[Federal Register Volume 67, Number 84 (Wednesday, May 1, 2002)]
[Notices]
[Pages 21657-21668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10746]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM01-10-000]


Standards of Conduct for Transmission Providers; Notice of Staff 
Conference

April 25, 2002.
    Take notice that on May 21, 2002, the Federal Energy Regulatory 
Commission staff will hold a public conference to discuss the proposed 
revisions to the gas and electric standards of conduct governing 
transmission providers and their energy affiliates issued in this 
docket on September 27, 2001.\1\ To focus the discussion at the 
conference, a staff analysis of the comments received to date is 
attached to this notice. The conference will begin at 9:30 a.m. at the 
Commission's offices, 888 First Street NE., Washington, DC in the 
Commission's Meeting Room. All interested persons are invited to 
attend.
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    \1\ Standards of Conduct for Transmission Providers, 66 FR 50919 
(Sept. 27, 2001), IV FERC Stats. & Regs. Regulations Preambles para. 
32,555 (Sep. 27, 2001).
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    To reflect the changing structure of the energy industry, in this 
docket the Commission proposed to adopt one set

[[Page 21658]]

of standards of conduct to govern the relationships between regulated 
gas and electric transmission providers and all their energy 
affiliates, broadening the definition of an energy affiliate covered by 
the standards of conduct, from the more narrow definition in the 
existing regulations found in parts 37 and 161. This proposal is 
intended to eliminate the potential for a transmission provider's 
market power over transportation to be transferred to its affiliated 
energy businesses because the existing rules do not cover all affiliate 
relationships.
    The Commission received comments to the NOPR from 154 interested 
participants from all segments of the natural gas and electric 
industries, trade associations, and state and federal regulatory 
agencies. In light of these comments, in the attached analysis of the 
comments, the Commission staff suggests some possible changes in the 
proposals in the NOPR, specifically, changes to the proposed definition 
of an ``energy affiliate.'' The purpose of the public conference is to 
discuss the issues outlined in the attached staff paper.
    The conference will be organized in a town meeting, or technical 
conference, format to allow discussion of specific drafting options for 
the regulatory text. Attendees who want to propose alternatives to the 
regulatory text in the attached staff paper should come prepared to 
share specific proposed language. Also, the participation of people 
familiar with the business operations of the transmission providers and 
their energy affiliates is particularly invited. Participants are 
encouraged to offer assessments of the quantitative impacts of the 
proposed rule and the benefits to be obtained by the proposed rule. The 
order of the discussion at the conference will follow the organization 
of the attached staff paper: the definition of an energy affiliate, 
application of the rules to the bundled sales function for retail 
native load, the independent functioning requirement, information 
disclosure rules, and the posting of specified information.
    The Capitol Connection patrons in the Washington, DC area will 
receive notices regarding the broadcast of the conference. It also will 
be available, for a fee, live over the Internet, via C-Band Satellite, 
and via telephone conferencing. Persons interested in receiving the 
broadcast, or who need further information, should contact David 
Reininger or Julia Morelli at the Capitol Connection (703-993-3100) as 
soon as possible or visit the Capitol Connection web site at http://www.capitolconnection.gmu.edu and click on ``FERC.''
    In addition, National Narrowcast Network's Hearing-On-The-Line 
service covers all FERC meetings live by telephone so that interested 
persons can listen at their desks, from their homes, or from any phone, 
without special equipment. Billing is based on time on-line. Call (202) 
966-2211 for further details.
    Questions about the conference should be directed to: Demetra Anas, 
Office of General Counsel, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, 202-208-0178, 
[email protected].

Linwood A. Watson, Jr.,
Deputy Secretary.
Staff Analysis of the Major Issues Raised in the Comments
    In this rulemaking, the Commission proposed to adapt existing 
regulations to reflect the evolving energy market by consolidating the 
standards of conduct and applying them uniformly to all regulated 
transmission providers (natural gas pipelines and transmitting public 
utilities). Standards of Conduct for Transmission Providers.\2\ The 
NOPR also broadened the definition of an energy affiliate from the more 
narrow definition in the existing regulations.\3\ In this paper, staff 
provides its analysis of the major issues raised by the commenters in 
response to the NOPR. Further analysis will be necessary to evaluate 
the implications of the D.C. Circuit Court's recent decision in 
Dominion Resources Inc. v. FERC.\4\
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    \2\ Standards of Conduct for Transmission Providers, 66 FR 50919 
(Oct. 5, 2001), IV FERC Stats. & Regs. Regulations Preambles para. 
32,555 (Sep. 27, 2001).
    \3\ The gas standards of conduct are codified at Part 161 of the 
Commission's regulations, 18 CFR Part 161 (2001), and the electric 
standards of conduct are codified at Part 37 of the Commission's 
regulations, 18 CFR Part 37 (2001).
    \4\ Dominion Resources, Inc., And Consolidated Natural Gas Co., 
89 FERC para. 61,1652 (1999), order on compliance filing, 91 FERC 
para. 61,140 (2000), order denying reh'g, 93 FERC para. 61,214 
(2000), vacated and remanded (D.C. Circuit No. 01-1169, Slip Op. 
Issued April 19, 2002).
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I. Background

    The standards of conduct are one method used by the Commission to 
limit the ability of the transmission provider, a natural monopoly, to 
extend its market power over transmission to other energy markets by 
giving its affiliates unduly preferential treatment. Currently, the 
standards of conduct require that: (1) a transmission provider's 
transmission function operates independently from its marketing and 
sales functions; and (2) a transmission provider must treat all 
transmission customers, affiliated and unaffiliated, on a non-
discriminatory basis.
    In the NOPR, the Commission proposed to update its standards of 
conduct to reflect the current realities of the natural gas and 
electric industries. When the gas standards of conduct were first 
adopted, in the 1980's, the Commission was responding to concerns that 
pipelines had created marketing affiliates, and as a result, pipelines 
were giving their marketing affiliates preferential treatment. See 
Order No. 497 et. seq.\5\ More recently, the Commission promulgated the 
electric standards of conduct in Order No. 889 \6\ simultaneously with 
Order No. 888, which required electric transmission providers to offer 
open access transmission service.
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    \5\ Order No. 497, 53 FR 22139 (June 14, 1988), FERC Stats. & 
Regs. 1986-1990 para. 30,820 (1988); Order No. 497-A, order on 
reh'g, 54 FR 52781 (Dec. 22, 1989), FERC Stats. & Regs. 1986-1990 
para. 30,868 (1989); Order No. 497-B order extending sunset date, 55 
FR 53291 (Dec. 28, 1990), FERC Stats. & Regs. 1986-1990 para. 30,908 
(1990); Order No. 497-C, order extending sunset date, 57 FR 9 (Jan. 
2, 1992), FERC Stats. & Regs. 1991-1996 para. 30,934 (1991), reh'g 
denied, 57 FR 5815 (Feb. 18, 1992), 58 FERC para. 61,139 (1992); 
Tenneco Gas v. FERC (affirmed in part and remanded in part), 969 
F.2d 1187 (D.C. Cir. 1992); Order No. 497-D, order on remand and 
extending sunset date, 57 FR 58978 (Dec. 14, 1992), FERC Stats. & 
Regs. 1991-1996 para. 30,958 (Dec. 4, 1992); Order No. 497-E, order 
on reh'g and extending sunset date, 59 FR 243 (Jan. 4, 1994), FERC 
Stats. & Regs. 1991-1996 para. 30,987 (Dec. 23, 1993); Order No. 
497-F, order denying reh'g and granting clarification, 59 FR 15336 
(Apr. 1, 1994), 66 FERC para. 61,347 (Mar. 24, 1994); and Order No. 
497-G, order extending sunset date, 59 FR 32884 (June 27, 1994), 
FERC Stats. & Regs. 1991-1996 para. 30,996 (June 17, 1994).
    \6\ Open Access Same-Time Information System (Formerly Real-Time 
Information Network) and Standards of Conduct, 61 FR 21737 (May 10, 
1996), FERC Stats. & Regs., Regulations Preambles January 1991-1996 
para. 31,035 (Apr. 24, 1996); Order No. 889-A, order on reh'g, 62 FR 
12484 (Mar. 14, 1997), III FERC Stats. & Regs. para. 31,049 (Mar. 4, 
1997); Order No. 889-B, reh'g denied, 62 FR 64715 (Dec. 9, 1997), II 
FERC Stats. & Regs. para. 31,253 (Nov. 25, 1997).
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    With the move toward open access transmission service for both the 
gas and electric industries, the energy market structure is vastly 
different now than it was 15 or even 5 years ago. The standards of 
conduct have, for the most part, remained unchanged, while the energy 
market structures have changed significantly.
    As new types of market participants, both affiliated and 
unaffiliated, grow and change, more entities compete for access to 
transmission service. Moreover, with the changes in the size and scope 
of transmission providers resulting from mergers, the transmission 
providers and their affiliates are engaged in both gas and electric

