[Federal Register Volume 67, Number 110 (Friday, June 7, 2002)]
[Proposed Rules]
[Pages 39315-39321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14176]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM98-10-011]


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

May 31, 2002.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Request for comments.

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SUMMARY: The Federal Energy Regulatory Commission is requesting 
comments with respect to the issues remanded by the United States Court 
of Appeals for the District of Columbia Circuit to the Commission 
regarding Order No. 637.
    Specifically, the Commission requests comments on issues pertaining 
to the right of first refusal (``ROFR'') term matching cap, the 
relationship of the ROFR to tariff provisions, backhauls and 
forwardhauls to the same point, and the waiver of posting and bidding 
for prearranged releases.

DATES: Comments are due on or before June 30, 2002.

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

FOR FURTHER INFORMATION CONTACT: Diego A. Gomez, Office of General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 219-2703.

SUPPLEMENTARY INFORMATION:

Notice Requesting Comments

    On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit issued an opinion generally affirming 
Order No. 637.\1\ The Court, however, reversed and remanded Order No. 
637 \2\ with respect to two issues and remanded, without reversing, 
with respect to two other issues. As discussed below, the Commission 
solicits comments from interested parties on these issues. This notice 
will enable the Commission to decide the remanded issues with the 
benefit of the views of all interested parties.
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    \1\ Interstate Natural Gas Association of America v. FERC, 285 
F.3d 18 (D.C. Cir. 2002) (INGAA).
    \2\ Regulation of Short-Term Natural Gas Transportation Services 
and Regulation of Interstate Natural Gas Transportation Services, 
FERC Stats. & Regs. Regulations Preambles (July 1996-December 2000) 
[para] 31,091 (February 9, 2000); order on reh'g, Order No. 637-A, 
FERC Stats. & Regs, Regulations Preambles (July 1996-December 2000) 
[para] 31,099 (May 19, 2000); order denying reh'g, Order No. 637-B, 
92 FERC [para] 61,062 (2000).
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Background

    The four issues the Court has remanded to the Commission are the 
following:
1. Right of First Refusal Term Matching Cap
    The Court reversed and remanded Order No. 637's policy that 
shippers exercising their right of first refusal (ROFR) to retain 
capacity need only match contract term lengths of up to five years. The 
ROFR originated in Order No. 636,\3\ where the Commission tempered the 
pipeline's pre-granted authority to abandon contracts upon their 
termination with a ROFR for firm customers with a contract longer than 
one year.\4\ Specifically, the Commission adopted a regulation 
providing that such a shipper could retain its service under a new 
contract by matching the term and the rate (up to the maximum rate) 
offered by the highest competing bidder.\5\ In Order No. 636-A, the 
Commission capped the contract length the existing shipper must match 
at twenty years.
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    \3\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, 57 FR 13267 (April 16, 1992), FERC Statutes and Regulations, 
Regulations Preambles January 1991-June 1996 [para] 30,939 at 
30,446-48 (April 8, 1992); order on reh'g, Order No. 636-A, 57 FR 
36,128 (August 12, 1992), FERC Statutes and Regulations, Regulations 
Preambles January 1991-June 1996 [para] 30,950 (August 3, 1992); 
order on reh'g, Order No. 636-B, 57 FR 57,911 (December 8, 1992), 61 
FERC [para] 61,272 (1992); reh'g denied, 62 FERC [para] 61,007 
(1993); aff'd in part and remanded in part, United Distribution 
Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); order on remand, 
Order No. 636-C, 78 FERC [para] 61,186 (1997).
    \4\ Order No. 636 at 30,446-48.
    \5\ 18 CFR Sec. 284.221(d)(2)(ii) (2001).
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    On appeal of Order No. 636, the Court found the twenty-year cap was 
not justified by the record and remanded it for further explanation.\6\ 
The Court stated that the Commission had not adequately explained how 
the twenty-year term matching cap protects against the pipelines' 
preexisting market power, particularly why the twenty-year cap would 
prevent bidders on capacity constrained pipelines from using long 
contract duration as a price surrogate to bid beyond the maximum 
approved rate, to the detriment of captive customers. On remand in 
Order No. 636-C, the Commission changed its policy and adopted a five-
year term matching cap. It relied on the fact most commenters in the 
Order No. 636 proceeding had supported a term matching cap in the range 
of five years and more recent evidence showed that five years was about 
the median length of all contracts of one year or longer between 
January 1, 1995 and October 1, 1996.\7\
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    \6\ United Distribution Companies v. FERC, 88 F.3d 1105, 1140-41 
(D.C. Cir. 1996) (UDC).
    \7\ Order No. 636-C at 61,774 and 61,792.
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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. 
The Commission, however, deferred further consideration of the term cap 
to the proceeding which became the Order No. 637 proceeding in Docket 
No. RM98-10-000, where a more current record could be developed. In 
Order No. 637, the Commission continued the five-year cap policy, 
finding that none of the parties presented evidence to support the 
conclusion that a five-year contract is atypical in the current market.
    On appeal, the Court found that the Commission had not addressed 
the objections that had been raised concerning the five-year cap and 
had relied on the same evidence that it had used to make its decision 
in Order No. 636-C, namely the fact that five years was about the 
median length of all contracts of one year or longer.\8\ The Court 
concluded that the only evidence supporting the Commission's final 
decision to choose a five-year cap was the original record, which in 
the Commission's own view was incomplete. The Court held the Commission 
had neither given an affirmative explanation for its selection of five 
years, nor had it responded to its own or the pipelines' objections to 
the five-year cap. The Court also questioned why the Commission used a 
median to function as a ceiling. The Court thus vacated the five-year 
cap and remanded the issue to the Commission.
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    \8\ INGAA at *78.
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2. Relationship of ROFR to Tariff Provisions
    The Court remanded, without reversing, a second issue concerning 
the ROFR. In Order No. 637, the Commission stated that shippers always 
have the ROFR set forth in 18 CFR 284.221(d), regardless of the 
provisions set forth in their contract.\9\ In Order No. 637-A, the 
Commission stated that shippers' regulatory ROFR is effective 
``regardless of the terms of any tariff.'' \10\ The Court found that 
the Commission had not adequately explained whether, through these 
statements, the Commission intended to provide that the regulatory ROFR 
is self-executing, and applies regardless of any inconsistent language 
in the pipeline's tariff or whether tariff language is necessary to 
effect the right. Accordingly the Court remanded this issue to the 
Commission to explain its current position on this issue and, to the 
extent that the language in the Order Nos. 637 and 637-A is legally 
unsustainable, to modify it.
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    \9\ Order No. 637, at 31,341.
    \10\ Order No. 637-A, at 31,647.
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3. Backhauls and Forwardhauls to the Same Point
    In Order No. 637, the Commission also addressed segmentation of 
capacity,

