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FERC Continues to Exclude Pipelines from Order 712 Above-Rate Deals

In reaffirming its landmark Order 712 removing the maximum rate cap on short-term released capacity last Thursday, FERC offered several clarifications, but denied rehearing, continuing to exclude pipelines from the program, saying pipelines already have built-in flexibility in their ability to negotiate rates.

The order removing the rate cap for shippers is designed to boost the secondary capacity market, encouraging firm shippers to sell space they cannot use for periods of up to one year. It also could encourage shippers to sign on for more firm capacity since they now have a means of making a profit on that capacity when they aren't using it themselves (see NGI, June 23).

But, the Federal Energy Regulatory Commission said, it continues to find it necessary to maintain the maximum rate ceilings for short-term pipeline transactions to protect against the potential exercise of market power by the pipelines.

"The removal of the rate ceiling for short-term capacity release transactions is designed to extend to capacity release transactions the pricing flexibility already available to pipelines through negotiated rates without compromising the fundamental protection provided by the availability of recourse rate service," the Commission said in Order No. 712-A.

Meanwhile, a recent report from data collector Capacity Center showed no-cap capacity release deals were responsible for one-third of the growth in the overall secondary capacity market in the first three months of its operation compared to the same August-through-October period a year ago. While still a very small part of the overall secondary capacity market, the 310 above-rate trades in the three-month period accounted for $527 million of increased value, with firm shippers collecting an average of twice the maximum rate for the deals, according to the Boston-based Capacity Center, which tracks deals on 53 interstate pipelines.

The overall trades in the period went from 5,686 in August through October 2007 to 6,569 in the same period this year. There were 61 above-max trades in August, the first month of Order 712 operation, and a combined 249 in September and October.

Responding to requests, FERC clarified several areas of the rule. Asset management arrangements (AMA) and retail unbundling releases are exempt from prohibition on extensions and rollovers for short-term releases. It also clarified that the delivery purchase obligation under an AMA to be five months for annual periods and five to 12 months for nonannual periods.

FERC also clarified that open-access liquefied natural gas (LNG) terminals can tie their connecting downstream pipeline with terminal capacity. Currently, open access LNG terminals are subject to bidding requirements. FERC declined to revise the rule for LNG terminals that are not open-access because it lacks knowledge on how such arrangements would be structured and therefore could not ensure transparency.

The final rule will be effective 30 days after publication in the Federal Register

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