[[Page 21659]]

transactions. As customers of transmission companies compete for access 
to the transmission service, a transmission provider's market power 
over transmission could be transferred to its affiliated energy 
businesses because the existing rules do not cover all affiliate 
relationships.
    Therefore, the NOPR proposed to combine the standards of conduct so 
that the regulations address the evolution in the gas and electric 
industries, including the convergence of many gas and electric 
companies. The NOPR also proposed that the standards of conduct would 
govern the relationship between the transmission provider and its 
energy affiliates, broadening the definition of energy affiliate to 
reflect the changes in competitive markets. Under the proposed 
definition of energy affiliates, the transmission provider would be 
required to treat its bundled sales function for retail native load as 
an energy affiliate. The proposed definition of energy affiliates would 
also eliminate the exemption in the current standards of conduct for 
producers, gatherers, processors and local distribution companies 
(LDCs) that only engage in on-system sales. Finally, the NOPR proposed 
that any offer of a discount for any transmission service made by the 
transmission provider must be announced to all potential customers 
solely by posting on the OASIS or Internet. This was to ensure that all 
parties have equal and timely access to discount information in the 
fast-paced marketplace.
    In response to the NOPR, the Commission received 154 sets of 
comments, plus one reply comment, from natural gas pipelines, electric 
utilities, LDCs, producers, gatherers, marketers, industrials, end 
users, munis, coops, ISOs, trade associations, one city, and state and 
federal agencies. This paper provides staff's preliminary views on the 
most significant issues.
    Some of the NOPR's initiatives were generally supported by the 
commenters. Specifically, the proposal to develop a single set of 
standards of conduct was endorsed by companies involved in the 
converging energy industry because they currently operate under both 
the electric and gas standards of conduct. In addition, commenters 
supported the proposals to exempt a Commission-approved RTO from the 
standards of conduct, and to permit a transmission owner that 
participates in an RTO but does not control or operate its transmission 
facilities to request an exemption from the standards of conduct.
    The NOPR also solicited comments on specific additional policy 
suggestions, such as structural remedies, capacity limits, revising 
capacity allocation methods, disgorgement of opportunity cost and 
prohibiting profit sharing mechanisms. For the most part, the 
commenters, which were predominantly from the gas industry on these 
policy suggestions, argued that there was no evidence that justified 
the need for implementing, on a generic basis, the additional policy 
suggestions suggested in the NOPR. Very few commenters supported any of 
the measures. These measures are not discussed in this paper.
    However, some of the comments raised significant substantive 
issues, which are discussed herein.

II. Discussion

    This paper discusses substantive issues that generated the most 
comments. The scope of the proposed rule yielded the greatest volume of 
comments. Therefore, the first two sections highlight the issues 
relating to: (1) the definition of energy affiliate, and (2) whether to 
treat the bundled sales function for retail native load as a marketing 
function. The third section addresses issues related to the requirement 
for the transmission function to operate independently. The fourth 
section highlights the current policy differences on information 
disclosure under the gas and electric standards of conduct compared to 
the NOPR's proposals. The fifth section addresses commenters' concerns 
relating to the requirement to post organizational charts and job 
descriptions on the Internet or OASIS. Finally, the last section 
discusses the proposed requirement to post discount information at the 
time a discount is offered.

A. Issues Concerning the Definition of An Energy Affiliate

    The current standards of conduct only govern the relationship 
between the regulated transmission provider and its marketing affiliate 
and/or wholesale merchant function. The NOPR proposed to govern the 
relationship between the transmission provider and all of its energy 
affiliates to eliminate the loophole in the current regulations that 
does not prohibit a transmission provider from giving other affiliates 
an undue preference or preferential access to information. Therefore, 
the NOPR defined the term energy affiliate broadly as,

any entity affiliated with a transmission provider that engages in 
or is involved in transmission transactions or manages or controls 
transmission capacity or buys, sells, trades or administers natural 
gas or electric energy or engages in financial transactions relating 
to the sale or transmission of natural gas or electric energy.

    Proposed Section 358.3(d). Under this definition, the NOPR proposed 
to govern the relationship between the transmission provider and 
affiliated producers, gatherers, LDCs and processors. This definition 
generated a lot of comments from virtually all industry groups arguing 
that the definition of energy affiliates was overly broad, suggesting 
that some narrowing of the definition would be appropriate.
    Since the standards of conduct seek to prohibit undue preferences 
and thereby the transfer of market power from the transmission provider 
to its affiliates, the term ``energy affiliate'' must require the 
transmission business to operate independently from more of its energy 
affiliates than are covered by the existing rules. A narrow definition 
of energy affiliates would allow the transmission function to continue 
to share employees and information with some of its energy affiliates 
who could then receive an unfair advantage in the competitive 
marketplace. On the other hand, too broad a definition of ``energy 
affiliate'' would limit some of the efficiencies to be gained from 
vertical integration. The issue to be decided by the Commission is 
whether the costs associated with requiring the independent functioning 
of the transmission provider from a broad range of affiliates exceed 
the costs associated with potential anticompetitive behavior.
1. Clarifying the Definition of Energy Affiliate
    Affiliates not engaged or involved in transmission transactions: 
Thirteen entities, including Ad Hoc Marketer, INGAA and mostly natural 
gas pipelines, oppose the proposed definition of energy affiliates 
because it does not require the energy affiliate to be engaged or 
involved in transmission transactions on the transmission provider's 
system. These commenters urge the definition of energy affiliates to be 
narrowed to only apply to affiliates that are involved in 
transportation on affiliated transmission providers' systems.
    Staff disagrees with the commenters. Although an affiliate may not 
be directly involved in transmission transactions, the energy commodity 
market is closely linked to the activities in the transmission market. 
The transmission market and commodity markets are so interconnected 
that a transmission provider does have the ability to operate

[[Page 21660]]

