[Federal Register Volume 67, Number 104 (Thursday, May 30, 2002)]
[Rules and Regulations]
[Pages 37669-37670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12940]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM98-10-010]


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

Issued May 16, 2002.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Interim policy on certain remanded issues.

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SUMMARY: On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit issued an opinion, generally affirming 
Order No. 637 concerning short-term and interstate natural gas 
transportation service. However, among other things, the Court vacated 
and remanded the policy that existing customers need only match a 
contract term of up to five years when exercising their right of first 
refusal. To prevent confusion in contracting and disruption to the 
market during the brief, but unavoidable, interim before the Commission 
can fully address the issues raised in the Court's remand, the 
Commission is issuing this Interim Policy, providing for the term cap 
currently in the pipelines' tariffs to govern the right of first 
refusal during the interim period.
    The Court also remanded the policy adopted in Order No. 637 that 
pipelines must permit segmented forwardhaul and backhaul transactions 
to the same delivery point, each of which may use mainline capacity up 
to the contract demand of the underlying contract. The Commission will 
not address that issue in the individual pipeline proceedings to comply 
with Order No. 637 until after the issuance of the order on remand.

EFFECTIVE DATE: The interim policy is effective May 16, 2002.

FOR FURTHER INFORMATION CONTACT: Richard Howe, Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 208-1274.

SUPPLEMENTARY INFORMATION:

Federal Energy Regulatory Commission

Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
Linda Breathitt, and Nora Mead Brownell; Regulation of Short-Term 
Natural Gas Transportation Services, and Regulation of Interstate 
Natural Gas Transportation Services

[Docket No. RM98-10-010]

Interim Policy on Certain Remanded Issues

Issued May 16, 2002.
    On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit issued an opinion,\1\ generally affirming 
Order No. 637.\2\ However, among other things, the Court vacated and 
remanded the policy adopted in Order Nos. 636 and 637 that existing 
customers need only match a contract term of up to five years when 
exercising their right of first refusal. To prevent confusion in 
contracting and disruption to the market during the brief, but 
unavoidable, interim before the Commission can fully address the issues 
raised in the Court's remand, the Commission is issuing this Interim 
Policy, providing for the term cap currently in the pipelines' tariffs 
to govern the right of first refusal during the interim period.
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    \1\ Interstate Natural Gas Association of America v. FERC, 2000 
U.S. App. LEXIS 6219 at *70-*78 (No. 98-1333) (D.C. Cir. April 5, 
2002) (INGAA).
    \2\ Regulation of Short-Term Natural Gas Transportation Services 
and Regulation of Interstate Natural Gas Transportation Services, 
FERC Stats. & Regs. Regulations Preambles (July 1996-December 2000) 
[para] 31,091 (February 9, 2000); order on rehearing, Order No. 637-
A, FERC Stats. & Regs, Regulations Preambles (July 1996-December 
2000) [para] 31,099 (May 19, 2000); order denying reh'g, Order No. 
637-B, 92 FERC [para] 61,062 (2000).
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    The Court also remanded the policy adopted in Order No. 637 that 
pipelines must permit segmented forwardhaul and backhaul transactions 
to the same delivery point, each of which may use mainline capacity up 
to the contract demand of the underlying contract. The Commission will 
not address that issue in the individual pipeline proceedings to comply 
with Order No. 637 until after the issuance of the order on remand.
    This order is in the public interest because it clarifies for 
pipelines and their customers the policies to be in effect while the 
Commission considers the Court's remand.