[[Page 39317]]

under which shippers may divide their mainline capacity into segments 
with each mainline segment equal to the contract demand of the original 
contract. As a general matter, shippers may overlap those mainline 
segments, but only up to the contract demand of the underlying 
contract. In Order No. 637-A, the Commission clarified that a shipper 
using a forwardhaul and backhaul to bring gas to the same delivery 
point in an amount that exceeds its contract demand is not overlapping 
mainline capacity. On appeal, the Court found that the Commission had 
not adequately addressed whether this policy modified the contracts 
between the pipeline and its shippers or adequately supported the need 
for any contract modification. The Court remanded these issues for 
further explanation, but did not reverse the Commission's holdings.
4. Waiver of Posting and Bidding for Prearranged Releases
    Finally, the Court reversed and remanded Order No. 637 on an issue 
concerning the posting of prearranged capacity releases for bidding. 
Before Order No. 637, the Commission provided that releasing shippers 
need not post prearranged deals at the maximum rate for bidding. 
However, Order No. 637 waived the maximum rate for capacity releases of 
less than one year until September 30, 2002. The Commission therefore 
found that all prearranged releases of less than one year must be 
posted for bidding. The Commission, however, stated that in individual 
cases where a local distribution company (LDC) considers an exemption 
from the posting and bidding requirement essential to further a state 
retail unbundling program, the LDC together with the appropriate state 
regulatory agency, could request the Commission to waive the posting 
and bidding requirement. The Commission also stated that if the LDC 
requests such a waiver, the LDC must be prepared to have all its 
capacity release transactions limited to the applicable maximum rate 
for pipeline capacity.
    The Court found that the Commission failed to support its rule 
conditioning the waiver of posting and bidding requirements on the 
applicant's being prepared to have all of its capacity release 
transactions limited to the applicable maximum rate. The Court 
accordingly reversed the Commission on this issue and remanded for the 
Commission to review the matter and reframe the waiver conditions.

Discussion

    The Commission is requesting comments from all interested parties 
on their views concerning what actions the Commission should take in 
response to the Court's remand of the above described four issues. All 
comments should be filed within 30 days of the date this order issues. 
The Commission is particularly interested in comments on the following 
issues concerning the term matching cap for the ROFR and backhauls and 
forwardhauls to the same point.

