[Federal Register Volume 59, Number 148 (Wednesday, August 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18870]


[[Page Unknown]]

[Federal Register: August 3, 1994]


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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL94-4-000]

 

Pricing Policy For New And Existing Facilities Constructed By 
Interstate Natural Gas Pipelines;

NOTICE OF PUBLIC CONFERENCE AND OPPORTUNITY TO FILE WRITTEN 
COMMENTS

July 28, 1994.
    Take notice that the Commission will convene a public conference in 
the above-captioned proceeding to consider the methodologies to be used 
in setting rates for transportation service with regard to new and 
existing facilities constructed by interstate natural gas pipelines. 
The Commission also will be accepting written comments prior to the 
conference. The date and procedures for the conference will be 
established by a subsequent notice. Written comments may be filed 
within 60 days of the date of this notice.

I. Scope of Inquiry

    Historically, when pipelines have sought to enlarge their 
facilities, the Commission had a preference for rolling-in the costs of 
the new construction into the pipeline's cost-of-service and 
establishing a single rate for both the existing customers and the 
expansion customers (those customers obtaining capacity as a result of 
the new facilities). The Commission found that rolled-in pricing would 
be appropriate when the new facilities were part of an integrated 
system and provided system-wide benefits.1 When the new 
construction was not integrated into the pipeline's existing system, 
the Commission would approve incremental pricing in which a separate 
cost-of-service is established for the existing and expansion 
facilities, and the prior holders of capacity (existing shippers) and 
expansion shippers pay different rates.
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    \1\See Trunkline Gas Company, 21 FPC 704 (1959), aff'd, Battle 
Creek Gas Company v. FPC, 281 F.2d 42 (D.C. Cir. 1960); Great Lakes 
Gas Transmission Limited Partnership, 45 FERC 61,237 (1988).
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    The Commission, however, became concerned about the effect of 
rolling-in the costs of new construction that is integrated into the 
pipeline's existing system. The Commission was particularly concerned 
with the effects of expensive construction because using rolled-in 
rates could result in disproportionate costs being imposed on existing 
customers when compared with the benefits they receive from the 
expansion.2 The Commission was further concerned that rolling-in 
rates in this situation could conflict with its efforts to adopt rate 
designs that promote economic efficiency by causing the pipeline's 
existing customers to subsidize the rates paid by expansion customers. 
As a result of these concerns, the Commission, in its Great Lakes 
orders, required the pipeline to charge incremental prices for a system 
expansion based on a test in which the benefits to existing customers 
were weighed against the costs of rolling-in the facilities 
(commensurate benefits test).
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    \2\See Great Lakes Gas Transmission Limited Partnership, 57 FERC 
61,140 (1991) (Opinion No. 367), reh'g denied, 62 FERC 61,101 
(1993), 57 FERC 61,141 (1991) (Opinion No. 368), reh'g denied, 62 
FERC 61,102 (1993) remanded, No. 91-1380, (D.C. Cir. June 10, 
1994), 1994 U.S. App. LEXIS 14190; and Southern Natural Gas Company, 
51 FERC 61,296 (1990).
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    In TransCanada Pipelines Limited v. FERC,3 the court of 
appeals, however, remanded the Commission's determination to use 
incremental rates in Great Lakes. The court concluded that the 
Commission had not justified its focus on commensurate benefits in 
light of the Commission's past approach of examining whether the new 
facilities were integrated into existing facilities and whether the 
facilities provided system-wide benefits, qualitatively described. The 
court also expressed concern that the use of incremental pricing may 
result in undue discrimination because facility expansion is caused not 
only by the demands of the new customers, but by the continuing demands 
of the existing customers. 4
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    \3\No. 91-1380, (D.C. Cir. June 10, 1994), 1994 U.S. App. LEXIS 
14190.
    \4\The Commission will decide its position in the Great Lakes 
remand in concert with its consideration of the appropriate pricing 
policy to use generically in this proceeding.
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    The Commission has been moving towards greater reliance on market 
forces both in its rates and certificate policies. In Order Nos. 
4365 and 6366, the Commission required pipelines to provide 
unbundled, open access transportation in order to promote greater 
efficiency and increased competition among pipelines and their 
customers, two goals that can be affected by the pricing policies used 
for new construction. In order to contribute to achieving these two 
goals, the Commission also required pipelines to institute capacity 
release mechanisms and to adopt flexible receipt and delivery point 
policies. In the competitive world of unbundled transportation, 
shippers have many more transportation options, and the prices shippers 
pay for transportation on different pipelines has become a critically 
important aspect of competition in the market. In the competitive 
capacity market created by Order Nos. 436 and 636, the development of 
consistent pricing policies is important both for pipelines and their 
customers, because they need to know the rates that will be charged in 
order to make appropriate decisions about the amount of capacity to 
build and to purchase.
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    \5\Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 436, 50 FR 42408 (Oct. 18, 1985), FERC Stats. & 
Regs. [Regulations Preambles 1982-1985]  30,665 (Oct. 9, 1985).
    \6\Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg. 
13,267 (Apr. 16, 1992), III FERC Stats. & Regs. Preambles  30,939 
(Apr. 8, 1992).
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    The Commission is interested in undertaking a comprehensive 
evaluation of its current pricing policies to determine whether 
revisions are needed. One goal of this effort is to develop pricing 
policies for new construction that will properly reflect cost 
responsibility and that will further efficiency and competition in the 
market and promote the development of the industry. Another important 
goal is to identify how best to provide pipelines and their existing 
and future customers with as much certainty as possible about whether 
