[Federal Register Volume 68, Number 150 (Tuesday, August 5, 2003)]
[Notices]
[Pages 46179-46184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19882]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL02-6-000]


Natural Gas Pipeline, Negotiated Rate Policies and Practices; 
Modification of Negotiated Rate Policy

July 25, 2003.
    Before Commissioners: Pat Wood, III, Chairman; William L. 
Massey, and Nora Mead Brownell.

    1. This order addresses the Commission's Negotiated Rate Policy and 
concludes that several modifications of that policy are necessary in 
order to continue to permit the flexible, efficient pricing of pipeline 
capacity in a transparent manner, while ensuring the mitigation of 
market power.

Background

    2. In 1996, the Commission issued its Policy Statement concerning 
negotiated rates.\1\ In summary, this policy, as modified by Order No. 
637,\2\ permitted interstate pipelines under part 284 of the 
Commission's regulations to negotiate rates with a shipper that vary 
from the otherwise applicable cost of service pipeline tariff, subject 
to certain limitations, such as the Commission's prohibition against 
pipelines negotiating terms and conditions of service.\3\ Moreover, 
under the Commission's

[[Page 46180]]

policy, pipelines must permit shippers to opt for use of a traditional 
cost of service ``recourse'' rate instead of requiring them to 
negotiate for rates for any particular service.\4\ The Commission 
determined that the availability of a recourse rate 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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    \1\ The Commission's current policies were originally 
established in, Alternatives to Traditional Cost-of-Service 
Ratemaking for Natural Gas Pipelines, Regulation of Negotiated 
Transportation Services, Statements of Policy and Comments, 74 FERC 
] 61,076 (1996), order on clarification, 74 FERC ] 61,194 (1996), 
order on reh'g, 75 FERC ] 61,024 (1996).
    \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) 
] 31,091 at 61,343 ( 2000) (Order No. 637); order on rehearing, 
Order No. 637-A, FERC Stats. & Regs, Regulations Preambles (July 
1996-December 2000) ] 31,099 at 31,648 (2000) (Order No. 637-A); and 
Order No. 637-B, 92 FERC ] 61,062 (2000) (Order No. 637-B), aff'd in 
part and remanded in part, Interstate Natural Gas Association of 
America v. FERC, 285 F.3d 18 (DC Cir. Apr. 5, 2002), Order on 
Remand, 101 FERC ] 61,127 (2002).
    \3\ The Commission has determined that negotiated terms and 
conditions of service include any provisions that result in a 
customer receiving a different quality of service than that provided 
other customers under the pipeline's tariff. Dominion Transmission, 
Inc., 93 FERC ] 61,177 (2000). The Commission will, however, permit 
the implementation of negotiations resulting in deviations from the 
pipeline's form of service agreement, so long as such changes do not 
change the conditions under which service is provided and do not 
present an undue risk of undue discrimination. Columbia Gas 
Transmission Corp., 97 FERC ] 61,221 at 62,001-02 (2001).
    \4\ See Natural Gas Pipeline Co. of America, 101 FERC ] 61,125 
(2002) (finding that a pipeline may not restrict the use of recourse 
rate bids and, thereby, deprive bidders of a cost of service rate 
alternative, by declaring that only negotiated rate bids would be 
considered valid for bidding in an open season to determine interest 
in a pipeline expansion project).
    \5\ 74 FERC ] 61,076 at 61,240.
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    3. On July 17, 2002, in Docket No. PL02-6-000, the Commission 
issued a Notice of Inquiry (NOI) concerning its Negotiated Rate 
Policy.\6\ There, the Commission stated that it was undertaking a 
review of issues related to its negotiated rate program and requested 
comments from, and posed questions to, the gas industry regarding the 
Commission's negotiated rate policies and practices. The Commission has 
received responses from all segments of the gas industry that raise a 
variety of issues related to the Commission's negotiated rate 
policies.\7\ As discussed below, upon consideration of its experience 
with the existing negotiated rate program, and the comments received 
from the industry in the NOI proceeding, the Commission has determined 
to modify several aspects of its Negotiated Rate Policy.
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    \6\ Notice of Inquiry Concerning Natural Gas Pipeline Negotiated 
Rate Policies and Practices, 100 FERC ] 61,061 (2002).
    \7\ See Appendix for list of commenters.
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Discussion

    4. The Commission finds that its negotiated rate program has been 
generally successful in providing flexible, efficient pricing of 
pipeline capacity while mitigating pipeline use of market power by 
means of a recourse rate. This view is supported by the majority of 
commenters as they support the negotiated rates program and want it to 
continue. However, certain commenters suggest various changes to 
increase transparency of the negotiated rates and methodologies for 
limiting pricing options for negotiated rates. The Commission has 
reviewed these comments and has determined to revise its filing 
requirements to increase the transparency of negotiated rates in order 
to minimize the potential for discrimination. In addition, the 
Commission has determined to address the pricing mechanisms permitted 
under negotiated rates in order to ensure adequate mitigation of any 
pipeline market power. The Commission will begin its discussion with a 
consideration of the use of natural gas based index prices; in 
particular, the use of such indices to determine basis differentials, 
as a pricing methodology for the negotiation of rates.

