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Proposed Rule

Regulation of Short-Term Natural Gas Transportation Services, and Regulation of Interstate Natural Gas Transportation Services

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Start Preamble May 31, 2002.

AGENCY:

Federal Energy Regulatory Commission.

ACTION:

Request for comments.

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SUMMARY:

The Federal Energy Regulatory Commission is requesting comments with respect to the issues remanded by the United States Court of Appeals for the District of Columbia Circuit to the Commission regarding Order No. 637.

Specifically, the Commission requests comments on issues pertaining to the right of first refusal (“ROFR”) term matching cap, the relationship of the ROFR to tariff provisions, backhauls and forwardhauls to the same point, and the waiver of posting and bidding for prearranged releases.

DATES:

Comments are due on or before June 30, 2002.

ADDRESSES:

Federal Energy Regulatory Commission, 888 First Street, NE., Washington DC, 20426.

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FOR FURTHER INFORMATION CONTACT:

Diego A. Gomez, Office of General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 219-2703.

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SUPPLEMENTARY INFORMATION:

Notice Requesting Comments

On April 5, 2002, the United States Court of Appeals for the District of Columbia Circuit issued an opinion generally affirming Order No. 637.[1] The Court, however, reversed and remanded Order No. 637 [2] with respect to two issues and remanded, without reversing, with respect to two other issues. As discussed below, the Commission solicits comments from interested parties on these issues. This notice will enable the Commission to decide the remanded issues with the benefit of the views of all interested parties.

Background

The four issues the Court has remanded to the Commission are the following:

1. Right of First Refusal Term Matching Cap

The Court reversed and remanded Order No. 637's policy that shippers exercising their right of first refusal (ROFR) to retain capacity need only match contract term lengths of up to five years. The ROFR originated in Order No. 636,[3] where the Commission tempered the pipeline's pre-granted authority to abandon contracts upon their termination with a ROFR for firm customers with a contract longer than one year.[4] Specifically, the Commission adopted a regulation providing that such a shipper could retain its service under a new contract by matching the term and the rate (up to the maximum rate) offered by the highest competing bidder.[5] In Order No. 636-A, the Commission capped the contract length the existing shipper must match at twenty years.

On appeal of Order No. 636, the Court found the twenty-year cap was not justified by the record and remanded it for further explanation.[6] The Court stated that the Commission had not adequately explained how the twenty-year term matching cap protects against the pipelines' preexisting market power, particularly why the twenty-year cap would prevent bidders on capacity constrained pipelines from using long contract duration as a price surrogate to bid beyond the maximum approved rate, to the detriment of captive customers. On remand in Order No. 636-C, the Commission changed its policy and adopted a five-year term matching cap. It relied on the fact most commenters in the Order No. 636 proceeding had supported a term matching cap in the range of five years and more recent evidence showed that five years was about the median length of all contracts of one year or longer between January 1, 1995 and October 1, 1996.[7]

On rehearing in Order No. 636-D, the Commission recognized that pipelines had raised legitimate concerns about whether the five-year term matching cap was causing a bias toward short-term contracts, with adverse economic consequences for both pipelines and captive customers. The Commission, however, deferred further consideration of the term cap to the proceeding which became the Order No. 637 proceeding in Docket No. RM98-10-000, where a more current record could be developed. In Order No. 637, the Commission continued the five-year cap policy, finding that none of the parties presented evidence to support the conclusion that a five-year contract is atypical in the current market.

On appeal, the Court found that the Commission had not addressed the objections that had been raised concerning the five-year cap and had relied on the same evidence that it had used to make its decision in Order No. 636-C, namely the fact that five years was about the median length of all contracts of one year or longer.[8] The Court concluded that the only evidence supporting the Commission's final decision to choose a five-year cap was the original record, which in the Commission's own view was incomplete. The Court held the Commission had neither given an affirmative explanation for its selection of five years, nor had it responded to its own or the pipelines' objections to the five-year cap. The Court also questioned why the Commission used a median to function as a ceiling. The Court thus vacated the five-year cap and remanded the issue to the Commission.

2. Relationship of ROFR to Tariff Provisions

The Court remanded, without reversing, a second issue concerning the ROFR. In Order No. 637, the Commission stated that shippers always have the ROFR set forth in 18 CFR 284.221(d), regardless of the provisions set forth in their contract.[9] In Order No. 637-A, the Commission stated that shippers' regulatory ROFR is effective “regardless of the terms of any tariff.” [10] The Court found that the Commission had not adequately explained whether, through these statements, the Commission intended to provide that the regulatory ROFR is self-executing, and applies regardless of any inconsistent language in the pipeline's tariff or whether tariff language is necessary to effect the right. Accordingly the Court remanded this issue to the Commission to explain its current position on this issue and, to the extent that the language in the Order Nos. 637 and 637-A is legally unsustainable, to modify it.

