[Federal Register Volume 67, Number 143 (Thursday, July 25, 2002)]
[Proposed Rules]
[Pages 48592-48593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18782]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. PL02-6-000]


Notice of Inquiry Concerning Natural Gas Pipeline Negotiated Rate 
Policies and Practices

July 17, 2002.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of inquiry.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
issuing this Notice of Inquiry to seek comments on its negotiated rate 
policies and practices, established in Alternatives to Traditional 
Cost-of-Service Ratemaking for Natural Gas Pipelines, Regulation of 
Negotiated Transportation Services of Natural Gas Pipelines, Statement 
of Policy and Request for Comments, 74 FERC para. 61,076 (1996). 
Specifically, the Commission is undertaking a review of the recourse 
rate as a viable alternative and safeguard against the exercise of 
market power of interstate gas pipelines, as well as the entire 
spectrum of issues related to its negotiated rate program, and welcomes 
comments on these issues.

DATES: Written comments must be received by the Commission by August 
26, 2002. Reply comments must be received by the Commission 30 days 
after the filing date for initial comments.

ADDRESSES: Office of the Secretary, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT: Michael G. Henry, Office of the 
General Counsel, Federal Energy Regulatory Commission, 888 First 
Street, NE., Washington, DC 20426 (202) 208-0532.

SUPPLEMENTARY INFORMATION:

Natural Gas Pipeline Negotiated Rates Policies and Practices

    1. In this notice of inquiry (NOI), the Federal Energy Regulatory 
Commission (Commission) presents an opportunity for comments regarding 
its Negotiated Rates Policies and Practices, established in 
Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas 
Pipelines, Regulation of Negotiated Transportation Services of Natural 
Gas Pipelines, Statement of Policy and Request for Comments, 74 FERC 
para. 61,076 (1996). Specifically, the Commission is undertaking a 
review of the recourse rate as a viable alternative and safeguard 
against the exercise of market power of interstate gas pipelines, as 
well as the entire spectrum of issues related to its negotiated rate 
program, and welcomes comments on these issues.

Background

    2. Since 1996 pipelines have had the option to use negotiated rates 
as an alternative to cost-of-service ratemaking. The Commission 
introduced negotiated rates to allow pipelines choosing not to seek 
market base rates by establishing a lack of market power or to 
undertake an incentive rate program, to adopt another alternative to 
traditional cost-of-service regulation. The original program was 
developed at a time when there was a great deal of concern about 
capacity ``turnback'' as a result of Order Nos. 436 and 636, and other 
factors.\1\ Because the industry was shifting from traditional supply 
sources to other sources, many existing pipeline shippers no longer 
needed the same amount of firm capacity from their traditional 
pipeline's supply regions, and as a result sought to ``turn back'' 
transmission capacity when their transportation contracts expired. The 
negotiated rates program was thus developed to help pipelines market 
that turned-back capacity to new shippers, such as electric generators, 
as well as to help retain local distribution customers whose existing 
contracts were expiring.
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    \1\ See, e.g., 74 FERC para. 61,079 at 61,225-26 (1996).
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    3. Under the negotiated rates program, instead of cost-of-service 
regulation, the pipeline and a shipper may negotiate rates that vary 
from the pipeline's otherwise applicable tariff. A recourse rate that 
is on file in the pipeline's tariff is always available for those 
shippers preferring traditional cost-of-service rates. The Commission 
recognized, however, that potential problems could occur if capacity 
became constrained, as for example, if shippers that were willing to 
pay more than the maximum rate through a negotiated rate were bidding 
against shippers that were bidding the maximum recourse rate. The 
Commission required that, in those situations, customers bidding more 
than the maximum rate would be treated as

[[Page 48593]]