Gas Index Pricing Mechanisms

    5. In its Policy Statement, the Commission set forth a mechanism by 
which a pipeline that does not attempt to establish a lack of market 
power to justify market-based rates and does not wish to embark on an 
incentive rate program, may seek a negotiated rate alternative to 
traditional cost of service ratemaking and thus achieve flexible, 
efficient pricing. The Commission determined that, under this policy, 
the availability of a cost of service based recourse rate would protect 
shippers from the exercise of any market power by the transporters. As 
such, in its efforts to permit parties to establish flexible, efficient 
pricing for transportation service, the Commission did not seek to 
limit mechanisms used in transportation price negotiations.
    6. Since the establishment of this policy, pipelines have availed 
themselves of the flexibility of the Commission's policies to negotiate 
many different types of pricing mechanisms. These have included 
negotiated rates for transportation based upon gas commodity price 
indices. These gas commodity price indices, when used as a negotiated 
pricing mechanism, usually reflect gas prices at different points such 
as at natural gas production basins or certain receipt and delivery 
points and citygates. This transportation pricing mechanism is based 
upon the difference between the gas price indices at the two points 
that is commonly referred to as the basis differential. The foundation 
for this pricing mechanism is that the difference in price between two 
points, as shown by the respective price indices, reflects the value of 
transportation between the two points.
    7. Several commenters oppose the use of basis differentials as a 
pricing mechanism for negotiated transportation rates.\8\ Those opposed 
to the use of such pricing mechanisms argue that the use of such basis 
differentials in establishing transportation prices leads to rates far 
in excess of the recourse rate; gives the pipeline an interest in the 
commodity price of gas; and permits shippers to lock-in a profit margin 
and mitigate price risk, which provides increased price protection not 
available to recourse shippers.
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    \8\ See generally, comments of Oklahoma, Mirant, CPUC, NASUCA, 
BP, IPAA, and Calpine.
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    8. IPAA states that the fundamental problem with negotiated 
transportation rates is that they tempt pipeline monopolies with 
negotiated rate authority to focus more attention on the opportunity to 
market gas than on their statutory obligation to provide non-
discriminatory transportation. On this general note, the Industrials 
argue that negotiated transportation rate deals based on price 
differentials give pipelines a stake in the commodity price of gas on a 
particular day or at a particular location, thus effectively allowing 
pipelines to re-enter the gas commodity sales business. CPUC adds that 
transportation rates based upon commodity sales prices allow the 
pipeline to capture part of the commodity gas price and essentially 
makes it a partner in a merchant transaction. Mirant also asserts that 
index-based deals allow pipelines to compete directly with shippers in 
commodity markets.
    9. Oklahoma and NASUCA argue that the use of basis differentials 
for negotiating transportation rates at best operates as a contractual 
mechanism to make additional profits, and at worst, operates as an 
incentive to withhold capacity. BP adds that such contracts provide an 
incentive for the pipeline to maximize revenue by selling any 
unutilized firm transportation as interruptible transportation and 
competing against the shipper's capacity. As such, it argues that this 
type of arrangement gives the pipeline an incentive to withhold 
operationally available capacity from the market for the purpose of 
increasing the commodity basis differential. Mirant states that the 
shippers and pipelines are not on an equal footing, because of the 
pipeline's control over capacity, the pivotal component of such trades. 
In addition, Mirant states that pipelines may have more information 
regarding the factors leading to differentials between index prices and 
may actually be able to influence such differentials through the 
operation of their systems.
    10. CPUC opposes the use of negotiated rates in general and index-
based rates in particular. CPUC states that evidence indicates that the 
California energy markets have been manipulated by traders and that 
spot market published commodity indices are not verifiable. Therefore, 
CPUC argues that it is unreasonable to continue the use of negotiated 
rates in

