Although industry comments on Order 637 still were tricklinginto FERC late Friday, it was clear that gas producers, bothmajors and independents, and industrial customers had some of thebiggest problems with the final order by far, while the interstatepipelines and LDCs sought minor tweaking of a “discrete” set ofissues.

Both the producers and industrials urged FERC to reconsider itsdecision to remove the price caps in the short-term capacityrelease market on an experimental basis. Also, industrials soughtrehearing of some of the revisions to right of first refusal.

The Independent Petroleum Association of America (IPAA), whichrepresents Independent producers, “commended” FERC for its decisionnot to approve negotiated terms and conditions “across-the-boardfor all pipelines,” but other than that they felt the Commissionslargely ignored them in Order 637.

“What is disturbing to IPAA…..is that in a decision supposedlytaking into account the need to increase total gas supply by 50% ormore, the Commission has given no meaningful consideration to themost important supply questions [posed] by IPAA,” which needanswers if FERC’s policies are to have a “neutral impact” on thesupply-demand balance for gas, the producer group told FERC.

Specifically, the group seeks rehearing on the Commission’sdecisions to lift the price ceiling on short-term capacity releasetransactions (less than one year) for two and a half years, and topermit interstate pipelines to propose seasonal rates on a limitedSection 4 pro forma filing.

Additionally, it called on FERC to adopt mitigation measures toshield against the potential exercise of market power once the capsare lifted, take measures to “correct” the grey market, andreconsider its decision to allow certain regulatory changes to beimplemented prior to the effective date of the new data-reportingrequirements. To offset the removal of the price caps, the NaturalGas Supply Association (NGSA), a trade group of major producers,also urged the Commission to provide “certain safeguards up frontto lessen the ability of pipelines and their affiliates to usetheir market power.”

“Essentially, what the Commission is doing by lifting price capson secondary capacity is conceding that it cannot control the greymarket, so instead it will validate it. This is like Congressconcluding that since the illegal drug market cannot be regulated,it should legalize drugs,” the IPAA told FERC.

The industrial gas customers, led by the Process Gas ConsumersGroup (PGC), also agreed the Commission had overstepped its NGAauthority by lifting the rate caps on short-term capacity releasetransactions. In addition the industrial customers believe theCommission went out of bounds in two other areas: right of firstrefusal (ROFR) and term-differentiated rates.

“Although Order 637 retains the right of first refusal and itsfive-year matching cap, the Commission has elected to mandate asubstantial narrowing of the number of shippers and transactions towhich the regulatory ROFR would apply,” they said. Specifically, inboth 637 and FERC’s new construction policy statement, theCommission ruled that a pipeline satisfying certain conditions mayrequire ROFR shippers to match a rate higher than the currentmaximum rate for their service. Also in 637, FERC said ROFR wouldattach only to shippers with maximum rate contracts, and would nolonger be available to shippers with discounted or negotiatedconstracts.

Additionally, industrial customers contend the Commission erredin giving pipes permission to file for term-differentiated rates”without undertaking further generic review” of the issue.

The American Gas Association asked for clarifications on FERC’sdecisions to: limit a shipper’s ability to exercise ROFR on ageographic segment of capacity; raise the rate to be matched whenexercising a ROFR; and limit the ROFR to contracts for 12consecutive months of service.

The Interstate Natural Gas Association of America (INGAA)applauded the final order, especially for giving pipelines “newpricing flexibility so that short-term natural gas markets canevolve.” As a result, it sought rehearing or clarification on “onlya discrete set of issues.”

Specifically, it asked FERC to clarify that releasing andreplacement shippers cannot use the pipeline system at a levelgreater than their original contract with the pipeline; seasonaland term-differential rates may be implemented by settlement, andexcess revenues from seasonal rates can be addressed as part of arevenue-sharing mechanism; it will expeditiously approve new tariffservices and non-conforming service agreements where there’s noundue discrimination of degradation of existing service; and removethe ROFR term matching cap. INGAA said it wouldn’t seek rehearingof FERC decision not to permit pipelines to negotiate terms andconditions of service.

In contrast, NGSA stressed pipeline seasonal rates shouldn’t beallowed without a Section 4 rate proceeding. “Implementing seasonalrates without a Section 4 rate review results in “double-dipping”(the collection of revenues above a pipeline’s annual revenuerequirement) because it allows pipelines to continue their currentdiscount adjustment, while increasing peak seasonal rates, theproducers said.

Under seasonal rates, pipelines would be allowed to chargehigher rates during the peak season than in the non-peak season. Ifpipelines should collect more than their annual cost of serviceunder seasonal rates, Order 637 requires them to give 50% of therevenue excess back to their customers.

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