[Federal Register Volume 68, Number 238 (Thursday, December 11, 2003)]
[Rules and Regulations]
[Pages 69134-69162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30444]



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Part II





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 37, et al.



Standards of Conduct for Transmission Providers; Final Rule

  Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / 
Rules and Regulations  

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 37, 161, 250, 284 and 358

[Docket No. RM01-10-000; Order No. 2004]


Standards of Conduct for Transmission Providers

November 25, 2003.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission is adopting standards 
of conduct that apply uniformly to interstate natural gas pipelines and 
public utilities (jointly referred to as Transmission Providers). The 
standards of conduct will govern the relationships between regulated 
Transmission Providers and all of their Energy Affiliates. The new 
standards of conduct will eliminate the loophole in the current 
regulations that do not cover a Transmission Provider's relationship 
with Energy Affiliates that are not marketers or merchant affiliates. 
The Final Rule will ensure that Transmission Providers cannot extend 
their market power over transmission to wholesale energy markets by 
giving their Energy Affiliates unduly preferential treatment.

EFFECTIVE DATE: The rule will become effective February 9, 2004.

FOR FURTHER INFORMATION CONTACT: Demetra Anas, Office of Market 
Oversight and Investigation, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC, (202) 502-8178.

SUPPLEMENTARY INFORMATION:

                            Table of Contents
 
                                                              Paragraph
                                                                Number
 
I. Background..............................................            2
II. Current Regulations....................................            5
III. Need for the Rule.....................................            6
IV. Section-by-Section Analysis of Final Rule..............           16
    A. Applicability--Sec.   358.1.........................           16
        i. Regional Transmission Organizations/Independent            17
         System Operators..................................
        ii. Non-Public Utilities...........................           24
        iii. Cooperatives and Small Pipelines and Utilities           25
        iv. Delay of Applicability.........................           29
    B. General Principles--Sec.   358.2....................           30
    C. Definitions--Sec.   358.3...........................           32
        i. Definition of a Transmission Provider...........           33
        ii. Definition of an Energy Affiliate..............           37
            1. LDCs........................................           41
            2. Affiliates not engaged or involved in                  45
             transmission transactions, e.g., trading and
             financial affiliates..........................
            3. Affiliated Transmission Providers...........           49
            4. Holding or service companies................           52
            5. Foreign affiliates..........................           59
            6. Affiliates buying power for themselves......           63
            7. Producers, Gatherers, and Processors........           66
            8. Intrastate and Hinshaw Pipelines............           72
        iii. Definition of Marketing, Sales or Brokering...           73
        iv. Definition of a Transmission Function..........           80
        v. Definition of a Reseller........................           81
    D. Independent Functioning--Sec.   358.4...............           82
        i. Background and History of Independent                      86
         Functioning Requirement
        ii. Energy Affiliate Function or Commercial                   88
         Function..........................................
        iii. Sharing of Non-Transmission Functions.........           95
        iv. Sharing of Senior Officers and Directors.......          102
        v. Sharing of Field and Maintenance Personnel......          105
        vi. Transmission Employees that Engage in                    107
         Operational Purchases.............................
        vii. Risk Management Employees.....................          109
        viii. Costs of compliance..........................          113
        ix. Conclusion.....................................          118
    E. Identification of Affiliates on Internet............          122
        i. Posting Organizational Charts...................          123
        ii. Posting of Merger Information..................          126
        iii. Transfer of Employees.........................          128
    F. Books and Records...................................          132
    G. Written Procedures..................................          133
        i. Posting Standards of Conduct Procedures.........          135
        ii. Training.......................................          138
        iii. Chief Compliance Officer......................          140
    H. Non-Discrimination Requirements--Sec.   358.5.......          142
        i. Information Access and Disclosure Prohibitions..          143
                A. ``No Conduit'' or ``Automatic                     144
                 Imputation''..............................
                B. Sharing of Operational Information......          151
                C. Generation Dispatch.....................          154
                D. Voluntary Consent.......................          156
                E. Transaction Specific Exemption..........          158
        ii. Implementing Tariffs...........................          162
    I. Discounts...........................................          163
V. Conforming Changes......................................          170

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VI. Additional Policy Changes not Adopted..................          171
VII. Regulatory Flexibility Act Certification..............          173
VIII. Information Collection Statement.....................          174
IX. Environmental Statement................................          202
X. Document Availability...................................          203
XI. Effective Date and Congressional Notification..........          206
 

Before Commissioners: Pat Wood, III, Chairman; William L. Massey, and 
Nora Mead Brownell.
    1. The Federal Energy Regulatory Commission is adding Part 358 to 
its regulations and revising Parts 37 and 161 of its regulations in 
response to the changing structure of the energy industry.\1\ In this 
rule, the Commission adopts standards of conduct that apply uniformly 
to interstate natural gas pipelines and public utilities (jointly 
referred to as Transmission Providers) that are currently subject to 
the gas standards of conduct in Part 161 of the Commission's 
regulations and the electric standards of conduct in Part 37 of the 
Commission's regulations.\2\ In light of the changing structure of the 
energy industry, the standards of conduct will govern the relationships 
between regulated Transmission Providers and all of their Energy 
Affiliates. The new standards of conduct will eliminate the loophole in 
the current regulations that do not cover a Transmission Provider's 
relationship with Energy Affiliates that are not marketers or merchant 
affiliates. The Final Rule will ensure that Transmission Providers 
cannot extend their market power over transmission to wholesale energy 
markets by giving their Energy Affiliates unduly preferential 
treatment.
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    \1\ The Commission is also making minor conforming changes in 
Parts 250 and 284.
    \2\ The gas standards of conduct are codified at part 161 of the 
Commission's regulations, 18 CFR part 161 (2003), and the electric 
standards of conduct are codified at 18 CFR 37.4 (2003).
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I. Background

    2. On September 27, 2001, the Commission issued a Notice of 
Proposed Rulemaking (NOPR) in this proceeding.\3\ One hundred and 
fifty-five interested persons submitted comments.\4\ Several commenters 
requested an opportunity for an oral presentation on the matters raised 
in the NOPR. On April 25, 2002, the Commission published an ``Analysis 
of the Major Issues Raised in the Comments'' (Major Issues Analysis), 
suggesting some possible changes to the proposals in the NOPR. The 
Major Issues Analysis proposed changes in the definition of an Energy 
Affiliate, among other things, and provided draft regulatory text.
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    \3\ Standards of Conduct for Transmission Providers, 66 FR 50919 
(Oct. 5, 2001), IV FERC Stats. & Regs. Regulation Preambles ] 32,555 
(Sept. 27, 2001).
    \4\ See Appendix A for a list of commenters.
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    3. The Major Issues Analysis also gave notice that the Commission 
would host a full-day technical conference giving interested persons 
the opportunity to discuss issues raised in the NOPR and the Major 
Issues Analysis. Approximately 200 participants attended the conference 
on May 21, 2002. During and following the conference, participants were 
encouraged to submit drafting options for regulatory text. The 
Commission then posted all of the proposals on its Internet Website. 
Since the conference, the Commission has received more than 100 
additional comments, many from interested persons who previously 
submitted comments.
    4. This Final Rule is being issued after a review of all the 
comments filed in this proceeding and will become effective on February 
9, 2004. By February 9, 2004, each Transmission Provider is required to 
file with the Commission and post on the OASIS or its Internet website 
a plan and schedule for implementing the standards of conduct. By June 
1, 2004, all Transmission Providers must comply with the standards of 
conduct and post procedures on the Internet that will enable customers 
and the Commission to determine whether Transmission Providers are in 
compliance with the standards of conduct requirements contained herein.