[[Page 46181]]

place of tariff rates to serve markets or to simulate market behavior.
    11. Other commenters argue that the Commission should continue to 
permit the use of basis differentials as a mechanism by which to set 
negotiated transportation rates. In essence, they maintain that these 
pricing methodologies represent a reasonable proxy for the value of the 
transportation and that the indexed rates allow shippers to easily 
engage in hedging programs and gas supply cost-management.\9\ For 
example, INGAA argues that there is a relationship between the 
unregulated gas commodity price and the value of a pipeline's 
transportation, and that to achieve the Commission's goals of price 
transparency and market efficiency, the Commission should not place 
unwarranted restrictions on the ability to negotiate rates using basis 
differentials. INGAA argues that there is nothing inherently wrong 
about rates that reflect this market reality and that such rates 
protect shippers because the rate cannot exceed the basis differential.
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    \9\ See, e.g., Comments of Alliance, ProLiance, Dominion, KM 
Pipelines, KeySpan, AGA, Peoples, EnCana, APSA, Northern Natural, 
MidAmerican, El Paso, Williston Basin, TransColorado, INGAA, 
Peoples, Duke Trading, Williams, EPSA and NGSA.
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    12. The KM Pipelines and Williams argue that the Commission has 
recognized, in the context of evaluating the lifting of price caps in 
the short-term secondary market for released capacity, that basis 
differentials reflect the value placed by the market on the 
transportation capacity. Peoples and Duke Trading state that the price 
differential between points is a commonly accepted proxy for the value 
of transportation between such points. In the same vein, the KM 
Pipelines assert that, whether index-based pricing is permitted or not, 
the expected level of basis differentials will be a fundamental 
underlying consideration in contracting and, therefore, eliminating 
this pricing mechanism will not change the basic dynamics of the 
transaction.
    13. Many commenters argue that the Commission should assume that 
most shippers that negotiate rates are sophisticated market 
participants, and that the Commission should not get involved in the 
pricing of such transactions beyond ensuring that the shipper always 
has the option of taking the recourse rate.\10\ The AGA states that 
flexible and creative negotiations should not be inhibited by 
proscriptions against certain types of transactions such as those 
predicated on basis differentials. MidAmerican adds that deals based 
upon price differentials are no different than fixed price negotiated 
rate deals, because in either circumstance, the shipper can always 
revert to a recourse rate. EPSA, Dominion, NGSA and Alliance argue, in 
essence, that restrictions on the types of rates that can be negotiated 
may unnecessarily reduce flexibility and the value of the program.
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    \10\ See, e.g., Comments of NEG, El Paso, Peoples, Encana, WDG, 
MidAmerican and Alliance.
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    14. Williston Basin, TransColorado and EnCana maintain that it is 
difficult for pipelines to manipulate hub prices to increase profits. 
They assert that while the risk of manipulation is low, the potential 
benefits to shippers and pipelines are high, and shippers are more 
willing to acquire capacity when they can share the risk with the 
pipeline.
    15. The Canadian Association of Petroleum Producers (CAPP) argues 
that the Commission should allow indexed-based rates, but that the 
Commission should ensure that pipelines entering into such arrangements 
do not withhold capacity from the market in order to affect commodity 
prices. CAPP asserts that the popularity of indexed rates demonstrates 
their appeal and that to prohibit them would potentially undermine the 
purposes of the negotiated rate program. KeySpan asserts that 
negotiated rate frameworks, such as those based on gas price 
differentials, respond to the needs of shippers and consumers and that 
there is no risk associated with these pricing structures that is not 
outweighed by their potential benefits.

Discussion of Basis Differential Pricing Mechanisms

    16. The Commission has determined to modify its negotiated rates 
policy and will no longer permit the use of gas basis differentials to 
price negotiated rate transactions. Gas commodity price indices, when 
used as a negotiated pricing mechanism, usually reflect gas prices at 
different points, such as at gas basins or certain receipt and delivery 
points and citygates. The pricing mechanism is based upon the 
difference between the gas price indices at the two points. As 
discussed above, the basis differential pricing mechanism uses the 
difference in gas prices between two points, to reflect the value of 
transportation between such points. Thus, under this mechanism, the 
wider the difference between the points, the greater the value of the 
transportation. In the Commission's view, allowing the use of gas 
commodity basis differentials by a pipeline as a mechanism for pricing 
transportation by a pipeline with market power threatens the 
Commission's regulatory structure for the transportation of gas as well 
as the Commission's attempts to improve and maintain a competitive 
natural gas commodity market.\11\ This is because such mechanisms 
provide pipelines with an incentive to withhold capacity in an attempt 
to manipulate the gas commodity market by widening the differences 
between the indices.
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    \11\ In Order No. 636, the Commission reviewed the House 
Committee Report leading to the Natural Gas Wellhead Decontrol Act 
of 1989, [Pub. L. 101-60, 103 Stat.157 (1989)], which stated that 
the Commission's competitive open-access pipeline system should be 
maintained and that:
    The Committee stresses that these new rules, and especially the 
wide adoption of blanket certificates for nondiscriminatory open 
access interstate transportation of non-pipeline gas, are essential 
to its decision to complete the decontrol process. All sellers must 
be able to reach the highest-bidding buyer in an increasingly 
national market. All buyers must be free to reach the lowest-selling 
producer, and to obtain shipment of its gas to them on even terms 
with other supplies. Order No. 636 at 30,397, H.R. Rep. No. 29 101st 
Cong.1st Sess., at p 6.
    In addition, the Commission noted that the House Committee 
Report urged the Commission ``to retain and improve this competitive 
structure in order to maximize the benefits of decontrol.'' Id. 
(emphasis in original)
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    17. In Order No. 637, the Commission discussed how its policies 
under traditional cost of service rate regulation limit the pipeline's 
market power stating:

