Gas marketers and producers credited FERC last week for taking a “relatively aggressive stance” in finding Natural Gas Pipeline Company of America (NGPL) had committed “significant” violations of its marketing-affiliate rules. But some seriously doubted that by itself the $8.84 million civil penalty imposed by the Commission would be enough to block future unlawful conduct by NGPL or other pipelines.

They contend FERC should have augmented the civil penalty, which is the maximum amount allowed under the Natural Gas Policy Act (NGPA) for marketing-affiliate rule violations, with strong remedial actions against Natural, such as barring the pipeline from doing business with its marketing affiliate, MidCon Gas Services, either for a specific period of time or altogether. Without tough sanctions, marketers said NGPL, and possibly other pipelines, would continue to abuse relationships with their marketing affiliates because the profits to be gained far outweigh the maximum-allowed penalties if caught. Adding insult to injury for some was FERC’s decision to suspend one half of the penalty amount if Natural ceases the violations over the next two years. Some companies, such as Natural Gas Clearinghouse, last week already were considering seeking a rehearing on the “appropriateness of the remedy” in the case.

In the much-anticipated decision, which was spelled out in three separate orders, FERC agreed with most of the results of a Commission staff audit ordered last year into Natural’s contracting practices, which found that the pipeline and MidCon Gas shared several operating employees and that this ultimately led to a swapping of sensitive market information between the two affiliates. This caused MidCon to have a decisive advantage over non-affiliate shippers when bidding for NGPL’s transportation capacity, FERC and staff concurred. The Commission staff undertook the audit in response to a complaint filed by Amoco Production alleging that Natural showed preference to affiliate MidCon Gas when awarding capacity on its system.

“From the perspective of the order itself and the fact the Commission took the initiative to go out and audit…and found that there were violations, we’re happy with the order. It’s what is the impact of the order that we question. While $8 million sounds like a lot of money, or even $4 million sounds like a lot of money, we question whether it is enough to deter this kind of conduct” in the future, said an executive of a major gas marketing company, who asked not to be identified.

He believes FERC’s penalty pales in comparison to the “huge amounts of money” that Natural “likely” reaped as a result of the affiliate-abuse violations committed during the 1995-1996 winter heating season, when gas prices skyrocketed in the Chicago area. “A $4 million or $8 million penalty probably does not compare to what profits were taken out of the market in violation of regulations. If you were to ask a senior executive of a company in a position to do this again whether they would do it again, I suspect the answer would be ‘everyday.'”

During that winter “when things were so bad, MidCon [was among] the only ones to get gas to Chicago…Nobody else was able to get the capacity, [but] somehow MidCon was always able to have gas available,” one source recalled. Marketers insist MidCon’s bountiful transportation capacity during that period was directly tied to Natural’s practice of favoring its affiliate over non-affiliated shippers when allocating capacity. Natural, which was “in the process of assessing these complex orders” last week, had no comment, except to say it hoped to resolve the case “as quickly and amicably as possible.”

FERC’s ruling, the marketer said, sends a mixed message to other pipelines. “One is to be a little bit more careful in how you structure your affiliate relationships on pipelines. And the second message is ‘you don’t need to be too careful because the profits you reap from the violations of regulations may well be much more than what the penalty is.’ So, in essence, it’s a calculated risk in getting caught,” he noted.

Producer Advocates Divorcement

The Commission’s ruling also fell far short of the pleas made by some producers, such as Burlington Oil &Gas, which urged FERC to completely sever all business ties between Natural and MidCon Gas and to order restitution for shippers that were harmed by Natural’s unlawful activities. These remedial actions, according to Burlington, were more important than the assessment of penalties against the pipeline.

Still, producers overall were pleased the Commission took any action at all. “The main concern that a number of producers had was whether the FERC was basically going to drop the complaint once Amoco and NGPL came to a settlement. I think the producer community is happy that they didn’t because the producers, and I think rightfully so, feel they were just as much affected [by Natural’s activities] as Amoco,” said Philip Budzik, director of regulatory affairs and technical analysis at the Natural Gas Supply Association.

As part of its ruling, FERC refused to grant Amoco’s request to drop its complaint. The producer made the plea after it and Natural reached a private settlement last summer resolving its grievances. In addition, Natural and Amoco lost their battle for privileged treatment of the settlement. The Commission said it would permit parties to the case to review the document, excluding the gas sales agreement, subject to a protective order. It ordered parties to jointly file a proposed protective order within 15 days of its decision.

In a remedial-like step, the Commission ordered Natural and MidCon Gas, both of which are subsidiaries of MidCon Corp., to further separate their organizational structures beyond that which was carried out last summer. “Specifically, Natural and its marketing affiliate may not share any officers or directors. Further, the Commission prohibits the Strategic Planning Group of MidCon Management Corp., or any other MidCon [Corp.] affiliates that also advises Natural, from providing advice to MidCon Gas on energy-related matters,” the order said [RP97-232, IN98-1]. In addition, FERC barred two employees who were transferred from Natural to MidCon Gas last summer — Danny Ivy and Ivonne Martinez — from working for the MidContinent division of MidCon Gas until Natural “can demonstrate that any shipper information they obtained from Natural is no longer commercially valuable.” It also ordered Natural to submit within 30 days a compliance program to safeguard against further violations of its marketing-affiliate rules.

Although some saw this as a step in the right direction, they said it doesn’t go far enough. “They’re not requiring them to move out of the building so everybody’s still going to see each other. [They’ll] go to lunch and spill their guts,” remarked one marketer.

Calls for Capacity Auction

In yet another attempt at remedial action, the Commission rejected Natural’s proposed tariff changes to its method for allocating transportation capacity, saying they were no better than its existing tariff provisions that are “unduly vague and led to an atmosphere of perceived favoritism toward its affiliate…” Because of its past practices, FERC said it would require a “specificity” of tariff provisions for Natural beyond that which is demanded of other pipelines.

Specifically, the Commission ordered Natural to eliminate all provisions relating to proposed queue procedures in favor of open auction to allocate all capacity [RP97-431]. In addition, it directed Natural to change its tariff to “specifically describe all factors, weights and formulae that will be used to determine the winning bid for each auction.” FERC’s demand for tariff “specificity” from Natural, although well intended, could wind up backfiring on the pipeline’s customers, according to one marketer. “That appears to hurt the market more than it does hurt NGPL because it just reduces the flexibility that the customers would have in negotiating with them.”

The key affiliate-abuse infractions by Natural that were upheld last week by the Commission included:

  • Standard of Conduct G because the pipeline failed to function independently of MidCon Gas to the maximum extent possible;
  • Standard E because Natural’s System Optimization Group acted as a conduit for MidCon Gas, providing it with contract information that Natural received from non-affiliates;
  • Standard F because, through System Optimization, Natural provided capacity information to MidCon without contemporaneously disclosing that information to non-affiliated shippers. It also violated Standard of Conduct F by failing to post soon-to-be available capacity under expiring contracts on its electronic bulletin board, even though it previously informed MidCon and other select shippers of that availability; and
  • Standard K because Natural departed from its tariff procedures for right-of-first-refusal postings without identifying this general waiver in its log of waivers.

Susan Parker

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