II. Current Regulations

    5. The current standards of conduct restrict the ability of 
interstate natural gas pipelines and public utilities (Transmission 
Providers) to give their marketing affiliates or wholesale merchant 
functions undue preferences over non-affiliated customers. The 
Commission's goal--to prevent unduly discriminatory behavior--reflects 
FERC's statutory responsibilities under the NGA and FPA.\5\ Both gas 
\6\ and electric \7\ standards of conduct rely on

[[Page 69136]]

similar mechanisms to prevent transmission from being used in an unduly 
preferential or discriminatory manner by: (1) Separating employees \8\ 
engaged in transmission services from those engaged in commodity 
marketing services, i.e., marketing or sales for resale of natural gas 
or electric energy; and (2) ensuring that all transmission customers, 
affiliated and non-affiliated, are treated on a non-discriminatory 
basis. The Commission's goals have not changed. This rule is designed 
to prevent Transmission Providers from giving undue preferences to any 
of their Energy Affiliates to ensure that transmission is provided on a 
non-discriminatory basis.
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    \5\ Sections 4 and 5 of the Natural Gas Act (NGA), 15 U.S.C. 
717c and 717e (2000), state that no natural gas company shall make 
or grant an undue preference or advantage with respect to any 
transportation or sale of natural gas subject to the Commission's 
jurisdiction. Similarly, under sections 205 and 206 of the Federal 
Power Act (FPA), 16 U.S.C. 824d and 824e (2000), no public utility 
shall make or grant an undue preference with respect to any 
transmission or sale subject to the Commission's jurisdiction.
    \6\ Order No. 497, 53 FR 22139 (June 14, 1988), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 ] 30,820 (June 1, 1988); 
Order No. 497-A, order on reh'g, 54 FR 52781 (Dec. 22, 1989), FERC 
Stats. & Regs., Regulations Preambles 1986-1990 ] 30,868 (Dec. 15, 
1989); Order No. 497-B, order extending sunset date, 55 FR 53291 
(Dec. 28, 1990), FERC Stats. & Regs., Regulations Preambles 1986-
1990 ] 30,908 (Dec. 13, 1990); Order No. 497-C, order extending 
sunset date, 57 FR 9 (Jan. 2, 1992), FERC Stats. & Regs., 
Regulations Preambles 1991-1996 ] 30,934 (Dec. 20, 1991), reh'g 
denied, 57 FR 5815 (Feb. 18, 1992), 58 FERC ] 61,139 (Feb. 10, 
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., Regulations Preambles 1991-1996 ] 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., Regulations Preambles 1991-1996 
] 30,987 (Dec. 23, 1993); Order No. 497-F, order denying reh'g and 
granting clarification, 59 FR 15336 (Apr. 1, 1994), 66 FERC ] 61,347 
(Mar. 24, 1994); and Order No. 497-G, order extending sunset date, 
59 FR 32884 (June 27, 1994), FERC Stats. & Regs., Regulations 
Preambles 1991-1996 ] 30,996 (June 17, 1994).
    See also Standards of Conduct and Reporting Requirements for 
Transportation and Affiliate Transactions, Order No. 566, 59 FR 
32885 (June 27, 1994), FERC Stats. & Regs., Regulations Preambles 
1991-1996 ] 30,997 (June 17, 1994); Order No. 566-A, order on reh'g, 
59 FR 52896 (Oct. 20, 1994), 69 FERC ] 61,044 (Oct. 14, 1994); Order 
No. 566-B, order on reh'g, 59 FR 65707 (Dec. 21, 1994), 69 FERC ] 
61,334 (Dec. 14, 1994); and Reporting Interstate Natural Gas 
Pipeline Marketing Affiliates on the Internet, Order No. 599, 63 FR 
43075 (Aug. 12, 1998), FERC Stats. & Regs., Regulations Preambles 
1996-2000 ] 31,064 (July 30, 1998).
    \7\ Open Access Same-Time Information System (Formerly Real-Time 
Information Network) and Standards of Conduct, Order No. 889, 61 FR 
21737 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles 
1991-1996 ] 31,035 (Apr. 24, 1996); Order No. 889-A, order on reh'g, 
62 FR 12484 (Mar. 14, 1997), FERC Stats. & Regs., Regulations 
Preambles 1996-2000 ] 31,049 (Mar. 4, 1997); Order No. 889-B, reh'g 
denied, 62 FR 64715 (Dec. 9, 1997), FERC Stats. & Regs., Regulations 
Preambles 1996-2000 ] 31,253 (Nov. 25, 1997).
    See also Promoting Wholesale Competition Through Open Access 
Non-Discrimination Transmission Services by Public Utilities; 
Recovery of Stranded Costs by Public Utilities and Transmitting 
Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & 
Regs., Regulations Preambles 1991-1996 ] 31,036 (Apr. 24, 1996) at 
31,692; order on reh'g, Order No. 888-A, 62 FR 12274 (Mar. 14, 
1997), FERC Stats. & Regs., Regulations Preambles 1991-1996 ] 31,048 
(Mar. 4, 1997); order on reh'g, Order No. 888-B, 81 FERC ] 61,248 
(1997); order on reh'g, Order No. 888-C, 82 FERC ] 61,046 (1998), 
aff'd in relevant part sub nom., Transmission Access Policy Study 
Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), cert. granted, 69 
U.S.L.W. 3574 (Nos. 00-568 (in part) and 00-809), cert. denied (No. 
00-800) (U.S. Feb. 26, 2001).
    \8\ Each reference to employees includes contractors, 
consultants and agents.
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III. Need for the Rule

    6. As discussed in the NOPR, significant changes have occurred 
since the standards of conduct were first adopted. In Order No. 636, 
the Commission required all interstate natural gas pipelines to provide 
open-access transportation service and to unbundle their gas sales from 
transportation.\9\ Since then, the market has expanded to include both 
physical and financial transactions by marketing and non-marketing gas 
pipeline affiliates.\10\ In the gas industry, these changes include 
unbundling, capacity release, and e-commerce. Today, as a result of 
growth and consolidations, many interstate natural gas pipeline 
companies also have a much wider array of affiliates in all sectors of 
the energy business. The gas industry has experienced consolidations in 
every sector--pipelines, producers, marketers, LDC/utilities and 
industrials. Examples include the mergers of El Paso Energy 
Corporation, Sonat Inc. and the Coastal Corporation, and Columbia 
Energy Group and NiSource Inc. Marketing affiliates and non-marketing 
affiliates today offer a variety of new services, such as bundled 
sales, asset management, price hedging, risk management, and electronic 
commodity trading. Recently, some pipelines have reduced or eliminated 
some of these services, while others continue to have active merchant, 
management and trading functions.
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    \9\ Order No. 636, Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation Under Part 
284 of the Commission's Regulations, and Regulation of Natural Gas 
Pipelines After Partial Wellhead Decontrol, FERC Stats. & Regs. ] 
30,939 (1992), order on reh'g, Order No. 636-A, FERC Stats. & Regs. 
] 30,950 (1992), order on reh'g, Order No. 636-B, 61 FERC ] 61,272 
(1992), aff'd in part, rev'd in part, United Distribution Cos. v. 
FERC, 88 F.3rd 1105 (D.C. Cir. 1996), cert denied, 137 L. Ed 2d 845, 
117 S. Ct. 1723 (1997), on remand, Order No. 636-C, 78 FERC ] 61,186 
(1997), order on reh'g, Order No. 636-D, 83 FERC ] 61,210 (1998).
    \10\ We also have seen the entry of many financial institutions 
into the trading arena, e.g., Morgan Stanley Capital Group, Inc., 
Bank of America, N.A., and UBS AG.
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    7. Similarly, now that public utility Transmission Providers have 
been providing open-access service under Order No. 888 for several 
years, there has been a large increase in the number of power marketers 
with market-based rates,\11\ an increased market for available 
transmission capacity, and an increased number of power transactions. 
Electric power is evolving into a more liquid, transparent commodity.
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    \11\ As of October 1, 2003, the Commission has granted 
approximately 1300 market-based rate authorizations; nearly 880 of 
these were approved within the last five years. Of the 
authorizations granted within the last five years, about 500 were 
granted to investor-owned utilities and their affiliates.
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    8. Not only are the affiliated entities changing in size and scope, 
so are the Transmission Providers. As a result of an increase in merger 
activities there has been a convergence of the gas and electric 
industries.\12\ These industry changes mean that interstate natural gas 
pipelines and their affiliates not only deal in gas, but also in power, 
much of which is generated using natural gas. In one of its recent 
regulatory reviews, the Federal Trade Commission (FTC) found that the 
proposed acquisition of Panhandle and Trunkline by CMS was likely to 
adversely affect industrial plants in the CMS local natural gas 
franchise areas that rely on natural gas as a fuel to generate electric 
power onsite.\13\
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    \12\ Since 1995, the Commission has received 66 public utility 
merger applications, 60 of which have been approved, one has been 
set for hearing and five have been withdrawn or terminated. Several 
mergers joined gas and electric companies, such as NiSource Inc. 
with Columbia Energy Group and Dominion Resources, Inc. with 
Consolidated Natural Gas Company.
    \13\ In the matter of CMS Energy Company and Panhandle Eastern 
Pipeline Co. et al., FTC File 991-0046, Analysis of Proposed Consent 
Order to Aid Public Comment.
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    9. The Commission is concerned that a Transmission Provider's 
market power could be transferred to its affiliated businesses because 
the existing rules do not cover all affiliate relationships. For 
example, an integrated entity could exercise market power in delivered 
natural gas service to raise costs of rival generators or inhibit entry 
of new generators into wholesale power markets.
    10. Although the current standards of conduct limit Transmission 
Providers' ability to make or grant undue preferences to their 
wholesale merchant functions or to their marketing affiliates, they do 
not cover the transmission providers' other non-marketing affiliates, 
even though the NGA and FPA prohibit a natural gas pipeline company and 
a public utility from giving any entity an undue preference. Non-
marketing affiliates of Transmission Providers compete against non-
affiliates for transmission services, in capacity release transactions, 
in power sales, and in siting new generation. For example, in the gas 
industry, non-marketing affiliates of interstate natural gas pipelines 
control large amounts of capacity on their affiliated pipelines, yet 
they are not covered by the current standards of conduct because they 
do not actually hold pipeline capacity (functioning instead as asset 
managers) or they fit within one of the existing exceptions, e.g., 
producers, gatherers and local distribution companies.\14\ See 18 CFR 
161.2 (2003). A comparison of the October 2003 Index of Customers data 
to the January 2001 Index of Customers data reveals that the amount of 
firm capacity held by marketing affiliates has decreased during that 
period, while the amount of firm capacity held by other affiliates has 
increased during that period.\15\
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    \14\ A review of data from the 85 interstate natural gas 
pipelines and certificated storage companies that submitted an Index 
of Customers for October 2003, shows that 63 of them transport or 
store gas for their affiliates. Thirty-six pipelines transport gas 
for their marketing affiliates, which hold an average of 16 percent 
of the affiliated pipelines' capacity. Similarly, 13 pipelines with 
storage services ``transport'' gas for their marketing affiliates, 
which hold an average of 43 percent of the affiliates storage 
companies' capacity.
    In addition, 33 pipelines transport gas for other (non-
marketing) affiliates that hold an average of 42 percent of the 
affiliated pipelines' capacity, and 16 storage companies 
``transport'' gas for their other affiliates, which hold an average 
of 46 percent of the affiliated storage companies' capacity.
    Staff's review, which looked at all interstate natural gas 
pipelines that filed Index of Customers is more complete than an 
INGAA-sponsored study of select pipelines that showed, during 2000, 
that marketing and non-marketing affiliates of natural gas pipelines 
contracted for 14.4 percent of the capacity on their affiliated 
pipeline.
    \15\ The January 2001 Index of Customers data shows that 
marketing affiliates held about 18 percent of affiliated interstate 
natural gas pipelines' firm capacity and non-marketing affiliates 
held an additional 19 percent of the affiliated pipelines' firm 
capacity. The October 2003 Index of Customers data shows that 
marketing affiliates hold about 16 percent of the affiliated 
pipelines' firm capacity and non-marketing affiliates hold an 
additional 42 percent of the affiliated pipelines' firm capacity.