    The principal reason for limiting pipeline rates to a level that 
would permit recovery of a pipeline's annual revenue replacement is 
to limit the ability of the pipelines to exercise market power, so 
that the pipeline does not charge excessive rates. Without rate 
regulation, pipelines would have the economic incentive to exercise 
market power by withholding capacity (including not building new 
capacity) in order to raise rates and earn greater revenue by 
creating scarcity. Because pipelines are regulated, however, there 
is little incentive for a pipeline to withhold capacity, because 
even if it creates scarcity, it cannot charge rates above those set 
by its cost of service. Since pipelines cannot increase revenues by 
withholding capacity, rate regulation has the added benefit of 
providing pipelines with a financial incentive to build new capacity 
when demand exists.\12\
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    \12\ Order No. 637 at 31,270.

    18. Subsequently, in Tennessee, the Commission examined the 
pipeline's incentive to withhold capacity in spite of the Commission's 
part 284 regulations prohibiting such action and determined that its 
traditional cost of service regulation that does not permit the 
pipeline to charge more than the maximum cost of service rate provided 
an adequate check on such incentives.\13\
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    \13\ Tennessee Gas Pipeline Co., 91 FERC ] 61,053 at 61,191 
(2000), order on reh'g, 94 FERC ] 61,097 (2001), aff'd, Process Gas 
Consumers Group v. FERC, 292 F.3rd. 831 (DC Cir. 2002). (Tennessee)
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    19. However, the Commission's negotiated rate policy permits 
pipelines

[[Page 46182]]

to charge rates above the maximum cost of service rate thus presenting 
the possibility that a pipeline could increase revenues by withholding 
capacity. The Commission has relied on the availability of recourse 
service to prevent such an exercise of market power ``by assuring that 
the customer can fall back to cost-based traditional service if the 
pipeline unilaterally demands excessive rates or withholds service.'' 
\14\ As a general matter, this should be sufficient to prevent the 
pipeline's exercise of market power, since ordinarily a shipper would 
be expected to choose the recourse rate in preference to a 
significantly higher negotiated rate.
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    \14\ 74 FERC ] 61,076 at 61,240.
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    20. However, this may not be true where the negotiated 
transportation rate is tied to the commodity price of gas. Such a 
negotiated rate may render the shipper indifferent to the actual costs 
of transportation. For example, a shipper may agree to an index 
differential-based, negotiated transportation rate with a pipeline. The 
shipper may then enter into gas sales agreements with its customers 
based upon the downstream price index that, in effect, lock in this 
transportation rate and/or a profit on the transaction. As a result, 
the shipper is indifferent to the price of gas at the downstream point 
and the pipeline's withholding of capacity to manipulate the downstream 
commodity gas price (and the effect of such manipulation on the 
negotiated transportation rate). It has, in effect, shifted the 
possible risks of the pipeline's abuse of its market power to the gas 
commodity market as a whole. In other words, negotiated transportation 
rates that use basis differentials to price transportation give the 
pipeline an incentive to withhold capacity so as to widen the basis 
differentials. In addition, the shipper may have little incentive not 
to agree since it is either held harmless or may, in fact, share in the 
profits from the increased price differential.\15\
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    \15\ See, e.g., Transwestern Pipeline Co., 100 FERC ] 61,058 
(2002), in which a shipper agreed to a negotiated transportation 
rate based upon a basis price differential that led to prices many 
times the pipeline's maximum rate.
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    21. In Order No. 636, the Commission stated that its primary goal 
was to improve the competitive structure of the natural gas industry 
and, at the same time, maintain adequate and reliable service. The 
Commission stated that its intent was to further ``facilitate the 
unimpeded operation of market forces to stimulate the production of 
natural gas * * * .'' \16\ The Commission thus undertook the task of 
improving the benefits of the decontrol of natural gas prices--chiefly, 
abundant gas supplies at lower prices--through the maintenance and 
improvement of its competitive pipeline transportation system. To 
permit pipelines to utilize pricing mechanisms, such as those based 
upon natural gas commodity prices, which create powerful incentives for 
the pipelines to attempt to use their monopoly power to manipulate the 
prices of the competitive natural gas commodity market, is contrary to 
the Commission's goal of improving the competitive pipeline 
transportation system set forth in Order No. 636.\17\
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    \16\ Order No. 636 at 30,393, citing, S.Rep. No. 39, 101 Cong., 
1st Sess., at p. 2 (1989).
    \17\ In Order No. 636, the Commission determined that because of 
firm transportation available under the rules promulgated by Order 
No. 636, and because of the abundance of uncommitted gas supplies 
available to replace pipeline sales of gas throughout North America, 
it would not be profitable for a pipeline to attempt to exercise 
market power over the sale of natural gas. Order No. 636 at 30,440.
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    22. Pricing mechanisms that invest pipelines with an incentive to 
use market power to manipulate the commodity price of gas hinder the 
Commission's attempt to maintain and improve the competitive natural 
gas market. To allow pipelines to acquire an interest in commodity 
prices, or more precisely the difference between the commodity prices 
at separate points, reverses the regulatory trend which is based upon 
the competitive transportation structure acting to ensure competitive 
natural gas markets. This interest in the prices of the natural gas 
commodity presents pipelines with an incentive to withhold existing 
capacity in order to manipulate natural gas prices and may also create 
a disincentive to invest in the expansion of capacity.\18\
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    \18\ See Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000), 
order on reh'g, 94 FERC ] 61,097 (2001).
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    23. While such pricing mechanisms may be useful in permitting 
parties to the negotiated agreement to engage in various hedging 
programs and gas supply cost-management programs, in the Commission's 
view this flexibility cannot justify the increased risk of market 
manipulation faced by market participants. This slight limitation of 
transportation pricing flexibility is offset by the fact that 
negotiated rates may be based upon a virtually unlimited number of non-
gas indices or other financial mechanisms that have no relationship 
with the commodity price of gas and are therefore not subject to 
manipulation through the withholding of pipeline capacity.
    24. Accordingly, the Commission will no longer permit the pricing 
of negotiated rates based upon natural gas commodity price indices. 
Negotiated rates based upon such indices may continue until the end of 
the contract period for which such rates were negotiated, but such 
rates will not be prospectively approved by the Commission.