if they were bidding the recourse rate, and capacity was to be 
allocated pro rata among the negotiated rate bidder and recourse rate 
bidders. This, it was thought, would remove an incentive for negotiated 
rate shippers to bid more than the maximum recourse rates when capacity 
is constrained, because the shipper would have known it was paying more 
than was necessary to get the capacity.\2\ In the last several years, 
there has been a significant increase in the reliance on negotiated 
rates to price natural gas transportation service. More recently, 
negotiated rate transactions based on price-index differentials have 
developed. These types of transactions, in particular, have raised 
serious concerns regarding the breadth and direction of the 
Commission's negotiated rate program.\3\
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    \2\ Id. at 61,241.
    \3\ See, e.g., Transwestern Pipeline Co., 94 FERC para. 61,233 
(2001), order to show cause, 94 FERC para. 61,337 (2001), 95 FERC 
para. 61,143 (2001), and PG&E Gas Transmission, Northwest Corp., 
order establishing hearing procedures, 96 FERC para. 61,276 (2001).
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    4. When the Commission introduced negotiated rates, at the 
suggestion of certain industry participants, it expected that 
negotiated rates would help achieve flexible, efficient pricing when 
market-based rates are not appropriate. Negotiated rates offered 
greater rate flexibility while limiting market power through the 
availability of the recourse rate.\4\ The recourse rate option, the 
Commission explained, ``would prevent pipelines from exercising market 
power by assuring that the customer can fall back to cost-based, 
traditional service if the pipeline unilaterally demands excessive 
prices or withholds service.'' \5\
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    \4\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines, Statement of Policy and Request for Comments, 
74 FERC para. 61,076 at 61,240, order on clarification, 74 FERC 
para. 61,194, reh'g denied, 75 FERC para. 61,024 (1996).
    \5\ Id.
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    5. So important was the availability of the recourse rate option 
that, as the Commission explained, the success of the negotiated rate 
policy relied upon the recourse rate ``remain[ing] a viable alternative 
to negotiated service.'' \6\ The failure of the recourse rate option to 
remain viable was an ``impermissible'' result.
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    \6\ Id.
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    6. Accordingly, the Commission finds that it is an appropriate time 
to assess the value and viability of its negotiated rate program. The 
Commission is seeking comments from all segments of the industry on 
these matters.

Questions for Response

    7. The Commission seeks responses to the following questions:
    (A) Has the negotiated rate program been generally successful or 
unsuccessful in granting pipelines needed flexibility to serve new 
natural gas markets and retain existing markets? (Please support 
position taken with concrete specifics as much as possible.)
    (B) Should the Commission modify its negotiated rate program?
    (C) Do the negotiated rate filing requirements provide sufficient 
information for necessary transparency of the transactions? Should the 
Commission require pipelines to file negotiated rates on thirty days 
notice before such rates are implemented?
    (D) Does the recourse rate option effectively mitigate pipeline 
market power? Are further mitigation measures necessary? And if so, 
which measures?
    (E) Should the Commission disallow negotiated rates above the 
maximum recourse rate? Should the negotiated rate be limited to a 
certain multiple of the maximum recourse rate? Should the negotiated 
rate be limited to adjusting the levels of the reservations demand and 
commodity rate components, but the total revenue responsibility over 
the term of the contract remain equal the revenue responsibility under 
the recourse rate?
    (F) Should the Commission disallow negotiated transportation rate 
deals based on price differentials of delivered gas between hubs?
    (G) If such index price differential rates continue to be allowed, 
should some limits or restraints be placed on them? If so, what limits 
might be useful or appropriate?

Public Comment Procedure

    8. The Commission invites interested persons to submit written 
comments on the matters and issues raised in this notice, including any 
related matters or alternative proposals that commenters may wish to 
discuss. Upon evaluation of those comments, the Commission will 
determine what further action, if any, will be appropriate. Comments 
are due August 26, 2002. Comments must refer to Docket No. PL02-6-000, 
and may be filed either in electronic or paper format. Those filing 
electronically do not need to make a paper filing.
    9. Documents filed electronically via the Internet can be prepared 
in a variety of formats, including WordPerfect, MS Word, Portable 
Document Format, Real Text Format, or ASCII format, as listed on the 
Commission's Web site at 
http://ferc.gov, under the e-filing link. The e-filing link provides 
instructions for how to Login and complete an electronic filing. First 
time users will have to establish a user name and password. The 
Commission will send an automatic acknowledgment to the sender's e-mail 
address upon receipt of comments. User assistance for electronic filing 
is available at 202-208-0258 or by e-mail to [email protected]. Comments 
should not be submitted to the e-mail address.
    10. For paper filings, the original and 14 copies of such comments 
should be submitted to the Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington DC 20426.
    11. All comments will be placed in the Commission's public files 
and will be available for inspection in the Commission's Public 
Reference Room at 888 First Street, NE., Washington DC 20426, during 
regular business hours. Additionally, all comments may be viewed, 
printed, or downloaded remotely via the Internet through FERC's home 
page using the FERRIS link.

Document Availability

    12. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's home page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    13. From FERC's home page on the Internet, this information is 
available in the Federal Energy Regulatory Records Information System 
(FERRIS). The full text of this document is available on FERRIS in PDF 
and WordPerfect format for viewing, printing, and/or downloading. To 
access this document in FERRIS, type the docket number excluding the 
last three digits of this document in the docket number field.
    14. User assistance is available for FERRIS and the FERC's Web site 
during normal business hours from our Help line at (202) 208-2222 or 
the Public Reference Room at (202) 208-1371 Press 0, TTY (202) 208-
1659. E-Mail the Public Reference Room at 
[email protected].

    By direction of the Commission.
Linwood A. Watson, Jr.,
Deputy Secretary.
[FR Doc. 02-18782 Filed 7-24-02; 8:45 am]
BILLING CODE 6717-01-P