its transmission system in a manner as to give a trading affiliate an 
undue preference or to provide the trading affiliate with unduly 
preferential information. For example, a transmission constraint 
directly impacts the value of the commodity being transported and 
preferential access to information about such a constraint could 
provide a significant benefit to an affiliate engaged in trading of the 
commodity, even if the trader is not using the affiliated transmission 
provider. This is of particular importance in the electric power market 
because electric power cannot be practicably stored in large amounts. 
In these circumstances, Staff is concerned that the transmission 
provider could extend its market power over transmission to the other 
businesses or could operate its transmission system to unduly benefit 
an affiliate. Therefore, the definition of energy affiliates should not 
be revised to require the affiliate to be engaged or involved in a 
transmission transaction.
    Trading and financial affiliates: Several commenters, including Ad 
Hoc Marketers, INGAA, one natural gas pipeline and four electric 
transmission providers oppose or request clarification on defining 
energy affiliates to include entities that trade power or are engaged 
in financial transactions. Entities involved in the trading of power or 
in financial transactions related to the sale, purchase or transmission 
of power are an integral part of the energy commodity and transmission 
markets. As discussed above, the transmission market and commodity 
markets are so interconnected that a transmission provider has the 
ability to operate its transmission system in a manner so as to give a 
trading affiliate an undue preference or to provide the trading 
affiliate with unduly preferential information. In these circumstances, 
Staff is concerned that the transmission provider could extend its 
market power over transmission to the trading of energy commodities or 
financial transactions involving energy commodities. Therefore, trading 
and financial affiliates should be included in the definition of energy 
affiliates, to the extent that they are engaged in transactions in the 
energy commodity or transmission market.
    Pipeline affiliates: Twenty-seven entities, the majority of which 
came from the gas pipeline industry, pointed out that the definition of 
energy affiliate would appear to require transmission providers to 
treat affiliated transmission providers as energy affiliates. Many 
argue that such a broad definition of energy affiliate would restrict 
the joint operations of jurisdictional transmission facilities and 
would mandate unnecessary duplication of jointly operated facilities. 
INGAA and others point out that governing the relationship between 
affiliated transmission providers would be inconsistent with recent 
Commission policy. They cite the Commission's orders that required 
Dominion Transmission, Inc. to apply the gas standards of conduct to 
its energy affiliates as a merger condition. There, the Commission 
specifically excluded affiliated transmission providers from the 
definition of energy affiliates because they are already subject to the 
non-discrimination provisions of the standards of conduct.\7\
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    \7\ Dominion Resources, Inc. and Consolidated Natural Gas Co., 
89 FERC para. 61,162 (1999), order on compliance filing, 91 FERC 
para. 61,140 (2000), order denying reh'g, 93 FERC para. 61,214 
(2000), vacated and remanded, (D.C. Cir. No. 01-1169 Slip. Opinion 
issued on April 19, 2002). Even though the Commission required 
Dominion to apply the standards of conduct to its energy affiliates, 
it did not go so far as to require Dominion to apply the standards 
of conduct to its affiliated transmission providers.
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    Staff agrees that jurisdictional pipelines coordinating 
transactions with affiliated pipelines or holding upstream or 
downstream capacity on other pipelines is not a concern. Similarly, 
coordination of transmission activities or sharing of information 
between affiliated electric transmission providers is not a concern. 
Nor does it appear that communications between regulated gas 
transmission providers and regulated electric transmission providers 
would be a problem. This is because the transmission activities of gas 
pipelines and electric transmission providers are adequately regulated 
under the open access rules. Moreover, the focus of the standards of 
conduct are to prevent transmission market power from extending to 
other products or services, so the transmission provider to 
transmission provider communications should not undermine the purpose 
of the rule. Since this was not the intent of the NOPR, the definition 
of energy affiliates should be clarified to exclude affiliated 
transmission providers.
    Holding or service companies: Several commenters, including INGAA, 
Dominion, EEI and Williams, argue that the definition of energy 
affiliates could be construed to include service or holding companies 
because the definition includes affiliates that engage in financial 
transactions related to the transmission of natural gas or electricity. 
The commenters argue that this could limit the ability of senior 
officers and directors of the holding or service companies to exercise 
their fiduciary duties for their subsidiaries.
    Holding and service companies typically are not participants in the 
energy or transmission market and would not be considered energy 
affiliates. As discussed above, only affiliates engaged in financial 
transactions that are involved in or engaged in the energy commodity or 
transmission markets will be considered an energy affiliate. Therefore, 
the final rule should clarify that the definition of energy affiliate 
does not include holding or service companies that do not engage in or 
are involved in transmission transactions in U.S. energy markets. This 
would avoid the problem highlighted in the comments of potentially 
prohibiting legitimate communications between the transmission company 
and the holding or service company.
    Although, there may be situations where information from the 
transmission company could flow to an energy affiliate through a 
holding or service company, the purposes of the NOPR can be achieved by 
prohibiting the holding or service companies from acting as conduits 
for sharing information between the transmission provider and other 
energy affiliates. Therefore, the final rule should include a provision 
prohibiting any affiliate from acting as a conduit for sharing 
information with an energy affiliate. This proposed regulatory revision 
should be reflected in the prohibited disclosure provisions of section 
358.5(b), which are discussed later in this document.
    Foreign affiliates: Thirteen commenters, including INGAA, six 
natural gas pipelines, five electric transmission providers and Shell 
objected to the definition of energy affiliates to the extent that it 
includes foreign affiliates. They are concerned that transmission 
providers will be required to treat affiliates in Europe, South America 
and the Caribbean as energy affiliates. Staff sees no reason to be 
concerned about the possibility that a transmission provider will 
extend its market power by giving foreign affiliates an undue 
preference, where the foreign affiliates do not participate in the 
energy markets in the United States. Therefore, the final rule should 
clarify that definition of energy affiliates excludes foreign 
affiliates that do not participate in the U.S. energy markets. However, 
a transmission provider should treat a foreign affiliate that 
participates in U.S. energy markets, by either buying, selling or 
trading natural gas or electric energy, as an energy affiliate.
    In addition, where a foreign affiliate has an ownership interest in 
a jurisdictional transmission provider that

[[Page 21661]]

affiliate is, by virtue of its ownership interests, participating in 
the U.S. energy markets. For example, a joint venture U.S. pipeline 
transmission provider would have to treat its Canadian affiliates that 
buy, sell or trade natural gas or electric energy or engage in or are 
involved in transmission transactions in U.S. energy markets as an 
energy affiliate.
    Affiliates buying power for themselves: Several commenters, 
including Dominion, Calpine, and KN, argued that the Commission needs 
to clarify the definition of energy affiliates because including the 
terms ``buy,'' ``sell,'' or ``administer'' could be construed to 
include affiliated entities that are purchasing power for their own 
consumption, for example, a communications affiliate that is purchasing 
power to heat its office building. Under the NOPR, if an affiliate is 
simply ``buying'' power for its own consumption and not using the 
affiliated transmission provider for transmission, the transmission 
provider would be required to post the organizational charts and job 
descriptions for the energy affiliates, which the commenters argue, 
would be burdensome. Although these purchases can have an impact on the 
energy markets, nonetheless, there is little potential for competitive 
harm if the definition of energy affiliates is clarified to exclude any 
affiliate of the transmission provider that is solely purchasing power 
or natural gas for its own consumption and is not using an affiliated 
transmission provider for transmission.
    Proposed regulatory text: The proposed revisions to section 
358.3(d) would read as follows:
    (d)(i) Energy Affiliate means an affiliate of a transmission 
provider that (1) engages in or is involved in transmission 
transactions in U.S. energy or transmission markets; or (2) manages or 
controls transmission capacity of a transmission provider in U.S. 
energy or transmission markets; or (3) buys, sells, trades or 
administers natural gas or electric energy in U.S. energy or 
transmission markets; or (4) engages in financial transactions relating 
to the sale or transmission of natural gas or electric energy in U.S. 
energy or transmission markets.
    (ii) The definition of energy affiliate excludes (1) other 
affiliated regulated transmission providers; and (2) holding or service 
companies that do not engage in or are involved in transmission 
transactions in U.S. energy markets.
2. Should the Definition of Energy Affiliate include Producers, 
Gatherers and LDCs?
    Under the proposed definition of energy affiliates, transmission 
providers would be required to apply the standards of conduct to their 
relationships with their affiliated producers, gatherers, intrastate 
pipelines, processors and LDCs. The NOPR proposed to eliminate the 
exemption of Order No. 497, which permitted the natural gas pipelines 
to share employees and information between its interstate transmission 
business and its affiliated producers, gatherers and LDCs.\8\
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    \8\ 18 C.F.R. Sec. 161.2(c) (2001).
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    Ten entities, consisting mostly of producers and unaffiliated gas 
marketers, supported the proposed definition of energy affiliate, 
focusing on LDCs. They asserted that: (1) Conditions have changed since 
Order No. 497 was promulgated and LDCs compete more vigorously for 
access to transmission service because they no longer provide service 
under state approved cost-of-service regulation; (2) the current 
exemption is a loophole that permits the LDC to get preferential access 
to information, which harms competition; and (3) the LDC exemption 
permits pipelines to circumvent the standards of conduct by using the 
LDC as a conduit for sharing information where they are solely engaged 
in on-system sales.
    Four states, Indiana, Pennsylvania, Utah and Wyoming, and the City 
of New Orleans opposed applying the standards of conduct to a 
transmission providers' relationship with its affiliated LDC because 
section 1 of the NGA makes production, gathering, distribution and 
intrastate transportation subject to regulation by the states.
    Thirty-four commenters, primarily natural gas pipelines and 
affiliated marketers, opposed applying the standards of conduct to a 
transmission provider's relationship with its affiliated LDCs. They 
argued that: (1) There is no evidence or market analysis to support 
eliminating the exemption granted under Order No. 497; (2) to require 
such separation would cause unnecessary duplication of employees and 
gas control facilities, resulting in additional costs to the consumers; 
(3) the Commission does not have jurisdiction over producers, gatherers 
or LDCs; and (4) limits on communications with LDCs would impair 
reliability, and the ``emergency'' exception is insufficient.
    The argument that the Commission cannot govern the relationship 
between the transmission provider and energy affiliates that are 
subject to state regulation is misdirected. The Commission has ample 
authority to ensure that the interstate pipeline treats all customers, 
affiliated and unaffiliated, on a non-discriminatory basis by 
regulating the conduct of the pipeline. \9\ The NOPR did not, in any 
way, propose to regulate the affiliates' conduct. The real issue is not 
whether the Commission has the legal authority to require pipelines to 
function independently of state regulated affiliates. The issue is 
whether it is the correct policy to adopt.
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    \9\ See Section 4 of the Natural Gas Act, which states that with 
respect to the sale or transportation of natural gas, no natural gas 
company shall make or grant an undue preference or subject any 
person to an undue preference or disadvantage or maintain any 
unreasonable difference in rates, charges, service or facilities. 15 
U.S.C. Sec. 717c (2000).
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    In determining whether to adopt this policy, the Commission has to 
balance the costs to the transmission provider and its affiliated 
producers associated with separating shared functions against the 
benefit to competition and the elimination of discriminatory behavior. 
As noted by many of the commenters, there will be costs, and for some 
transmission companies that have fully integrated transmission and 
distribution functions, those costs could be considerable. On the other 
hand, the affiliate relationship between the transmission provider and 
its affiliated LDC gives the transmission provider the financial 
incentive to share information with the affiliated LDC, and the 
loophole in the current regulations permits it to do so. As a result, 
the affiliated LDC has an unfair advantage over unaffiliated sellers. 
Elimination of the loophole in the current regulations would level the 
playing field for all sellers and shippers, ensuring a competitive 
marketplace. Therefore, the definition of energy affiliates in the 
final rule should require a transmission provider to treat affiliated 
LDCs as energy affiliates.
    Staff also recommends that the definition of energy affiliate 
include producers, gatherers and processors. Whether a producer or 
gatherer is making an on-system sale or an off-system sale, it is still 
competing for access to the interstate transmission system. Nothing in 
the language of the NGA distinguishes between transmission used for on-
system sales versus off-system sales. The Commission's focus is to 
ensure comparability of service. To retain a loophole that permits the 
transmission provider to share employees with its energy affiliates or 
give its producers or

