Debate over Pipe-Affiliate Rules Shapes Up

Pipelines and LDCs are urging FERC to take a measured approach in its review of Order 497 regulations that are designed to deter abuses between interstate pipes and their marketing affiliates, but natural gas producers believe it's time to make some major changes to the rules.

The Commission's current regulatory approach for weeding out abuses between pipelines and their affiliates "is not effective" because it places the "burden of policing the market largely on market participants," but it doesn't provide them with the "adequate market information" to carry this out, said the Independent Petroleum Association of America (IPAA) in comments filed at FERC on Jan. 5.

Until now, FERC has attempted to correct affiliate-abuse problems on a "case-by-case basis...long after the fact," said the independent producer group, adding that this approach will no longer do. It urged the Commission to scrap this "reactive" method to curbing affiliate abuses in favor of a more proactive approach. Significantly, it also asked that FERC's Order 497 regulations be applied to all types of pipeline affiliates, not just marketing affiliates.

Although the Commission's existing code of conduct governing the behavior between pipelines and their affiliates has been "generally helpful in curbing widespread clear" violations, the Natural Gas Supply Association (NGSA) called on FERC to take further steps to "expand and enhance safeguards against affiliate abuse."

Specifically, it proposes that pipelines be required to report actual usage and non-usage of scheduled capacity; FERC monitor on an ongoing basis a reasonable number (perhaps 200) of critical paths or critical receipt points on pipelines for evidence of affiliate abuses; FERC conduct frequent random audits of pipelines and affiliates; pipeline bidding procedures be revised to cap the term of affiliated bids at five years; rate caps be restored on releases by marketing affiliates that control a large portion of capacity on a given pipeline; and FERC consider ordering "complete structural separation" in cases where "egregious" violations of pipeline-affiliate rules occur.

The IPAA and the NGSA submitted their comments in advance of a public conference scheduled for Jan. 31 during which FERC will hear discussion on the need for changes to its pipeline-affiliate regulations.

Surprisingly, industrial gas customers --- who note they have been under "severe economic pressures" due to high natural gas prices this winter --- said they would be "wary of any proposals that would significantly disrupt the current regulatory framework," including existing pipeline-affiliate rules. They urged the Commission to "tread softly in embarking on any significant regulatory changes and, first and foremost, to do no harm."

FERC's current regulatory approach governing pipelines and affiliated marketers "appears to [be] working properly to limit and discourage the instances of overt abuse..." However, industrials were concerned that much of the information being publicly filed by pipelines was receiving "little broad-scale analysis by either interested third parties or the Commission." As a result, they called on the Commission to step up its efforts to "monitor the incoming information to screen for patterns of improper behavior."

Industrials believe affiliates should only be barred from holding, or limited in their ability to hold, capacity on their affiliate pipelines in cases where "extremely egregious behavior" has occurred. However, they cautioned FERC to be on the lookout for "areas and industry relationships that produce new type of affiliates or dealings that may escape the current rules or otherwise require additional scrutiny."

National Fuel Gas Distribution, an LDC affiliate of National Fuel Gas Supply Corp., believes the Commission's regulations "strike the right balance for dealing with pipeline affiliates." The Commission's affiliate standards, on one hand, give pipeline capacity-holders a "forum to challenge instances of improper affiliate activity," while, on the other hand, they allow "rational business structures to continue without significant additional costs," National Fuel said.

While it's good practice to take a "fresh look" at regulations from time to time, the LDC said it "is extremely concerned with some of the questions to be taken up by the Commission at the conference, including whether there should be prohibitions on affiliates holding capacity on affiliated pipelines, limitations on an affiliate's capacity market share, or broad applications of the standards of conduct to all affiliates." It contends such changes "would, at the very least, cause upheaval to a company like [National Fuel Distribution] and impose significant systems and administrative costs on its customers."

As expected, interstate pipelines contend that the current pipeline-affiliate rules need no changes. "The current standards of conduct, reporting requirements and complaint procedures have been shown to be, and continue to be, more than adequate to monitor affiliate transactions, and address any alleged affiliate abuse," said the Interstate Natural Gas Association of America (INGAA), which represents interstate pipes. Any move to stiffen the existing pipeline-affiliate rules would be harmful to the entire gas industry, it contends.

Before "further prohibitory rules" can be imposed on affiliate transactions, INGAA said three things must be conclusively established. "First, it must be proven that a significant industry-wide problem actually exists. Second, it must be established that a proposed regulation will actually remedy that industry-wide problem, and that the remedy proposed and adopted is the 'least competitively restrictive alternative.' Finally, it must be determined that the benefits of imposing the new remedy outweigh the costs."

Susan Parker

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