[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Rules and Regulations]
[Pages 47284-47293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19453]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 154, 161, 250, and 284

[Docket Nos. RM98-10-005 and RM98-12-005; Order No. 637-B]


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

Issued July 26, 2000.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule; order denying rehearing.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
issuing an order denying requests for rehearing and providing 
clarification of Order No. 637-A [65 FR 35705, Jun. 5, 2000]. Order No. 
637 revised Commission regulations to enhance the competitiveness and 
efficiency of the interstate pipeline grid. The rehearing and 
clarification requests addressed in the order principally relate to 
posting and bidding requirements for pre-arranged capacity release 
transactions and segmentation. The order also addresses requests 
related to penalties, reporting requirements, and the right of first 
refusal (ROFR).

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

FOR FURTHER INFORMATION CONTACT:  Michael Goldenberg, Office of the 
General Counsel, Federal Energy Regulatory Commission, 888 First 
Street, NE., Washington, DC 20426, (202) 208-2294.
    Robert A. Flanders, Office of Markets, Tariffs, and Rates Federal 
Energy Regulatory Commission, 888 First

[[Page 47285]]

Street, NE., Washington, DC 20426, (202) 208-2084.

SUPPLEMENTARY INFORMATION:

Order Denying Rehearing

    In Order No. 637-A,\1\ issued on May 19, 2000, the Commission 
denied in part and granted in part rehearing of Order No. 637,\2\ and 
clarified its policies as they relate to the regulatory changes made in 
Order No. 637. Order Nos. 637 and 637-A revised the Commission's open 
access regulations to improve the efficiency of the market and to 
provide captive customers with the opportunity to reduce their cost of 
holding long-term pipeline capacity, while continuing to protect 
against the exercise of market power. Specifically, Order Nos. 637 and 
637-A granted a waiver for a limited period of the price ceilings for 
short-term released capacity; revised the Commission's regulatory 
approach to pipeline pricing in order to enhance the efficient 
allocation of capacity; revised regulations relating to scheduling 
procedures, capacity segmentation, and pipeline penalties to improve 
the efficiency and competitiveness of the pipeline grid; revised 
pipeline reporting requirements to provide greater transparency; and 
revised the right of first refusal (ROFR) to remove economic biases.
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    \1\ Regulation of Short-Term Natural Gas Transportation Services 
and Regulation of Interstate Natural Gas Transportation Services, 
Order No. 637-A, 65 FR 35706 (Jun. 5, 2000), III FERC Stats. & Regs. 
Regulations Preambles para. 31,099 (May 19, 2000).
    \2\ Regulation of Short-Term Natural Gas Transportation Services 
and Regulation of Interstate Natural Gas Transportation Services, 
Order No. 637, 65 FR 10156 (Feb. 25, 2000), III FERC Stats. & Regs. 
Regulations Preambles para. 31,091, at 31,308 (Feb. 9, 2000).
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    In Order No. 637-A, the Commission upheld the regulations adopted 
in Order No. 637, making only minor adjustments relating to penalties, 
reporting requirements, and the ROFR. The Commission also responded to 
requests for clarification and explained its policies relating to 
implementation of the regulations adopted in Order No. 637.
    Twenty-one requests for rehearing or clarification of Order No. 
637-A were filed.\3\ The principal requests relate to the issues of 
posting and bidding requirements for pre-arranged capacity release 
transactions at the maximum tariff rate and the requirement that 
pipelines permit shippers to segment capacity as well as Commission 
policies as they relate to segmentation. There also are a few requests 
for rehearing or clarification relating to the penalty provisions, 
reporting requirements, and the ROFR.
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    \3\ Those filing rehearing and clarification requests are listed 
on the Appendix.
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    As discussed below, this order denies the requests for rehearing. 
The order does not address rehearing or clarification requests that 
were fully discussed in Order No. 637-A or that are not generic, but 
relate to particular pipelines or potential issues that may arise in 
filings. These issues include requests by the Pa. Office of Consumer 
Advocate about pipeline filings to implement capacity auctions, by AGA, 
El Paso, and DTI relating to the mechanics of the ROFR pricing policy, 
and by National Fuel regarding the receipt and delivery points 
available to a shipper exercising its ROFR for a volumetric portion of 
its capacity. These concerns can be addressed in specific cases, if 
they arise.

I. Exemption from the Posting and Bidding Requirements for Pre-
Arranged Capacity Release Transactions at the Previous Maximum Rate

    In Order No. 637, the Commission granted a waiver of the maximum 
rate ceiling applicable to short-term capacity release transactions 
until September 30, 2002. The Commission, however, retained the pre-
existing posting and bidding requirements for capacity release 
transactions.\4\ Under the Commission regulations issued in Order No. 
636 and continued in Order No. 637, the Commission requires all 
capacity release transactions, including prearranged deals, to be 
posted for bidding with two exceptions. First, pre-arranged deals for 
31 days or less are not subject to posting and bidding, but any 
rollover or continuation of such transactions is subject to bidding. 
Second, transactions at the ``maximum rate applicable to the release'' 
are exempt from posting and bidding.\5\
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    \4\ Order No. 637, 65 FR at 10182, III FERC Stats. & Regs. 
Regulations Preambles para. 31,091, at 31,279.
    \5\ 18 CFR 284.8(h)(1) (formerly 18 CFR 284.243(h)(1)).
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    On rehearing of Order No. 637, a number of shippers sought 
rehearing or clarification regarding the continued applicability to 
short-term capacity release transactions of the prior exemption from 
posting and bidding for prearranged capacity release transactions at 
the maximum tariff rate. They contended local distribution companies 
should be permitted to enter into pre-arranged transactions at the 
maximum tariff rate without having those transactions subject to the 
posting and bidding requirements. They argued that maintaining pre-
arranged transactions at the maximum rate would facilitate state retail 
unbundling programs.
    In Order No. 637-A, the Commission denied the rehearing and 
clarification requests. The Commission explained that the current 
regulation exempted transactions at the ``maximum rate applicable to 
the release,'' so that once the maximum rate ceiling was removed, all 
transactions (except for transactions qualifying for the 31 days or 
less exemption) would be subject to the posting and bidding 
requirements. In order to ensure that the regulations are clear, the 
Commission amended 284.8 (i) to specify that the exemption from the 
posting and bidding requirements for transactions at the maximum rate 
would not apply to short-term capacity release transactions as long as 
the waiver of the maximum rate ceiling is in effect.
    In denying rehearing, the Commission found that requiring posting 
and bidding is necessary to ensure that capacity is equally available 
to all shippers and to protect against undue discrimination and the 
exercise of market power.\6\ The Commission also explained that in 
individual cases where an LDC considers an exemption from the posting 
and bidding requirement essential to further a state retail unbundling 
program, it, together with the appropriate state regulatory agency, may 
request the Commission to waive the regulation. If the LDC seeks such a 
waiver, the Commission stated the LDC should be prepared to have all of 
its capacity release transactions and any re-releases of that capacity 
limited to the applicable maximum rate for pipeline capacity.
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    \6\ Order No. 637-A, 65 FR at 35718, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,568-69.
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    AGA, UGI, Florida Cities, Dominion LDCs, New England Local 
Distribution Cos., Pa. Office of Consumer Advocate, and National Fuel 
seek rehearing of the Commission's determination to require posting and 
bidding for transactions at the previous maximum tariff rate for 
release transactions. They also request that local distribution 
companies not be required to relinquish their ability to sell above the 
maximum rate as condition of a waiver exempting maximum rate 
transactions from the posting and bidding requirements. They contend 
that failing to provide an exemption from posting and bidding for 
prearranged capacity release transactions at the previous maximum rate 
impedes state retail unbundling efforts where LDCs are required to 
release capacity to marketers serving in-state customers at maximum 
rates.