[[Page 21662]]

gatherers preferential information is inconsistent with the 
Commission's goal of non-discriminatory interstate transmission 
service.
    With respect to producers, gatherers, and processors, the 
commenters voiced practical concerns about how the proposed standards 
of conduct would impact communications amongst these entities and with 
their affiliated transmission providers. INGAA seemed to assume that 
the NOPR proposed to restrict communications between producers, 
gatherers, and processors. This is not the case. The NOPR does not 
propose to restrict communications among producers, gatherers and 
processors. However, the NOPR was silent on what types of day-to-day 
communications would be permitted between the transmission providers 
and their affiliated producers, gatherers and processors. As discussed 
later, affiliates should be able to share certain operational 
information crucial to the reliable operation of the transmission 
system. This would alleviate many of the commenters' concerns about how 
the transmission provider will be able to do business with its 
affiliated gatherers, producers and processors.
    Several parties voiced concern about the shared functions and 
employees on the upstream and downstream systems, particularly for off-
shore facilities which are constructed and operated as integrated 
systems. The approach under the existing regulations has been to 
evaluate particular circumstances for each transmission provider's 
system, and where appropriate, permit the sharing of certain field-type 
personnel where there is little potential to give an affiliate an undue 
preference or to harm the competitive market. \10\ However, the 
Commission has had considerable experience in determining which types 
of field-type personnel could be shared, and could provide additional 
guidance in the final rule or on a case-by-case basis in implementing 
the final rule.
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    \10\ Order No. 497-F at 62,157 and Tennessee Gas Pipeline 
Company, 55 FERC para.61,285 (1990).
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B. Should the Definition of Marketing, Sales or Brokering Include the 
Bundled Sales Function for Retail Native Load

    In proposed section 358.3(e), the definition of ``marketing, sales 
or brokering'' includes an electric transmission provider's sales unit, 
including those employees that engage in wholesale merchant sales or 
bundled retail sales. As a result, a transmission provider would have 
to separate its interstate transmission function from its bundled sales 
function. \11\ This would eliminate the exemption of Order No. 889, 
which permitted the electric transmission provider to use the same 
employees for its interstate transmission business and its bundled 
retail sales and distribution business.
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    \11\ Section 284.286 of the Commission's regulations, 18 C.F.R. 
Sec. 284.286 (2001) currently requires an interstate pipeline to 
separate its interstate transmission function from its unbundled 
sales service, essentially treating the pipeline's sales business as 
the equivalent of an affiliated marketing company.
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    Fourteen commenters, including the Cooperatives, Calpine, ELCON, 
EPSA, NEMA, Transmission Access Policy Group and Transmission Group, 
four state agencies and the FTC supported the NOPR's proposal to 
include retail function employees within the definition of energy 
affiliate. They argued that the Commission can assert jurisdiction over 
the organizational structure of the jurisdictional public utility and 
the dissemination of information acquired through the operation of 
jurisdictional assets. Generally, they argue that: (1) The Commission 
must ensure that transmission service is not unduly discriminatory; (2) 
bundled retail sales represent a large percentage of utilities' sales 
and the utilities have little incentive to promote comparability, to 
improve OASIS or to provide equal quality service; and (3) the 
distinction between wholesale and retail is artificial and the 
conditions in the retail market impact the wholesale market. Several 
commenters, including Dynegy, argue that discriminatory behavior that 
harms competition is taking place. For example, Dynegy contends that 
some utilities block ATC across valuable interconnections in the name 
of service to native load, which has the effect of blocking other 
purchases within the utility's system. Commenters also assert that when 
a utility's merchant function reserves access to a valuable import 
path, purportedly for native load, only to simultaneously export the 
utility's own generation from the same control area in amounts equal to 
or greater than the imports this results in an undue preference. The 
FTC strongly endorses eliminating the native load exemption from the 
current regulations, contending that the retail merchant function 
should not have preferential access to information or to the interstate 
transmission grid.
    Thirty-six commenters, including EEI, NASUCA, NARUC, many electric 
transmission companies and ten state agencies, opposed treating retail 
function employees as a marketing function. For the most part, they 
contend that: (1) The Commission is exceeding its statutory authority 
under section 201 of the FPA, which gives states regulatory authority 
over facilities used in distribution, intrastate commerce or retail 
consumption (state preemption); (2) separation of employees engaged in 
the bundled sales function for retail native load from interstate 
transmission employees would cause expensive duplication of staff and 
facilities, without any countervailing competitive benefit (estimates 
of the one-time costs range from $75,000--$1,000,000); (3) the 
transmission provider may not be able to maintain reliability and would 
have difficulty in coordinating generation dispatch; and (4) there are 
no competitive concerns because retail service is state mandated. 
NASUCA argues that structural separation may not be necessary to 
accomplish the Commission's goal that all market participants should 
have access to the same information. NASUCA proposes the required 
posting of any information relating to transmission prices or 
availability provided to retail sales employees by transmission 
employees should accomplish the Commission's goal without requiring the 
expense of requiring a separation of functions.
    Several commenters, APPA, Duke, Bowater and Oklahoma Gas and 
Electric, proposed that transmission providers treat employees engaged 
in a bundled sales function for retail native load as energy affiliates 
only where they do business in states that have enacted retail 
competition. They argue that in states where there are no competitors 
seeking transmission access to serve retail customers, there can be no 
harm to the customer. North Carolina Utilities Commission argues that 
in states where there is no retail competition, such as North Carolina, 
the NOPR will not have the effect of promoting competition because 
there is none. However, a piece-meal rule, that excludes transmission 
providers in states that have not enacted retail competition would be 
difficult to implement because many transmission providers and their 
retail merchant operate in multiple states.
    The NOPR's proposal is consistent with the Supreme Court's recent 
decision concerning Order No. 888. \12\ The Supreme Court held that the 
plain language of section 201(b) of the Federal Power Act gives the 
Commission jurisdiction over wholesale sales of electric energy and 
transmission in interstate commerce. The Court further