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    11. The current standards of conduct do not address the sharing of 
confidential shipper information and transportation information with 
all Energy Affiliates. For example, if an interstate natural gas 
pipeline informs its affiliated asset manager about a proposed pipeline 
expansion or upcoming curtailment, the current standards of conduct do 
not require it to make that information available to non-affiliates, 
unless the asset manager is a Marketing Affiliate. Nor do the current 
standards address whether an electric Transmission Provider can share 
with its generator affiliates information about generation projects 
planned by competitors. Sharing of information between Transmission 
Providers and Energy Affiliates undermines and frustrates the efforts 
of ``independent'' businesses to buy, sell, build, grow, and provide 
competitive alternatives in markets where there are concerns about 
market power. Although Transmission Providers' unduly preferential 
behavior towards their Energy Affiliates may not violate the current 
standards of conduct, we believe it violates the general statutory 
prohibitions against undue discrimination and undue preferences in the 
provision of interstate transmission services.
    12. Many commenters argue generally that the rule is unnecessary. 
They maintain that there have been relatively few cases of anti-
competitive behavior. Some commenters urged the Commission to maintain 
the status quo. Many public utility Transmission Providers and 
interstate natural gas pipeline Transmission Providers argue that there 
is no need for a general rule, and individual instances of abuse can be 
considered and resolved by the Commission in case-by-case 
investigations or in individual Commission proceedings.
    13. Some commenters supported the Commission's proposal to develop 
uniform standards of conduct. For example, the American Antitrust 
Institute said that Transmission Providers have the ability and 
incentive to adversely affect electricity or gas prices by frustrating 
or precluding a rival's access to electric transmission or gas 
transportation. In addition, those companies involved in the converging 
energy industry support the Commission's initiative because they 
currently operate under both the electric and gas standards of conduct. 
Some commenters urge the Commission to adopt stricter prohibitions, 
such as structural remedies or capacity limits. NASUCA says that the 
lack of complaints is a ``Catch-22.'' NASUCA states that the reason 
there have been very few complaints regarding other affiliates is that 
anti-competitive transactions involving these transactions do not 
violate the current standards of conduct.
    14. Having carefully considered all the comments, the Commission is 
convinced of the need for a general rule to establish standards of 
conduct governing relationships between Transmission Providers and 
their Energy Affiliates. With the creation of the Office of Market 
Oversight and Investigations (OMOI), the Commission is seeing the 
results of a more active enforcement program investigating unduly 
discriminatory practices. Recently, the Enforcement Division of OMOI 
has uncovered affiliate abuse activity that reveals that some 
Transmission Providers are giving their affiliates undue preferences 
and violating the standards of conduct.\16\ In addition, several audits 
of public utilities, conducted by the Division of Regulatory Audits, 
Office of the Executive Director, revealed violations of the standards 
of conduct. Specifically, Public Service Company of New Mexico (PNM) 
failed to comply with the independent functioning requirement.\17\ In 
addition, wholesale merchant function employees had access to computer 
terminals that allowed them to access transmission system information 
on the EMS (Energy Management System). More recently, an audit of 
Ameren Corporation revealed, among other things, that Ameren's 
transmission employees had engaged in non-public, off-OASIS 
communications with wholesale merchant function employees and other 
customers.\18\
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    \16\ See e.g., Transcontinental Gas Pipe Line Corp., 102 FERC ] 
61,302 (2003) (Transco); National Fuel Gas Supply Corp., 103 FERC ] 
61,192 (2003); Idaho Power Corp., 103 FERC ] 61,182 (2003) (Idaho 
Power); and Cleco Corp., 104 FERC ] 61,125 (2003) (Cleco).
    \17\ April 25, 2000 Letter from John Delaware, Deputy Director 
and Chief Accountant, to Public Service Company of New Mexico in 
Docket No. FA99-9-000.
    \18\ For example, merchant function employees called 
transmission function employees to request the most up-to-date, non-
firm ATC information to save time in submitting requests for 
transmission service via OASIS. See September 27, 2002 Letter from 
John Delaware, Deputy Executive Director and Chief Accountant to 
Ameren Corporation in Docket Nos. FA01-5-000, FA01-6-000 and FA01-7-
000.
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    15. Transmission Providers continue to have economic incentives to 
show undue preferences toward their Energy Affiliates. The Commission 
is adopting new rules to close loopholes in existing rules and to give 
Transmission Providers specific guidance on how to eliminate undue 
discrimination and undue preferences in the provision of interstate 
transmission services, consistent with the directions of the NGA and 
FPA. The Commission believes that the revised standards of conduct will 
ensure that Transmission Providers function independently of all their 
Energy Affiliates. Such separation is vital if the Commission is to 
ensure that Transmission Providers do not use their access to 
information about transmission to unfairly benefit their own or their 
affiliates' sales to the detriment of competitive markets.

IV. Section-by-Section Analysis of Final Rule

A. Applicability--Sec.  358.1

    16. The NOPR proposed that the standards of conduct would apply to 
all Transmission Providers, as discussed in the section below. The NOPR 
also stated that the standards of conduct would not apply to 
Commission-approved Regional Transmission Organizations (RTOs) that 
comply with the requirements of Order No. 2000.\19\ However, RTOs would 
be subject to the posting requirements in Sec. Sec.  37.5 and 37.6 of 
the Commission's regulations, 18 CFR 37.5 and 37.6 (2003). Finally, the 
NOPR provided that a public utility transmission owner that 
participates in a Commission-approved RTO and does not operate or 
control its transmission facilities may request an exemption from the 
standards of conduct. Following a review of the comments, and as 
discussed in more detail below, the Commission is adopting this section 
with modifications, as follows:
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    \19\ Regional Transmission Organizations, Order No. 2000, 65 FR 
809 (Jan. 6, 2000), FERC Stats. & Regs., Regulation Preambles July 
1999-December 2000 ] 31,089 (Dec. 20, 1999), order on reh'g, Order 
No. 2000-A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs., 
Regulation Preambles 1996-2000 ] 31,092 (Feb. 25, 2000), petitions 
for review pending sub nom., Public Utility District No. 1 of 
Snohomish County, Washington v. FERC (D.C. Cir., Apr. 24, 2000 (Nos. 
00-1174, et al.)).

