Pipelines and LDCs are urging FERC to take a measured approachin its review of Order 497 regulations that are designed to deterabuses between interstate pipes and their marketing affiliates, butnatural gas producers believe it’s time to make some major changesto the rules.
The Commission’s current regulatory approach for weeding outabuses between pipelines and their affiliates “is not effective”because it places the “burden of policing the market largely onmarket participants,” but it doesn’t provide them with the”adequate market information” to carry this out, said theIndependent Petroleum Association of America (IPAA) in commentsfiled at FERC on Jan. 5.
Until now, FERC has attempted to correct affiliate-abuseproblems on a “case-by-case basis…long after the fact,” said theindependent producer group, adding that this approach will nolonger do. It urged the Commission to scrap this “reactive” methodto curbing affiliate abuses in favor of a more proactive approach.Significantly, it also asked that FERC’s Order 497 regulations beapplied to all types of pipeline affiliates, not just marketingaffiliates.
Although the Commission’s existing code of conduct governing thebehavior between pipelines and their affiliates has been “generallyhelpful in curbing widespread clear” violations, the Natural GasSupply 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 reportactual usage and non-usage of scheduled capacity; FERC monitor onan ongoing basis a reasonable number (perhaps 200) of criticalpaths or critical receipt points on pipelines for evidence ofaffiliate abuses; FERC conduct frequent random audits of pipelinesand affiliates; pipeline bidding procedures be revised to cap theterm of affiliated bids at five years; rate caps be restored onreleases by marketing affiliates that control a large portion ofcapacity on a given pipeline; and FERC consider ordering “completestructural separation” in cases where “egregious” violations ofpipeline-affiliate rules occur.
The IPAA and the NGSA submitted their comments in advance of apublic conference scheduled for Jan. 31 during which FERC will heardiscussion on the need for changes to its pipeline-affiliateregulations.
Surprisingly, industrial gas customers — who note they havebeen under “severe economic pressures” due to high natural gasprices this winter — said they would be “wary of any proposalsthat would significantly disrupt the current regulatory framework,”including existing pipeline-affiliate rules. They urged theCommission to “tread softly in embarking on any significantregulatory changes and, first and foremost, to do no harm.”
FERC’s current regulatory approach governing pipelines andaffiliated marketers “appears to [be] working properly to limit anddiscourage the instances of overt abuse…” However, industrialswere concerned that much of the information being publicly filed bypipelines was receiving “little broad-scale analysis by eitherinterested third parties or the Commission.” As a result, theycalled on the Commission to step up its efforts to “monitor theincoming information to screen for patterns of improper behavior.”
Industrials believe affiliates should only be barred fromholding, or limited in their ability to hold, capacity on theiraffiliate 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 ofaffiliates or dealings that may escape the current rules orotherwise require additional scrutiny.”
National Fuel Gas Distribution, an LDC affiliate of NationalFuel 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 pipelinecapacity-holders a “forum to challenge instances of improperaffiliate activity,” while, on the other hand, they allow “rationalbusiness structures to continue without significant additionalcosts,” National Fuel said.
While it’s good practice to take a “fresh look” at regulationsfrom time to time, the LDC said it “is extremely concerned withsome of the questions to be taken up by the Commission at theconference, including whether there should be prohibitions onaffiliates holding capacity on affiliated pipelines, limitations onan affiliate’s capacity market share, or broad applications of thestandards 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 andadministrative costs on its customers.”
As expected, interstate pipelines contend that the currentpipeline-affiliate rules need no changes. “The current standards ofconduct, reporting requirements and complaint procedures have beenshown to be, and continue to be, more than adequate to monitoraffiliate 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 existingpipeline-affiliate rules would be harmful to the entire gasindustry, it contends.
Before “further prohibitory rules” can be imposed on affiliatetransactions, INGAA said three things must be conclusivelyestablished. “First, it must be proven that a significantindustry-wide problem actually exists. Second, it must beestablished that a proposed regulation will actually remedy thatindustry-wide problem, and that the remedy proposed and adopted isthe ‘least competitively restrictive alternative.’ Finally, it mustbe determined that the benefits of imposing the new remedy outweighthe costs.”
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