[[Page 21663]]

stated that no statutory language limits the Commission's transmission 
jurisdiction to the wholesale market. The NOPR proposed rules for 
transmission within the Commission's jurisdiction and did not assert 
jurisdiction over the bundled sales function. The Commission's focus 
and the proposed regulations relate to the jurisdictional interstate 
transmission provider and how it operates its interstate transmission 
system. Requiring the transmission provider to treat its bundled retail 
sales business as an energy affiliate is a critical step to full 
comparability.
---------------------------------------------------------------------------

    \12\ New York et al. v. FERC et al., 70 U.S.L.W. 4151, 4166; 122 
S.Ct. 1012; 2001 U.S. Lexis 1380 (March 5, 2002).
---------------------------------------------------------------------------

    The question facing the Commission is whether the cost of 
separating the retail sales function from the transmission function 
outweighs the benefit of eliminating the potential anticompetitive 
effects of a transmission owner's native load preference.
    Staff has observed that many transmission providers have already 
structured their corporate organization so that the retail sales unit 
is a part of the wholesale merchant function. For those companies, 
there would be no cost to comply. However, for the transmission 
providers that currently share transmission function employees with 
employees engaged in bundled retail sales, there will be a cost of 
separating those employees and functions. These transmission providers, 
that typically use the shared employees for customer service, load 
forecasting and scheduling purposes, argue that they would incur 
significant costs to separate the transmission function from the retail 
sales function with no commensurate benefit.
    As Duke recognized, the magnitude of these increased costs depends, 
in part, on how the separation is implemented and whether certain 
specific functions, like administrative or support functions, and 
certain information, like specific transaction or reliability 
information, can be shared between the transmission function and the 
retail sales function. Therefore, many electric transmission providers 
articulated the types of costs associated with separating the retail 
sales function from the transmission function, for example, hiring 
additional employees, leasing additional space, purchasing additional 
computers, software, increased administrative and legal costs. Only a 
few provided details quantifying the costs associated with separating 
the retail sales function, presumably because of the uncertainty 
whether the Commission would continue to permit the sharing of some 
support or administrative employees. As discussed below, under the 
current gas and electric standards of conduct, the Commission has 
permitted transmission providers to share non-transmission functions, 
such as administrative, accounting, human resources, with their 
marketing affiliates or merchant functions. This paper recommends that 
the Commission continue to permit the sharing of non-transmission 
functions between the transmission business and its energy affiliates 
under the proposed regulations.
    On the other hand, when a transmission provider shares employees 
and information with its retail sales function, there is an inherent 
incentive for the transmission provider to favor its native load. As a 
result, the native load is shielded from external competition and the 
market is not competitive. EPSA highlights the potential $32 billion 
benefit of a well-functioning competitive market (citing a Department 
of Energy 1999 study.) More recently, the FTC studied competition and 
consumer protection, focused on retail competition, and found that 
effective wholesale and retail competition will mutually reinforce each 
other, thus combining to bring benefits to customers.\13\ By requiring 
the transmission provider to give all transmission customers, wholesale 
or retail, affiliated or unaffiliated, the same access to transmission 
information, the Commission is fulfilling its obligation to ensure non-
discriminatory transmission service. Moreover, requiring the 
transmission provider to treat its retail sales function as a marketing 
affiliate would level the playing field for all transmission customers, 
and would promote a competitive marketplace.
---------------------------------------------------------------------------

    \13\ FTC Staff Report: Competition and Consumer Protection 
Perspectives on Electric Power Regulatory Reform, Focus on Retail 
Competition (Sep 2001) http://www.ftc.gov/reports/index.
---------------------------------------------------------------------------

C. The Independent Functioning Requirement

    The NOPR, like the current gas and electric standards of conduct, 
proposes to require the transmission business to function 
independently. Although the current standards of conduct require the 
transmission business to function independently of marketing or 
wholesale merchant functions, the proposed standards of conduct require 
the transmission business to function independently of any energy 
affiliates.
    Costs of compliance: Gas pipelines and electric transmission 
utilities were almost unanimous in their opposition to the proposed 
broad definition of energy affiliates because they construed it to 
include affiliated businesses or components of their business that the 
Commission probably did not intend to sweep into the definition of an 
energy affiliate, such as affiliated transmission providers, holding 
companies, service companies and foreign affiliates. As a result, they 
argued that the costs associated with requiring the transmission 
function to operate independently of the other energy affiliates ranged 
from $75,000 to $200,000,000, depending on the size of the transmission 
provider.
    It appears that the commenters' projected costs of imposing the 
independent functioning requirement reflect the ``worst-case 
scenario,'' that is, if the Commission were to require a complete 
separation of affiliated transmission providers, holding companies and 
other energy affiliates, such as electric retail sales, LDCs etc., as 
well as prohibiting the sharing of certain non-operating functions.
    If the Commission narrows the definition of the term energy 
affiliate as discussed earlier, then the implementation costs would not 
be as large as those suggested by the commenters. Therefore, the 
majority of cost estimates submitted by the comments do not provide a 
useful basis for assessing the costs of expanding the independent 
functioning requirement to the transmission provider's relationship 
with a broader group of affiliates. However, some companies did break 
down specific costs associated with establishing separate computer and 
telephone systems and a separate office building for an affiliated LDC. 
For example, National Fuel, which is a pipeline whose operations are 
wholly integrated with its LDC, states it would cost $10.7 million in 
the first year to duplicate these facilities.
    Sharing of non-transmission functions: Forty-six commenters, 
including gas pipelines, electric transmission providers, AGA, EEI, 
INGAA, NGSA and Industrials, were very concerned because the NOPR was 
silent on whether the Commission would implement the independent 
functioning requirement consistent with the case law that has developed 
under the current standards of conduct.
    Historically, the Commission has recognized that different 
transmission providers are faced with different practical circumstances 
in reviewing the appropriate degree of separation between the 
transmission function and the marketing affiliate or wholesale merchant 
function. Under the current gas and electric current standards of 
conduct, the Commission has permitted the transmission function to 
share with its marketing affiliate or wholesale merchant function non-
operating officers or directors, and personnel

[[Page 21664]]

performing various non-operating functions.\14\ The Commission's 
approach has been to balance its regulatory goals with the 
practicalities of operating a transmission system, large or small.
---------------------------------------------------------------------------

    \14\ The Commission's current policy is that non-operating 
functions include those not engaged in day-to-day marketing, sales, 
transportation or other gas-related operations, including clerical 
and secretarial staff, general office accounting staff and some 
field personnel. In Order No. 497-F, the Commission stated that 
field personnel, such as those who perform manual work (dig 
trenches) or purely technical duties (operate and maintain the 
pipeline's equipment) would not be considered operating employees.
---------------------------------------------------------------------------

    For large gas and electric transmission providers, the Commission 
has permitted the sharing of various non-transmission functions such as 
legal, accounting, human resources, travel and information 
technology.\15\ By permitting such sharing of non-operating employees, 
the Commission has allowed the transmission provider to realize the 
benefits of cost savings through integration where the shared employees 
do not have duties or responsibilities relating to transmission and 
could not give a marketing affiliate an undue preference. In these 
circumstances, the sharing of transmission business employees with 
marketing affiliate employees was not considered to be likely to be 
harmful to shippers, consumers or competition in the transmission 
market. The Commission has also recognized that under normal 
circumstances, highly placed employees, such as officers or directors, 
are not involved in day-to-day duties and responsibilities, and can be 
shared between a transmission provider and its marketing affiliate so 
long as these individuals comply with the information disclosure 
prohibitions.\16\
---------------------------------------------------------------------------