projects will be approved and the rates customers will be paying for 
capacity when pipelines expand. Unless pipelines and customers are 
aware of the rate implications of expansions, they cannot make informed 
decisions about the amount of capacity to build and to purchase.
    As part of the inquiry into ways to provide greater certainty about 
project approvals and rates for new construction, the Commission is 
interested in reexamining its current certificate and rates policies 
for new construction. As a result of the increased reliance on market 
forces brought about by Order Nos. 436 and 636, the Commission has 
reevaluated its certificate policies to place greater reliance on the 
market. The Commission has established procedures under which pipelines 
can obtain construction certificates for projects that are not fully 
subscribed at the time of application. First, pipelines may apply for 
optional certificates for undersubscribed projects under which the 
pipelines are at risk for cost recovery.7 Second, if pipelines 
apply for a traditional certificate and have not been able to 
demonstrate that the project will be fully subscribed under long term 
contracts, the Commission has permitted the construction to go forward 
by issuing certificates containing conditions under which the pipeline 
is placed at risk for unsubscribed capacity.8 The Commission, 
however, has declined to issue at-risk certificates where companies 
have failed to demonstrate support for a significant amount of the 
projected capacity.9
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    \7\18 CFR Part 157, Subpart E.
    \8\See, e.g., Arkla Energy Resources Company, 63 FERC  61,215 
at 62,590 (1993).
    \9\See, e.g., Questar Pipeline Company, 67 FERC  61,145 (1994). 
But see, Petal Gas Storage Company, 64 FERC  61,190 (1993), in 
which the Commission issued a certificate approving operation of 
existing storage facilities to provide third party storage service 
at market-based rates, though the applicant, a newly formed company, 
had no executed contracts or binding precedent agreements.
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    The Commission's policy has been to determine whether to allow a 
rolled-in pricing methodology for new facilities when pipelines have 
sought to recover the costs for these facilities in proceedings under 
Sec. 4 of the Natural Gas Act (NGA), rather than when the pipelines 
have sought certificate approval for construction under Sec. 7 of NGA. 
However, when a pipeline seeks incremental pricing treatment, the 
Commission generally addresses this issue in the Sec. 7 certificate 
proceeding where a new facility or service is first proposed. The 
Commission has not made rolled-in pricing determinations in certificate 
applications because, in Sec. 7 certificate proceedings, the Commission 
is considering rates only for new service or customers and cannot 
change the rates of the pipeline's existing customers.10 One 
effect of making rolled-in pricing determinations in Sec. 4 rate 
proceedings is that the decision is made after the facilities are built 
and after the customers have determined whether to sign contracts for 
the facilities.
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    \1\0See Northern Natural Gas Company v. FERC, 827 F.2d 779 (D.C. 
Cir. 1987); Panhandle Eastern Pipe Line Company v. FERC, 613 F.2d 
1120 (D.C. Cir. 1979), cert. denied, 449 U.S. 889 (1980). The 
Commission could change existing customers' rates only by acting 
under Sec. 5 of the NGA and finding that their rates are unjust and 
unreasonable.
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    In a recent order in Northwest Pipeline Corporation,11 the 
Commission sought to provide greater certainty about rate treatment by 
issuing a declaratory order in Northwest's certificate proceeding 
providing a preliminary determination of rate design methodology. Based 
on the information provided by Northwest in its application and in 
response to Commission data requests, the Commission found that rolled-
in rate treatment would be appropriate in a subsequent Sec. 4 rate 
filing to recover the facility costs, provided, however, that Northwest 
could show in the Sec. 4 rate proceeding that the expansion facilities 
would provide the system-wide benefits it alleged in the certificate 
application and that the rate impact of rolling-in the facilities would 
be approximately the same as, and not materially greater than, that 
projected by Northwest.
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    \1\159 FERC  61,289 (1992), order on reh'g, 68 FERC  61,037 
(1994).
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    The Commission is interested in obtaining the industry's views on 
the extent of contractual support for a project that should be required 
before the Commission expends resources evaluating the project's rate 
and environmental aspects. The Commission is concerned about 
authorizing activities that will affect the environment or confer 
eminent domain powers on an applicant when the applicant offers no 
support (whether by way of contracts or precedent agreements) for its 
proposal. The Commission, however, also is aware that some applicants, 
particularly new entrants to the market, may not be able to obtain the 
financing needed to attract customers for their project without some 
indication by the Commission that the project ultimately may be 
approved and, if so, at what price capacity will be available.
    Depending on the policy adopted for recovering expansion costs, the 
Commission is also interested in examining whether its current policy 
of making rolled-in rate determinations in Sec. 4 rate proceedings may 
need to be revised. For example, if the Commission were to adopt a 
specific policy (such as always pricing on a rolled-in or incremental 
basis) or definitive criteria, the question of the proceeding (whether 
a Sec. 7 certificate or a Sec. 4 rate case) in which to make the 
determination could be less important, since pipelines and customers 
would know in advance how the facilities would be priced. However, if 
the Commission were to adopt more general criteria, such as a system-
wide benefits or commensurate benefits test, the Commission may need to 
consider whether and how to revise its current policies on when and in 
what proceeding to make the determination.
    The Commission is establishing this conference to obtain views from 
all facets of the gas industry on issues relating to the methods for 
recovering facility costs. The Commission discusses below some of the 
issues bearing on the determination of pricing methodologies. The 
Commission is interested in hearing the industry's views on these 
issues, as well as other issues related to facility cost recovery, in 
written submissions and in oral presentations at the conference.