Filing Requirements

    25. As the Commission's negotiated rate program has evolved, the 
Commission has clarified the filing requirements necessary for 
implementing such rates. In its original Policy Statement, the 
Commission stated that pipelines would need to file a tariff sheet 
indicating that the negotiated rate for a service would be either the 
rate stated on its existing rate schedule or a rate mutually agreed to 
by the pipeline and its customer. The Commission stated that when a 
rate is negotiated, the pipeline would need to file a numbered tariff 
sheet stating the exact legal name of the customer and the negotiated 
rate for the service.\19\
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    \19\ 74 FERC ] 61,076 at 61,241.
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    26. The Commission then modified this filing requirement to require 
that the pipeline file either the negotiated contract itself or a 
tariff sheet reflecting the essential elements of the negotiated rate 
agreement necessary to permit shippers that believe they are similarly 
situated to the shipper receiving the negotiated rate to make such a 
determination.\20\ The Commission determined that if the pipeline chose 
to file a tariff sheet, the tariff sheet must contain the essential 
details of the transaction.\21\ In addition, the Commission required 
that the tariff sheet must include a statement affirming that the 
negotiated rate contract does not deviate in any material aspect from 
the form of service agreement in the pipeline's tariff.\22\ The

[[Page 46183]]

Commission found that this information was necessary so that the 
Commission could evaluate whether the transaction was unduly 
discriminatory.\23\
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    \20\ NorAm Gas Transmission Co., 75 FERC ] 61,091 (1996), order 
on reh'g, 77 FERC ] 61,011 at 61,037 (1996). 18 CFR Sec.  154.1(b) 
(2003) provides that pipelines must file all contracts related to 
their services. An exception to this general requirement is 
permitted by 18 CFR 154.1(d) (2003) which states that although any 
contract which ``deviates in any material aspect from the form of 
service agreement in the tariff'' must be filed, it also states that 
any contract that conforms to the pipeline's form of service 
agreement set forth in the pipeline's tariff need not be filed.
    \21\ The Commission stated that the tariff sheet ``must state 
the name of the shipper, the negotiated rate, the type of service, 
the receipt and delivery points applicable to the service and the 
volume of gas to be transported.'' 77 FERC ] 61,011 at 61,037 
(1996).
    \22\ The Commission's regulations provide that the pro forma 
service agreement must refer to the service to be rendered and the 
applicable rate schedule of the tariff; and, provide spaces for 
insertion of the name of the customer, effective date, expiration 
date, and term. Blank spaces may be provided for the insertion of 
receipt and delivery points, contract quantity and other specifics 
of each transaction as appropriate. 18 CFR Sec.  154.110 (2003).
    \23\ 77 FERC ] 61,011 at 61,037 (1996).
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    27. Subsequently, the Commission defined a material deviation as 
any provision of a service agreement that goes beyond the filling-in of 
the spaces in the form of service agreement with the appropriate 
information provided for in the tariff and that affects the substantive 
rights of the parties.\24\ Therefore, if a negotiated rate agreement 
contains any such deviation from the form of service agreement, the 
pipeline must file the agreement for the Commission's review. The 
Commission will only accept negotiated rate agreements with such 
material deviations from the pipeline's form of service agreement if 
such deviations do not change the conditions under which service is 
provided and do not present a risk of undue discrimination.\25\
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    \24\ Columbia Gas Transmission Corp., 97 FERC ] 61,221 at 62,002 
(2001).
    \25\ Id. at 62,001-02.
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    28. Many commenters assert that the Commission's filing 
requirements for negotiated rates provide sufficient information for 
the necessary transparency of negotiated transactions.\26\ Duke 
Trading, WDG and NEG state that the current filing requirements permit 
the Commission and other interested parties to monitor the contracting 
activity of the pipelines for undue discrimination, and to allow market 
participants to undertake a full commercial analysis of each negotiated 
rate deal. El Paso asserts that there is no evidence to justify a 
change in the filing requirements, or that additional requirements are 
necessary for transparency. The KM Pipelines add that additional 
information may actually obscure the important terms of the agreement.
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    \26\ See Comments of Northern Natural, Peoples, MidAmerican, 
Alliance, The Industrials, ProLiance, El Paso, EnCana, INGAA, 
Vector, CAPP, Williston Basin, Dominion, Williams, and Duke 
Transmission.
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    29. On the other hand, Calpine states that the filing requirements 
do not provide sufficient transparency of information for negotiated 
rate transactions and joins BP and EPSA in asserting that the lack of a 
consistent format complicates any assessment of the options available 
to a shipper when reviewing multiple pipeline filings and comparing the 
negotiated rates granted to other shippers. Mirant states that the 
current filing requirements are insufficient to ensure transparency and 
states that the Commission should not permit the pipelines to file a 
mere contract summary because the summaries may fail to disclose all 
meaningful and negotiated contract terms. NGSA joins Mirant and 
requests that the Commission require pipelines to file both the 
negotiated rate contract and a tariff sheet describing the contract. 
NGSA states that there is too much risk that the pipeline could omit 
details of a transaction that shippers see as important, and without 
full disclosure of the contract, the Commission and shippers have only 
limited ability to monitor negotiated transactions.
    30. NASUCA and BP state that negotiated rate transactions lack 
transparency because of their bilateral nature, despite the posting and 
filing requirements. NASUCA states that recourse shippers and 
regulatory agencies often lack access to essential information. BP 
states that, even when the contracts are filed, it is sometimes hard to 
determine what elements are negotiated.