    \15\ Under Standard G, 18 C.F.R. Sec. 161.3(g)(2001), to the 
maximum extent practicable a pipeline's operating employees and the 
operating employees of its marketing affiliate must function 
independently of each other. In Order No. 497-E, the Commission 
defined operating employees as, in part, those that are engaged in 
the day-to-day duties and responsibility for planning, directing, 
organizing or carrying out gas-related operations, including gas 
transportation, gas sales or gas marketing activities. Order No. 
497-E at 30,996.
    \16\ Order No. 497-E at 30,996.
---------------------------------------------------------------------------

    For small gas transmission providers, the Commission looked, on a 
case-by-case basis, at the size of companies, the number of employees 
and level of interest in transportation on the pipeline, and, where 
appropriate, determined that companies had separated to the maximum 
extent practicable even if they did share transmission employees with 
their marketing affiliates.\17\ The Commission did not conduct 
comparable reviews of how small electric transmission providers 
implemented the independent functioning requirement of the electric 
standards of conduct because the Commission exempted many of the small 
electric transmission providers from the electric standards of 
conduct.\18\
---------------------------------------------------------------------------

    \17\ See e.g., Ringwood Gathering Co., 55 FERC para. 61,300 
(1991) and Caprock Pipeline Company, et al., 58 FERC para. 61,141 
(1992).
    \18\ Black Creek Hydro, Inc., 77 FERC para. 61,232 (1996).
---------------------------------------------------------------------------

    The independent functioning requirement is a central component of 
the standards of conduct, limiting the ability of the transmission 
provider to use its market power to preferentially benefit an energy 
affiliate. Nonetheless, it is necessary to recognize the practicalities 
of operating a transmission system, and therefore staff recommends that 
the Commission continue to permit the sharing of non-transmission 
functions between the transmission business and its energy affiliates 
under the proposed regulations.

D. Information Disclosure Requirements/Prohibitions

    The standards of conduct prohibitions on information disclosure are 
intended to prevent a transmission provider from granting its energy 
affiliate an undue preference over non-affiliates by sharing 
confidential or transmission information. The existing gas and electric 
standards of conduct concerning the permissible flow of information 
between affiliates are quite different, so as a result the positions of 
the commenters with respect to the NOPR's proposals depended on the 
industry upon which they were focused.
1. Current Policy Differences on Information Disclosure Under the Gas 
and Electric Standards of Conduct
    Under the current gas standards of conduct, when a natural gas 
pipeline company shares transportation information with its marketing 
affiliate, the pipeline must contemporaneously share that information 
with non-affiliates.\19\ This requirement is designed to prevent a 
transmission provider from giving its marketing affiliate undue 
preferences over its unaffiliated customers through the exchange of 
insider transmission information.
---------------------------------------------------------------------------

    \19\ Standard F, 18 C.F.R. Sec. 161.3(f) (2001), states that to 
the extent a pipeline provides to a marketing affiliate information 
related to transportation of natural gas, it must provide that 
information contemporaneously to all potential shippers, affiliated 
and non-affiliated on its system.
---------------------------------------------------------------------------

    In addition, the current gas standards of conduct prohibit a 
pipeline from sharing with its marketing affiliate any information the 
pipeline receives from a nonaffiliated shipper or potential 
nonaffiliated shipper (this is considered confidential 
information).\20\ The gas industry commonly refers to this as the 
``automatic imputation rule'' because the Commission's policy is that 
when an employee that performs functions for the pipeline and its 
marketing affiliate receives confidential shipper information, the 
information is automatically divulged or imputed to the marketing 
affiliate since the employee is also working for the marketing 
affiliate. In Tenneco, the Court of Appeals endorsed this approach when 
it found that the relevant question is not whether a shared employee 
who receives critical information will disclose it to the affiliate, 
but whether that shared employee will in fact receive such information 
in the first place, or alternatively, how the pipeline intends to keep 
information supplied by nonaffiliated shippers from reaching a shared 
employee.\21\
---------------------------------------------------------------------------

    \20\ Standard E, 18 C.F.R. Sec. 161.3(e) (2001), states that a 
pipeline may not disclose to its marketing affiliate any information 
the pipeline receives from a nonaffiliated shipper or potential 
nonaffiliated shipper.
    \21\ Tenneco Gas v. FERC (affirmed in part and remanded in 
part), 969 F.2d 1187 (D.C. Cir. 1992).
---------------------------------------------------------------------------

    Over the past 15 years, several natural gas pipelines have urged 
the Commission to adopt different approaches: (1) apply the ``automatic 
imputation rule'' only to shared operating employees; and (2) adopt a 
``no-conduit rule.'' \22\ However, the Commission has consistently 
applied the ``automatic imputation rule'' to all shared employees, 
whether they perform operating and non-operating functions, and 
specifically rejected a ``no-conduit rule.'' \23\
---------------------------------------------------------------------------

    \22\ Under a ``no-conduit rule,'' a shared non-operating 
employee could receive confidential information as long as the 
shared employee did not act as a conduit for sharing the information 
with the marketing affiliate or wholesale merchant function.
    \23\ See Order No. 497-E and F, and Amoco Production Co. and 
Amoco Energy Trading Co. v. Natural Gas Pipeline Company of America, 
83 FERC para. 61,197 at 61,849 (1998).
---------------------------------------------------------------------------

    In contrast, under the current electric standards of conduct, which 
contain much broader information disclosure prohibitions, the 
Commission has permitted shared non-operating employees to receive 
confidential shipper information as long as the shared employee did not 
act as a conduit for sharing the information with wholesale merchant 
function employees.\24\ In implementing Order

[[Page 21665]]

No. 889, the Commission justified the different rule because the 
electric standards of conduct provide a stricter separation of 
functions requirement than the pipeline standards.\25\ When the 
Commission reviewed the standards of conduct for electric transmission 
providers, the Commission adopted the ``no-conduit'' rule, rather than 
applying the ``automatic imputation rule.'' \26\
---------------------------------------------------------------------------

    \24\ Under the gas standards of conduct, the contemporaneous 
disclosure requirement only applies to transportation information, 
while under the electric standards of conduct, the contemporaneous 
disclosure requirements apply to transmission and market information 
and prohibit off-OASIS communications. See 18 C.F.R. Secs. 37.4(4) 
and 161.3(f) (2001).
    \25\ Under the gas standards of conduct, to the maximum extent 
practicable, a pipeline's operating employees and the operating 
employees must function independent of each other. See 18 C.F.R. 
Sec. 161.3(g) (2001). In contrast, the employees of the electric 
transmission provider engaged in transmission system operations must 
function independently of the employees engaged in wholesale 
merchant functions, except for emergency circumstances affecting 
system reliability. See 18 C.F.R. Sec. 37.4(a)(1) (2001). The key 
difference being the flexibility under the term ``maximum extent 
practicable,'' which permits, in certain situations, the sharing of 
operating employees.
    \26\ Allegheny Power Service Corp., et. al., 84 FERC para. 
61,316 at 62,425 (1998).
---------------------------------------------------------------------------