[[Page 47286]]

    The Commission denies the requests for rehearing of its requirement 
for posting and bidding for capacity release transactions at the 
previous maximum tariff rate. As the Commission explained in Order No. 
637-A, Order No. 636 generally required posting and bidding for 
capacity release transactions to ensure that capacity is equally 
available to all shippers and to protect against undue discrimination 
and the exercise of market power. The only reason that prearranged 
deals at the maximum rate were exempt from the posting and bidding 
requirements was that, as long as a rate ceiling was in effect, no 
other shipper could beat the pre-arranged deal and bidding and posting 
requirements would be superfluous.\7\ With the removal of the rate 
ceiling during the waiver period, pre-arranged transactions always can 
be beaten by a higher bid, and posting and bidding for transactions at 
the previous (and now non-existent) maximum rate is necessary to ensure 
that capacity is available to all shippers and to protect against undue 
discrimination and the exercise of market power.
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    \7\ Release of Firm Capacity on Interstate Natural Gas 
Pipelines, Order No. 577, 60 FR 16979 (Apr. 4, 1995), FERC Stats. & 
Regs. Regulations Preambles [Jan. 1991-June 1996] para. 31,017, at 
31,316 (Mar. 29, 1995) (``when the pre-arranged deal is at the 
maximum rate, no other shipper can make a better bid for that 
capacity'').
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    Order No. 637 proceeded from the premise that lifting the price 
ceiling for short-term capacity release transactions would create a 
more efficient and competitive national market for gas and 
transportation in which shippers seeking short-term capacity would pay 
the market price. Providing certain customers with a preferential rate 
for short-term capacity runs counter to that premise. It would make the 
overall gas market less efficient because capacity could be allocated 
to those shippers who do not place the greatest value on obtaining it. 
Indeed, providing preferential rates to certain customers is 
inconsistent with the basic premise of Order No. 637, because such 
preferences can lead to other customers having to pay higher than 
market rates for capacity. Reserving capacity at preferential rates for 
certain customers will remove that capacity from the market, with the 
likely effect of increasing prices for the capacity remaining to be 
sold to other customers.\8\
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    \8\ For example, suppose an LDC has 10,000 Dth of available 
capacity with a maximum rate of $1 during a time at which the price 
of capacity would exceed the $1 value. Suppose that if the LDC 
places all 10,000 Dth for sale, the price per unit would be $1.25 
given the demand characteristics of the shippers bidding for 
capacity. However, if the LDC sells 500 Dth to certain shippers, 
such as marketers who sell gas behind the LDC's city-gate, for the 
former maximum rate of $1.00, that leaves only 500 Dth remaining to 
be sold to other interstate shippers. By limiting the amount of 
available capacity through sales at below-market prices, the price 
for the remaining capacity is likely to rise above $1.25 in order to 
allocate the capacity to the remaining interstate shippers.
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    The rehearing requests also address potential conditions the 
Commission may impose in considering requests for waiver of the posting 
and bidding requirements. The Commission has yet to receive a waiver 
request or determine whether to grant such a waiver. Each waiver 
request, together with any associated conditions, will be considered on 
an individual basis based on the facts presented in the waiver request.

II. Segmentation

    In Order No. 636, the Commission adopted a policy of requiring 
pipelines to permit shippers to divide their capacity into segments and 
use each segment for different purposes. In Order No. 637, the 
Commission responded to the inconsistent application of segmentation 
rights by adopting a regulation requiring pipelines to enable each 
shipper ``to make use of the firm capacity for which it has contracted 
by segmenting that capacity into separate parts for its own use or for 
the purpose of releasing that capacity to replacement shippers to the 
extent such segmentation is operationally feasible.'' \9\ The 
Commission required pipelines to submit pro forma tariff filings to 
comply with this regulation. In Order No. 637-A, the Commission made no 
changes in the regulation, but explained some of its policies regarding 
the implementation of the segmentation requirement in the pipeline 
compliance filings.
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    \9\ Order No. 637, 65 FR at 10195, III FERC Stats. & Regs. 
Regulations Preambles para. 31,091, at 31,303-304; 18 CFR 284.7(e).
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    Columbia Gas seeks rehearing of the requirement that pipelines make 
pro forma compliance filings. Other requests relate to policies 
involved in implementing the requirement, particularly those relating 
to segmentation on reticulated pipelines and policies relating to the 
use of primary receipt points, discounting, backhauls, and priority for 
transactions at secondary points.

A. Compliance Filing Requirement

    Columbia Gas contends that under section 5 of the Natural Gas Act, 
the Commission must show that an existing pipeline tariff is unjust and 
unreasonable and that its proposed change is just and reasonable. 
Columbia Gas maintains the Commission has not explained whether it is 
acting under section 5 in the rulemaking or in the individual 
compliance filings and, accordingly, has not demonstrated that it has 
the authority to direct pipelines to make filings to change their 
tariffs to permit segmentation or to demonstrate that they should not 
have to comply with the new requirement.
    The Commission exercised its section 5 authority in this case by 
making the generic determination that pipeline tariffs that do not 
permit segmentation, where segmentation is feasible, are unjust and 
unreasonable, because the pipeline is denying shippers the ability to 
use their firm capacity as flexibly as the pipelines did when they were 
merchants.\10\ Because pipelines may have to implement segmentation in 
different ways depending on the operational characteristics of their 
systems, the Commission established pro forma compliance filings, just 
as it did in Order No. 636, as the means for determining how pipelines 
can best comply with the regulation. Any final determination on whether 
a particular pipeline tariff is unjust and unreasonable will be made in 
the individual compliance filing.
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    \10\ Order No. 637-A, 65 FR at 35730, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,590-91; Transmission 
Access Policy Study Group v. FERC, No. 97-1715, at 59-61, 2000 U.S. 
App. LEXIS 15362 (D.C. Cir. June 30, 2000) (authority to make a 
generic public interest finding under Mobile-Sierra); Wisconsin Gas 
Co. v. FERC, 770 F.2d 144, 1166-67 (D.C. Cir. 1985) (authority to 
make generic finding that practices are unjust and unreasonable in 
rulemakings).
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    The Commission has the authority under section 5 of the NGA to 
establish a hearing to determine whether a pipeline's tariff is unjust 
and unreasonable and to determine the proper just and reasonable tariff 
provision.\11\ The NGA gives the Commission the authority to require 
pipelines to provide information necessary to make those 
determinations,\12\ which is the information required by the pro forma 
compliance filings. Indeed, Columbia Gas concedes the Commission ``may 
have sufficient authority to direct a pipeline to show cause why a 
specific alleged conduct should not be found to be in violation of its 
tariff or the Commission's regulations.'' \13\ In this case, the 
Commission has directed the filing of pro forma tariffs to determine 
whether pipelines are in compliance