Discussion of Negotiated Rate Filing Requirements

    31. The Commission's experience with negotiated rate filings has 
shown that the filings on occasion lack the information necessary for 
the Commission's Staff and the pipelines' shippers to analyze the 
negotiated agreement. First, even where the agreement contains no 
deviation from the form of service agreement, the tariff sheet summary 
may not describe the primary rate formula or the other essential 
elements of the transaction in sufficient detail. Second, pipelines 
have sometimes failed to file a service agreement even though it 
contained a material deviation. Finally, and most importantly, where 
pipelines have filed service agreements with material deviations, the 
deviations have often not been clearly identified, requiring the 
Commission to carefully compare the negotiated rate agreement with the 
form of service agreement in order to determine how the two may differ. 
Indeed, on some occasions, parties have drafted the entire service 
agreement independently of the form of service agreement in the tariff. 
As a result, provisions may be worded differently from similar 
provisions in the form of service agreement, but it is not immediately 
apparent whether the parties intended the provisions to be 
substantively different. These circumstances hinder the Commission's 
ability to assess whether the transaction is unduly discriminatory as 
well as the assessment of the transaction by shippers attempting to 
determine if they are similarly situated to the shipper in the 
negotiated transaction.\27\
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    \27\ See, e. g., Gulfstream Natural Gas System, L.L.C., 103 FERC 
]61,312 (2003); CenterPoint Energy Gas Transmission Co., 102 FERC 
]61,094 (2003) and CenterPoint Energy Gas Transmission Co., 102 FERC 
]61,059, order on reh'g, 103 FERC ]61,228 (2003).
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    32. The Commission will permit a pipeline filing a negotiated rate 
transaction that does not deviate from its pro forma service agreement 
to file a tariff sheet reflecting the terms of the agreement, together 
with a statement that the agreement conforms in all material respects 
with its pro forma service agreement.\28\ However, pipelines are 
reminded that the tariff sheet summaries must fully describe the 
essential elements of the transaction, including the name of the 
shipper, the negotiated rate, the type of service, the receipt and 
delivery points applicable to the service and the volume of gas to be 
transported. Also, where the price term of the negotiated rate 
agreement is a formula, the formula should be fully set forth in the 
tariff sheet.\29\ Pipelines are also reminded that, in order to file a 
tariff sheet summary, they must certify that the agreement contains no 
deviation from the form of service agreement that goes beyond filling 
in the blank spaces or that affects the substantive rights of the 
parties in any way. Since there would appear to be no reason for the 
parties to use language different from that in the form of service 
agreement other than to affect the substantive right of the parties, 
this effectively means that all language that is different from the 
form of service agreement should be filed with the Commission.
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    \28\ This action merely emphasizes the Commission's current 
regulations which require that if the pipeline contends that its 
filing implements a negotiated contract that conforms to its form of 
service agreement in all material aspects, and therefore, it is not 
necessary to file the contract, such a filing will contain a 
statement that the pipeline's filing complies with the requirements 
of 18 CFR 154.1(d) (2003). Violation of this regulation may result 
in the rejection of the filing or suspension of the pipeline's 
negotiated rate authority.