    The NOPR proposed to prohibit the transmission provider from 
disclosing transmission information about transmission system 
operations, or information acquired from non-affiliated customers, to 
their marketing and sales employees and the energy affiliates' 
employees through non-public communications. The NOPR, however, was 
silent on how the information prohibitions would be applied to shared 
employees, that is, whether the Commission would adopt the ``automatic 
imputation rule'' from the gas standards of conduct or the ``no-conduit 
rule'' from the electric standards of conduct. Many commenters, from 
both the gas and electric industry, request, without much explanation, 
that the Commission codify the ``no-conduit rule'' and apply to it all 
transmission providers.
    Under the proposed regulations, staff expects transmission 
providers would continue to share non-operating employees, including 
officers and directors with their energy affiliates. In the past, the 
Commission's focus has been how to keep the information supplied by 
non-affiliated shippers from reaching the shared non-operating 
employees. Some non-operating functions, for example, Human Resources 
or Travel, clearly have little or no access to transmission-related or 
market information and application of the information disclosure 
prohibitions has little practical impact on those operations. However, 
where shared employees have regular access to transmission-related 
information, such as billing or accounting, and provide services to 
both the transmission provider and its energy affiliates, Staff is 
concerned that there is an opportunity for transmission information to 
be used for other functions.
    The issue is, once the shared employee learns confidential shipper 
information, can he or she use that information to give an energy 
affiliate an undue preference? Under the no-conduit rule, the shared 
non-operating employee could receive the information, but would be 
prohibited from sharing the information with an energy affiliate. 
Applying the no-conduit rule might allow transmission providers to 
share more non-operating employees with its energy affiliates without 
violating the information disclosure prohibitions.
    On the other hand, the automatic imputation rule recognizes the 
reality that an individual cannot segment his or her brain, and once an 
individual learns information, he or she is likely to utilize it. The 
automatic imputation rule is a clearer standard and easier to implement 
because it eliminates the opportunity for improperly sharing 
information. Staff would recommend that the Commission adopt the 
automatic imputation rule under the proposed regulations.
2. Sharing of Operational/Reliability Information
    Many commenters from virtually all segments of the gas and electric 
industry argue that the separation of functions and the information 
disclosure prohibitions required by the NOPR will prohibit a 
transmission provider from communicating crucial operational 
information with its retail sales function, generation function, 
producer, gatherer or LDC. They argue that prohibiting certain of these 
communications will endanger the reliability of both the gas and 
electric transmission systems. Several commenters argue that the 
Commission should adopt the approach taken when implementing Order No. 
889, where the Commission permitted transmission providers to share 
certain types of operational information with its generation function 
and wholesale merchant function.
    Staff recommends that transmission providers and their energy 
affiliates be permitted to share crucial operational information 
necessary to maintain the reliability of the transmission system. One 
option for resolving this concern would be to promulgate rules 
governing the specific types of information that a transmission 
provider could share with its energy affiliates.
3. Exceptions Under the Current Gas Standards of Conduct
    Under current policy, a transmission provider is not required to 
contemporaneously disclose to all shippers information relating to a 
marketing affiliate's specific request for transportation service. The 
NOPR did not specifically address this issue. Similarly, in numerous 
cases implementing the existing gas standards of conduct, the 
Commission has permitted a non-affiliate to voluntarily consent, in 
writing, to allow the gas pipeline to share the non-affiliate's 
information with the marketing affiliate.\27\ The NOPR did not 
specifically address this policy. Virtually every segment of the gas 
industry requested clarification whether the Commission would continue 
the ``specific-transaction exception'' and the voluntary disclosure 
provision.
---------------------------------------------------------------------------

    \27\ See e.g., Southern Natural Gas Company, 70 FERC para. 
61,348 (1995).
---------------------------------------------------------------------------

    In several cases implementing the existing gas standards of 
conduct, the Commission permitted transportation function employees to 
buy and sell gas for operational reasons, including to balance fuel 
usage, for storage operations, to effectuate cashouts and deplete or 
replenish line pack.\28\ Several gas pipelines, as well as INGAA, note 
that the NOPR does not appear to retain the historical exclusion for 
such activities and urge the Commission to retain this exception.
---------------------------------------------------------------------------

    \28\ See e.g., East Tennessee Natural Gas Co., 63 FERC para. 
61,578, order on rehearing 64 FERC para. 61,159 (1993).
---------------------------------------------------------------------------

    These exceptions, which impact practical operations of the 
transmission system, are important and merit retention. Therefore, 
these exclusions should be continued in the proposed regulations.
    Proposed regulatory text: The revision to proposed section 358.5(b) 
would add three new sections, sections 358.5(b)(3), 358.5(b)(5) and 
(6), and renumber section 358.5(b)(3) to 358.5(b)(4) as follows:
    (3) An employee of a transmission provider and a transmission 
provider cannot use any affiliate or employee of an affiliate as a 
conduit for sharing information with an energy affiliate that is 
prohibited by sections 358.5(b)(1) and (2).
    (4) If an employee of the transmission provider discloses 
information in a manner contrary to the requirements of sections 
358.5(b)(1) and (2), the transmission provider must immediately post 
such information on the OASIS or Internet website.

[[Page 21666]]

    (5) A nonaffiliated transmission customer may voluntarily consent, 
in writing, to allow the transmission provider to share the non-
affiliate transmission customer's transmission information with an 
energy affiliate.
    (6) A transmission provider is not required to contemporaneously 
disclose to all transmission customers or potential transmission 
customers information relating to an energy affiliate's specific 
request for transmission service.

E. Posting Organizational Charts and Job Descriptions

    Currently, natural gas pipelines and electric utilities are 
required to post various organizational charts and job descriptions. 
The gas pipelines are required to make changes to the postings within 
three business days of a change. The Commission has never addressed the 
frequency of changes to be made under the electric standards of 
conduct. Commenters from the gas and electric industry urge the 
Commission to reconsider this requirement. Although they are already 
complying with this requirement with respect to their marketing 
affiliates, they argue that there would be significantly more 
information to post if the Commission adopts a broad definition of the 
term energy affiliate. Several urge that the information be updated 10-
30 days from the date of the change, rather than the three days 
proposed by the NOPR. Commenters also argue that it may be difficult to 
post all changes within three business days given the complexity of 
some mergers or buy-outs.
    Staff disagrees with the commenters position that there would be 
significantly more information to post with the broader definition of 
the term energy affiliate. Under the NOPR, there are only two changes, 
which might cause a minimal additional burden: (1) the transmission 
provider would have to identify all of its energy affiliates on the 
organizational charts in order to provide a clear picture of the 
transmission provider's relative position in the corporate structure of 
the parent company; and (2) a transmission provider would have to 
provide additional information concerning any employees it shares with 
its energy affiliates. Most companies already maintain organizational 
charts and structural information, so there should be little additional 
burden to post this. With respect to posting information for employees 
the transmission provider shares with its energy affiliate, such 
posting should be minimal because the standards of conduct require the 
transmission provider to function independently of its energy 
affiliates.
    Regarding the ability to update employee information, Staff has 
observed that some companies link their employee or human resource 
databases to the posted organizational charts and job descriptions, 
such that an automatic download or update takes place each day. 
Therefore, requiring the changes to be posted within three days would 
appear reasonable. However, the commenters' arguments, that it may be 
difficult to post all changes within three business days given the 
complexity of some mergers or buy-outs, is also a reasonable one. That 
does not, however, justify a delay of 10 to 30 business days. In 
balancing the minimal burden associated with updating day-to-day 
employee information with the efforts that would be needed to post 
completely new organizational charts resulting from complex changes, 
such as the sale, purchase or merger of a company, it would be 
reasonable to require the information to be updated within seven 
business days from the date of the change.

