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FERC Scheduled to Address Next Generation Gas Issues

FERC Scheduled to Address Next Generation Gas Issues

Price caps in the short-term capacity market and negotiated pipeline services are expected to take center stage when FERC unveils its long-anticipated proposals on second-generation Order 636 issues at the Commission meeting this week. FERC is scheduled to address the controversial issues in companion notices of proposed rulemaking (NOPRs), one focusing on the regulation of short-term transportation services and the other tackling regulation of interstate pipeline services.

"I think the real battleground over what's going to be debated here is lifting the price caps in the short-term market and allowing parties to negotiate terms and conditions. Everything else is incrementally important. But those are clearly, at least from the producers' standpoint, the two most serious issues that we face," said Philip Budzik, director of federal regulatory affairs for the Natural Gas Supply Association (NGSA). Other issues to be possibly addressed, industry sources said, are the viability of straight-fixed variable (SFV) rate design, the five-year matching term under the right-of-first-refusal (ROFR) and some pipeline certificate issues.

In the NOPR on short-term transportation services, the Commission likely will focus on the issue of whether to remove the price caps on short-term firm, short-term interruptible and capacity-release capacity, Budzik noted [RM98-10]. "I'm also presuming that they'll look at the issue of direct brokering again because the LDCs have always complained about the fact that it takes them three days to award capacity whereas you can call a pipeline and in 10 minutes they can give you capacity over the phone."

Negotiated terms and conditions of service will be the center of attention in the NOPR on interstate gas transportation services, he believes [RM98-12]. "Chairman [James] Hoecker has said that he may throw some other things in that, but from our perspective the most important or critical [issue] is the negotiated terms and conditions."

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 the Interstate Natural Gas Association of America (INGAA) on negotiated terms and conditions of service, adding that it "clearly head[s] in the right direction by requiring negotiated deals to be at least somewhat transparent and subject to protest."

But he questioned whether the added flexibility was necessary. "It concerns me that those touted as needing flexibility, such as electric generators, do not come forward to state their case" for negotiated terms and conditions. Moreover, he noted that pipelines already have the ability to propose new, flexible services for their customers under current regulations. "The number of new parking, loaning and title transfer services shows the success of this approach."

As for how a negotiated terms and conditions program should be implemented, "I suggest that the Commission establish on a generic basis [the] terms and conditions of service that would be non-negotiable," Massey said. The AGA/INGAA proposed plan would give individual pipelines and their customers the authority to determine on their own which terms and conditions are non-negotiable.

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

He said he also was concerned that certain FERC policies - such as the five-year matching term under ROFR and SFV rate design - favor short-term contracts over long-term agreements. "The Commission will have to closely examine its existing policies to ensure that they do not skew the balance in favor of short-term contracts." NGSA's Budzik said he doubted FERC would raise the ROFR issue in the companion NOPRs.

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

Look at Certificate Policies

He also questioned how the Commission's certificate policies were affecting the balance between short- and long-term transactions. FERC's current 'need' policy requires a pipeline to present binding agreements for a term of 10 years or more covering at least 25% of the proposed capacity in order for a project to win certification. "In most instances, pipelines have successfully met the Commission's requirements...Recently, however, it appears that pipelines may be having difficulty attracting long-term capacity commitments for some new projects," Massey said. "Have Commission policies such as the five-year matching term under the right-of-first-refusal affected pipelines' ability to attract long-term capacity?"

Because non-affiliated shippers are more reluctant to sign long-term contracts than ever before, pipelines are turning to their affiliates to meet the Commission's need criteria, he noted. "Since these agreements are not arms-length transactions, should the Commission's certificate policies view them differently than agreements with non-affiliates?" he asked.

Separately, the Commission also is scheduled to deal with the issue of complaint procedures at the Wednesday meeting. It has listed the item under its "miscellaneous" agenda. "That means they're probably going to be proposing a complaint process that would be applicable to both the natural gas and electricity industries," said Budzik. "There's a significant difference in what the electrics have been proposing as opposed to what the gas industry has been proposing. The electrics have embraced the notion of alternative dispute resolution or arbitration, but the customers of the gas pipeline system have not. We may end up being disappointed..."

Susan Parker

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