[[Page 47287]]

with its regulation requiring them to permit segmentation.
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    \11\ 15 U.S.C. 717d(a).
    \12\ 15 U.S.C. 717i (Commission can require natural gas 
companies to file special reports and to require natural gas 
companies to answer questions); 717m (c) (Commission can summon 
witnesses and require production of documents relevant to a 
hearing).
    \13\ Columbia Gas Rehearing Request, at 15.
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B. Segmentation on Reticulated Pipelines

    Columbia Gas and DTI seek clarification or rehearing relating to 
the requirement for segmentation on reticulated pipelines. Columbia Gas 
seeks clarification that a pipeline is permitted to demonstrate that 
capacity segmentation is not operationally feasible on its system. DTI 
argues that in requiring segmentation for reticulated pipelines the 
Commission ignored the detrimental effect that requiring segmentation 
for one zone pipelines with postage stamp rate designs can have on the 
development of market centers.
    DTI asserts that the Commission erred by not providing greater 
guidance on how segmentation on reticulated pipelines should be 
accomplished.
    The determination as to whether and how to implement segmentation 
on particular pipelines will be determined in the pro forma compliance 
filing proceedings. As the Commission stated in Order No. 637-A, the 
Commission expects all pipelines, including reticulated pipelines, to 
implement segmentation to the maximum extent feasible and that factors 
such as current rate design should not be an obstacle to permitting 
segmentation. The Commission expects pipelines and their customers to 
work together to propose methods of segmentation that will work given 
the operational characteristics of the pipeline. On reticulated 
pipelines, this may include allowing segmentation on straight-line 
portions of the pipeline where capacity paths can be constructed, using 
different methods for allocating storage capacity so that customers 
will have capacity paths from storage to delivery points, or permitting 
shippers authority to segment subject to operational limitations when 
needed to protect system integrity or other shippers rights. The 
details of segmentation need to be worked out in the first instance 
between the pipelines and their customers who have the greatest 
knowledge of the physical operations of the system.

C. Allocation of Point Rights and Point Priority

    In Order No. 637-A, the Commission discussed its policies on how 
segmentation should be implemented, including policies relating to 
overlapping capacity segments, allocation of primary point rights, 
point discounts, and mainline priority at secondary points within a 
contract path. Rehearing or clarification requests were received on 
several of these policies.
1. Segmentation at Paper Pooling Points
    In Order No. 637-A, the Commission clarified that shippers can 
divide their capacity through segmentation at any transaction point on 
the pipeline system, including virtual transaction points, such as 
paper pooling points, as well as at physical interconnect points, such 
as market centers.\14\ Columbia Gas and El Paso contend that the 
Commission has not explained how segmentation at paper points will 
work. Columbia contends that permitting segmentation at paper points 
will permit shippers to multiply their capacity beyond their contract 
demand.
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    \14\ Order No. 637-A, 65 FR at 35731, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,591-92.
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    The Commission was merely clarifying that shippers would have the 
right to segment capacity at locations on a pipeline that may not be 
physical interconnect points, but are recognized gas transaction 
points, such as paper pooling points. For example, a shipper may want 
to release capacity upstream of a pooling point and obtain gas at the 
pooling point for transportation on a downstream segment of its 
capacity. Columbia Gas has not explained how such segmentation will 
permit shippers to multiply their capacity beyond their contract 
demand. To the extent such difficulties exist, they are more 
appropriately examined in the compliance filings where the operational 
characteristics of the pipeline can be evaluated.
2. Forwardhaul-Backhaul Overlaps at a Point
    In Order No. 637-A, the Commission explained its policy regarding 
overlap of capacity segments. As a general matter, the Commission's 
policy is that shippers are permitted to segment capacity and overlap 
those mainline segments up to the contract demand of the underlying 
contract. As part of this discussion, the Commission found that a 
shipper using a forwardhaul and a backhaul to bring gas to a delivery 
point in an amount that exceeds its contract demand is not overlapping 
mainline capacity.
    INGAA, Williams, and El Paso Pipelines seek rehearing of this 
determination. They claim that the Commission is changing an existing 
policy without adequate justification and that overlaps of capacity at 
a point result in shippers receiving service in excess of the original 
shipper's contract.
    In the first place, the Commission is not changing a well 
established policy. The only case cited by those seeking rehearing in 
which the Commission did not permit a forwardhaul and backhaul overlap 
to a single point was a Commission letter order, addressed only to the 
parties in the case and which did not discuss the policy issues 
involved.\15\ More recently, in a formal order, the Commission found 
that a forwardhaul and a backhaul to 23 meter stations treated as a 
single delivery point for nomination and scheduling purposes would not 
be considered an overlap.\16\ In making this determination, the 
Commission found it unnecessary to analyze whether gas may have 
physically overlapped at some mainline point in excess of the shipper's 
contract demand. Distinguishing between overlaps at a single point and 
those to a collection of points treated as a single point is not a 
useful basis for determining shippers' rights to use their capacity.
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    \15\ Iroquois Gas Transmission System, L.P., 78 FERC para. 
61,135 (1997).
    \16\ Transcontinental Gas Pipe Line Corporation, 91 FERC para. 
61,031 (2000).
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    The Commission, therefore, has eliminated such artificial 
distinctions and moved to a policy in which forwardhauls and backhauls 
to the same point are not considered an overlap. Those seeking 
rehearing have not shown that pipelines face any operational problems 
in permitting such flexibility nor have they demonstrated that such 
flexibility adversely affects other shippers or the pipeline's ability 
to sell mainline capacity to other shippers. The shipper has contracted 
for a certain amount of mainline capacity from the pipeline and the use 
of that capacity to effect a forwardhaul and a backhaul does not exceed 
the shipper's contract demand in any mainline segment.
    The Commission's policy since Order No. 636 has been that shippers 
should be permitted to make the full use of their firm capacity whether 
through a forwardhaul, backhaul, or through a combination of 
forwardhaul and backhaul.\17\ After unbundling, shippers should have 
the same flexibility that pipelines had as merchants, which included 
the ability to forwardhaul and backhaul to the same point.
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    \17\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation Under Part 284 of the 
Commission's Regulations, Order No. 636-B, 61 FERC para. 61,272, at 
61,997 (1992) (shippers can use their capacity to release capacity 
through forwardhauls and backhauls).
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3. Primary Point Rights
    In Order No. 637, the Commission explained that in the past it had 
adopted different policies on the issue of whether pipelines could 
restrict

[[Page 47288]]