    Sec.  358.1 Applicability.
    (a) This part applies to any interstate natural gas pipeline 
that transports gas for others pursuant to subpart A of Part 157 or 
subparts B or G of Part 284 of this chapter.
    (b) This part applies to any public utility that owns, operates, 
or controls transmission facilities used for the transmission of 
electric energy in interstate commerce.
    (c) This part does not apply to a Transmission Provider that is 
a Commission-approved Regional Transmission Organization (RTO) or 
Independent System Operator (ISO). If a public utility transmission 
owner participates in a Commission-approved RTO or ISO and does

[[Page 69138]]

not operate or control its transmission facilities and has no access 
to transmission or market information covered by Sec.  385.5(b), it 
may request an exemption from this part.
    (d) A Transmission Provider may file a request for an exemption 
from all or some of the requirements of this part for good cause.
i. Regional Transmission Organizations/Independent System Operators
    17. The NOPR proposed to exempt Commission-approved RTOs from the 
standards of conduct, while Transmission Providers that are members of 
RTOs would not automatically be exempt from them. The NOPR stated that 
depending on how an RTO is structured, there may be a continuing need 
to apply the standards of conduct to public utility Transmission 
Providers that are members of RTOs. While an RTO may administer or 
manage the transmission facilities, there are instances in which a 
transmission owner continues to physically control or operate the 
transmission facilities or control centers.\20\
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    \20\ See PJM Interconnection, L.L.C. and Allegheny Power, 96 
FERC ] 61,060 (2001), where the Commission permitted PJM-West's 
transmission assets to be operated through PJM's central control 
center, while the physical control of these transmission assets 
remained with the transmission owners.
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    18. EEI urged the Commission to be flexible to accommodate the 
varying operational arrangements that may be worked out between RTOs or 
ISOs and participating utilities. EEI, the Kentucky Commission, LG&E 
and KU urged the Commission to permit utilities that have joined an 
RTO, but still ``technically'' operate transmission facilities, to be 
eligible for exemptions from the rule. They argued that because the RTO 
``administratively'' controls the transmission facilities, concerns 
about improper transfer and use of transmission information are 
alleviated.
    19. BPA stated that it is unclear whether a Transmission Provider 
would be eligible for an exemption if, despite turning over operation 
and control, the Transmission Provider retains preferential access to 
unposted transmission information and requested that the Commission 
exempt a Transmission Provider even if it possesses minimal 
transmission information.
    20. BPA has highlighted one of the main concerns of the standards 
of conduct--information access. If a Transmission Provider operates 
transmission facilities, regardless of whether it belongs to an RTO/
ISO, it has the ability to provide an undue preference to an affiliate 
and has access to valuable transmission information. Unless the ISO or 
RTO has a control center and field employees dedicated to the operation 
and maintenance of all transmission facilities under its operation, a 
Transmission Provider may be responsible for the operation of the 
transmission assets (under the direction of the ISO or RTO) and, more 
importantly, have direct access to transmission information.\21\ 
Participation in an ISO or RTO does not necessarily prevent a 
Transmission Provider from sharing information with its affiliates 
preferentially or preferentially operating facilities for the benefit 
of its Energy Affiliates.
---------------------------------------------------------------------------

    \21\ RTOs and ISOs centrally monitor the transmission system, 
approve transmission service requests through OASIS, and direct 
member Transmission Providers in the operation of the transmission 
assets. RTOs, ISOs and member Transmission Providers share 
transmission information to facilitate safe and reliable operation 
of the transmission system.
---------------------------------------------------------------------------

    21. NYISO requested clarification that it would not be subject to 
the rule. The Commission clarifies that NYISO would not be subject to 
the rule.
    22. LILCO urged the Commission to require RTOs to be subject to the 
requirement to implement tariffs in a non-discriminatory fashion under 
Sec.  385.5(c) of the Commission's regulations. Similarly, MID and the 
Illinois Commission requested that the Commission require RTOs and 
comparable entities (ISOs) to comply with the standards of conduct. MID 
claimed that RTOs and ISOs often procure Ancillary Services and Energy 
to meet their customers' needs and such purchases can have a 
significant effect on the market.
    23. The Commission will not require ISOs or RTOs to be subject to 
the requirements of the standards of conduct as these transmission 
organizations have been designed and approved by the Commission to 
eliminate unduly preferential practices. Indeed, one of the many 
reasons for their creation was to provide a remedy to undue 
discrimination rather than relying on the standards of conduct. If 
transmission customers observe that an ISO or RTO is not complying with 
its Commission-approved tariff or behaving in an unduly discriminatory 
fashion, it may file a complaint with the Commission, or contact the 
Commission's Enforcement Hotline or the ISO's or RTO's market 
monitoring unit (MMU).
ii. Non-Public Utilities
    24. The Kentucky Commission, LPPC, Nebraska Public Power District 
and SMUD urged the Commission to clarify that the standards of conduct 
will apply to non-public utilities, by virtue of the reciprocity 
provisions of Order No. 888, in the same manner as the current 
standards of conduct apply to non-public utilities. Sempra urged the 
Commission to clarify that public power agencies or non-jurisdictional 
Transmission Providers that get access to the jurisdictional grid 
through reciprocity tariffs under Order No. 888 should be required to 
comply with the standards of conduct to eliminate the preferences they 
provide to their own merchant operations. The Commission agrees and is 
amending the proposed regulation to make it clearer which entities are 
subject to the requirements of the standards of conduct. If a non-
public utility voluntarily files a reciprocity open access tariff under 
Order No. 888, it shall comply with the Final Rule.
iii. Cooperatives and Small Pipelines and Utilities
    25. Several commenters, including Alabama Electric Coop., Arkansas 
Electric Coop., Connexus, Seminole Electric Coop., Old Dominion, 
Midwest Energy, National Rural Electric Coop. Assoc., Southwest 
Transmission Coop., East Texas Electric Coop., Wolverine Power Supply 
Coop., Energy East Companies, Empire Electric District, Wells Rural 
Electric Coop. and Rural Utilities Service of the Department of 
Agriculture, asked the Commission to clarify that small utilities or 
cooperatives (coops) that obtained waivers of the standards of conduct 
under Order No. 889 would automatically be exempt from the provisions 
of the Final Rule.\22\ Along the same lines, B-R Pipeline, Distrigas of 
Massachusetts, Hampshire Storage, NiSource, SCG, USG, and U.S. Gypsum 
and Washington Gas Light urged the Commission to categorically exempt 
small pipelines or those that were built to serve one or several 
customers. NRECA requested that the Commission incorporate waiver 
provisions in the standards of conduct and continue the effectiveness 
of previously issued waivers.
---------------------------------------------------------------------------

    \22\ Black Creek Hydro, Inc. 77 FERC ] 61,232 (1996).
---------------------------------------------------------------------------

    26. The Industrials recommended that the regulatory text contain a 
specific exemption provision. Dynegy, on the other hand, urges the 
Commission not to create broad categorical exemptions from the rule 
but, rather, to evaluate specific claims of hardship on a case-by-case 
basis.
    27. The Commission will continue the exemptions and partial waivers 
for the entities that have previously received

[[Page 69139]]

exemptions and partial waivers under Order No. 889 or Order No. 497. 
However, an exemption may be revoked if, after an investigation or 
audit, the Commission determines that the entity no longer qualifies 
for the exemption or the entity has abused the exemption.
    28. In addition, Transmission Providers that did not previously 
obtain an exemption may request an exemption from all or some of the 
requirements of Part 358. RUS and NRECA requested clarification that 
generation and transmission cooperatives and their distribution 
cooperatives will not be subject to the Final Rule. The Commission 
clarifies that it will treat generation and transmission cooperatives 
consistent with the policies established under Order No. 888.\23\
---------------------------------------------------------------------------

    \23\ Order No. 888-A at 30,666.
---------------------------------------------------------------------------

iv. Delay of Applicability
    29. Alliance urges the Commission to allow Transmission Providers 
to delay implementing the Final Rule while the Commission reviews a 
Transmission Provider's request for an exemption or waiver from the 
standards of conduct. This is inconsistent with Commission policy to 
implement rules after reasonable notice; however, apart from the 
information filing required in Sec.  358.5(e)(1), the Commission is 
giving Transmission Providers until June 1, 2004 to implement the 
requirements of the Final Rule. This implementation date should afford 
Transmission Providers time to fashion requests for waivers or 
exemptions.

B. General Principles--Sec.  358.2

    30. The NOPR proposed the following general principles for the 
standards of conduct: (1) A Transmission Providers' employees engaged 
in transmission system operations must function independently from the 
Transmission Providers' sales or marketing employees and from any 
employees of their Energy Affiliates,\24\ and (2) a Transmission 
Provider must treat all transmission customers, affiliated and non-
affiliated, on a non-discriminatory basis, and cannot operate its 
transmission system to benefit preferentially an Energy Affiliate or 
Marketing Affiliate.
---------------------------------------------------------------------------

    \24\ As noted earlier, when the Commission references employees, 
it includes contractors, consultants or agents.
---------------------------------------------------------------------------

    31. No comments were received on this section. Therefore, the 
Commission is adopting these principles as proposed in the NOPR. These 
principles are based on Section 4 of the NGA and Section 205 of the 
FPA, which prohibit a natural gas company or a public utility, 
respectively, from making or granting an undue preference with respect 
to transportation/transmission or sale subject to the Commission's 
jurisdiction.