F. Posting Discounts at Time of Offer

    The NOPR proposed to require any offer of a discount for any 
transmission service made by the transmission provider to be announced 
to all potential customers solely by posting on the OASIS or Internet. 
Although this language is consistent with the electric standards of 
conduct, it represents a change from the current gas standards of 
conduct, which require discount information to be posted within 24 
hours of the time gas first flows under a discounted transaction. The 
NOPR stated that posting discounts on the Internet is a simple, quicker 
way of communicating discount information to all potential customers 
and reflects the Commission's desire is to ensure that all potential 
customers have equal and timely access to discount information in the 
fast-paced marketplace.
    Commenters from the electric industry were largely silent on this 
issue because they are already operating under these requirements.
    A few commenters, APGA, Amoco/BP, CPUC and Reliant, offered 
unqualified support of this requirement. Twenty-six commenters, 
primarily from the gas industry, INGAA, Ad Hoc Marketers, NGSA, EPSA, 
and Industrials, strongly opposed posting discounts at the time of the 
offer. The commenters point out that discounting is fundamentally 
different between the gas and electric industry. In the gas industry, 
pipelines face a competitive transportation market, where discounting, 
pipeline-to-pipeline competition and alternative fuel sources are 
frequent. They argue that this proposal would put a damper on 
discounting and the posting requirement is inconsistent with selective 
discounting for the gas industry. Many expressed concern about the 
vagueness of the word ``offer'' and offered various definitions or 
variations for when the information should be posted. Several 
commenters, AGA, Dominion, Industrials and NISOURCE, recommended that 
discounts be posted after they are executed.
    The final rule will need to balance the importance of equal and 
timely access to discount information with the possibility that a new 
discount requirement might put such a damper on discounting, that 
transmission capacity would remain unsold or put an interstate pipeline 
at a competitive disadvantage vis-a-vis non-jurisdictional competition, 
e.g., intrastate pipelines. Staff agrees that the term ``offer'' can be 
interpreted in a variety of ways, and recommends that the final rule 
provide additional clarification on the timing of the posting in the 
final rule. However, the current requirement, under section 
161.3(h)(2), to post information within 24 hours of gas flow is too 
late to afford an unaffiliated competitor the opportunity to negotiate 
a comparable deal in today's fast-paced marketplace. In balancing those 
competing concerns, Staff recommends that the final rule require the 
transmission provider to post the discount at the conclusion of 
negotiations, when the discount offer is binding.
    Proposed regulatory text: The proposed revisions to section 
358.5(d) would read as follows:
    (d) Discounts. Any offer of a discount for any transmission service 
made by the transmission provider must be posted on the OASIS or 
Internet website contemporaneously with the time that the offer is 
contractually binding. The posting must include: the name of the 
customer involved in the discount and whether it is an affiliate or 
whether an affiliate is involved in the transaction, the rate offered; 
the maximum rate; the time period for which the discount would apply; 
the quantity of power or gas scheduled to be moved; the delivery points 
under the transaction; and any conditions or requirements applicable to 
the discount. The posting must remain on the OASIS or Internet website 
for 60 days from the date of posting.

List of Commenters

AEC Storage and HUB Service INC.
Alabama Electric Cooperative, Inc.

[[Page 21667]]

Alabama Municipal Electric Authority (AMEA)
Alcoa Power Generating Inc.
Allegheny Power--Monongahela Power Company, The Potomac Edison Company 
and
The West Penn Power Company
Alliance Pipeline L.P.
American Electric Power System
American Forest & Paper Association
American Gas Association (AGA)
American Public Gas Association (APGA)
American Public Power Association (APPA)
Amoco Production Company and BP Energy Company (Amoco/BP)
Arkansas Public Service Commission
Atlanta Gas Light Company, Virginia Natural gas, Inc. and Chattanooga 
Company
Atmos Energy Corporation
Avista Corporation (Avista)
Bangor Hydro--Electric
Basin Electric Power Cooperative
Bonneville Power Administration (BPA)
Bowater Inc. (Bowater)
California Dairy Coalition
Calpine Corporation (Calpine)
Canadian Association of Petroleum Producers and the Alberta Department 
of Energy
Carolina Power & Light Company and Florida Power Corporation
Cinergy Services, Inc. (Cinergy)
City Council of the City New Orleans, Louisiana
CMS Energy Corporation (CMS)
Colorado Spring Utilities (CSU)
Connexus Energy
Conectiv
The Cooperatives--The Alabama Electric Cooperative, The Arkansas 
Electric Cooperative Corporation and The Seminole Electric Cooperative
Dairyland Power Cooperative
Discovery Producer Services LLC and Discovery and Discovery Gas 
Transmission LLC
Dominion Resources, Inc. (Dominion)
DTE Energy Company
Duke Energy Corporation (Duke Energy)
Dynegy Inc. (Dynegy)
East Texas Electric Cooperative, Inc. and Wolverine Power Supply 
Cooperative, Inc.
Edison Electric Institute (EEI)
Electric Power Supply Association (EPSA)
Electricity Consumers Resource
El Paso Corporation
El Paso Energy Partners, LP
Empire District Electric Company
Enbridge Inc.
Energy East Companies and Rochester Gas & Electric
Entergy Services, Inc. (Entergy)
Equitable Resources, Inc.
Exelon Corporation
Federal Trade Commission (FTC)
Fertilizer Institute
First Electric Cooperative Corporation
Florida Pubic Service Commission
Green Mountain Power Corporation
Gulf South Pipeline Company, LP
Gulfstream Natural Gas System, L.L.C.
Idaho Public Utilities
Independent Oil & Gas Association of West Virginia (IOGA)
Illinois Commerce Commission
Interstate Natural Gas Association of America (INGAA)
Independent Petroleum Association of America and Cooperating 
Association (IPAA)
The Industrials--The Process Gas Consumers Group, The American Forest & 
Paper Association, The American Iron and Steel Institute, The Georgia 
Industrial Group, The Industrial Gas Users of Florida, The Florida 
Industrial Gas Users, and United States Gypsum Company.
Industrial Coalitions on Standards of Conducts for Transmission 
Providers
Keyspan Corporation
Kinder Morgan Pipelines
LG& E Energy Corp.
The Long Island Lighting Company (filed one day out of time)
Maritimes & Northeast Pipeline, L.L.C.
Maryland Public Service Commission
Member System
Midwest Independent Transmission System
MIGC, Inc.
Minnesota Department of Commerce
Mississippi Public Service Commission
Mirant
Montana-Dakota Utilities Co.
Montana Power Company
National Association of State Utility Consumer Advocate
National Energy Marketer Association (NEMA)
National Propane Gas Association
National Fuel Gas Distribution Corporation
National Grid USA
National Rural Electric Cooperative Association
Natural Gas Supply Association (NGSA)
New Power Company
New York Power Authority (NYPA)
New York Independent System Operator, Inc.
Nevada Independent Energy Coalition
Niagara Mohawk Power Corporation
NICOR Gas
Nisource Inc.
North Carolina Utilities Commission
Northeast Utilities Service Company
Northeast Independent Transmission Company Proponents
Northwest Natural Gas Company
Oktex Pipeline Company
Oklahoma Corporation Commission
Oklahoma Gas & Electric Company
Orlando Utilities Commission
Pancanadian Energy Services Inc.
Piedmont Natural Gas Co.
Pinnacle West Companies
Portland Natural Gas Transmission System
PPL Companies
Process Gas Consumer Group
Proliance Energy, LLC
Public Utilities Commission of the State of California ``CPUC''
Public Service Company
PSEG Companies
Public Utilities Commission of Ohio & Michigan
Puget Sound Energy
Questar Market Resource, INC.
Questar Pipeline Company, Questar Gas Company, and The Questar 
Regulated Services Company
Reliant Resources, Inc.
Rural Utilities Service, United States Department of Agriculture
SCANA Companies--South Carolina Electric & Gas Company, Public Service 
Company, of North Carolina, South Carolina Pipeline Corporation, SCG 
Pipeline Inc., SCANA Energy Marketing, INC. and SCANA Services, Inc..
Sempra Energy
Shell Offshore Inc.
Shell Gas Transmission, LLC
Southern California Edison Company
Southern Company Services, Inc.
Southwest Transmission Cooperative, Inc. ( ``SWTC'')
Southwest Gas Corporation
Superior Natural Gas Corporation and Walter Oil & Gas Corporation
TECO Energy, Inc.
Transmission Access Policy Study Group (``TAPS'')
Transmission Group--Northern Natural Gas Company, Transwestern Pipeline 
Company, Florida Gas Transmission Company, Northern Border Pipeline 
Company, Midwestern Gas Transmission Company, and Portland General 
Electric.
Unaffiliated Marketers--The Midwest United Energy LLC, The Wasatch 
Energy, LLC and The Public Alliance for Community Energy.
USG Pipeline Company, B-R Pipeline Company , and The United States 
Gypsum Company
Utah Associated Municipal Power System
Utah Division of Public Utilities
Utilicorp United Inc.
Vector Pipeline L.P.
Vermont Department of Public Service
Washington Gas Light Company and Hampshire Storage Company
Washington Utilities and Transportation Commission
Wells Rural Electric Company
The Williams Companies

[[Page 21668]]

Williston Basin Interstate Pipeline Company
Wisconsin Electric Power Company and Wisconsin Gas Company
Wisconsin Public Service Corporation and The Upper Peninsula Power 
Company

[FR Doc. 02-10746 Filed 4-30-02; 8:45 am]
BILLING CODE 6717-01-P