II. Issues to be Considered

A. Benefits And Effects Resulting From The Adoption Of Rolled-in Or 
Incremental Pricing

    The Commission is interested in receiving comments on the 
competitive effects of adopting rolled-in or incremental pricing as 
well as other effects resulting from the choice of pricing methodology. 
The following are some of the questions that will be considered.
    1. Which pricing methodology better reflects cost responsibility 
and provides better market signals about the appropriate scale of 
construction? Will rolled-in pricing lead to overbuilding because the 
existing customers are contributing to the costs of construction? On 
the other hand, does rolled-in pricing better avoid piecemeal 
expansions, and higher overall costs, by permitting pipelines to build 
facilities to better serve future needs? Is Commission oversight 
through its certificate regulation sufficient to prevent overbuilding?
    2. What is the effect of each pricing methodology on other national 
goals, such as promoting the use of natural gas or protecting the 
environment? For example, which methodology would better permit the 
market to make the appropriate fuel choice given environmental and 
other impacts of the choice?
    3. Does the choice of pricing methodology have a significant effect 
on competition among pipelines? For example, does a new pipeline, whose 
prices reflect current construction costs, have difficulty competing 
against an existing pipeline that can roll-in new facilities costs? If 
so, should this be a regulatory concern?
    4. Does the choice of pricing methodology have a significant effect 
on competition in the capacity release market? For example, does an 
incremental shipper, whose rates reflect the current cost of 
construction, have difficulty competing in the capacity release market 
with a shipper paying a pre-expansion rate?
    5. Does the adoption of any pricing methodology better comport with 
a regulatory regime that relies on private contracts and market forces? 
For example, does the choice of pricing methodology affect business 
planning and the negotiation of long-term contracts? How important is 
long-term contracting to the industry?
    6. Does charging shippers different prices for the same service 
under incremental pricing (vintage pricing) create economic distortions 
or undue discrimination, as raised by the Court in TransCanada? 
Commenters should consider the following questions.
    a. Does vintage pricing create economic distortions and, if so, are 
such distortions greater or less than those associated with rolled-in 
pricing?
    b. Should existing shippers be entitled to receive lower prices 
because they signed long-term contracts with the pipelines when prices 
were lower? Commenters should address the terms and conditions relating 
to rate increases that would exist in long term contracts in a 
competitive market for capacity. They also should address the prices 
existing shippers should pay when their contracts expire.
    c. What price should a new shipper which acquires existing capacity 
(formerly priced at a pre-expansion rate) pay? For example, if an 
existing shipper exercises a contractual right to reduce its contract 
demand freeing capacity for a new shipper, should a new shipper pay the 
pre-expansion, the incremental, or some other rate for that freed-up 
capacity?
    d. Are there methods of dealing with the vintage pricing issue? For 
example, should current shippers be able to release capacity prior to 
the expansion at up to the proposed incremental rate? If current 
shippers are willing to release some of their existing capacity prior 
to the expansion, the scale of the expansion could be reduced. 
Permitting current shippers to release capacity also would ensure that 
all shippers would make their capacity determinations based on 
incremental prices and that capacity would be allocated to those 
shippers valuing it the most.

B. What Pricing Methodology Or Test Should The Commission Adopt For New 
And Existing Facilities?

    Given the economic effects of the potential choices, the Commission 
is interested in obtaining comments on the pricing methodology or 
methodologies that should be used. Comments should not be limited to 
the rolled-in or incremental methodologies used in the past, but should 
include potential alternative approaches, with a discussion of the 
benefits of each approach. If the Commission were to continue its case-
by-case approach to determining pricing methodology, the Commission is 
interested in obtaining comments on the appropriate test that should be 
