year; and require the same level of transparency and pipeline reporting for index-based discount transactions as is required for index-based negotiated-rate transactions.

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