[Federal Register Volume 67, Number 110 (Friday, June 7, 2002)]
[Proposed Rules]
[Pages 39315-39321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14176]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 284
[Docket No. RM98-10-011]
Regulation of Short-Term Natural Gas Transportation Services, and
Regulation of Interstate Natural Gas Transportation Services
May 31, 2002.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Request for comments.
-----------------------------------------------------------------------
[[Page 39316]]
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.
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.
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.
---------------------------------------------------------------------------
\1\ Interstate Natural Gas Association of America v. FERC, 285
F.3d 18 (D.C. Cir. 2002) (INGAA).
\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)
[para] 31,091 (February 9, 2000); order on reh'g, Order No. 637-A,
FERC Stats. & Regs, Regulations Preambles (July 1996-December 2000)
[para] 31,099 (May 19, 2000); order denying reh'g, Order No. 637-B,
92 FERC [para] 61,062 (2000).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 [para] 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 [para] 30,950 (August 3, 1992);
order on reh'g, Order No. 636-B, 57 FR 57,911 (December 8, 1992), 61
FERC [para] 61,272 (1992); reh'g denied, 62 FERC [para] 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 [para] 61,186 (1997).
\4\ Order No. 636 at 30,446-48.
\5\ 18 CFR Sec. 284.221(d)(2)(ii) (2001).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\6\ United Distribution Companies v. FERC, 88 F.3d 1105, 1140-41
(D.C. Cir. 1996) (UDC).
\7\ Order No. 636-C at 61,774 and 61,792.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ INGAA at *78.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\9\ Order No. 637, at 31,341.
\10\ Order No. 637-A, at 31,647.
---------------------------------------------------------------------------
3. Backhauls and Forwardhauls to the Same Point
In Order No. 637, the Commission also addressed segmentation of
capacity,
[[Page 39317]]
under 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.
---------------------------------------------------------------------------
\11\ Tennessee Gas Pipeline Co., 91 FERC [para] 61,053 (2000),
reh'g, 94 FERC [para] 61,097 (2001), appeal pending sub nom. Process
Gas Consumers Group v. FERC, D.C. Circuit, Case No. 01-1151.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
[[Page 39318]]
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.
By direction of the Commission.
Linwood A. Watson, Jr.,
Deputy Secretary.
BILLING CODE 6717-01-P
[[Page 39319]]
[GRAPHIC] [TIFF OMITTED] TP07JN02.003
[[Page 39320]]
[GRAPHIC] [TIFF OMITTED] TP07JN02.004
[[Page 39321]]
[FR Doc. 02-14176 Filed 6-6-02; 8:45 am]
BILLING CODE 6717-01-C