Expressing concern that FERC’s proposed rule on affiliate bidding could block bids that are entirely appropriate, major pipeline shippers — producers and utilities — urged the agency to revise its proposal to specifically target collusive behavior by affiliates during an open season that relies on pro rata allocation.

While supportive of the Commission’s efforts to prevent manipulation in open seasons, the American Gas Association (AGA), which represents natural gas utilities, said it “is concerned…that the Commission’s proposed rules would unnecessarily limit conduct by affiliates that is entirely appropriate. AGA believes that the proposed rules would also unnecessarily burden participation in pipeline open seasons and disrupt the capacity release markets,” said the group, which represents natural gas utilities.

The notice of proposed rulemaking (NOPR), which the Federal Energy Regulatory Commission (FERC) issued in early April, would bar multiple affiliates from bidding in an open season for capacity allocated on a pro rata basis unless an affiliate has an “independent business reason” for submitting a bid. It also would prohibit affiliates from releasing capacity obtained in an open season on a pro rata allocation to another affiliate, or allow an affiliate to acquire such capacity from another affiliate [RM11-15].

Saying this could restrict legitimate bidding, AGA called on FERC to change the proposal to specifically bar affiliates from participating in an open season in which a pipeline may allocate capacity on a pro rata basis, if the intent is to obtain a “larger allocation of capacity for one affiliate than that affiliate could acquire for itself.”

If the NOPR is not altered, it would as an unintended consequence “unnecessarily limit or chill conduct by affiliates that is entirely appropriate,” AGA said.

“The proposed rules would unnecessarily burden participation in pipeline open seasons. At best, every market participant with affiliates would be required to document an independent reason each time it bids in a pipeline open season with a pro rata allocation method in case any other market participant with whom it might be considered affiliated sought to submit a bid.

“In many cases, a market participant would have no way of knowing whether some of its affiliates intended to or did submit a bid in the same pipeline open season with a pro rata allocation method,” AGA said.

The AGA suggests the Commission should narrow the focus of the proposed rule to zero in on conduct that is considered manipulative. FERC’s NOPR stems from an Office of Enforcement investigation into a 2007 open season conducted by Cheyenne Plains Natural Gas Co. pipeline. FERC at the time received a number of calls from Cheyenne open season participants claiming that some marketers submitted bids on behalf of multiple affiliates in order to “game” the pro rata allocation method relied upon by Cheyenne. Calls to the agency’s hot line triggered a FERC investigation of bidder conduct during the Cheyenne open season and similar open seasons held on Colorado Interstate Gas and Northern Natural.

Following an 18-month investigation, the Commission in early 2009 approved four stipulation and consent agreements, requiring marketers and other energy firms to pay more than $8 million in civil penalties and disgorge approximately $4 million in unjust profits for allegedly engaging in fraudulent open season bidding for transportation capacity on the Cheyenne Plains pipeline (see NGI, Jan. 19, 2009).

“The inappropriate conduct in the March 2007 open season involving Cheyenne Plains Gas Pipeline…is that two or more entities worked together to secure a greater share of pipeline capacity for one entity [than] that entity could have otherwise obtained for itself. The gravamen of the manipulative conduct…is collusion to secure a greater share of capacity for one entity than that entity could otherwise acquire for itself…AGA contends that the remedy [in] the proposed rules is not tailored to address the conduct considered to be manipulative. Accordingly, AGA recommends that the Commission revise its proposal to specifically prohibit the conduct considered to be manipulative.” the utility group said.

The Natural Gas Supply Association, which represents major gas producers, also raised concerns that the proposed rule could cause some affiliates with legitimate, independent business reasons to miss out on bidding for capacity, and it called on FERC to provide an additional explanation of what constitutes an “independent business reason” for the purpose of bidding in an open season.

“Open seasons are generally short — many run for only days — so shippers must therefore decide quickly whether they want to purchase capacity and whether their bid(s) would be compliant with FERC regulations,” the producer group said. “FERC must therefore find a balance between prohibiting anticompetitive conduct and allowing shippers the flexibility to make legitimate bids for capacity. Policies and regulations which unnecessarily restrict such justifiable bidding could unintentionally serve to inhibit new business models and frustrate commercial ingenuity and creativity.”

The Interstate Natural Gas Association of America, which represents interstate gas pipelines, declined to take a side. It only said that FERC “should specify that interstate pipelines have no obligation to determine whether affiliate entities are participating in an open season or whether each affiliate has ‘an independent business reason for submitting a bid,’ and that interstate pipelines have no obligation to verify that the capacity originally obtained during an open season pursuant to a pro rata allocation is not released to, or on behalf of, an affiliate of the releasing shipper.”

The American Public Gas Association (APGA) embraced the NOPR. “Prohibiting multiple affiliates of the same entity from participating in an open season for capacity, in which [a] pipeline may allocate capacity on a pro rata basis, is an appropriate response to capacity allocation gaming. [This]…should deter manipulation and permit all players to participate on a level playing field,” said municipal gas utility group..

“The Commission’s proposed exception, allowing multiple affiliates to bid in the same open season if each has its own independent business reason for submitting a bid, strikes a reasonable balance,” the APGA said. “In this manner, the proposed rule will not hinder legitimate transactions or limit access to pipeline capacity by companies with independent affiliates.”

The National Energy Marketers Association called on FERC to make only one clarification — that the prohibition on the release of capacity not encompass local distribution companies’ release of capacity to retail marketing affiliates under state retail access programs — and recommended that the rule be applied prospectively.

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