ROFR Questions

    1. Balancing of risk between shipper and pipeline. In remanding the 
issue of the appropriate term matching cap for the ROFR, the Court 
pointed out that both in Order No. 636-D and the notice of proposed 
rulemaking that led to Order No. 637, the Commission expressed concern 
that the five-year term matching cap resulted in a bias toward short-
term contracts by providing a disincentive for an existing shipper to 
enter into a contract of more than five years. This could foster an 
imbalance of risks between existing shippers and pipelines, allowing 
shippers indefinite control over pipeline's capacity, but giving 
pipelines not corresponding protection. Accordingly, the Commission 
requests comments on what approach to the term-matching cap strikes a 
proper balance between the concerns of captive customers about their 
ability to retain capacity under reasonable terms and conditions when 
their contracts expire and the concerns of pipelines about a bias 
toward short-term contracts.
    2. Need for any term matching cap. In Tennessee Gas Pipeline 
Company (Tennessee),\11\ the Commission found that no term matching cap 
is necessary where a pipeline uses the net present value method to 
allocate unsubscribed capacity among bidders for that capacity. The 
Commission reasoned that, in that context, the Commission's existing 
regulatory controls are sufficient to constrain pipelines from 
exercising market power to pressure shippers into longer contracts than 
they desire. Because the Commission limits the rates pipelines can 
charge to maximum just and reasonable levels and requires pipelines to 
sell all available capacity to shippers willing to pay the maximum 
rate, the only way a pipeline could create scarcity to force shippers 
to accept longer term contracts would be to refuse to build additional 
capacity when demand requires it. However, the Commission found 
pipelines would have a greater incentive to build new capacity to serve 
all the demand for their service, than to withhold capacity, since the 
only way the pipeline could increase current revenues and profits would 
be to invest in additional facilities to serve the increased demand.
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    \11\ Tennessee Gas Pipeline Co., 91 FERC [para] 61,053 (2000), 
reh'g, 94 FERC [para] 61,097 (2001), appeal pending sub nom. Process 
Gas Consumers Group v. FERC, D.C. Circuit, Case No. 01-1151.
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    a. The Commission requests comment on whether the same regulatory 
controls which Tennessee found constrain the pipeline's ability to 
exercise market power in the allocation of its unsubscribed capacity 
provide justification for the removal of any term matching cap in the 
ROFR setting.
    b. The Commission also requests comment on whether there are 
reasons, other than the need to control the pipeline's exercise of 
market power, why a term matching cap is necessary in the ROFR context. 
The Commission provides existing long-term maximum rate shippers a ROFR 
in order to enable the Commission to make the finding required by NGA 
section 7 that abandonment of service following contract expiration is 
in the public convenience and necessity. Does the need to satisfy the 
requirements of NGA section 7 require a term matching cap regardless of 
the pipeline's ability to exercise market power? What findings are 
necessary to satisfy NGA section 7 other than a finding that the 
pipeline cannot exercise market power?
    3. Term Cap Length. To the extent any commenting party asserts that 
a term matching cap is necessary as part of the ROFR, the Commission 
requests that said party propose a term cap length which it deems 
appropriate. Moreover, the Commission requests that such proposed term 
cap length be justified and explained in detail. In order to assist 
parties in presenting comments on this issue (and the other issues 
discussed above concerning the ROFR), the Commission has developed 
detailed information concerning the term lengths in contracts entered 
into since the issuance of Order No. 636. That information is set forth 
in the Appendix to this notice.\12\ Parties should comment on what 
conclusions should be drawn from the information in the Appendix as to 
the appropriate length of any term matching cap or whether the 
information provides support for removing any term matching cap.
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    \12\ Table I shows the lengths of all contracts entered into 
between 1996 and 2001, including contracts which have expired. Table 
II shows all presently active contracts entered into since 1992.

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Forwardhaul/Backhaul Questions

    The Commission also solicits comments on the remanded forwardhaul/
backhaul issue.
    1. Contract violation. The Commission requests that the parties 
comment on why and how a pipeline's contracts are violated by the 
policy established in Order No. 637-A concerning forwardhauls and 
backhauls to the same delivery point. Pipelines' service agreements 
with their customers generally provide that the contract incorporates 
the terms and conditions in the pipeline's tariff. Given this fact, if 
the Commission requires the pipeline to modify the terms and conditions 
in its tariff consistent with its backhaul/forwardhaul policy, is there 
any violation of the contract between the pipeline and its customer? To 
the extent a commenter asserts that there is a contract violation, it 
should provide the specific contractual provisions which it believes 
the policy violates.
    2. Benefits to the market. The Commission requests comments on 
whether forwardhauls and backhauls to the same delivery point help 
foster more competitive markets. Are there sufficient competitive 
benefits to justify action under NGA section 5 to implement the policy 
concerning backhauls and forwardhauls to the same point?
    3. Operational feasibility. The Commission requests comments on 
whether there are any operational issues or impacts with providing 
forwardhauls and backhauls to the same delivery point which should be 
considered in responding to the Court's remand.
    While the Commission is primarily interested in comments on the 
above described issues, parties may also comment on the two other 
issues the Court remanded to the Commission (i.e., the relationship of 
the ROFR to tariff provisions and the waiver of posting and bidding for 
prearranged releases).
    The Commission orders:
    Interested parties to the above-captioned proceeding are invited to 
file comments on the issues discussed above on or before 30 days after 
the issuance of this order.

    By direction of the Commission.
Linwood A. Watson, Jr.,
Deputy Secretary.
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[FR Doc. 02-14176 Filed 6-6-02; 8:45 am]
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