replacement shippers' ability to choose new primary points depending on 
whether pipelines had historic tariff provisions that limited primary 
point rights to the same level as the shipper's mainline contract 
demand. Although the Commission accepted tariff filings during Order 
No. 636 that continued historic limitations on the number of primary 
receipt and delivery points, the Commission questioned in the Order No. 
636 restructuring orders as well as in Order No. 637 whether allowing 
pipelines to limit receipt and delivery point quantities to the 
shipper's contract demand continued to be appropriate.
    In Order No. 637, the Commission concluded that a pipeline's overly 
restrictive allocation of primary point rights to existing shippers 
could restrict the ability of shippers to use their capacity flexibly 
and required pipelines in their compliance filings to justify continued 
restrictions on primary receipt and delivery point allocation, in 
particular requiring pipelines to justify a proposal to deviate from 
the Commission policy that both releasing and replacement shippers 
could choose primary receipt and delivery points equal to their 
contract demand (Texas Eastern/El Paso policy).\18\ In Order No. 637-A, 
the Commission stated that it could not clarify the role of primary 
receipt points on a generic basis, but would need to examine the issues 
raised in the pipelines' compliance filings.
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    \18\ Order No. 637, 65 FR at 10194, III FERC Stats. & Regs. 
Regulations Preambles para. 31,091, at 31,301-302; Texas Eastern 
Transmission Corporation, 63 FERC para. 61,100, at 61,452 (1993); El 
Paso Natural Gas Company, 62 FERC para. 61,311, at 62,991. See also 
Transwestern Pipeline Company, 61 FERC para. 61,332, at 62,232 
(1992).
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    El Paso Energy contends that the Commission has not justified its 
change in policy with respect to primary point rights, a justification 
it argues is especially necessary when the policy change affects 
contractual rights. El Paso argues that ``first-in-time shippers and 
marketers will immediately seek to segment their capacity into the 
smallest pieces possible in order to confiscate the largest amount of 
primary point capacity as possible.'' \19\
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    \19\ El Paso Rehearing Request, at 9.
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    Rather than being a change in Commission policy, as El Paso 
intimates, the Commission is seeking here to apply on a uniform basis 
policies that it first developed in Order No. 636, in part at least, in 
El Paso's own restructuring proceeding.\20\ In that order, the 
Commission found:
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    \20\ El Paso Natural Gas Company, 62 FERC para. 61,311, at 
62,982-83 (1993).

overly restrictive limits on the amount of primary receipt and 
delivery point capacity that a shipper can reserve could preclude a 
shipper from seeking alternative sources of gas at several primary 
receipt points. Thus, it may be unreasonable for a pipeline to limit 
primary receipt capacity to a firm transportation shipper's MDQ, 
particularly if the total receipt point capacity of the pipeline 
substantially exceeds its maximum daily transportation capacity. 
Furthermore, if a pipeline's consent is always required to change a 
primary receipt point, then the pipeline would have the ability to 
block a shipper's change in a primary point that might injure the 
commercial prospects of the pipeline's gas sales affiliate, or of 
favored transportation customers.\21\
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    \21\ Id.

In Order No. 637-A, the Commission further explained why permitting 
flexibility in the selection of primary points in segmented releases 
can be important to creating effective competition between pipeline 
services and released capacity. If replacement shippers are limited to 
the use of segmented points on a secondary basis, as El Paso suggests, 
the pipeline would still retain the right to sell that receipt point on 
a primary basis. The ability to sell points on a primary basis would 
provide the pipeline with a competitive advantage over segmented 
release transactions.
    Because of the potential effects that limitations on primary point 
rights can have on competition, such restrictions need to be reexamined 
in the pipeline's compliance filings. In those filings, pipelines need 
to justify restrictions on shippers' abilities to use additional 
primary points in segmentation transactions and any deviations from the 
Texas Eastern/El Paso policy.
    El Paso is concerned that permitting shippers to select primary 
points in excess of their mainline contract demand could lead to 
possible hoarding of capacity. But, as the Commission stated in Order 
No. 637-A, its policy recognizes that pipelines might need to impose 
some restrictions on primary point rights, as appropriate to the 
circumstances of their systems, to prevent hoarding of capacity by some 
shippers to the detriment of others.\22\ While the crafting of 
appropriate tariff provisions to limit hoarding may be challenging, as 
El Paso suggests, it does not appear infeasible.
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    \22\ Order No. 637-A, 65 FR at 35732, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,593. See El Paso Natural 
Gas Company, 62 FERC para. 61,311, at 62,982-83 (1993) (pipelines 
can propose methods for limiting the potential for hoarding).
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4. Discount Provisions
    In Order No. 637-A, the Commission addressed requests with respect 
to the interaction of its segmentation policy and its current policy 
permitting pipelines to limit discounts to particular points.\23\ The 
Commission stated that this issue needs to be reexamined in the 
compliance filings when segmented transactions occur within the path of 
the shipper's transportation contract. The Commission explained that 
once the pipeline has decided that a discount is needed to stimulate 
throughput in a section of the pipeline, it has foreclosed the 
possibility of selling that capacity to a shipper at an upstream point 
and that the discount, therefore, should apply to all transactions 
within the capacity path.
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    \23\ Order No. 637-A, 65 FR at 35733, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,595.
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    Pipelines contend that the new rule will prevent them from 
selectively discounting because it will prevent them from offering 
selective discounts to all shippers within the capacity path.\24\ INGAA 
states that as it reads the Commission's new rule, if long line 
pipelines decide to ``discount transportation to New York from the Gulf 
of Mexico or southern Texas they are precluded from refusing discounts 
from the just and reasonable maximum rate for points of delivery along 
over 1,000 miles of pipeline into many different markets, which markets 
present diverse competitive conditions.'' \25\
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    \24\ DTI, INGAA, Williams, Reliant, Columbia Gas, Duke Energy 
Pipelines, Enron Pipelines, El Paso.
    \25\ Rehearing Request by INGAA, at 7.
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    The Commission will clarify that it did not intend to change the 
rules regarding selective discounting. Pipelines, for example, will 
still be able to discount transportation to a particular customer who 
has competitive options to stimulate throughput without necessarily 
offering the same discount to other customers who are not similarly 
situated.
    As part of the examination of restrictions on segmentation, the 
compliance filings need to examine whether current restrictions on a 
discount shipper's use of its capacity impede segmentation and 
competition. In Natural Gas Pipeline Company of America,\26\ the 
Commission refused to permit the pipeline to impose a condition in 
discount contracts that would suspend the discount in the event the 
shipper released capacity, because such a provision would inhibit the 
competition between capacity release and pipeline capacity by requiring 
the discount shipper to pay the maximum rate in order to release 
capacity.
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    \26\ 82 FERC para. 61,298 (1998).

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[[Page 47289]]

    Once having granted a particular shipper a discount, some pipelines 
restrict the shipper's use of its capacity through capacity release or 
segmentation by requiring that shipper to pay the maximum rate for 
capacity in order to effectuate a segmented or release transaction. 
Placing such restrictions on discounted transactions could interfere 
with competition created through released capacity. Replacement 
shippers frequently need to use points different from those of the 
releasing shippers, and neither the releasing or replacement shipper 
may be willing to absorb the differential between the discounted and 
maximum rate. Given the increased use of discounted transportation by 
pipelines, it is important to explore in the compliance filings, the 
effect that allowing pipelines to restrict discount shippers' ability 
to segment and release capacity at alternative points would have on 
competition.
    DTI asks for clarification that the policy with respect to point 
discounts should not necessarily be applied to reticulated pipelines 
which do not permit segmentation. The Commission stated in Order No. 
637-A that discount policies on reticulated pipelines need to be 
evaluated differently than those on straight-line pipelines because a 
reticulated pipeline, with multiple laterals, may provide a shipper 
with a discount in order to stimulate throughput on a less-used lateral 
of its system, but not provide such discounts on more valuable 
laterals.\27\
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    \27\ This concern does not apply to long line pipelines, since 
selling capacity to a downstream point on a long line pipeline makes 
impossible the sale of that same capacity to an upstream point. 
Thus, in selling the capacity at a discount, the long line pipeline 
already has foregone the opportunity to collect a higher rate at the 
upstream point.
---------------------------------------------------------------------------

