Expansion of the FERC definition of interstate pipelineaffiliate to include other subsidiaries beside marketingaffiliates, and rigorous market monitoring by the Commission,appeared to be the most popular of the solutions offered lastThursday to level the playing field in the face of the increasingconvergence of pipeline and power companies.

The suggestions came from marketers, producers, state regulatorsand consumers at a first-of-its-kind roundtable discussion beforekey staff members of the Federal Energy Regulatory Commission.

Dynegy Inc. favors preventive, rather than reactive measures, EdRoss, representing the marketer, said. “The best solution isstructural change.” This means expanding the definition ofaffiliates subject to the Order 497 affiliate rules to include morethan just marketing affiliates. He also advocated more rigorousmarket monitoring by FERC, a levelized bidding process and physicalseparation of pipeline and affiliate offices. Ross joined with MikeGoldenberg of FERC’s General Counsel’s Office, in leading adiscussion of pipeline “funny money,” or intracorporate transfers.”We can’t compete on any deal that a pipeline affiliate doesn’twant us to get,” Ross said.

New York Public Service Commission representative Phillip Teumimblasted merchant generating affiliates, saying convergence hasbrought “wonderful new opportunities for new types of affiliateabuses.” It is just too easy for “subtle” information about sitingof prospective power plants to pass between a pipeline and itsmerchant generating affiliate, Teumim said.

The current system of relying on the market to police itself andsend complaints to FERC doesn’t work, pipeline customers charged.It is too difficult and costly to monitor all the necessarypipeline transactions, to aggregate data from the varied displayson pipeline bulletin boards and to pursue legal actions that oftentake years. Dynegy’s Ross complained that posting an Adobe Acrobatdata file does not allow for manipulating the data to makecomparisons. Producers and representatives of large consumingcompanies said they did not have the budget for a full-time staffto monitor pipeline transactions, saying it should be FERC’s job asthe watchdog over monopoly pipelines to ensure fair play. Toadequately monitor 40 to 50 pipelines “would require a full timestaff ,” said the Natural Gas Supply Association’s Mark Haskell.Even by his large company members, “it cannot be done.”

BP Amoco’s Jeff Holligan and representatives of independentproducers said that much of the problem was at the producer end andinvolved denying access to gathering lines, or affiliates biddingup the price of the capacity to make producers pay more or keepthem out of the market. BP “has never won capacity unless we bidmore than it’s worth,” Holligan said. Also, since there are fewrate cases anymore, “we never know how much a pipeline iscollecting.”

Pipeline defenders argued that the rules are working. JoanDreskin, representing the Interstate Natural Gas Association ofAmerica, presented a table showing that all pipeline affiliatesheld a slightly smaller share (14.4%) of transportation capacity ontheir own pipeline affiliates in 2000 than they did in 1996(14.7%). Also, in the three cases of affiliate abuse prosecutedbefore FERC, the Commission made no finding that competitors hadbeen harmed. Beyond those cases, Dreskin said there is onlyanecdotal evidence of abuses, and pointed out that complaints aredeclining.

Ross disputed the INGAA figures, saying they did not includepipeline capacity managed by affiliates. And, he suggested, FERCdidn’t find any competitors harmed because it couldn’t find anyleft. “How many marketers are left? How many have been acquired bypipeline affiliates?” The three cases FERC prosecuted, involvingNGPL, Koch and Columbia, involved hundreds of violations over aperiod of years.

Adhering to the guidelines that no pending cases be discussed,no mention was made of the heated controversy surrounding El PasoMerchant Energy’s contract for a large block of capacity on El PasoNatural Gas, which several sources credited with sparking thecurrent affiliate debate.

Bill Scherman, representing an ad hoc group of marketers, andLeslie Lawner, Enron North America’s counsel, defended the rules asthey stand. Scherman, a former FERC general counsel, pointed outthe Commission had no record to base an expansion of the rules.Lawner said “the rules are generally good. I don’t think any gamesare played in most cases.”

The problem, however, is that no one really knows. Consumerscan’t detect abuse simply by reading a pipeline bulletin board,said Denise Goulet of the National Association of State UtilityConsumer Advocates. “It’s not readily apparent; it’s only whensomebody drops the ball or blows the whistle, that you can say’Aha! Affiliate abuse is happening.’ The underlying problem isinherent. The businesses in this country are set up to make moneywhere they can. If they have a regulated affiliate that has a limiton earnings and an unregulated affiliate that has no limit onearnings, the economic and financial incentive is to get what theycan out of the unregulated affiliate.”

“Just inherently, the fact that an affiliate can bid forcapacity on a pipeline creates a perverse disincentive,” said MikeReidy, representing the California Dairy Coalition of ConcernedEnergy Consumers. “I don’t feel very well protected when I knowthere structurally are institutional opportunities for affiliateabuse.”

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