FERC’s marketing affiliate rule, which hinges on the hope thatpipeline owners will police themselves, has been about as effectiveas a wolf guarding a henhouse, says a Washington D.C. lawyer whorepresents producers and independent marketers. Because ofescalating abuses in the market, he believes overhauling Order 497should be the first priority of the Commission in its post-Order637 dialogue with the natural gas industry.
There “are some issues that simply will not wait. Chief amongthese issues are the recurring (in fact, growing) regulatoryproblems associated with pipeline-affiliate marketers,” said MarkR. Haskell, co-managing partner of Brunenkant & Haskell LLP,last Thursday at the annual meeting of the Energy Bar Association.Order 497 was set up to stave off abuses between pipelines andtheir unregulated marketing affiliates, but it has failed miserablyin that task and the “natural gas market is the worse for it,” henoted.
“The failed regulatory model of Order 497 should be discarded infavor of a new regime of regulation that emulates structuralseparation to the maximum extent possible,” he noted. Under such aregime, “new contracts between a pipeline and an affiliatedmarketer should be subject to strict scrutiny. Home pipe affiliatesshouldn’t be permitted to purchase capacity that has not beenposted as being publicly available.”
Also, he said, pipes shouldn’t be allowed to use their marketingaffiliates to bid up the price for capacity on their system underright of first refusal. And on the issue of “funny money,”intra-corporate transfers of funds, a pipeline should be requiredto pay non-affiliated shippers the cost it incurs by “foregoing abusiness opportunity” with non-affiliates in favor of accepting acapacity bid from its marketing affiliate. This would eliminate the”built-in advantage” that affiliates have over non-affiliates whenbidding for capacity on their home pipeline
But even these protections may not prove to be enough in theend. “If so, complete structural separation — an outright ban ona pipeline affiliate marketer’s ability to do business on its homepipeline — must be considered” by FERC, Haskell said. Such a banwould be a last resort since it “might upset settled investmentdecisions and engender widespread opposition.”
Marketing affiliates were the interstate pipelines’ response tobeing stripped of their merchant function under Order 636, henoted. “As the merchant function passed into the annals of history,coincidentally and amazingly market affiliates were produced.” Andwith their arrival, pipelines were able to hold onto their salesability, Haskell said, adding that losing it was a just a “myth.”
“Some of those affiliates have developed [into] businesses thatare national in scope, with few if any ties to the homepipelines…..Others are still living at home with Mom. They don’twant to move out.” It’s this latter group where the abuse orpotential for abuse flourishes, he told the group of energylawyers.
Just a “cursory review” of interstate pipeline “Index ofCustomers” at FERC underscores the close relationship between someaffiliates and their parent pipelines, Haskell said. “Enron NorthAmerica is one of the largest single shippers on its affiliateNorthern Natural Gas Co. The listing of Reliant’s affiliatedshippers in its most recent filing runs for pages. Not only doesKoch Energy Trading control substantial firm transportationcapacity, but it also has contracted for more than 100 Bcf of PALS[parking and loan] service on its affiliated pipeline…..”
Order 497 “was intended to curtail the built-in incentives foraffiliate abuse. [But] the basis of that policy is and was flawed.At the heart of Order 497 is a philosophy of self-policing” byinterstate pipelines that have “undeniable economic incentives tobend, break or ‘interpret’ rules in a manner sufficient to maskanti-competitive conduct,” he noted
Weakness of Order 497
While some in the industry were encouraged by the tough actionthat FERC took against Kinder Morgan Inc. (KMI) in late March foraffiliate abuses, Haskell wasn’t one of them. If anything, hethinks the stipulation and consent agreement, ordering KMI to pay acivil fine of $5.1 million and make customer refunds underscoresthe weaknesses of Order 497. “The damages suffered bynon-affiliated marketers cannot be measured simply in terms of raterefunds. Market opportunities were lost as a result of[the]proscribed conduct,” he said.
Further adding to non-affiliate shippers’ woes is the fact thatinterstate pipelines no longer have any “incentive” to file ratecases. “Pipelines can collect rates based on a 10-year filing, aneight-year filing. A pipeline can be passed around from holdingcompany to holding company through mergers, changing its businessrisks, changing its…..overhead costs,” but the same rates “aregoing to remain in place,” Haskell noted.
“Malcontents” are told to file complaints at FERC, but onlyscant information is available at the Commission to help shippers’substantiate their charges. “The information currently available inpipeline Form 2 [reports] is virtually useless in this process,” hesaid. “Potential complainants have…..disjointed, irrelevant dataon a host of pipelines and little or no clear path of proving whatshould otherwise be obvious — pipeline rates should be subject toperiodic review under Section 5” of the Natural Gas Act.
In fact, “when pipelines are merged their rates should besubject to review automatically, without delay.” At the rate thepipelines are going “if we have two more pipeline mergers, we couldhave the first [nationwide] RTO,” he quipped.
Nor is Haskell a big fan of FERC’s decision to remove the pricecaps on the capacity-release transactions on an experimental basis.He said it reminded him of when his nine-year-old son tried toconvince his younger brother “to close his eyes and run real fastwhile standing in front of the garage door.” How can FERC call thisan experiment? he asked. “It’s dangerous.”
For M. Lisanne Crowley of the D.C. law firm of Crowell &Moring LLP, which represents LDCs, “[too] many issues were leftopen or subject to the pipeline’s discretion” in Order 637. Haskellagreed noting the order “leaves for another day the mostcontroversial issues” facing the gas industry. While this approachof “regulatory gradualism” may have some appeal in otherindustries, he said it doesn’t work in a “dynamic” gas market.
Alice M. Fernandez, FERC’s director of the Division of Tariffsand Rates-East, said she expects the Commission to begin itsdialogue with the gas industry after it comes out with itsrehearing order on Order 637, which should be “relatively soon.”The gas industry “should have a busy summer” at FERC, she promised.
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