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Energy Industry Split on FERC’s Proposed Affiliate Rule
Interstate natural gas pipelines, electric utility transmission owners and local distribution companies believe FERC has gone over-board in its proposed rule that would completely wall off regulated transportation and transmission companies from their unregulated affiliates to stamp out market-power abuses, while shippers and consumers — who would benefit most from the stricter rule — think the Commission has struck the right balance.
“The Commission’s proposed rules are too broad, and would hurt customers and natural gas utility shareholders by forcing them to duplicate facilities and staffing [in compliance with the rule], thus imposing substantial direct and indirect costs without commensurate benefits,” said Jane Lewis, senior managing counsel for the American Gas Association (AGA), which represents gas LDCs.
The AGA is especially concerned about the proposed rule because it may make gas utilities that are affiliated with interstate pipelines subject for the first time to FERC’s standards of conduct that govern the behavior between pipelines and their affiliates.
She contends that FERC has “over-reached” in its proposed rule, which seeks to extend the Commission’s existing gas-only standards of conduct to apply to both gas pipelines and electric transmission providers. It calls on regulated pipeline/transmission monopolies to be physically separated, operate independently and to keep separate books/records from all of their energy affiliates, not just their unregulated marketing affiliates, to limit the opportunity to show undue preference to affiliates over non-affiliates. The proposed rule was issued in late September.
The Interstate Natural Gas Association of America (INGAA), which represents interstate pipelines, said the proposed rule has been written “so broadly” that it “threatens to interfere with the day-to-day functioning of interstate pipeline systems,” and could also “disrupt necessary communications between parent corporations and their subsidiaries, as well as the relationships between interstate pipelines and their affiliates.”
Moreover, “the costs associated with implementing and complying would be enormous,” INGAA told FERC in comments last week. The proposed rule also raises “serious jurisdictional questions” because, as it is currently drafted, the rule would reach outside of U.S. borders to affect company affiliate operations, the trade group argued.
But Houston-based Dynegy Inc.”strongly supports” the proposed rule, and called on FERC to “go even further to implement structural remedies.” Predictably, “there…will be numerous companies requesting that the Commission tailor its proposal more narrowly so that it will not apply, for example, between affiliated pipelines, or between pipelines and their affiliated LDCs, producers or processors. Economies of scale may be lost to the extent corporations must hire extra employees to separate functions that currently are consolidated, but the public policy need for greater affiliate control is overwhelming,” the marketer/trader said.
As a an extreme solution to the affiliate-abuse problem, Dynegy suggested that energy affiliates be banned from buying firm capacity directly from their sister pipelines. Rather, affiliates should be required to “transact on the pipelines by participating in the secondary market in arm’s-length transactions with other shippers. In this way, the affiliate can acquire the home pipeline services they need on a firm basis to perform transportation and storage services, but they do so without the ability to gain preferential deals from the pipelines based on the structural advantage inherent in intra-corporate transfers.”
The California Dairy Coalition advocated a similar ban on affiliates, saying it believes that “direct transactions [between pipelines and affiliates] set up a scenario which could lead to market power abuse.” In the event FERC “ultimately determines to adopt [the] less stringent approach as a final rule, the coalition believes it will require considerable resources…to engage in vigorous oversight of the numerous entities and large holding companies active in the industry to insure compliance with the rule.”
The “recent dramatic and unexpected collapse” of the once-powerful Enron Corp.”highlights the incredibly important role that the Commission and its staff [must] play in the oversight of companies that have both regulated and unregulated arms of the industry ‘under the same roof,'” the coalition noted.
“It is still too early to determine whether any of the problems at Enron were associated with so many different functions, both regulated and unregulated, being conducted by the various arms of one company. However, the speed of Enron’s implosion demands extended review by the Commission to fully understand the interrelationships of the various entities, and the resultant impact (if any) on consumers.”
The coalition also believes that closer FERC oversight will be required of the marketers and traders that are picking up the market share once held by Enron. “Where those companies have both regulated and unregulated entities, such expansions of market share increase the potential for abuse, to the detriment of consumers. Thus, Enron’s disappearance (or diminution), by eliminating one competitor, leads to the need for additional scrutiny by the Commission of the remaining market participants,” it said.
In its comments filed last Thursday, the AGA urged FERC to continue to exempt gas utilities that are affiliated with interstate pipes from the standards, when the utilities act in their traditional function of “purchasing and arranging for the transportation of gas for their own system, and then selling that gas to their customers.” The AGA noted that state regulators oversee this traditional sales function of gas utilities, and watch closely for market abuses.
But the Utah Associated Municipal Power Systems (UAMPS), which includes 45 municipal and public power systems in six western states, thinks the standards should apply to both affiliated gas and electric utilities. “There is no reason to believe…that extending the standards of conduct to include bundled retail load will threaten transmission providers’ and state commissions’ ability to ensure reliable retail service. Non-affiliated load-serving entities, like UAMPS and its members, who depend on others’ transmission systems to integrate their resources and loads, must also ensure reliable service to retail loads, and have successfully done so without preferential access to transmission information.”
Industrial shippers told FERC that they believe the potential for affiliate abuse appears to greatest in the electric markets. “While the potential for affiliate abuse does remain in natural gas pipeline markets, in the 15 years since Order 436 and 13 years since Order 497, many interstate pipelines appear to have taken substantial steps to comply with the spirit of the gas marketing affiliate rules. On the electric side, however, not only is open access still in its infancy, but integrated utilities are much better positioned to abuse market power through the subtle (or not so subtle) interplay between generation and transmission patterns,” they said.
Nevertheless, the Industrials believe that the Commission should pair its affiliate regulations with “vigorous oversight” of gas transportation markets and operations. “Aggressive market monitoring, an accessible complaint process, and swift and effective enforcement penalties where affiliate abuse is found” should complement regulations.
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