Price caps in the short-term capacity market and negotiatedpipeline services are expected to take center stage when FERCunveils its long-anticipated proposals on second-generation Order636 issues at the Commission meeting this week. FERC is scheduledto address the controversial issues in companion notices ofproposed rulemaking (NOPRs), one focusing on the regulation ofshort-term transportation services and the other tacklingregulation of interstate pipeline services.

“I think the real battleground over what’s going to be debatedhere is lifting the price caps in the short-term market andallowing parties to negotiate terms and conditions. Everything elseis incrementally important. But those are clearly, at least fromthe producers’ standpoint, the two most serious issues that weface,” said Philip Budzik, director of federal regulatory affairsfor the Natural Gas Supply Association (NGSA). Other issues to bepossibly addressed, industry sources said, are the viability ofstraight-fixed variable (SFV) rate design, the five-year matchingterm under the right-of-first-refusal (ROFR) and some pipelinecertificate issues.

In the NOPR on short-term transportation services, theCommission likely will focus on the issue of whether to remove theprice caps on short-term firm, short-term interruptible andcapacity-release capacity, Budzik noted [RM98-10]. “I’m alsopresuming that they’ll look at the issue of direct brokering againbecause the LDCs have always complained about the fact that ittakes them three days to award capacity whereas you can call apipeline and in 10 minutes they can give you capacity over thephone.”

Negotiated terms and conditions of service will be the center ofattention in the NOPR on interstate gas transportation services, hebelieves [RM98-12]. “Chairman [James] Hoecker has said that he maythrow some other things in that, but from our perspective the mostimportant or critical [issue] is the negotiated terms andconditions.”

In a speech last week at the American Gas Association (AGA)annual Legal Forum, Commissioner William Massey said FERC was”seriously considering” the joint proposal by AGA and theInterstate Natural Gas Association of America (INGAA) on negotiatedterms and conditions of service, adding that it “clearly head[s] inthe right direction by requiring negotiated deals to be at leastsomewhat transparent and subject to protest.”

But he questioned whether the added flexibility was necessary.”It concerns me that those touted as needing flexibility, such aselectric generators, do not come forward to state their case” fornegotiated terms and conditions. Moreover, he noted that pipelinesalready have the ability to propose new, flexible services fortheir customers under current regulations. “The number of newparking, loaning and title transfer services shows the success ofthis approach.”

As for how a negotiated terms and conditions program should beimplemented, “I suggest that the Commission establish on a genericbasis [the] terms and conditions of service that would benon-negotiable,” Massey said. The AGA/INGAA proposed plan wouldgive individual pipelines and their customers the authority todetermine on their own which terms and conditions arenon-negotiable.

“While this heads in the right direction, I believe thatcertain terms and conditions – perhaps, for example, the quality ofgas, a minimum number of intra-day nominations, the right torelease capacity, access to secondary receipt and delivery points,and similar bedrock requirements – are so fundamental that theCommission should make them non-negotiable on all systems,” he toldgas attorneys at the AGA forum in Olympic Valley, CA.

He said he also was concerned that certain FERC policies – suchas the five-year matching term under ROFR and SFV rate design -favor short-term contracts over long-term agreements. “TheCommission will have to closely examine its existing policies toensure that they do not skew the balance in favor of short-termcontracts.” NGSA’s Budzik said he doubted FERC would raise the ROFRissue in the companion NOPRs.

Massey further believes the decontracting trend and state retailunbundling are tipping the scale in favor of short-term contracts.”On a generic basis, the Commission should look at theinterrelationship between federal policies for the interstate gridand state unbundling policies, so that we can find common groundbetween federal and state prerogatives.” He said he was opposed toa piecemeal approach to such issues, saying that it would likelyresult in “further fragmentation” of the interstate pipeline grid.

Look at Certificate Policies

He also questioned how the Commission’s certificate policieswere affecting the balance between short- and long-termtransactions. FERC’s current ‘need’ policy requires a pipeline topresent binding agreements for a term of 10 years or more coveringat least 25% of the proposed capacity in order for a project to wincertification. “In most instances, pipelines have successfully metthe Commission’s requirements…Recently, however, it appears thatpipelines may be having difficulty attracting long-term capacitycommitments for some new projects,” Massey said. “Have Commissionpolicies such as the five-year matching term under theright-of-first-refusal affected pipelines’ ability to attractlong-term capacity?”

Because non-affiliated shippers are more reluctant to signlong-term contracts than ever before, pipelines are turning totheir affiliates to meet the Commission’s need criteria, he noted.”Since these agreements are not arms-length transactions, shouldthe Commission’s certificate policies view them differently thanagreements with non-affiliates?” he asked.

Separately, the Commission also is scheduled to deal with theissue of complaint procedures at the Wednesday meeting. It haslisted the item under its “miscellaneous” agenda. “That meansthey’re probably going to be proposing a complaint process thatwould be applicable to both the natural gas and electricityindustries,” said Budzik. “There’s a significant difference in whatthe electrics have been proposing as opposed to what the gasindustry has been proposing. The electrics have embraced the notionof alternative dispute resolution or arbitration, but the customersof the gas pipeline system have not. We may end up beingdisappointed…”

Susan Parker

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