FERC to Audit Pipeline Affiliate Transactions

Following a year in which allegations of affiliate-abuse violations topped the headlines, FERC disclosed it is developing plans to audit as many as 10 pipelines this year to determine whether they are complying with the standards of conduct that place limits on the extent of their dealings with marketing affiliates.

"We are in the process of putting together a list from which we will select" six to 10 pipeline companies as targets of FERC audits in 1998, said John Delaware, the Office of Chief Accountant's (OCA) project manager. A final list of the companies to be audited should be out in a week or so, he told NGI last Thursday.

For potential candidates, the Commission will be looking at pipelines that have a large percentage of their transportation capacity dedicated to their marketing affiliates, and at those that have a large percentage of discounts, he noted. Three pipelines - KN Interstate Gas Transmission, Williston Basin Interstate and KN Wattenberg - already have been picked for audits, according to Delaware. The Commission has "some questions about organizational procedures" at the companies. FERC's Chief Accountant Debbie Clark said Carnegie Natural Gas also has been notified that it will be audited.

In a recent letter to gas pipeline companies, FERC informed the industry of its plans to step up its auditing of transactions involving pipelines and their marketing affiliates that took place between January 1996 and the present. The FERC auditors will be looking for "systematic problems and will take the appropriate course of action," Clark said. The audit reports will be made public once completed.

For Delaware, the job will be "kind of like being a cop" in one respect. But he sees it as more than that. The other part of his job will entail finding pipeline companies that do certain things better than others, and passing that information along to the Commission. Clark agreed, noting the goal of the audits is not just to be "punitive" but to help pipelines and their affiliates get into compliance on standards of conduct.

Clark said the OCA does not plan to hire additional auditors to carry out the stepped-up oversight program. It will use its existing staff of 73 employees, the majority of whom are auditors, for this effort. Each audit, she noted, will have a team of three to four OCA staffers, plus a manager. FERC's decision to shift OCA's focus away from solely auditing the financial records of energy companies will enable it to assume the additional workload with existing staff. "We will still look at the high-dollar areas," but the financial audits won't be as "comprehensive" as they have been in the past.

The OCA has set its sights beyond the auditing of interstate pipelines and their relationships with their marketing affiliates. "As we get going, we'll get into [auditing] other things, such as terms and conditions of tariffs. Our intent is to not just do affiliated type relationships," she told NGI.

FERC's stepped-up audit program comes in the wake of a staff audit report last July that substantiated allegations made by Amoco Production that Natural Gas Pipeline Company of America (NGPL) showed preference to its marketing affiliate, MidCon Gas Services Corp., over non-affiliates when awarding firm capacity on its system. Although the two parties reached a settlement, the case still is pending before FERC. Clark credited Chairman James Hoecker for the renewed focus on pipeline audits.

The Interstate Natural Gas Association of America (INGAA), which represents pipelines, had a measured reaction to the news. "We view this as a step towards light-handed regulation" of pipelines, said spokeswoman Anne Roland. The Commission is "setting up a structure that allows them to monitor pipeline activities and take care of problems as they occur rather than [using] command-and-control" tactics, she noted.

Gas producers and LDCs, on the other hand, praised FERC's move. This is an "important first step in deterring the pipelines from preferentially treating their affiliates," and it hopefully will become a "permanent feature of the FERC's audit and enforcement program," noted Philip Budzik, director for regulatory affairs and technical analysis at the Natural Gas Supply Association. While this "hasn't been a burning issue" for LDCs, the American Gas Association is supportive of FERC's efforts, said Brian White, director of gas transportation. "We just want to see a level playing field for everyone."

A producer source, who asked not to be identified, said the Commission's action was akin to putting more police on the streets. "It's the difference between having a police function that operates strictly through 911, and the analogy here would be the complaint process, or having a police function that operates by patrolling the streets. If the police were to solely rely on 911, there are a lot of violations of the law you'd never catch. And by having the police visible on the street, you deter a certain amount of crime that would have otherwise happened," he said.

"I think [this will be] good for the industry. I think it's something that FERC needs to engage in not just as a one-time activity, but as an ongoing activity just as much as the SEC audits investment companies on a regular basis."

FERC auditors should be aware of two things, however. "The problem [of affiliate abuse] extends beyond just pipelines and marketing affiliates. Pipelines also have a host of other corporate affiliates - power generation affiliates, gathering affiliates, LDC affiliates and storage affiliates. There's always the temptation to give your own corporate affiliate a break where you wouldn't have given other people similar discounts or deals or free hookups," the source said.

In addition, "the reality is going to be that through the audit function you're not going to catch everything. One of the things that's going to happen over time is the parties are going to become a little bit more sophisticated in terms of leaving a paper trail or phone records that would be audited."

As for the Amoco-NGPL complaint, "I think it will be hard for the Commission to walk away [from the alleged affiliate-abuse violations] because it was so systematic," the producer source said. "It wasn't something that just sort of happened accidentally or once. Apparently, it had been going on for sometime."

FERC reportedly is making headway in the hot-button case. In fact, it held a closed-door meeting on it last Wednesday. The Commission has a number of options before it: it could approve a request by Amoco, which was made after reaching a settlement with NGPL, to drop the complaint entirely; it could reject it in favor of further investigation of Natural's pipeline practices; or it could expand the FERC probe to include other interstate pipelines besides Natural. Several pipeline customers insist they might have been victims of Natural's alleged practices as well as Amoco. In addition, they claim Natural's practices are commonplace in the industry.

In a filing at the Commission last week, Natural Gas Clearinghouse and LG&E Natural Marketing Inc. urged FERC not to drop the case. "The stakes in this proceeding are high. The integrity of the Commission's competitive regulations, as well as the Commission's commitment to enforce them, are on trial." It "simply cannot, as Natural and Amoco have repeatedly argued, forgive and forget Natural's unlawful behavior merely because Natural has reached a private settlement with Amoco..." To do so would "send a message to the public that pipelines can buy their way out of unlawful activity."

Susan Parker

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