    \29\ In the case of complicated formula, the pipeline may, as an 
alternative, simply file the agreement.
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    33. In addition, in order to provide greater transparency and to 
assist the Commission and interested parties in analyzing negotiated 
rate transactions, the Commission has determined that the form of 
service agreement must be used as a starting point in drafting any 
negotiated rate contract. Therefore, the Commission will henceforward 
require that a pipeline filing a contract proposing material changes 
from its form of service agreement must clearly

[[Page 46184]]

delineate differences between its negotiated contractual terms and that 
of its form of service agreement in redline and strikeout. In addition, 
the pipeline shall provide a detailed narrative outlining the terms of 
its negotiated contract, the manner in which such terms differ from its 
form of service agreement, the effect of such terms on the rights of 
the parties, and why such deviation does not present a risk of undue 
discrimination.
    34. Information presented in such a manner, in conjunction with the 
tariff sheets, will permit the Commission and the parties to 
efficiently ascertain whether the proposed negotiated transaction 
entails such a risk of undue discrimination that it cannot be permitted 
or whether other similarly situated shippers may be able to obtain such 
service.

    By the Commission. Commissioner Brownell dissenting with a 
separate statement attached.
Linda Mitry,
Acting Secretary.

Appendix

Commenters

Alliance Pipeline L.P. (Alliance)
American Gas Association (AGA)
American Public Gas Association (APGA)
BP Energy Company (BP) Calpine Energy Services, L.P. (Calpine)
Canadian Association of Petroleum Producers (CAPP)
Connecticut Department of Public Utility Control (Connecticut)
Consolidated Edison Company of New York, Inc. and Orange and 
Rockland Utilities, Inc. (ConEd and Orange and Rockland)
Dominion Resources, Inc. (Dominion)
Duke Energy Gas Transmission Corp. (Duke Transmission)
Duke Energy Trading and Marketing, L.L.C. (Duke Trading)
Dynegy Marketing and Trade (Dynegy)
Electric Power Supply Association (EPSA)
El Paso Corporation's Pipeline Group (El Paso)
EnCana Gas Storage Inc., EnCana Marketing (USA) Inc., and EnCana 
Energy Services Inc. (EnCana)
Gulf South Pipeline Company, LP (Gulf South)
Illinois Municipal Gas Agency (IMGA)
Independent Petroleum Association of America (IPAA)
Interstate Natural Gas Association of America (INGAA)
KeySpan Delivery Companies (KeySpan)
Louisville Gas and Electric Company (Louisville)
Maritimes & Northeast Pipeline, LLC (Maritimes)
Michigan Public Service Commission (Michigan PSC)
MidAmerican Energy Co. (MidAmerican)
Mirant Americas Energy Marketing, LP (Mirant)
National Association of State Utility Consumer Advocates (NASUCA)
Natural Gas Pipeline Company of America and Kinder Morgan Interstate 
Gas Transmission, LLC (jointly ``KM Pipelines'')
Natural Gas Supply Association( NGSA)
NEG Shippers (NEG)
NiSource Pipelines (NiSource)
Northern Natural Gas Company (Northern Natural)
Northwest Industrial Gas Users (NWIGU)
Oklahoma Corporation Commission (Oklahoma)
Peoples Gas Light and Coke Co., North Shore Gas Co., and Peoples 
Energy Resources Corp. (Peoples)
Process Gas Consumers Group, American Forest & Paper Association, 
American Iron and Steel Institute, Georgia Industrial Group, 
Industrial Gas Users of Florida, Florida Industrial Gas Users United 
States Gypsum Company (collectively, the ``Industrials'')
ProLiance Energy, LLC (ProLiance)
Public Service Commission of the state of New York (New York)
Public Utilities Commission of California (CPUC)
Sempra Energy Trading Corp. (Sempra)
TransColorado Gas Transmission Company (TransColorado)
Vector Pipeline L.P. (Vector)
The Williams Companies, Inc. (Williams)
Williston Basin Interstate Pipeline Company (Williston Basin)
Wisconsin Distributor Group (WDG)

