Rather than extending FERC’s standards of conduct to cover mostly all energy affiliates of power/natural gas transmission providers, a Dominion Resources official proposed last week that the Commission focus on identifying the specific functions of energy transmission providers and their affiliates that could lead to sharing of competitive market information, and place restrictions in those areas.

“We feel that it would be reasonable to apply the standards of conduct restrictions between [employees who perform] commercial-type functions” for transmission providers and their energy affiliates, said Gary Sypolt, senior vice president of transmission for Dominion. Specifically, Dominion believes employees who buy, sell, manage or trade natural gas, electricity and transportation capacity with affiliated distribution companies, generation development companies, affiliated power marketers, gas marketing companies and gas producers “should not be shared.” he noted.

“Even though the record does not indicate abuse [in these areas], we understand that the perception of potential competitive harm may exist,” Sypolt said, adding that he believed Dominion’s proposal would address that perception. On the other hand, “we strongly believe that no competitive harm could result [from] the sharing of non-commercial employees” between transmission companies and affiliates, he noted.

At a packed FERC technical conference last Tuesday, Sypolt offered Dominion’s plan as an alternative to FERC staff’s proposal that seeks to expand the scope of the Commission’s standards of conduct to apply to nearly all energy affiliates. Currently, the standards restrict contacts between transmission providers and their marketing affiliates or wholesale merchant companies. The staff plan would extend the restrictions to apply to dealings between transmission providers and their affiliates involved in production, gathering, processing and local distribution as well as energy marketing. The only exclusions would be transmission affiliates of transmission providers, and foreign affiliates that do not operate in U.S. energy markets.

The Commission wants to eliminate opportunities for transmission providers to give preferential treatment to their affiliates, thus giving them a competitive edge over non-affiliates, or vice versa. While the mounting allegations of price manipulation and “wash” trades within the energy industry have created support for staff’s effort, energy companies — namely transmission providers — contend that FERC is envisioning market-power abuses where none exist, and that expanded standards for affiliates could do more harm than good for energy markets.

“We do not believe the case has been made for [an] extension of the rules” to producers, gatherers, processors and local distribution companies (LDCs), said Dan Collins of El Paso Corp., who represented the Interstate Natural Gas Association of America (INGAA) at the conference. However, if the Commission adheres to the proposed wider scope for the affiliate rules, “it is essential, we believe, that the Commission clarify its information disclosure requirements so that we can continue to have cost-effective, efficient delivery systems that are not hamstrung by artificial constraints.”

William Sherman, a Washington, DC attorney representing the Ad Hoc Marketers Group, argued that FERC had not made the “requisite findings” of market power to justify extending the standards of conduct to the upstream and downstream markets. Furthermore, he noted that staff’s proposal would “harm and undermine legitimate efficiencies” in the energy industry. David Halphen of Shell Gas Transmission warned that an expanded code of conduct could “disrupt” the operations of critical infrastructure in the Gulf of Mexico.

It also would result in increased costs for energy companies, said Allan Allred of Questar Corp., which owns both a jurisdictional pipeline (Questar Pipeline) and a non-regulated LDC, Questar Gas. The company would have to pay $3-4 million to hire additional employees for Questar Gas, costs which would be passed on to ratepayers, he noted.

“There is no commercial benefit” to separating Questar Pipeline from Questar Gas, Allred said, adding that regulators in Wyoming — where Questar Gas operates — have received no market-abuse complaints stemming from the integrated operation of the two companies.

There is “ample evidence of affiliate abuse” between transmission providers and their marketing affiliates, but the cases of abuse involving other affiliates “[are] not well documented” because these are not considered a violation of current Commission regulations, said Susan Tomalty of Dynegy’s Illinois Power, which backs the staff proposal.

Jeff Holligan of BP Amoco said he supported an extension of the standards of conduct, but believes it should be done in a “manner that is very well thought out” by FERC. A key concern of BP’s, he said, is preventing information that it shares about its volumes with processing plants from being transferred “down the chain of affiliates to other producers or marketing affiliates.” He suggested that the standards be “tailored…or customized for [a] particular segment” of the market.

“We don’t have a problem with two interstate pipelines [that are affiliated] sharing operations…Where we have a problem is [when] non-jurisdictional entities that aren’t really under the standards of conduct are given information from the jurisdictional entity that they use in some manner to skew the outcome of the market,” Holligan said during the conference.

Former FERC Commissioner Jerry Langdon, who represented El Paso Energy Partners, said it would “absolutely” help if FERC would restrict only certain kinds of communications between gathers/processors/producers and their affiliated transmission companies. An example of an exempted conversation, he noted, would be the daily conversations that El Paso Energy has with affiliated pipelines about gas quality.

FERC Chairman Pat Wood appeared to agree that staff’s proposal needed “more crispening up” on the issue of restricted communications. He noted the Commission doesn’t mind transmission companies engaging in commercial communications about volumes and reserves, discount rates and capacity availability. It’s only when conversations turn to market abuses that problems arise.

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