Although industry comments on Order 637 still were tricklinginto FERC late Friday, it was clear that gas producers, both majorsand independents, and industrial customers had some of the biggestproblems with the final order by far, while the interstatepipelines and LDCs sought only minor tweaking of a “discrete” setof issues.

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, which was the center pieceof the 268-page final order that was issued in February. Also,industrials sought rehearing of some of the revisions to right offirst 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 in limitedSection 4 pro forma filings.

Additionally, it called on FERC to adopt mitigation measures toshield customers against the potential exercise of market poweronce the caps are lifted, to take measures to “correct” the greymarket, and reconsider its decision to allow certain regulatorychanges to be implemented prior to the effective date of the newdata-reporting requirements. To offset the removal of price caps,the Natural Gas Supply Association (NGSA), a trade group of majorproducers, also urged the Commission to provide “certain safeguardsup front to lessen the ability of pipelines and their affiliates touse their market power.”

The IPAA criticized Order 637 for being tolerant of abuses inthe grey market, where non-jurisdictional capacity holders havebeen able to bypass FERC’s capacity-release rules by offeringrebundled service (released capacity and gas). “Essentially, whatthe Commission is doing by lifting price caps on secondary capacityis conceding that it cannot control the grey market, so instead itwill validate it. This is like Congress concluding that since theillegal 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 negotiatedcontracts, according to the industrials.

Additionally, industrial customers contend the Commission erredin giving pipes permission to file for term-differentiated rates”without undertaking further generic review” of the issue.Term-differentiated pricing would allow pipes to assess lower ratesfor longer term contracts and higher rates for shorter termcontracts. FERC took this action to induce pipeline customers tocontract for longer terms.

The American Gas Association, which represents LDCs, asked forclarifications on FERC’s decisions to: limit a shipper’s ability toexercise ROFR on a geographic segment of capacity; raise the rateto be matched when exercising a ROFR; and limit the ROFR tocontracts for 12 consecutive months of service.

The Interstate Natural Gas Association of America (INGAA), amajor interstate pipeline group, applauded the final order,especially for giving pipelines “new pricing flexibility so thatshort-term natural gas markets can evolve.” As a result, it soughtrehearing or clarification on “only a 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 contracts 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. At this time, INGAA said it wouldn’tseek rehearing of FERC’s decision not to permit pipelines tonegotiate terms and conditions 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.

NGSA commended the Commission for NOT lifting the rate caps onpipelines’ primary capacity, adopting negotiated terms andconditions of service; and for deciding that any proposal forterm-differentiated rates must be examined in a Section 4 ratecase.

Susan Parker

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