Brownell, Commissioner, dissenting

    1. In this order, the majority prohibits on a prospective basis 
the use of gas basis differentials to price negotiated rate 
transactions. The majority bases its determinations on the theory 
that such mechanisms provide pipelines with an incentive to withhold 
capacity in an attempt to widen the gas basis differential.
    2. Gas basis differential pricing is a widely used tool for 
structuring competitive flexible transportation arrangements, 
demonstrating the appeal to both shippers and transporters alike. 
Many commenters argue that the Commission should assume that most 
shippers that negotiate rates are sophisticated market participants, 
and that gas basis differential pricing responds to the needs of 
shippers and consumers. These commenters conclude that the risk of 
manipulation is low while the potential benefits to shippers and 
pipelines are high and, therefore, the Commission should not 
preclude such transactions.
    3. Gas basis differential pricing does not blur the role of the 
pipeline as a transporter with no direct interest in the commodity 
price because pipelines already use the gas basis differentials to 
value transportation. Whether or not a pipeline uses gas basis 
differential pricing in its negotiated rate transactions, pipelines 
determine the level of the discount that is necessary to maintain 
throughput on their systems by reference to the gas basis 
differentials. The Commission itself has recognized that the 
implicit price for transportation represents the most any shipper 
purchasing delivered gas at a downstream market would pay to move 
gas from the lower priced market to the higher priced market. Order 
No. 637 at 31,271.
    4. The majority opinion ignores the Commission's existing 
regulations which prevent pipelines from withholding capacity. The 
order cites to no evidence that pipelines have the ability to 
withhold capacity or, in fact, have withheld capacity to increase 
the gas basis differentials. In Docket No. PL02-4-000, the 
Commission Staff presented data it had collected concerning capacity 
release transactions over a 22 month period. The data reflected that 
rates shippers received for their released transactions (above and 
below the recourse rate) tracked the applicable basis differentials. 
This finding further validates the Commission's determination in 
Order No. 637 that the ``fact that prices for transportation rise 
during peak periods is not evidence of the exercise of market power 
but may be the appropriate market response to an increase in demand 
for capacity''. Order No. 637 at 31,281.
    5. The majority opinion seems to rely on Transwestern Pipeline 
Co., 100 FERC ] 61,058 as a reason for prohibiting the use of gas 
basis differential pricing. In the Transwestern case, the pipeline 
was found to have violated its tariff by improperly giving prior 
notice of the capacity posting to two shippers that were awarded the 
capacity. Not complying with the open access tariff provisions is 
not a concern directed solely at negotiated rate transactions, but 
is a concern regardless of how the capacity is priced. I would 
further note that capacity was not being withheld in that 
proceeding, but unfairly directed.
    6. Finally, the blanket prohibition of negotiated rate 
transactions that use gas basis differentials is overly prescriptive 
and an unnecessary intrusion in the marketplace, particularly when 
shippers have other choices. Most gas basis differential priced 
transactions are below the recourse rate. More importantly, shippers 
are protected because each negotiated rate transaction is noticed 
for comment and ultimately approved (or disapproved) by the 
Commission. The Commission has access to information about available 
pipeline capacity and daily gas basis differentials to monitor these 
types of transactions to determine if a pipeline is withholding 
capacity to increase the gas basis differential. With pipelines 
obligated to offer all available capacity, a viable recourse rate 
alternative, and our capability to monitor these transactions, the 
prohibition of gas basis differential pricing unnecessarily reduces 
flexibility and the value of the negotiated rate program.
    7. For these reasons, I respectfully dissent.


Nora Mead Brownell,
Commissioner.

[FR Doc. 03-19882 Filed 8-4-03; 8:45 am]
BILLING CODE 6717-01-P