5. Mainline Priority at Secondary Points Within the Capacity Path
    In Order Nos. 637 and 637-A, the Commission addressed the question 
of whether shippers seeking to use mainline capacity within their path 
should receive a higher priority than shippers paying the same zone 
rate, but seeking to use capacity outside of their path. The Commission 
previously had found that giving priority to the shipper in the path 
and providing equal or pro rata rights were both just and 
reasonable.\28\ In Order No. 637, the Commission chose not to adopt a 
specific policy with respect to assigning priority over mainline 
capacity among shippers using secondary points, leaving the status quo 
on individual pipelines. In Order No. 637-A, the Commission 
reconsidered and determined that providing priority to the shipper 
moving within its path would strengthen competition and promote 
capacity release because it would provide greater certainty as to the 
capacity rights of each of the shippers. Under pro rata allocation, the 
Commission found that neither the upstream nor downstream shipper would 
have definitive rights to the mainline capacity and that such 
uncertainty would make capacity trading difficult. The Commission 
provided that in the compliance filings, each pipeline must use the 
within-the-path allocation method unless it can demonstrate that such 
an approach is operationally infeasible or leads to anticompetitive 
outcomes on its system.
---------------------------------------------------------------------------

    \28\ Compare Tennessee Gas Pipeline Company, 71 FERC para. 
61,399, at 62,577 (1995) (providing equal priority) with Panhandle 
Eastern Pipe Line Company, 78 FERC para. 61,202, at pp. 61,870-71 
(1997) (conditionally accepting within the path allocation); 
Northwest Pipeline Corporation, 67 FERC para. 61,095 (1994) 
(priority given to shippers moving within primary path).
---------------------------------------------------------------------------

    Columbia's Distribution Companies, Florida Gas, NYSEG, and FMNGA 
seek rehearing of the within-the-path allocation priority contending 
this policy reduces competition, is discriminatory, and unfairly 
confers competitive advantages on some shippers while disadvantaging 
others. They claim it contravenes the Commission's general policy that 
shippers receive the service for which they pay. They further assert it 
contravenes the Commission's recognition in Order No. 637 that one 
cannot tell whether the upstream or downstream shipper places the 
greatest value on the capacity. They contend that, as a result, there 
is no basis for giving preferential rights to the downstream shipper. 
They further argue adoption of within-the-path allocation rights will 
result in all shippers seeking to subscribe to capacity at the farthest 
downstream point in order to obtain the most valuable capacity. They 
also maintain that the Commission should not change its allocation 
priority policy without also addressing each pipeline's rate and zone 
design.
    Enron and Florida Gas contend that the Commission should review the 
priority policy in individual cases. Florida Gas is concerned that the 
within-the-path allocation method will upset past agreements on Florida 
Gas Transmission Company. Enron maintains that in some situations, 
either within-the-path allocation or pro rata may be the most 
appropriate method and that the Commission should not mandate a single 
approach without close examination of pipeline's rate design.
    The Commission affirms its determination that within-the-path 
allocation priority generally will best facilitate competition in the 
capacity release market. The issue presented is how to allocate 
mainline capacity to secondary points when shippers pay the same zone 
rate. In the following illustration, where shipper 1 (with a primary 
delivery point at A) and shipper 2 (with a primary delivery point 
downstream at C) pay the same rate in the zone, the issue would be 
whether the shippers should receive equal priority over mainline 
capacity to point B or whether shipper 2 should receive a higher 
priority over mainline capacity to point B than shipper 1, because 
point B is within shipper 2's path.

[[Page 47290]]

[GRAPHIC] [TIFF OMITTED] TR02AU00.000

    Capacity allocation is at its most efficient when capacity can be 
exchanged so that the shipper placing the highest value on the capacity 
can purchase it. As the Commission found in Order No. 637-A, 
competition and capacity release will be more efficient if one party 
has a defined right that can be exchanged, rather than two or more 
shippers having equal rights.\29\ The problem with giving equal rights 
to reach secondary points is that neither the upstream (shipper 1) nor 
downstream shipper (shipper 2) has an alienable right to the mainstream 
capacity to point B. Thus, giving both shippers equal rights to the 
mainline capacity to point B gives neither shipper the right to make 
deliveries to point B and would make it difficult for either shipper to 
release capacity to a replacement shipper needing capacity to point B, 
because the replacement shipper would not be guaranteed the right to 
ship to point B. In addition, competition would be limited because a 
shipper with primary point capacity at B would have a competitive 
advantage in selling its capacity, since it can guarantee delivery to 
point B whereas neither shipper 1 nor shipper 2 can guarantee delivery 
to point B. In order to promote capacity trading, the right to the 
mainline capacity should be assigned to one shipper or the other, so 
that shipper has the right to release the capacity unencumbered by 
another shipper's claim.
---------------------------------------------------------------------------

    \29\ Order No. 637-A, 65 FR at 35734 & n.126, III FERC Stats. & 
Regs. Regulations Preambles para. 31,099, at 31,596 & n.126 (citing 
R. Posner, Economic Analysis of Law, Sec. 3.1, at 28 (2d ed. 1977)).
---------------------------------------------------------------------------

    The Commission agrees with the rehearing requesters that on an a 
priori basis, it is not possible to tell whether the upstream or 
downstream shipper places greater value on reaching the secondary 
point. But the purpose of assigning rights so as to permit capacity 
trading is to establish the value of the capacity and permit the 
allocation of that capacity to the highest valued use. In this case, 
the capacity cannot be allocated to the upstream shipper (shipper 1 in 
the example), because the downstream shipper (shipper 2) can always 
preempt the upstream shipper's ability to use the capacity by shipping 
to its primary point (point C). For instance, assume shipper 1 and 
shipper 2 each attempt to schedule 1000 Dth/day to delivery point B and 
the pipeline has only 1000 Dth/day available on the mainline between 
point A and point B. Once shipper 2 realizes its capacity will be cut, 
it will reschedule its capacity to its primary point C and thereby 
receive its full 1,000 Dth/day.\30\ In that event, even if shipper 1 
were given the higher priority to point B, it would be unable to 
schedule any gas to that point. If, on the other hand, the right were 
allocated to shipper 2, its use of the mainline to point B could not be 
interrupted or curtailed by shipper 1. Thus, as between the two 
shippers, the right to the secondary point needs to be allocated to 
shipper 2 in order to create a meaningful, tradable right to the 
capacity.
---------------------------------------------------------------------------

    \30\ As was pointed out in Order No. 637-A, shipper 2 can often 
effect the full delivery of capacity to point B through the 
expedient of scheduling capacity to point C and then using a 
backhaul to reach point B. Thus, shipper 2 can preempt shipper 1's 
ability to deliver to point B, while preserving its ability to make 
the delivery itself.
---------------------------------------------------------------------------

    For this reason, the allocation of the priority to the downstream 
shipper is not unduly discriminatory, because the upstream and 
downstream shippers are not similarly situated. By virtue of the 
primary point rights in their contracts, shipper 2 already has the 
ability to preempt shipper 1's use of the downstream point. The 
Commission, therefore, is not creating discrimination, but is simply 
reacting to the facts as they stand to facilitate more effective 
capacity allocation. This determination is consistent with the 
conclusion reached in Order No. 636 that while upstream shippers can 
select downstream points in the same zone, the shipper will be using 
those points on an interruptible basis, subject to a higher priority to 
shippers using primary points.\31\
---------------------------------------------------------------------------

