The staff of the Federal Energy Regulatory Commission denied last Thursday the bulk of the energy industry’s requests to limit the definition of “energy affiliate” as it applies in the agency’s notice of proposed rulemaking (NOPR) on standards of conduct governing the relationships between regulated monopolies and their affiliates.

Under the NOPR, which was issued in September 2001, FERC is seeking to limit the business contacts of monopoly natural gas pipeline and electric transmission providers with all of their energy affiliates, significantly broadening the current regulations that restrict pipeline/transmission contacts solely with marketing and sales affiliates. The Commission’s goal is to eliminate any loopholes in current regulations that permit pipeline and transmission providers to give affiliates undue preference or preferential access to information.

In a 29-page analysis of industry comments on the NOPR, staff defined “energy affiliate” as any affiliate of a pipeline and transmission provider that 1) engages in or is involved in transmission transactions in the U.S. energy or transmission markets; 2) manages or controls transmission capacity of a transmission provider in U.S. energy or transmission markets; 3) buys, sells, trades or administers natural gas or electric energy in U.S. energy or transmission markets; or 4) engages in financial transactions relating to the sale or transmission of natural gas or electric energy in U.S. energy or transmission markets.

Under staff’s definition, “energy affiliates” would include producers, gatherers, processors, local distribution companies, energy traders, financial affiliates, foreign affiliates that participate in the U.S. energy market, marketers, and retail function affiliates. Excluded would be regulated transmission affiliates of pipeline and transmission providers, and holding or service companies that do not engage in or are not involved in transmission transactions in U.S. energy markets, according to the analysis.

“A narrow definition of energy affiliates would allow the transmission function to continue to share employees and information with some of its energy affiliates who could then receive an unfair advantage in the competitive marketplace,” staff said in response to industry comments. But “too broad a definition of ‘energy affiliate’ would limit some of the efficiencies to be gained from vertical integration.”

Energy companies estimated that the costs of walling off the pipeline and transmission functions from its “energy affiliates” would range from $75,000 to $200 million. But FERC staff dismissed this as a “worst-case scenario.”

FERC staff has scheduled a conference for May 21 to discuss its proposed revisions to the standards of conduct for pipeline and transmission providers and their energy affiliates. It indicated that it would entertain alternative proposals, but staff warned that attendees “should come prepared to share specific proposed language.” In addition, “participants are encouraged to offer assessments of the quantitative impacts of the proposed rule and the benefits to be obtained by the proposed rule.”

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