C. Definitions--Sec.  358.3

    32. As proposed in the NOPR, Sec.  358.3 combines and revises the 
definitions that were previously contained in Sec. Sec.  37.3 and 161.2 
of the Commission's regulations, and adds, as appropriate, definitions 
for new terms. The Commission is modifying and adopting the definitions 
proposed in the NOPR, as discussed below.
i. Definition of a Transmission Provider
    33. The NOPR defined a Transmission Provider as:

(1) any public utility that owns, operates or controls facilities 
used for transmission of electric energy in interstate commerce; or 
(2) any interstate natural gas pipeline that transports gas for 
others pursuant to subpart A or Part 157 or subparts B or G of Part 
284.

    34. The Major Issues Analysis did not address the definition of 
Transmission Provider. The Commission has reviewed the commenters' 
recommendations, but, as discussed in more detail below, is adopting 
the definition of Transmission Provider as proposed.
    35. The American Forest and Paper Association (AFPA) urged the 
Commission to clarify that the definition of a Transmission Provider 
only includes ``any public utility that owns, operates or controls 
transmission facilities used for the transmission of electric energy in 
interstate commerce and is subject to the open access requirements of 
Order No. 888.'' It requested the Commission to clarify that 
Transmission Providers do not include industrials that own some 
discrete transmission facilities used solely for the purpose of 
interconnecting with the electrical grid. Along the same lines, the 
Industrials requested clarification that the definition of Transmission 
Provider will not apply to industrials with self-generation. The 
Industrials were concerned that the definition would include wholesale 
sellers such as power marketers and merchant generators with market-
based-rate authority and qualifying facilities (QF) because these 
entities self provide ancillary services or that selling ancillary 
services would be considered providing ``transmission service.'' 
Industrials claimed that any generator directly interconnected with an 
investor-owned transmission system would be deemed a Transmission 
Provider under the proposed definition. Finally, the Industrials were 
concerned that owning an interconnect could be interpreted as ownership 
of a transmission facility. Similarly, Calpine argued that independent 
generators connected to jurisdictional transmission facilities that do 
not own transmission facilities, must be excluded from the definition 
of Transmission Provider.
    36. The revision proposed by AFPA is unnecessary. Consistent with 
our implementation of Order No 888, Industrials that merely 
interconnect with the interstate transmission grid and sell power would 
not be a Transmission Provider as used in the Final Rule. Nor is self-
generation considered transmission in interstate commerce.
ii. Definition of an Energy Affiliate
    37. The NOPR's proposed definition of Energy Affiliate yielded the 
greatest volume of comments. The NOPR defined the term Energy Affiliate 
broadly, as:

an affiliate of a Transmission Provider that (1) engages in or is 
involved in transmission transactions; or (2) manages or controls 
transmission capacity of a Transmission Provider; or (3) buys, 
sells, trades or administers natural gas or electric energy; or (4) 
engages in financial transactions relating to the sale or 
transmission of natural gas or electric energy.

    38. 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 
cover more than the marketers and merchants covered by the existing 
rules. A narrow definition of Energy Affiliates will not specifically 
prohibit the transmission function from sharing 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 will limit some of the 
efficiencies gained from certain corporate structures. This language is 
also intended to cover affiliates that are indirectly involved in 
transportation, such as asset managers or agents.
    39. The definition in the NOPR proposed to govern the relationship 
between the Transmission Provider, and, among others, affiliated 
producers, gatherers, local distribution companies (LDCs) and 
processors. Virtually all of the industry groups argued that the 
definition of Energy Affiliates is overly broad, and suggested that 
some narrowing of the definition would be appropriate.
    40. In response to numerous comments, the Major Issues Analysis 
recommended various changes to the definition of Energy Affiliate and 
provided draft regulatory text. Follow-up comments recommended further

[[Page 69140]]

changes, which are grouped into several categories. As discussed below, 
the Commission is revising the definition of Energy Affiliate as 
follows:

    (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.
    (5) An energy affiliate does not include:
    (i) A foreign affiliate that does not participate in U.S. energy 
markets;
    (ii) An affiliated Transmission Provider; or
    (iii) A holding, parent or service company that does not engage 
in energy or natural gas commodity transactions or is not involved 
in transmission transactions in U.S. energy markets; or
    (iv) An affiliate that purchases natural gas or energy solely 
for its own consumption and does not use an affiliated Transmission 
Provider for transmission of natural gas or energy; or
    (v) A state-regulated local distribution company that does not 
make any off-system sales.
1. LDCs
    41. As proposed by the NOPR, Transmission Providers would be 
required to apply the standards of conduct to their relationships with 
their affiliated LDCs by eliminating the exemption of Order No. 497, 
which permitted natural gas pipelines to share employees and 
information between their transmission businesses and their affiliated 
LDCs that do not make off-system sales.\25\
---------------------------------------------------------------------------

    \25\ 18 CFR 161.2(c) (2003).
---------------------------------------------------------------------------

    42. Fourteen entities, including producers and unaffiliated gas 
marketers, NASUCA, AIA, the Industrials and the FTC 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; (2) the current exemption is a loophole that 
permits LDCs 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. The Connecticut Commission argued that giving LDCs an 
unfair competitive advantage can only hurt the long-term 
competitiveness of the market.
    43. However, thirty-four commenters, primarily interstate natural 
gas pipelines and affiliated marketers, INGAA and AGA opposed applying 
the standards of conduct to a Transmission Provider's relationship with 
its affiliated LDCs. These commenters recommended that the Commission 
retain the current exception in Order No. 497 for LDCs that do not 
engage in off-system sales. They argued that: (1) Section 1 of the NGA 
makes distribution subject to regulation by the states and not FERC; 
(2) there is no evidence or market analysis to support eliminating the 
exemption granted under Order No. 497; (3) to require such separation 
would cause unnecessary duplication of employees and gas control 
facilities, resulting in additional costs to customers; \26\ and (4) 
limits on communications with LDCs would impair reliability, and the 
``emergency'' exception in the proposed rule is insufficient.
---------------------------------------------------------------------------

    \26\ A discussion of the commenters' concerns regarding 
additional costs is included in the Independent Functioning 
discussion, below.
---------------------------------------------------------------------------

    44. The Commission has decided to retain the existing exemption for 
LDCs that do not make off-system sales. Specifically, the definition of 
Energy Affiliates will exclude those LDCs that are regulated by the 
state, provide solely retail service and engage in no off-system sales. 
However, the Commission notes that an affiliated LDC that engages in 
any off-system sale is an Energy Affiliate, and subject to the 
standards of conduct. An off-system sale would include a situation in 
which the affiliated LDC had contractually committed for more gas than 
it needed to serve its on-system customers and sold that gas off its 
system, e.g., at a hub or on the spot market. Moreover, affiliated LDCs 
are prohibited from being conduits for improperly sharing information 
covered by the Final Rule. We also remind Transmission Providers that 
they are required to comply with the undue discrimination and undue 
preferences provisions of the NGA vis-[agrave]-vis their behavior with 
their affiliated LDCs and will be subject to greater scrutiny 
prospectively.
2. Affiliates Not Engaged or Involved in Transmission Transactions, 
e.g., Trading and Financial Affiliates
    45. Thirteen entities, including Ad Hoc Marketers, INGAA and 
interstate natural gas pipelines, opposed 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 urged the Commission to narrow the 
definition of Energy Affiliates to apply only to affiliates that are 
involved in transportation on affiliated Transmission Providers' 
systems. Similarly, several commenters, including Ad Hoc Marketers, 
INGAA, Gulf South, and four public utility Transmission Providers 
requested that the Commission exclude from the definition of Energy 
Affiliates entities that trade power or are engaged in financial 
transactions. Gulf South argued that gas futures contracts are traded 
only for delivery in the future and are unrelated to the current spot 
market price of gas.
    46. The Commission disagrees with the commenters. Although an 
affiliate may not be directly involved in transmission transactions, 
the transmission markets and energy-related financial markets are so 
interconnected that a Transmission Provider does have the ability to 
operate its transmission system in a manner that gives a trading 
affiliate an undue preference or provides the trading affiliate with 
unduly preferential information. For example, a transmission constraint 
directly impacts the value of the commodity being transported. 
Preferential access to information about such a constraint could 
provide a significant benefit to an affiliate engaged in speculative 
trading of the commodity and cause the price of the commodity to rise 
to the detriment of the market, even if the trader is not using the 
affiliated Transmission Provider.
    47. Entities involved in the trading of power or gas or in 
financial transactions related to the sale, purchase or transmission of 
power or gas are an integral part of the financial and transmission 
markets. The monthly volume of futures contracts on the NYMEX has grown 
from approximately 170,000 per month in January 1982 to 7,000,000 per 
month in January 2000.\27\ As seen in the chart below, the financial 
natural gas (futures) markets and the physical (or spot) markets are 
closely linked. For example, NYMEX futures prices strongly correlate 
with transactions to buy and sell natural gas at Henry Hub, the 
physical delivery point specified in the NYMEX futures contracts.\28\
---------------------------------------------------------------------------