Background

    In Order No. 436, the Commission adopted a regulation giving 
pipelines pre-granted abandonment authority under Section 7(b) of the 
NGA, 15 U.S.C. 717f(b), to terminate open access transportation service 
to a shipper once its contract had expired and it had no contractual 
right of renewal.\3\ In Order Nos. 500-H and 500-I, the Commission 
interpreted that regulation as applying to all open access 
transportation services, including transportation service provided to 
the pipelines' historic sales customers who converted their sales 
service to transportation service. On review of Order Nos. 500-H and 
500-I, the court remanded the issue of pre-granted abandonment 
authority to the Commission, finding that the Commission had not 
``adequately explained how pregranted abandonment trumps another basic 
precept of natural gas regulation--protection of gas customers from 
pipeline exercise of monopoly power through refusal of service at the 
end of a contract period.''\4\
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    \3\ 18 CFR 284.221(d) (2001).
    \4\ American Gas Association v. FERC, 912 F.2d 1496, 1518 (D.C. 
Cir. 1990). (AGA).
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    In the subsequent Order No. 636 proceeding, the Commission 
determined that pre-granted abandonment authority would be tempered 
with a right of first refusal for firm customers with a contract longer 
than one year.\5\ Accordingly, Order No. 636 adopted a regulation 
providing that such a shipper could retain its service under a new 
contract by matching the term and the rate (up to the maximum rate) 
offered by the highest competing bidder.\6\ In Order No. 636, the 
Commission contemplated that the bids the existing shipper must match 
could be for any contract length. However, on rehearing, in Order No. 
636-A, the Commission capped the contract length the existing shipper 
must match at 20 years. The Commission did not, however, amend

[[Page 37670]]

the regulation adopted in Order No. 636 to include the 20-year cap.
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    \5\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, 57 FR 13267 (April 16, 1992), FERC Statutes and Regulations, 
Regulations Preambles January 1991-June 1996 [para] 30,939 at 
30,446-48 (April 8, 1992); order on reh'g, Order No. 636-A, 57 FR 
36,128 (August 12, 1992), FERC Statutes and Regulations, Regulations 
Preambles January 1991-June 1996 [para] 30,950 (August 3, 1992); 
order on reh'g, Order No. 636-B, 57 Fed. Reg. 57,911 (December 8, 
1992), 61 FERC [para] 61,272 (1992); reh'g denied, 62 FERC [para] 
61,007 (1993); aff'd in part and remanded in part, United 
Distribution Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); order 
on remand, Order No. 636-C, 78 FERC [para] 61,186 (1997).
    \6\ 18 CFR 284.221(d)(2)(ii) (2001).
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    On appeal, however, the Court found the 20-year cap was not 
justified by the record and remanded it for further explanation.\7\ The 
Court stated that the Commission had not adequately explained how the 
twenty-year term matching cap protects against the pipelines' 
preexisting market power, particularly why the 20-year cap would 
prevent bidders on capacity constrained pipelines from using long 
contract duration as a price surrogate to bid beyond the maximum 
approved rate, to the detriment of captive customers. On remand, the 
Commission changed its policy and adopted a five-year term matching cap 
in Order No. 636-C. It relied on the fact most commenters in the Order 
No. 636 proceeding had supported a term matching cap in the range of 
five years and more recent evidence showed that five years was about 
the median length of all contracts of one year or longer between 
January 1, 1995 and October 1, 1996.\8\ Since the 20-year term matching 
cap had not been included in the Commission's regulations, this change 
did not require any change in the Commission's regulations. However, 
the Commission required all pipelines whose current tariffs contained 
term caps longer than five years to revise their tariffs consistent 
with the new policy.
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    \7\ United Distribution Companies v. FERC, 88 F.3d 1105, 1140-41 
(D.C. Cir. 1996) (UDC).
    \8\ Order No. 636-C at 61,774 and 61,792.
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    On rehearing, in Order No. 636-D, the Commission recognized that 
pipelines had raised legitimate concerns about whether the five year 
term matching cap was causing a bias toward short-term contracts, with 
adverse economic consequences for both pipelines and captive customers. 
However, the Commission deferred further consideration of the term cap 
to the proceeding which became the Order No. 637 proceeding in Docket 
No. RM98-10-000, where a more current record could be developed.
    In the Order No. 637 proceeding, the Commission continued the five-
year cap policy, finding that none of the parties presented evidence to 
support the conclusion that a five-year contract is atypical in the 
current market. On appeal, the Court found that, in doing so, the 
Commission did not address any of the objections that had been raised 
concerning the five-year cap and had relied on the same evidence that 
it had used to make its decision in Order No. 636-C, namely the fact 
that five years was about the median length of all contracts of one 
year or longer.\9\ The Court concluded that the only evidence 
supporting the Commission's final decision to choose a five-year cap 
was the original record, which in the Commission's own view was 
incomplete. The Court held the Commission had neither given an 
affirmative explanation for its selection of five years, nor had it 
responded to its own or the pipelines' objections to the five-year cap. 
The Court also questioned why the Commission used a median to function 
as a ceiling. Consequently, the Court vacated the five-year cap and 
remanded the issue to the Commission.\10\
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    \9\ INGAA at *78.
    \10\ The Court also remanded to the Commission the question of 
whether the Commission's ROFR regulation or the provisions in a 
pipeline's tariff govern the conduct of the ROFR process.
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    In the Order No. 637 proceeding, the Commission also addressed 
segmentation of capacity, under which shippers may divide their 
mainline capacity into segments with each mainline segment equal to the 
contract demand of the original contract. As a general matter, shippers 
may overlap those mainline segments, but only up to the contract demand 
of the underlying contract. In Order No. 637-A, the Commission 
clarified that a shipper using a forwardhaul and backhaul to bring gas 
to the same delivery point in an amount that exceeds its contract 
demand is not overlapping mainline capacity. On appeal the Court found 
that the Commission had not adequately addressed whether this policy 
modified the contracts between the pipeline and its shippers or 
adequately supported the need for any contract modification.