    \31\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation Under Part 284 of the 
Commission's Regulations, Order No. 636-A, 57 FR 36128 (Aug. 12, 
1992), FERC Stats. & Regs. Regulations Preambles [Jan. 1991-June 
1996] para. 30,950, at 30,585 (Aug. 3, 1992), Order No. 636-B, 61 
FERC para. 61,272, at 62,013 (1992). In Northwest, the Commission 
recognized that there is no undue discrimination in giving priority 
to shippers using their primary path over those using capacity 
between secondary points. Northwest Pipeline Corporation, 67 FERC 
para. 61,095, at 61,274 (1994).
---------------------------------------------------------------------------

    Those requesting rehearing contend that adoption of within-the-path 
allocation priority will lead all shippers, upon contract expiration, 
to seek to sign up for capacity at the end of the zone, since it is the 
most valuable. The Commission recognized in Order No. 637 that such an 
incentive could be created, but in reconsidering its decision, the 
Commission determined that enhancing capacity release competition was 
worth the difficulty of perhaps having to deal with potential conflicts 
in the future. It may well turn out that there is not a great incentive 
to move primary points to the end of the zone, because, as some of the 
rehearing requests point out,\32\ shippers may not want to risk giving 
up their primary point rights at their former delivery points where 
they most need the gas.
---------------------------------------------------------------------------

    \32\ Rehearing Request FMNGA, at 9 (the shipper's right to use 
an upstream point is still secondary).
---------------------------------------------------------------------------

    Those seeking rehearing further contend that the Commission should 
not change policy until after it has examined pipelines' rate design 
and zone structures to ensure that the rates shippers pay equate with 
the service

[[Page 47291]]

they receive. Cost-of-service rate design, however, may not perfectly 
represent the value of capacity, because both rates and zones may 
reflect considerations other than the value of reaching downstream 
delivery points. Indeed, the issue with respect to allocation of 
mainline capacity has arisen on Panhandle Eastern Pipe Line Company, a 
pipeline without rate zones and with rates that already are very 
mileage sensitive.\33\ The Commission, therefore, will not generically 
delay implementation of within-the-path scheduling priority until after 
it has conducted an examination of pipeline rate structures.
---------------------------------------------------------------------------

    \33\ See Panhandle Eastern Pipe Line Company, 78 FERC para. 
61,202 (1997) (rates based on 100 mile increments); Panhandle 
Eastern Pipe Line Company, 87 FERC para. 61,331 (1997) (issue is 
still under consideration).
---------------------------------------------------------------------------

    ETG supports within-the-path allocation, but asks the Commission to 
clarify that it applies equally to receipt as well as the delivery 
points used in the Commission's illustration. The Commission grants the 
clarification. The analysis that applies to delivery points applies 
equally to receipt points, so that shippers seeking to move to receipt 
points within their path should generally have higher priority for 
mainline capacity than shippers moving to receipt points outside their 
path.\34\ This means that a shipper would have a higher priority over 
mainline transportation to a receipt point downstream of its primary 
point than a shipper in the same zone seeking to use the same receipt 
point, which is upstream of its primary receipt point.
---------------------------------------------------------------------------

    \34\ Northwest Pipeline Corporation, 67 FERC para. 61,095 (1994) 
(shipper within the path receives priority over shipper outside the 
path).
---------------------------------------------------------------------------

III. Imbalance Services, Operational Flow Orders, and Penalties

    In Order No. 637-A, the Commission affirmed its new policy set 
forth in Order No. 637 that penalties may be imposed only when 
necessary to protect system integrity, and further explained that 
pipelines may not impose penalties for purposes other than system 
reliability, such as for enforcement of contractual obligations.\35\ 
The Commission also held that under its definition of ``penalty,'' \36\ 
a tiered cash-out program is a penalty, while a cash-out mechanism that 
requires that a shipper reimburse for the cost of the gas provided by 
the pipeline is not a penalty. DTI and El Paso seek rehearing and 
clarification of these rulings.
---------------------------------------------------------------------------

    \35\ Order No. 637-A, 65 FR at 35741, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,608-09.
    \36\ The Commission stated that it considers a penalty to be any 
charge imposed by the pipeline on a shipper that is designed to 
deter shippers from engaging in certain conduct and reflects more 
than simply the costs incurred as a result of the conduct. Order No. 
637-A , 65 FR at 35742, III FERC Stats. & Regs. Regulations 
Preambles para. 31,099, at 31,610.
---------------------------------------------------------------------------

    DTI and El Paso argue that the Commission erred in finding that 
penalties cannot be used to enforce contractual rights because this 
ignores the pipeline's right as a contract carrier to impose reasonable 
penalties to enforce its contracts, and that where a pipeline and 
shipper have entered into a contract to transport a specific quantity 
of gas, the pipeline should not be forced to exceed that quantity. DTI 
asserts that the consequences of the Commission's approach will be that 
pipelines will be unable to enforce contracts because shippers will 
contract for de minimis amounts of contract capacity and rely on 
generic contract overrun rights to meet their requirements. Further, 
DTI asserts that this will lead to decontracting, jeopardize the 
pipeline's ability to recover its cost of service, and unlawfully force 
pipelines to become common carriers rather than contract carriers.
    As the Commission explained in the prior orders, penalties can 
limit the ability of shippers to use their capacity and can create 
market distortions.\37\ Therefore, the Commission shifted its policy 
away from one that fosters the use of penalties to a service-oriented 
policy that gives shippers other options to obtain flexibility and 
limits penalties to their intended purpose--to protect the reliability 
of the system.\38\ The result of this shift in policy does not 
eliminate the ability of pipelines to charge a penalty for contract 
overruns, but merely means that such penalties must be structured so 
that a penalty is not imposed when the system is not reasonably 
threatened. For example, a pipeline should not impose a penalty on a 
day that there is sufficient available capacity and the pipeline would 
have granted an authorized overrun. On a day when there is sufficient 
capacity to provide overrun service, a shipper that takes service above 
its contractual level is receiving interruptible service and should pay 
the maximum rate for that service, but should not be charged a penalty, 
since its use of interruptible service does not threaten system 
reliability or deliveries to other shippers.
---------------------------------------------------------------------------

    \37\ See Order No. 637, 65 FR at 10197-98, III FERC Stats. & 
Regs. Regulations Preambles para. 31,091, at 31,307-08; Order No. 
637-A, 65 FR at 35740, III FERC Stats. & Regs. para. 31,099, at 
31,607.
    \38\ See Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation Under Part 
284 of the Commission's Regulations, Order No. 636, 57 FR 13267 
(Apr. 16, 1992), FERC Stats. & Regs. Regulations Preambles [Jan. 
1991-June 1996] para. 30,939, at 30,424 (penalties are to deter 
behavior inimical to the welfare of the system).
---------------------------------------------------------------------------