    \27\ ``Derivatives and Risk Management in the Petroleum, Natural 
Gas and Electricity Industries,'' www.eia.doe.gov/oiaf/sesrviceerpt/derivative/index (Oct. 24, 2003).
    \28\ See, e.g., Fact-Finding Investigation of Potential 
Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2-
000, Final Report on Price Manipulation in Western Market, March 
2003 (Chapter IX at pp. IX-2 to IX-9).
---------------------------------------------------------------------------

BILLING CODE 6717-01-P

[[Page 69141]]

[GRAPHIC] [TIFF OMITTED] TR11DE03.004

BILLING CODE 6717-01-C
    48. The financial natural gas markets are so interconnected with 
the natural gas physical markets and the transmission market, 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. Therefore, the definition of Energy Affiliates in the 
Final Rule incorporates trading and financial affiliates to the extent 
they are engaged in transactions in the U.S. energy or gas commodity or 
transmission markets.
3. Affiliated Transmission Providers
    49. Twenty-seven entities, the majority of which are in the 
interstate natural 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 argued 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 pointed out that putting 
limitations on the relationship between affiliated Transmission 
Providers would be inconsistent with recent Commission policy. They 
cited the Commission's orders that required Dominion Transmission, Inc. 
to apply the gas standards of conduct to its Energy Affiliates as a 
merger condition.\29\ 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.
---------------------------------------------------------------------------

    \29\ Dominion Resources, Inc. and Consolidated Natural Gas Co., 
89 FERC ] 61,162 (1999), order on compliance filing, 91 FERC ] 
61,140 (2000), order denying reh'g, 93 FERC ] 61,214 (2000), vacated 
and remanded, (D.C. Cir. No. 01-1169 Slip. Op. issued on April 19, 
2002), order on remand pending.
---------------------------------------------------------------------------

    50. The Major Issues Analysis proposed an exemption that would 
exclude FERC-jurisdictional Transmission Providers from the definition 
of Energy Affiliate and provided draft regulatory text for comment. 
Numerous follow-up comments supported this proposed revision, including 
those filed Cinergy, Entergy, First Energy, NiSource, INGAA, and KM 
Interstate.
    51. The Commission agrees; FERC-jurisdictional interstate natural 
gas pipelines coordinating transactions with affiliated FERC-
jurisdictional interstate natural gas pipelines should be permitted to 
share transmission function employees and information, since both are 
bound by the standards of conduct requirements and are prohibited from 
sharing transmission, customer or market information with their Energy 
Affiliates. Similarly, a public utility Transmission Provider

[[Page 69142]]

may share transmission function employees and information with other 
public utility Transmission Providers. Nor does it appear that 
communications between FERC-regulated gas Transmission Providers and 
FERC-regulated public utility Transmission Providers is a problem for 
the same reason. Moreover, the focus of the standards of conduct is to 
prevent transmission market power from extending to other products or 
services, so Transmission Provider to Transmission Provider 
communications should not violate the purpose of the rule. The 
definition of energy affiliates, therefore, is clarified to exclude 
affiliated Transmission Providers. Many commenters expressed support 
for the language proposed in the Major Issues Analysis, and we will 
adopt it.
4. Holding or Service Companies
    52. Several commenters, including INGAA, Dominion, EEI, NiSource, 
and Williams, argued 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 argued 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.
    53. As discussed in the Major Issues Analysis, holding and service 
companies typically do not participate in the energy or transmission 
markets, and if they do not participate in those markets, they would 
not be considered Energy Affiliates. As discussed above, affiliates 
engaged in financial transactions that concern energy or natural gas 
commodity or transmission markets will be considered Energy Affiliates. 
Therefore, the Major Issues Analysis recommended that the Commission 
adopt a definition of Energy Affiliate that excludes holding or service 
companies that do not engage in and are not involved in energy or 
natural gas commodity or transmission transactions. The Major Issues 
Analysis also recommended that the Commission prohibit any affiliate, 
including holding companies or others exempt from the standards of 
conduct, from acting as a conduit for improperly sharing information.
    54. Supplemental comments in response to the language proposed by 
the Major Issues Analysis were generally supportive of the holding 
company exception, including those filed by DTE, Gulf South, National 
Grid, and PacifiCorp and PSE&G. However, several commenters expressed 
concern that the revision recommended in the Major Issues Analysis was 
insufficient. They claimed that, even with the narrowing proposed in 
the Major Issues Analysis, they could not comply with the standards of 
conduct and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which 
requires senior corporate executives to be fully informed about the 
financial conditions of their corporations and their subsidiaries.\30\ 
As noted by various commenters, including EEI and Duke, a parent 
company with an electric utility or gas distribution system as an 
operating division would not qualify for the exception proposed by the 
Major Issues Analysis. They claimed that separating the management or 
forming a holding company would require corporate reorganization, could 
be costly, and might trigger the restrictive requirements of the Public 
Utility Holding Company Act (PUHCA).\31\
---------------------------------------------------------------------------

    \30\ See Section 302 of the Sarbanes-Oxley Act, Pub. L. 107-204, 
Sec. 9, 116 Stat. 745, 777 (2002).
    \31\ Public Utility Holding Company Act of 1935, 15 U.S.C. 79a 
et seq. (2000).
---------------------------------------------------------------------------

    55. For example, Duke argued that complying with the Final Rule and 
the Sarbanes-Oxley Act would be difficult because the Duke Power 
Division of Duke Energy, which engages in transmission and wholesale 
and bundled electric sales, would be considered an Energy Affiliate of 
its interstate natural gas pipeline subsidiaries, and the pipeline 
subsidiaries would be prohibited from sharing information with the 
senior management of its Energy Affiliate/parent company, Duke Energy.
    56. The Major Issues Analysis specifically excluded holding and 
service companies, but did not mention ``parent companies.'' Duke 
encouraged the Commission to extend the holding company exemption to 
apply to parent companies that may not fall within the legal definition 
of ``holding company,'' as set forth by PUHCA. NGSA, APGA and IPAA all 
support Duke's proposal to the extent that the parent companies are not 
involved in energy transactions. The Commission is adopting this 
recommendation and will include ``parent'' companies that are not 
involved in energy or transmission transactions in the ``holding 
company'' exception from the definition of Energy Affiliate.
    57. Several commenters were also concerned about Transmission 
Providers with service corporation subsidiaries that employ virtually 
all corporate employees, including those who do work for Transmission 
Providers and Energy Affiliates. The Commission clarifies that if a 
Transmission Provider utilizes a service corporation or other 
subsidiary as the mechanism for employment, all the employees assigned, 
dedicated or working on behalf of a particular entity, e.g., a 
Transmission Provider or Energy Affiliate, are subject to the standards 
of conduct requirements as if they were directly employed by the 
Transmission Provider or Energy Affiliate.
    58. In addition, in follow-up comments, National Grid encouraged 
the Commission to clarify that the holding company exclusion extends to 
companies engaged or involved in markets not related to energy, power 
or transmission. The Commission so clarifies.
5. Foreign Affiliates
    59. Thirteen commenters, including INGAA, six interstate natural 
gas pipelines, EEI, five public utility Transmission Providers and 
Shell objected to the proposed definition of Energy Affiliates to the 
extent that it included foreign affiliates. They are concerned that 
Transmission Providers will be required to treat affiliates in Europe, 
South America and the Caribbean as Energy Affiliates. The Major Issues 
Analysis urged the Commission to exclude foreign affiliates and revised 
the draft regulatory text accordingly. Virtually all follow-up comments 
supported the staff's proposal.
    60. The Commission sees no reason to be concerned about the 
possibility that a Transmission Provider will extend its market power 
by giving foreign affiliates undue preferences where the foreign 
affiliates do not participate in energy markets in the United States. 
The Final Rule clarifies that the definition of Energy Affiliates 
excludes foreign affiliates that do not participate in the United 
States (U.S.) energy or transmission markets.
    61. In addition, where a foreign affiliate has an ownership 
interest in a jurisdictional Transmission Provider, that affiliate is, 
by virtue of its ownership interest, participating in the U.S. energy 
or transmission markets. For example, a joint venture U.S.-Canadian 
pipeline would have to treat as Energy Affiliates 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.
    62. On a slightly different note, several pipelines including 
Alliance, Maritimes and Northeast Pipeline, as well as Duke Energy, 
Canadian Association of Petroleum Producers and the Alberta Department 
of Energy,