Discussion

    The Commission lacks a sufficient record at this time to respond to 
the Court's concerns regarding the term cap used for the right of first 
refusal. As the Court itself noted, the most recent evidence developed 
in the prior proceedings concerned contract term lengths during the 
years 1995 to 1996. In addition, the Commission must address the 
objections that have been raised by the pipelines and other parties and 
those which it has raised itself. The Commission intends to proceed 
expeditiously to solicit evidence and views concerning the length of 
the term cap.
    However, there will inevitably be a gap between the time the 
Court's mandate issues, and the time the Commission can issue a 
substantive order on remand responding to the Court's concerns about 
the term matching cap. This raises the question of how the right of 
first refusal is to be exercised in the meantime as long-term contracts 
with right of first refusal rights expire. The Commission is concerned 
that uncertainty over the exercise of those rights could cause market 
disruption and believes that existing shippers and competitors for 
their capacity need to be able to negotiate new contracts without the 
uncertainty that a contract could be invalidated by the Commission's 
determinations concerning the term cap in an order on remand.
    In the interim, the Commission continues the term cap of five-years 
currently in pipeline tariffs as an interim policy. The Commission will 
not apply its subsequent order on the merits of the Court's remand on 
this issue to overturn any contracts entered into under this interim 
policy. This will enable existing shippers with a right of first of 
refusal, and competitors for their capacity, to compete for that 
capacity under known rules that will not change, and thus avoid 
upsetting their expectations.
    This Interim Policy will govern the term cap for contracts with the 
right of first refusal and will be effective from the date of issuance 
of this policy statement until the Commission adopts a different policy 
or rule on the maximum term that a holder of a contract with a right of 
first refusal must meet to retain its contract.
    The Commission also intends to solicit comments on the remanded 
forwardhaul/backhaul issue. The Commission required pipelines to allow 
a shipper to deliver full contract quantities via forwardhauls and 
backhauls to a single delivery point as part of its general requirement 
that shippers be permitted to segment their capacity. Whether 
individual pipeline tariffs improperly restrict segmentation is 
currently being addressed pursuant to NGA section 5 in the pipeline 
filings to comply with Order No. 637. Until the Commission has acted on 
the Court's remand of the backhaul/forwardhaul issue, the Commission 
will not be in a position to make the necessary section 5 findings in 
the compliance proceedings to require pipelines to permit backhauls and 
forwardhauls to the same point. Therefore, the Commission will not 
address that issue in the compliance proceedings until after the 
issuance of the order on remand.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 02-12940 Filed 5-29-02; 8:45 am]
BILLING CODE 6717-01-P