used in making this determination. The following are some questions to 
be considered.
    1. What does the industry need in the way of new construction over 
the next decade (e.g., expansion of facilities, access to new market or 
supply areas, replacement of old facilities, connections between 
existing facilities to create greater flexibility) and how do these 
needs bear upon the methodology or methodologies used by the Commission 
to set rates for new construction?
    2. Do changes in the industry warrant the adoption of a new 
approach to establishing pricing methodologies for new or existing 
construction? For example, are there relevant differences between 
current and past expansions in terms of the rate impact of the 
expansions or the customers served by the expansion (e.g., all the 
pipeline's customers rather than a subset)? What effect does the advent 
of open access transportation and the unbundling of gas sales from 
transportation brought about by Order Nos. 436 and 636 have on the 
choice of pricing methodology?
    3. To what extent should other aspects of rate design (e.g., 
unbundling, mileage-based rate design, seasonal rate design, production 
area rate design, or market based rates) affect the Commission's policy 
on the choice between rolled-in and incremental rates?
    4. Should the Commission continue to use general criteria, such as 
the extent of system-wide benefits, or should it adopt discrete 
policies or guidelines for determining the appropriate methodologies. 
The following are some possible options to be considered.
    a. Different methodologies could be used depending on the type of 
construction, for example mainline expansions, laterals, extensions 
beyond the existing termination point, or facilities directly connected 
to certain customers.
    b. Thresholds could be set for determining which methodology to 
apply, for example, rolling-in costs for facilities unless they would 
increase rates by more than a certain percentage.
    c. Rates for expansion customers could be set at the higher of 
rolled-in or incremental rates.
    5. Should the Commission consider options other than full rolled-in 
or incremental pricing of new facilities? The following are some 
options to be considered.
    a. Rates for expansion customers could be set based on the sum of 
incremental costs and a share of pre-expansion costs to reflect the 
benefits expansion customers receive from existing facilities. The 
rates for existing shippers also could be adjusted to reflect benefits 
received from the expansion.
    b. Rates could be set on an incremental basis, with the costs 
rolled-in after some specified period of time or rolled-in gradually 
over time at a pre-determined level each year.
    c. Incremental rates could be used for the expansion customers, but 
as lower priced contracts for existing shippers expire, their capacity 
would be rolled-in to the expansion capacity, thus reducing the 
incremental rate.
    d. Rolled-in rates could be used for expansions (or portions of 
expansions) built to serve existing markets and incremental rates for 
expansions (or portions of expansions) used to serve new markets.
    6. If more general criteria are to be used in individual cases, 
what should the tests or criteria be? Among the issues to be considered 
are:
    a. Should the Commission adopt a rebuttable presumption in favor of 
a particular pricing method and what test should be used to overcome 
the presumption?
    b. Should the commensurate benefits test be used for approving 
rolled-in pricing or is it sufficient that existing shippers obtain 
positive benefits?
    c. What are the advantages and disadvantages of each test, or is 
another formulation more appropriate?
    d. Do benefits need to be measurable? What weight should be given 
to various criteria, and how should non-measurable criteria be valued?
    7. How should the Commission handle multiple expansions, in 
particular when an initial, expensive addition makes subsequent 
additions less costly?
    For example, pure incremental pricing could cause customers to seek 
to delay making commitments until the later, less expensive expansion 
in order to obtain lower rates, while rolled-in pricing could 
discourage construction of the less expensive expansion because rates 
would be above the incremental cost of the project.
    a. Which of the options is preferable?
    b. Are there methods that could avoid both problems?
    c. Should the Commission adopt a policy under which the costs for 
expansions starting from a particular date are cumulated or ``rolled-
up'' to yield an average expansion rate?