3. Backhauls and Forwardhauls to the Same Point

In Order No. 637, the Commission also addressed segmentation of capacity, Start Printed Page 39317under which shippers may divide their mainline capacity into segments with each mainline segment equal to the contract demand of the original contract. As a general matter, shippers may overlap those mainline segments, but only up to the contract demand of the underlying contract. In Order No. 637-A, the Commission clarified that a shipper using a forwardhaul and backhaul to bring gas to the same delivery point in an amount that exceeds its contract demand is not overlapping mainline capacity. On appeal, the Court found that the Commission had not adequately addressed whether this policy modified the contracts between the pipeline and its shippers or adequately supported the need for any contract modification. The Court remanded these issues for further explanation, but did not reverse the Commission's holdings.

4. Waiver of Posting and Bidding for Prearranged Releases

Finally, the Court reversed and remanded Order No. 637 on an issue concerning the posting of prearranged capacity releases for bidding. Before Order No. 637, the Commission provided that releasing shippers need not post prearranged deals at the maximum rate for bidding. However, Order No. 637 waived the maximum rate for capacity releases of less than one year until September 30, 2002. The Commission therefore found that all prearranged releases of less than one year must be posted for bidding. The Commission, however, stated that in individual cases where a local distribution company (LDC) considers an exemption from the posting and bidding requirement essential to further a state retail unbundling program, the LDC together with the appropriate state regulatory agency, could request the Commission to waive the posting and bidding requirement. The Commission also stated that if the LDC requests such a waiver, the LDC must be prepared to have all its capacity release transactions limited to the applicable maximum rate for pipeline capacity.

The Court found that the Commission failed to support its rule conditioning the waiver of posting and bidding requirements on the applicant's being prepared to have all of its capacity release transactions limited to the applicable maximum rate. The Court accordingly reversed the Commission on this issue and remanded for the Commission to review the matter and reframe the waiver conditions.

Discussion

The Commission is requesting comments from all interested parties on their views concerning what actions the Commission should take in response to the Court's remand of the above described four issues. All comments should be filed within 30 days of the date this order issues. The Commission is particularly interested in comments on the following issues concerning the term matching cap for the ROFR and backhauls and forwardhauls to the same point.

ROFR Questions

1. Balancing of risk between shipper and pipeline. In remanding the issue of the appropriate term matching cap for the ROFR, the Court pointed out that both in Order No. 636-D and the notice of proposed rulemaking that led to Order No. 637, the Commission expressed concern that the five-year term matching cap resulted in a bias toward short-term contracts by providing a disincentive for an existing shipper to enter into a contract of more than five years. This could foster an imbalance of risks between existing shippers and pipelines, allowing shippers indefinite control over pipeline's capacity, but giving pipelines not corresponding protection. Accordingly, the Commission requests comments on what approach to the term-matching cap strikes a proper balance between the concerns of captive customers about their ability to retain capacity under reasonable terms and conditions when their contracts expire and the concerns of pipelines about a bias toward short-term contracts.

2. Need for any term matching cap. In Tennessee Gas Pipeline Company (Tennessee),[11] the Commission found that no term matching cap is necessary where a pipeline uses the net present value method to allocate unsubscribed capacity among bidders for that capacity. The Commission reasoned that, in that context, the Commission's existing regulatory controls are sufficient to constrain pipelines from exercising market power to pressure shippers into longer contracts than they desire. Because the Commission limits the rates pipelines can charge to maximum just and reasonable levels and requires pipelines to sell all available capacity to shippers willing to pay the maximum rate, the only way a pipeline could create scarcity to force shippers to accept longer term contracts would be to refuse to build additional capacity when demand requires it. However, the Commission found pipelines would have a greater incentive to build new capacity to serve all the demand for their service, than to withhold capacity, since the only way the pipeline could increase current revenues and profits would be to invest in additional facilities to serve the increased demand.

a. The Commission requests comment on whether the same regulatory controls which Tennessee found constrain the pipeline's ability to exercise market power in the allocation of its unsubscribed capacity provide justification for the removal of any term matching cap in the ROFR setting.

b. The Commission also requests comment on whether there are reasons, other than the need to control the pipeline's exercise of market power, why a term matching cap is necessary in the ROFR context. The Commission provides existing long-term maximum rate shippers a ROFR in order to enable the Commission to make the finding required by NGA section 7 that abandonment of service following contract expiration is in the public convenience and necessity. Does the need to satisfy the requirements of NGA section 7 require a term matching cap regardless of the pipeline's ability to exercise market power? What findings are necessary to satisfy NGA section 7 other than a finding that the pipeline cannot exercise market power?