    Designing contract overrun penalty provisions so that they are 
imposed only when necessary to protect system integrity does not give 
shippers an incentive to contract for less than their required capacity 
and rely instead on contract overruns to meet their needs. Shippers 
contract for firm service in order to be guaranteed the service 
necessary to meet their requirements on a peak day, and they will not 
be guaranteed service at peak if they contract for only a portion of 
their capacity needs. The capacity that a shipper would obtain by means 
of an unauthorized overrun is not firm service, but is interruptible 
service that is subject to bumping and is limited by the capacity 
available at the time. Shippers that contract for firm service have 
already made a choice not to rely on interruptible service to meet 
their needs and therefore are unlikely to rely on an interruptible 
overrun service. Further, pipelines can still impose reasonable 
penalties when such penalties are related to system integrity. For 
example, on a peak day when capacity is not available, a shipper 
ordinarily would not be entitled to an authorized overrun because the 
provision of overrun or interruptible service could impede system 
reliability or adversely affect other shippers. Thus, a firm shipper 
could expect to be charged a penalty for using overrun service on a 
peak day and this prospect would deter the shipper from decontracting.
    DTI has not explained why a contract overrun should be treated any 
differently than other penalties. For instance, when a shipper runs an 
imbalance by taking more gas than it has delivered to the pipeline, its 
responsibility is to make-up or pay for the gas it has taken and, under 
the Commission's regulations, a penalty would be imposed only when 
necessary to protect system reliability. Similarly, when a shipper 
incurs a contract overrun, it must pay for the interruptible service it 
has used, and a penalty should be imposed only when needed to protect 
the reliability of the pipeline. Thus, contrary to DTI's suggestion, 
the Commission's shift in policy does not affect the nature of the 
service provided by the pipelines or the ability of pipelines and 
shippers to contract for service, and does not force pipelines to 
become common carriers.
    El Paso asks the Commission to clarify that it is not abrogating 
GISB Standard

[[Page 47292]]

1.3.19 \39\ with its statement that shippers should be given the 
flexibility to exceed contractual limitations unless such action 
jeopardizes system integrity. The Commission clarifies that the new 
penalty policy does not abrogate GISB Standard 1.3.19 because it does 
not change the process for seeking authorized overrun service.
---------------------------------------------------------------------------

    \39\ GISB Standard 1.3.19 provides ``Overrun quantities should 
be requested on a separate transaction.''
---------------------------------------------------------------------------

    El Paso also argues that a tiered cash-out mechanism should not be 
treated as a penalty because the primary purpose of a tiered cash-out 
mechanism is the same as a simple cash-out mechanism, i.e., to address 
the costs resulting from using the pipeline's system supply. If the 
Commission does not grant rehearing on this issue, El Paso asks the 
Commission to modify the requirement that pipelines must include their 
cash-out mechanisms in their pro forma compliance filings and make 
clear that the cash-out mechanism provision is included in the 
compliance filing for informational purposes only. El Paso also asks 
the Commission to clarify that any currently effective settlement will 
remain in effect.
    A tiered cash-out mechanism is a penalty provision because, unlike 
a simple cash-out mechanism, it does not simply recoup the cost of gas 
incurred as a result of shipper conduct, but imposes a greater penalty 
for larger imbalances. The filing of any cash-out mechanisms in the pro 
forma compliance filings is not for informational purposes only, but is 
for the purpose of enabling the Commission to evaluate how the 
pipeline's system management program, including the cash-out mechanism, 
imbalance services, netting and trading, OFO and penalty provisions 
work together in light of the pipeline's characteristics and the 
Commission's policy. As a general matter, the Commission will not 
exempt pipelines from complying with this policy simply because it 
provides service pursuant to a settlement. However, if the parties to 
an individual proceeding believe that a particular settlement should 
govern the imposition of penalties on a specific pipeline, this issue 
can be addressed in the compliance proceeding.

IV. Reporting Requirements for Interstate Pipelines

    In Order No. 637-A, the Commission granted rehearing with respect 
to the time at which transactional information will be posted. In Order 
No. 637, the Commission held that firm transactional data must be 
posted contemporaneously with contract execution. In Order No. 637-A, 
the Commission modified this requirement to provide that the 
transactional information for both firm and interruptible service must 
be posted no later than the first nomination for service under the 
agreement. The Commission recognized that changing the time for posting 
of firm contracts may result in somewhat later disclosure of some 
contractual commitments, but explained that the effect of such a delay 
on the shippers' ability to obtain information about available capacity 
will be mitigated by other reporting requirements. Specifically, the 
Commission stated that under Sec. 284.13(d), the pipeline is required 
to post all available firm capacity on its system, and once the 
pipeline enters into a contract committing firm capacity, the pipeline 
must amend its posting to reflect the fact that this capacity is no 
longer available, even if it does not immediately disclose the identity 
of the purchasers.
    Amoco agrees that if the pipelines contemporaneously amend their 
capacity posting data at the time of the execution of the new contract, 
as the Commission assumes will be the case, this will provide some 
transactional information to the public at an early enough point to be 
helpful in the decisionmaking process. Amoco asserts that 
Sec. 284.13(d) of the regulations should be clarified, consistent with 
the Commission's intent, to modify the language to require pipelines to 
amend their capacity availability posting simultaneous with the 
execution of the contract. Specifically, Amoco asserts that the word 
``timely'' should be replaced with ``contemporaneously'' and ``whenever 
capacity is scheduled'' should be replaced with ``whenever contracts 
are executed.''
    There is no need to modify the regulation because it already 
requires posting of changes to available capacity immediately after 
contract execution. Section 284.13(d) of the Commission's regulations 
require pipelines to post available capacity ``whenever capacity is 
scheduled.'' GISB currently requires pipelines to schedule capacity 
four times a day,\40\ and therefore the pipeline must post its 
available capacity four times daily. This not mean, however, that 
capacity under contract can be posted as available up until the time it 
is actually scheduled. A change in available capacity must be reflected 
in the next capacity posting after the execution of the contract 
because once the contract is executed, the capacity is no longer 
available. The pipeline cannot post capacity as available if it is no 
longer available.
---------------------------------------------------------------------------

    \40\ 18 CFR Sec. 284.12(b)(1)(i), Standard 1.3.2.
---------------------------------------------------------------------------

V. Right of First Refusal

    In Order No. 637, the Commission held that in the future, the ROFR 
will apply only to maximum rate contracts and, therefore will not apply 
to discounted contracts or negotiated rate contracts. The Commission 
grandfathered existing discounted contracts so that the ROFR will apply 
upon the expiration of those contracts, but explained that the ROFR 
will not apply to the re-executed contract unless it is at the maximum 
rate. In Order No. 637-A, the Commission affirmed these holdings and 
clarified that the ROFR does not apply to negotiated rate contracts 
regardless of whether the negotiated rate is equal to or higher than 
the maximum tariff rate for the service.\41\ ETG, New England, and WPSC 
seek rehearing or clarification of these holdings.
---------------------------------------------------------------------------

    \41\ Order No. 637-A, 65 FR at 35756, III FERC Stats. & Regs. 
Regulations Preambles para. 31,099, at 31,634.
---------------------------------------------------------------------------

    ETG and New England argue that the Commission erred in depriving 
negotiated rate contracts that are at the maximum tariff rate of ROFR 
protection. ETG argues that a negotiated contract to pay the maximum 
rate is a contract at the maximum rate within the meaning of the 
discussion in Order No. 637 and revised section 284.221(d) of the 
Commission's regulations. Further, ETG asserts that this limitation on 
the ROFR will discourage negotiated rate contracts and discounts, 
contrary to the Commission's policy of favoring settlements and 
approving procedures for negotiated rate contracts. New England asserts 
that in negotiating the re-execution of existing contracts, certain 
pipelines insisted that captive shippers enter into negotiated rate 
contracts at the maximum tariff rate, and that these customers are 
subject to the pipeline's monopoly power. New England states that under 
the Commission's rationale, a captive customer willing to pay the 
maximum rate must forego any benefits of the negotiated rate contract 
in order to retain the ROFR.\42\ New England argues that this is unfair 
and tends to limit the service options available to captive customers.
---------------------------------------------------------------------------