C. Should The Commission Revise Its Policies To Provide More Guidance 
On Construction Approvals And Rates In Sec. 7 Certificate Proceedings?

    The Commission is interested in reviewing its current policies 
relating to granting at-risk certificates and determining the rate 
methodology for new projects to determine if changes in these policies 
are needed. For example, if the Commission adopts more general policies 
for recovering the costs of new facilities, rather than a bright-line 
test, pipeline customers may need notice of the rates they will be 
paying prior to the completion of the Sec. 4 proceeding in order to 
make better informed decisions about the amount of capacity for which 
to contract.
    The Commission is interested in receiving comments on the following 
questions.
    1. What pricing methodology is most consistent with the 
Commission's at-risk certificate policy?
    a. Is there any reason to differentiate between at-risk 
construction and fully subscribed construction in terms of the pricing 
methodology used for facility cost recovery?
    b. If rolled-in pricing is used, how should the at-risk condition 
be maintained?
    c. In light of the Commission's at-risk policy, should the optional 
certificate regulations be continued?
    2. What are the benefits or detriments of issuing preliminary 
determinations on certain aspects of a certificate application (such as 
environmental issues and rates)? Are preliminary determinations useful 
in dealing with economic aspects of a certificate proposal? What level 
of contractual or market support should be required to justify the 
issuance of a preliminary determination? What time limitations, if any, 
should the Commission impose on submission of supplemental evidence 
demonstrating contractual or market support?
    3. Should the Commission make a distinction in granting preliminary 
determinations depending on whether: (a) Market-based rates are 
proposed; (b) the applicant is a new company; or (c) little or no new 
construction of facilities is involved? What other distinctions, if 
any, should be made?
    4. What are the benefits and detriments of making pricing decisions 
in or coincident with certificate proceedings?
    a. Should the Commission use the preliminary determination or 
declaratory order approach as in Northwest? If so, what should be the 
burden of proof, what procedures should be used, and how binding should 
the determination be on subsequent Sec. 4 proceedings?
    In particular, commenters should address whether to use abbreviated 
procedures to make the preliminary determination. For example, the more 
abbreviated the procedures used during the certificate proceeding, the 
more quickly the determination will be made. On the other hand, the use 
of abbreviated procedures may increase the risk that the full Sec. 4 
proceeding may reveal problems or difficulties that were not apparent 
during the certificate examination. In other words, should the 
Commission provide certificate applicants with the choice of: (1) A 
fast-track procedure for applicants which wish to charge incremental 
rates, or which otherwise have no need for an up-front determination of 
the rolled-in rate treatment issue; or (2) a separate procedure for 
applicants which desire an up-front determination on rolled-in rate 
treatment and are willing to accept the likely evidentiary burdens as 
well as the additional time likely to process such an application? If 
so, how should these different tracks be designed?
    b. Should the Commission exercise its Sec. 5 authority in the 
certificate proceeding to establish rates for all customers?
    c. Should the Commission require pipelines seeking rolled-in rate 
treatment to file a Sec. 4 proceeding along with the certificate 
application?
    Commenters should address whether the filing should be a limited 
Sec. 4 filing examining only the expansion costs and the pricing 
methodology for these costs or whether it should be a full Sec. 4 
proceeding in which all the pipeline's costs are examined. Would a 
limited Sec. 4 proceeding be appropriate when the pipelines agrees to 
file a full Sec. 4 proceeding within a stipulated time frame?
    d. Should the Commission be able to change the initial rate 
methodology adopted for facilities at a later point in time? Does 
changing methodologies upset the goal of providing rate certainty? What 
criteria should the Commission use in making such changes?