[[Page 69143]]

expressed concerned about affiliated pipelines that cross the U.S. and 
Canadian borders. These companies argued that under the exception 
proposed by the Major Issues Analysis, affiliated pipelines that cross 
or interconnect at the U.S. and Canadian borders would fall within the 
definition of Energy Affiliate. The commenters argued that they should 
be treated as affiliated pipelines because their operations are closely 
coordinated and transmission services are shared even though they cross 
the international border. The Commission agrees and will permit these 
companies to share their transmission function activities and 
coordinate along both sides of the border as long as neither of the 
Transmission Providers shares employees or information with any of its 
Marketing or Energy Affiliates.
6. Affiliates Buying Power for Themselves
    63. Several commenters, including Dominion, Calpine and KM, 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 an affiliated entity that 
is purchasing power for its own consumption, such as a communications 
affiliate that is purchasing power to heat its office building. They 
argued that under the NOPR, if an affiliate is simply ``buying'' power 
for its own energy 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.
    64. In response to these comments, the Major Issues Analysis 
recommended that the Commission exclude an affiliate of a Transmission 
Provider that is purchasing electricity or natural gas for its own 
consumption and is not using an affiliated Transmission Provider for 
transmission.
    65. 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. Therefore, the Commission will 
adopt this recommendation in the Final Rule. However, this exception is 
not intended to create a loophole that circumvents the intent of rule, 
and does not apply to Energy Affiliates that use natural gas or power 
to produce another source of energy, e.g., generation affiliates.
7. Producers, Gatherers, and Processors
    66. The NOPR defined Energy Affiliate to include producers, 
gatherers and processors. The NOPR states that 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. NGSA stated 
that upstream services and transportation services are frequently 
offered as a single package by pipelines or their affiliates, which 
allows a pipeline to leverage its market power in the transportation 
market to gain an advantage in the upstream market. The comments 
regarding affiliated producers, gatherers, and processors were mostly 
included in the comments about affiliated LDCs. Commenters, including 
El Paso Energy Partners, Shell Offshore and Shell Gas, argued that: (1) 
The Commission does not have jurisdiction over producers, gatherers or 
intrastate pipelines; (2) there is no evidence to support eliminating 
the exemption granted under Order No. 497; (3) to require separation 
would cause unnecessary duplication of employees and gas control 
facilities, resulting in additional costs to customers; \32\ and (4) 
restrictions on communication would impair reliability.
---------------------------------------------------------------------------

    \32\ A discussion of the commenters' concerns regarding 
additional costs is included in the Independent Functioning 
discussion, below.
---------------------------------------------------------------------------

    67. The Commission is adopting the proposed regulation. The 
Commission is not asserting jurisdiction over the producers, gatherers 
or processors. 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 behavior of the 
Transmission Provider. Staff's review of the October 2003 Index of 
Customers indicates that 14 interstate natural gas pipelines transport 
gas for their production and gathering affiliates, which hold an 
average of 46% of the affiliated pipelines' capacity. But, unlike LDCs, 
producers, gatherers and processors are not generally subject to state 
regulation.
    68. Several commenters argue that Section 1 of the NGA makes 
production and gathering subject to regulation by the states and not 
the Commission. The Commission is not asserting jurisdiction over 
producers, gatherers or processors. The Commission has ample authority 
to ensure that the Transmission Provider treats all customers, 
affiliated and non-affiliated, on a non-discriminatory basis by 
regulating the conduct of the transmission provider's interactions with 
affiliated producers, gatherers or processors.
    69. The commenters voiced practical concerns about how the proposed 
standards of conduct would impact communications between a Transmission 
Provider and affiliated producers, gatherers, and processors. During 
the May 21 Conference there was much discussion about the possibility 
that expanding the standards of conduct would harm deepwater operations 
and future off-shore development efforts. Several participants stated 
that competing producers had worked cooperatively on affiliated 
pipelines to develop deepwater gas reserves. On the other hand, BP 
argued that Transmission Providers should not be permitted to share any 
information regarding a shipper's use of the pipeline or information 
regarding the operations or customers of non-affiliated gatherers that 
compete with the affiliate. BP argued that the definition of Energy 
Affiliate should not include affiliate gas processing plants. However, 
as discussed in more detail below, the Commission is permitting 
transmission providers to share crucial operational information with 
certain of its Energy Affiliates.
    70. Commenters also argued that there was no evidence that 
pipelines had unduly favored their producers, gatherers or processing 
affiliates. However, in a recent example, Transcontinental Gas Pipe 
Line Corporation and its gathering affiliate, Williams Field Services 
Company, acted as one entity for purposes of gathering and transporting 
natural gas in interstate commerce in a monopolistic fashion and abused 
their market power.\33\
---------------------------------------------------------------------------

    \33\ Shell Offshore Inc. v. Transcontinental Gas Pipe Line 
Corp., et al., 100 FERC ] 61,254 (2002), order on reh'g, 103 FERC ] 
61,177 (2003), appeal filed June 27, 2003 (D.C. Cir. No. 03-1179).
---------------------------------------------------------------------------

    71. The Commission's focus is to ensure comparability of service. 
To retain a loophole that permits the transmission provider to share 
employees or give its affiliated producers, gatherers or processors 
preferential information is inconsistent with the Commission's goal of 
non-discriminatory interstate transmission service. Producers that are 
selling energy are competing with other non-affiliated shippers for 
access to the pipelines' transmission systems. Whether a producer is 
selling gas from its own production or from the production of another, 
it is competing

[[Page 69144]]

with non-affiliates for access to the pipeline's transportation system. 
We conclude that providing a producer, gatherer or processor with 
preferential access to the pipeline's transmission system or 
information concerning the pipeline's system is inconsistent with NGA 
Section 4's prohibition against undue preferences or discrimination in 
the provision of interstate transportation services; accordingly, this 
Final Rule will prevent such conduct.
8. Intrastate and Hinshaw Pipelines
    72. Although the NOPR did not specifically address intrastate or 
Hinshaw pipelines,\34\ the definition of Energy Affiliate proposed in 
the NOPR would include intrastate and Hinshaw pipelines. Several 
commenters, including the Association of Texas Intrastate Natural Gas 
Pipelines, SCE&G and CMS, opposed including intrastate and Hinshaw 
pipelines in the definition of Energy Affiliate and urged the 
Commission to retain the current exemption at Sec.  161.2(c)(3) of the 
Commission's regulations, 18 CFR 161.2(c)(3) (2003), that permits 
intrastate pipelines to make on-system sales without triggering the 
standards of conduct. The arguments raised mirror those raised with 
respect to producers, gatherers or processors, which currently enjoy 
the same exemption. The Commission's definition of Energy Affiliate in 
the Final Rule will include intrastate and Hinshaw pipelines. Providing 
an intrastate pipeline or Hinshaw pipeline preferential access to a 
transmission system or information concerning a transmission system 
would be inconsistent with NGA Section 4's prohibitions against undue 
preferences or discrimination in the provision of interstate 
transportation service.
---------------------------------------------------------------------------

    \34\ Hinshaw pipelines are exempt from Commission regulation 
under the NGA, but they may have limited jurisdiction certificates 
to provide interstate transportation services like an intrastate 
pipeline under the Natural Gas Policy Act.
---------------------------------------------------------------------------

iii. Definition of Marketing, Sales or Brokering
    73. The NOPR proposed to define marketing, sales or brokering as:

    A sale for resale of natural gas or electric energy in 
interstate commerce. Sales and marketing employee or unit includes: 
(1) Any pipeline's sales operating unit, to the extent provided in 
Sec.  284.286 of this chapter, and (2) an electric transmission 
provider's sales unit, including those employees that engage in 
wholesale merchant sales or bundled retail sales.\35\
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    \35\ The term bundled retail sales employees, means those 
employees of the public utility Transmission Provider or its 
affiliates who market or sell the bundled electric energy product 
(including generation, transmission, and distribution) delivered to 
the transmission provider's firm and non-firm retail customers.

    74. The NOPR proposed that ``marketing'' would include a public 
utility Transmission Provider's sales unit, including all employees 
that engage in wholesale merchant sales or bundled retail sales 
functions.\36\ This would eliminate the exemption of Order No. 889, 
which permitted a public utility Transmission Provider to use the same 
employees for its interstate transmission business and its bundled 
retail sales business.
---------------------------------------------------------------------------

    \36\ Section 284.286 of the Commission's regulations currently 
requires an interstate natural gas 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. See 18 CFR 284.286 (2003).
---------------------------------------------------------------------------

    75. Fourteen commenters, including the FTC, Cooperatives, Calpine, 
ELCON, EPSA, NEMA, Transmission Access Policy Group, Transmission 
Group, several state commissions, and AAI supported the NOPR's proposal 
to treat retail function employees as marketing affiliate employees. 
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. In addition, they argued that: (1) The 
Commission must ensure that transmission service is not unduly 
discriminatory; (2) the 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.
    76. However, thirty-six commenters, including EEI, NASUCA, NARUC, 
many public utility Transmission Providers, several cooperatives and 
ten state commissions, opposed treating retail function employees as 
Marketing Affiliate employees. Many commenters questioned the need to 
change the standards of conduct for public utility Transmission 
Providers when the current rules appear to be adequate.\37\ 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 local distribution, 
intrastate commerce or retail consumption; (2) there are no competitive 
concerns because retail service is state regulated; (3) the 
Transmission Provider may not be able to maintain reliability and would 
have difficulty in coordinating generation dispatch; (4) some 
Transmission Providers could not fulfill their state-mandated 
obligations to be providers of last resort; (5) the Transmission 
Provider would not be able to engage in integrated resource planning; 
and (6) separating employees engaged in the bundled sales function for 
retail load from interstate transmission employees would cause 
expensive duplication of staff and facilities, without any 
countervailing competitive benefit.\38\
---------------------------------------------------------------------------