    \42\ New England states that the contract may differ from the 
pro forma service agreement on non-rate matters, and therefore be 
termed a negotiated rate agreement. For example, New England states 
the shipper may obtain the right to reduce contract demand prior to 
the expiration of the contract under certain circumstances.
---------------------------------------------------------------------------

    A shipper with a negotiated rate contract is not paying the tariff 
rate. That shipper's rate will be established

[[Page 47293]]

by its contract regardless of the tariff or any changes to the tariff 
rate during the term of the negotiated rate contract. Because a 
negotiated rate is not a tariff rate, it cannot be the maximum tariff 
rate within the meaning of the Commission's regulations regardless of 
how the level of the negotiated rate compares to the level of the 
tariff rate.
    Pipelines cannot require captive customers to enter into negotiated 
rate agreements rather than to take service under the maximum tariff 
rate. All shippers are entitled to take service pursuant to the 
pipeline's generally applicable tariff, and the pipeline cannot refuse 
to provide service under the tariff if capacity is available and the 
shipper agrees to pay the maximum tariff rate. This limitation does not 
impact the Commission's policy regarding settlements in rate cases; a 
negotiated rate is not a rate case settlement rate. Further, while the 
Commission permits negotiated rate contracts, it does not permit 
negotiated terms and conditions of service. The limitation on the ROFR 
therefore cannot limit the service options available to captive 
customers under negotiated contracts because customers cannot negotiate 
terms and conditions of service.
    ETG, New England, and WPSC ask the Commission to clarify that 
negotiated rate contracts entered into before the issuance of Order No. 
637 are, like discounted contracts, grandfathered and the ROFR will 
apply upon their expiration. These parties argue that negotiated rate 
contracts should be treated the same as discounted rate contracts with 
regard to grandfathering because in both cases shippers entered into 
the contracts in reliance on the existence of the ROFR, and the purpose 
of grandfathering is to protect that reliance interest.
    The ROFR applied to negotiated rate contracts prior to Order No. 
637, and the Commission agrees that the same policy should apply to 
negotiated rate contracts as to discounted contracts. Thus, negotiated 
rate contracts entered into prior to the issuance of Order No. 637 will 
be grandfathered, and the ROFR will apply to the service at the 
expiration of the contract. However, the ROFR will not apply to future 
negotiated rate contracts, and will apply only to contracts for 
recourse service taken pursuant to the pipeline's tariff at the maximum 
rate.

VI. Conclusion

    With this order, the rulemaking process is at an end. The next step 
is for the industry and the Commission to focus on the issues raised in 
the compliance filings so as to restructure pipeline services and 
penalties to enhance competition throughout the industry.

The Commission orders:

    Order Nos. 637 and 637-A are clarified as discussed in this 
order and rehearing of Order No. 637-A is denied.
    By the Commission. Commissioner Breathitt dissented with a 
separate statement attached.

David P. Boergers,

Secretary.


    Note: The following Appendix will not appear in the Code of 
Federal Regulations


Appendix--Requests for Rehearing Docket Nos. RM98-10-005 and RM98-12-
005

------------------------------------------------------------------------
                 Applicant                          Abbreviation
------------------------------------------------------------------------
American Gas Association..................  AGA.
Amoco Energy Trading Corporation and Amoco  Amoco.
 Production Company.
Columbia Gas Transmission Corporation.....   Columbia Gas.
Columbia's Distribution Companies           Columbia's Distribution
 (Columbia Gas of Kentucky, Maryland, Ohio   Companies.
 and Pennsylvania).
Dominion LDCs (Peoples Natural Gas Co.,     Dominion LDCs.
 East Ohio Gas Company, Hope Gas, Inc.,
 Virginia Natural Gas Co.).
Dominion Transmission, Inc................  DTI.
Duke Energy Gas Transmission (Algonquin     Duke
 Gas Transmission Company, East Tennessee
 Natural Gas Company, Texas Eastern
 Transmission Corporation).
East Tennessee Group......................  ETG.
El Paso Corporation Interstate Pipelines..  El Paso.
Enron Interstate Pipelines................  Enron.
Florida Cities............................  Florida Cities.
Florida Municipal Natural Gas Association.  FMNGA.
Interstate Natural Gas Association of       INGAA.
 America.
National Fuel gas Distribution Corporation  National Fuel.
New England Local Distribution Companies..  New England Distribution
                                             Companies.
New York State Electric & Gas Corp. (The    NYSEG.
 Berkshire Gas Company, Connecticut
 Natural Gas Corp., Southern Connecticut
 Gas Co.).
Pennsylvania Office of Consumer Advocate    Pa. Office of Consumer
 and Ohio Office of Consumer Counsel.        Advocate.
Reliant Energy Gas Transmission Company     Reliant.
 and Mississippi River Transmission
 Corporation.
The Williams Companies, Inc...............  Williams.
UGI Utilities, Inc........................  UGI.
Wisconsin Public Service Corporation......  WPSC.
------------------------------------------------------------------------

Breathitt, Commissioner, dissenting in part:

    I am dissenting in part on Order No. 637-B because of its 
determination that it is permissible for a shipper to use a 
forwardhaul and a backhaul to bring gas to a single delivery point 
in an amount that exceeds its contract demand. In a Tennessee Gas 
Pipeline Company proceeding, the Commission expressly prohibited 
shippers from using forwardhaul and backhaul transactions in a 
pipeline segment in excess of contract demand.\1\ This prohibition 
was retained in Order No. 637-A. The rationale offered in Tennessee 
was that segmenting rights are not without limit. The Commission 
explained that the limiting factor was the shipper original 
entitlement or contract demand. Specifically, the Commission stated, 
``this means that they have no right to release and use overlapping 
segments, where, in the overlapped portion, the total capacity 
released and used exceeds their original entitlement.''
---------------------------------------------------------------------------

    \1\ Tennessee Gas Pipeline Co., 85 FERC para. 61,052, at 61,135 
(1998).
---------------------------------------------------------------------------

    In an Iroquois Gas Transmission System, L.P. decision, the 
Commission applied that prohibition to overlapping transactions at a 
single point, finding that a shipper could not schedule forwardhaul 
and backhaul transactions to the same delivery point in excess of 
its total contract demand.\2\ The justification for this prohibition 
was the same in both cases. That is, the overlap of forwardhaul and 
backhaul transactions in excess of contract demand results in 
shippers receiving service in excess of that for which the shipper 
is paying. This is so, regardless of whether the overlap is at a 
single point or on a segment.
---------------------------------------------------------------------------

    \2\ Iroquois Gas Transmission System, L.P., 78 FERC para. 61,135 
at 61,524 (1997).
---------------------------------------------------------------------------

    Today's order does not adequately respond to this inconsistency 
in policy between treatment of contract rights on a segment and 
treatment of contract rights at a single point. Parties have argued 
on rehearing that overlapping transactions in excess of contract 
demand at a point negatively effects shippers' attempts to sell 
unused capacity in the secondary market. I do not believe that this 
order has adequately addressed this concern about the impact of this 
decision on the capacity release market. For these reasons, I am 
dissenting on the majority's decision to allow shippers to exceed 
there contractual entitlements by overlapping capacity at a single 
point.

Linda K. Breathitt,
Commissioner.
[FR Doc. 00-19453 Filed 8-1-00; 8:45 am]
BILLING CODE 6717-01-P