3. Term Cap Length. To the extent any commenting party asserts that a term matching cap is necessary as part of the ROFR, the Commission requests that said party propose a term cap length which it deems appropriate. Moreover, the Commission requests that such proposed term cap length be justified and explained in detail. In order to assist parties in presenting comments on this issue (and the other issues discussed above concerning the ROFR), the Commission has developed detailed information concerning the term lengths in contracts entered into since the issuance of Order No. 636. That information is set forth in the Appendix to this notice.[12] Parties should comment on what conclusions should be drawn from the information in the Appendix as to the appropriate length of any term matching cap or whether the information provides support for removing any term matching cap.

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Forwardhaul/Backhaul Questions

The Commission also solicits comments on the remanded forwardhaul/backhaul issue.

1. Contract violation. The Commission requests that the parties comment on why and how a pipeline's contracts are violated by the policy established in Order No. 637-A concerning forwardhauls and backhauls to the same delivery point. Pipelines' service agreements with their customers generally provide that the contract incorporates the terms and conditions in the pipeline's tariff. Given this fact, if the Commission requires the pipeline to modify the terms and conditions in its tariff consistent with its backhaul/forwardhaul policy, is there any violation of the contract between the pipeline and its customer? To the extent a commenter asserts that there is a contract violation, it should provide the specific contractual provisions which it believes the policy violates.

2. Benefits to the market. The Commission requests comments on whether forwardhauls and backhauls to the same delivery point help foster more competitive markets. Are there sufficient competitive benefits to justify action under NGA section 5 to implement the policy concerning backhauls and forwardhauls to the same point?

3. Operational feasibility. The Commission requests comments on whether there are any operational issues or impacts with providing forwardhauls and backhauls to the same delivery point which should be considered in responding to the Court's remand.

While the Commission is primarily interested in comments on the above described issues, parties may also comment on the two other issues the Court remanded to the Commission (i.e., the relationship of the ROFR to tariff provisions and the waiver of posting and bidding for prearranged releases).

The Commission orders:

Interested parties to the above-captioned proceeding are invited to file comments on the issues discussed above on or before 30 days after the issuance of this order.

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By direction of the Commission.

Linwood A. Watson, Jr.,

Deputy Secretary.

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Footnotes

1.  Interstate Natural Gas Association of America v. FERC, 285 F.3d 18 (D.C. Cir. 2002) (INGAA).

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2.  Regulation of Short-Term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Transportation Services, FERC Stats. & Regs. Regulations Preambles (July 1996-December 2000) ¶ 31,091 (February 9, 2000); order on reh'g, Order No. 637-A, FERC Stats. & Regs, Regulations Preambles (July 1996-December 2000) ¶ 31,099 (May 19, 2000); order denying reh'g, Order No. 637-B, 92 FERC ¶ 61,062 (2000).

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3.  Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 636, 57 FR 13267 (April 16, 1992), FERC Statutes and Regulations, Regulations Preambles January 1991-June 1996 ¶ 30,939 at 30,446-48 (April 8, 1992); order on reh'g, Order No. 636-A, 57 FR 36,128 (August 12, 1992), FERC Statutes and Regulations, Regulations Preambles January 1991-June 1996 ¶ 30,950 (August 3, 1992); order on reh'g, Order No. 636-B, 57 FR 57,911 (December 8, 1992), 61 FERC ¶ 61,272 (1992); reh'g denied, 62 FERC ¶ 61,007 (1993); aff'd in part and remanded in part, United Distribution Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); order on remand, Order No. 636-C, 78 FERC ¶ 61,186 (1997).

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4.  Order No. 636 at 30,446-48.

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5.  18 CFR § 284.221(d)(2)(ii) (2001).

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6.  United Distribution Companies v. FERC, 88 F.3d 1105, 1140-41 (D.C. Cir. 1996) (UDC).

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7.  Order No. 636-C at 61,774 and 61,792.

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8.  INGAA at *78.

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9.  Order No. 637, at 31,341.

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10.  Order No. 637-A, at 31,647.

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11.  Tennessee Gas Pipeline Co., 91 FERC ¶ 61,053 (2000), reh'g, 94 FERC ¶ 61,097 (2001), appeal pending sub nom. Process Gas Consumers Group v. FERC, D.C. Circuit, Case No. 01-1151.

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12.  Table I shows the lengths of all contracts entered into between 1996 and 2001, including contracts which have expired. Table II shows all presently active contracts entered into since 1992.

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BILLING CODE 6717-01-P

[FR Doc. 02-14176 Filed 6-6-02; 8:45 am]

BILLING CODE 6717-01-C