D. Implementation Issues Related To Use Of Incremental Rates

    The Commission is interested in exploring a number of questions 
relating to the implementation of incremental rates.
    1. How should the maximum rate for interruptible transportation be 
determined under incremental rates?
    2. The Commission has a policy that all shippers have a right to 
use all receipt and delivery points within the firm transportation path 
to which the shipper is entitled or for which it is willing to pay.
    a. How does the charging of different rates (in terms of an 
expansion shipper paying incremental rates and a non-expansion shipper 
paying pre-expansion rates) affect the flexible receipt and delivery 
point policy? Should non-expansion shippers have access to points on 
the expansion facilities? And, at what rate?
    b. Should expansion shippers have access to points on the existing 
facilities? Is it equitable for existing non-expansion shippers, who 
pay a pre-expansion rate, to have access to receipt and/or delivery 
points in competition with expansion shippers paying a higher 
incremental rate at the same points?
    3. Are there other administrative burdens on the industry or the 
Commission that would be occasioned by incremental rates? For example, 
pipelines now administer complex zone rate schedules. How much 
additional burden is created by incremental rates?

E. Questions Relating To Other Inquiries

    The Commission anticipates that it will initiate two other 
inquiries in the near future to address: (1) The performance of the 
current Order No. 636 capacity release program and whether that program 
can be improved to make the present secondary market in pipeline 
capacity more efficient; and (2) the relationship between the 
Commission's open access transportation policies and the use of natural 
gas as a fuel for electric generation.
    1. How do incremental rates, with different customers paying 
different rates, affect the current capacity release program and how 
should any problems or issues be handled? For example, what maximum 
rate should apply to shippers paying different rates?
    2. If the Commission were to modify the current capacity release 
program (e.g., by eliminating the price cap or by allowing releases 
outside of the pipeline's Electronic Bulletin Boards), would there be 
any effect that should be considered in deciding whether to apply 
rolled-in or incremental rates? Conversely, would the Commission's 
decision to use either rolled-in or incremental rates require 
modification of the Commission's regulations governing capacity release 
transactions? Or, will the secondary market, with or without 
modification, work equally well under either rate approach?
    3. Would either rolled-in or incremental treatment of new 
facilities be most consistent with a policy designed to facilitate the 
use of natural gas for the electric generation and cogeneration market? 
Please provide specific examples to the extent available.

III. Comment and Conference Procedures

    An original and 14 copies of comments on these issues should be 
filed with the Commission within 60 days after the date of this notice. 
Comments should be submitted to the Office of the Secretary, Federal 
Energy Regulatory Commission, 825 North Capitol Street, NE, Washington, 
DC 20426, and should refer to Docket No. PL94-4-000. All written 
comments will be placed in the Commission's public files and will be 
available for inspection in the Commission's Public Reference Room at 
941 North Capitol Street, NE, Washington, DC 20426, during regular 
business hours. The Commission will issue a subsequent notice of the 
date for the public conference and the procedures regarding 
presentations by the public at the conference.

    By direction of the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 94-18870 Filed 8-2-94; 8:45 am]
BILLING CODE 6717-01-P