FERC last Thursday issued a final rule that bars entities from using multiple affiliates to game the natural gas pipeline open season bidding process, saying it frustrates competition and denies access to capacity for customers that value it the most.

The final rule, which adopts in part a proposed rule issued in April, prohibits multiple affiliates from bidding in an open season for capacity allocated on a pro rata basis, unless an affiliate has an “independent business reason” for submitting a bid (see Daily GPI, June 2). Pipelines resort to the pro rata allocation method, or tiebreaker mechanism, when they do not have enough capacity to meet all shipper maximum bids during an open season. Capacity is allocated based on the ratio of each shipper’s nominations to all other qualifying nominations.

The final rule differs from the April proposal in one key respect: it does not prohibit affiliates from releasing capacity obtained in an open season on a pro rata allocation to another affiliate, or allow an affiliate to acquire such capacity from another affiliate [RM11-15]. The final rule takes effect 30 days after publication in the Federal Register.

The Federal Energy Regulatory Commission (FERC) said some entities have gamed the system by bidding with multiple affiliates in open seasons for pipeline capacity to defeat the pro rata allocation tiebreaker mechanism and obtain a greater share of available capacity than a single bidder could acquire by itself. This anticompetitive behavior thwarts Commission policies by denying fair distribution of capacity to those that value it the most, FERC said.

FERC’s final rule stems from an Office of Enforcement (OE) investigation into a 2007 open season on Cheyenne Plains Natural Gas Co. pipeline. The Commission at the time received a number of calls from Cheyenne open season participants claiming that some marketers submitted bids on behalf of multiple affiliates in order to “game” the pro rata allocation method relied upon by Cheyenne. Calls to the agency’s hotline triggered a FERC investigation of bidder conduct during the Cheyenne open season and similar open seasons held on Colorado Interstate Gas and Northern Natural.

Following an 18-month investigation, the Commission in early 2009 approved four stipulation and consent agreements, requiring marketers and other energy firms to pay more than $8 million in civil penalties and disgorge approximately $4 million in unjust profits for allegedly engaging in fraudulent open season bidding for transportation capacity on the Cheyenne Plains pipeline (see NGI, Jan. 19, 2009).

FERC’s OE investigation revealed that five different groups of entities accounted for 27 of the 47 winning bids and those groups obtained 57% of capacity awarded by Cheyenne. Put another way, 20% of the bidders secured more than 50% of the capacity awarded by means of their multiple bidding.

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