    \37\ The Commission does not have detailed data on the amount of 
transmission used for retail electric service.
    \38\ A discussion of the commenters' concerns regarding 
additional costs is included in the Independent Functioning 
discussion, below.
---------------------------------------------------------------------------

    77. The Major Issues Analysis recommended retaining the proposal in 
the NOPR. Many commenters submitted follow-up comments opposing the 
Staff's recommendation. In contrast with some commenters' statements, 
there have been several recent examples of affiliate abuse in the 
electric industry. In 2002, Idaho Power favored its wholesale merchant 
function and marketing affiliate by accepting their representations 
that certain non-firm transmission requests were necessary to serve 
native load, when in fact they were not.\39\ More recently, the 
Commission approved a settlement with Cleco Corp. for its 1999-2002 
violations of the standards of conduct, including, among other things, 
sharing of a trading floor by employees engaged in wholesale merchant 
functions and in retail sales functions.\40\
---------------------------------------------------------------------------

    \39\ 103 FERC ] 61,182 (2003).
    \40\ 104 FERC ] 61,125 (2003).
---------------------------------------------------------------------------

    78. The Commission has ample authority to regulate the behavior of 
the public utility that owns, operates or controls transmission in 
interstate commerce and its relationship with any Energy Affiliates. 
Nevertheless, the Final Rule will retain the exemption of Order No. 
889, which permits a public utility Transmission Provider to use the 
same employees for its interstate transmission business and its bundled 
retail sales business. However, as stated in Order No. 888-A, ``if 
unbundled retail transmission in interstate commerce occurs voluntarily 
by a public utility or as a result of a state retail access program, 
the Commission has exclusive jurisdiction over the rates, terms and 
conditions of such transmission.\41\ The standards of conduct will 
apply to merchant employees who are engaged in sales or purchase of 
power that will be resold at retail pursuant to state retail wheeling

[[Page 69145]]

programs.\42\ The Commission is also clarifying, however, that if a 
retail sales function employee engages in any wholesale sales, such as 
selling excess generation to a non-retail customer, the retail function 
will be treated as a wholesale merchant function. It is not appropriate 
for an entity that participates in the wholesale market to obtain an 
undue preference when competing with non-affiliates for transmission 
capacity.
---------------------------------------------------------------------------

    \41\ FERC Stats. & Regs., Regulation Preambles January 1991-June 
1996 ] 31,036 at 51,781.
    \42\ American Electric Power Service Corporation, 81 FERC ] 
61,332 (1997).
---------------------------------------------------------------------------

    79. Under the Final Rule, the definition of Marketing, Sales and 
Brokering includes: A sale for resale of natural gas or electric energy 
in interstate commerce. Sales and marketing employee or unit includes: 
(1) any interstate natural gas pipeline's sales operating unit, to the 
extent provided in Sec.  284.286 of this chapter, and (2) a public 
utility Transmission Provider's energy sales unit, unless such unit 
engages solely in bundled retail sales. If a retail sales unit engages 
in any wholesale sales, the separation of functions requirement will 
apply.
iv. Definition of a Transmission Function Employee
    80. Although the NOPR did not provide a definition for the term 
``Transmission Function employee,'' many commenters, including Duke, 
urged the Commission to adopt a definition to provide additional 
clarity to the regulations. Following the May 21 Conference, several 
commenters provided draft regulatory text. In response to the comments, 
the Commission will add a definition for the term ``Transmission 
Function'' to the Final Rule, as follows:

    Transmission Function employee means an employee, contractor, 
consultant or agent of a Transmission Provider who conducts 
transmission system operations or reliability functions, including, 
but not limited to, those who are engaged in day-to-day duties and 
responsibilities for planning, directing, organizing or carrying out 
transmission-related operations.
v. Definition of a Reseller
    81. The NOPR defined a ``reseller'' as any transmission customer 
who offers to sell transmission capacity it has purchased. As noted by 
Duke, Carolina Power and Light, FPA and several other commenters, the 
definition of ``reseller'' was used in the NOPR, but was not used in 
the rest of the regulatory text. They request that the term be deleted. 
The Commission agrees and is deleting the term from the Final Rule.

D. Independent Functioning--Sec.  358.4

    82. The NOPR proposed Sec.  358.4, as follows:

    (a) Separation of functions.
    (1) Except in emergency circumstances affecting system 
reliability, the transmission function employees of the Transmission 
Provider must function independently of the Transmission Provider's 
marketing or sales employees and its energy affiliates' employees.
    (2) Notwithstanding any other provisions in this section, in 
emergency circumstances affecting system reliability, Transmission 
Providers may take whatever steps are necessary to keep the system 
in operation. Transmission Providers must report to the Commission 
and post on the OASIS or Internet website, as applicable, each 
emergency that resulted in any deviation from the standards of 
conduct, within 24 hours of such deviation.
    (3) The Transmission Provider is prohibited from permitting its 
sales and marketing employees or employees of its energy affiliates 
from: (i) conducting transmission system operations or reliability 
functions; and (ii) having access to the system control center or 
similar facilities used for transmission operations or reliability 
functions that differs in any way from the access available to other 
transmission customers.

    83. Several commenters proposed an alternative ``functional 
approach,'' while others focused on implementation of the proposed 
independent functioning requirement, including: (1) Sharing of senior 
management between Transmission Providers and their Marketing and 
Energy Affiliates (corporate governance); (2) sharing of non-
transmission support employees between Transmission Providers and 
Marketing and Energy Affiliates; (3) sharing of field and maintenance 
employees between Transmission Providers and Marketing and Energy 
Affiliates; (4) allowing Transmission Provider employees to engage in 
operational or cash-out sales.
    84. In response to the NOPR, commenters focused on whether certain 
types of non-transmission function employees could be shared between 
Transmission Providers and their Energy and Marketing Affiliates. The 
Major Issues Analysis recommended that the Commission adopt the 
language proposed in the NOPR, with some clarifications to permit the 
sharing of ``support-type'' employees. During the May 21 Conference and 
in follow-up comments, several entities made recommendations regarding 
an alternative approach.
    85. As discussed in more detail below, the Commission is adopting 
the independent functioning requirement with the modifications 
discussed below. The independent functioning requirement in the Final 
Rule is as follows:

    (a) Separation of functions.
    (1) Except in emergency circumstances affecting system 
reliability, the transmission function employees of the Transmission 
Provider must function independently of the Transmission Provider's 
Marketing or Energy Affiliates' employees.
    (2) Notwithstanding any other provisions in this section, in 
emergency circumstances affecting system reliability, a Transmission 
Provider may take whatever steps are necessary to keep the system in 
operation. Transmission Providers must report to the Commission and 
post on the OASIS or Internet website, as applicable, each emergency 
that resulted in any deviation from the standards of conduct, within 
24 hours of such deviation.
    (3) The Transmission Provider is prohibited from permitting 
Marketing or Energy Affiliates' employees from: (i) conducting 
transmission system operations or reliability functions; and (ii) 
having access to the system control center or similar facilities 
used for transmission operations or reliability functions that 
differs in any way from the access available to other transmission 
customers.
    (4) Transmission Providers are permitted to share support 
employees and field and maintenance employees with their Marketing 
and Energy Affiliates.
i. Background and History of Independent Functioning Requirement
    86. The principle underlying proposed Sec.  358.4 is that when 
employees engaged in transmission services function independently, 
there are significantly fewer opportunities to give unduly preferential 
treatment to affiliates engaged or involved in commodity transactions 
or other business activities that compete with non-affiliated customers 
of the Transmission Providers. Section 358.4(a) combines the separation 
of functions requirements of current Sec. Sec.  161.3(g) \43\ and 
37.4(a)(1) and (2), ensures that the transmission function employees of 
the Transmission Provider function independently of the Transmission 
Provider's sales and marketing employees and employees of the Energy 
Affiliates. Like the separation of functions requirement in current 
Sec.  37.4(a)(1) and (2), employees engaged in transmission functions 
would be required to function

[[Page 69146]]

independently; but, in the event of emergencies affecting system 
reliability, may take whatever steps are necessary to keep the 
transmission systems in operation, including, if needed, using 
affiliates' employees.
---------------------------------------------------------------------------

    \43\ 43 Under Standard G, 18 CFR 161.3(g) (2003), 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 who are engaged in 
day-to-day duties and responsibilities 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.
---------------------------------------------------------------------------

    87. Currently, under Sec.  37.4(a)(2), if the transmission function 
of a public utility Transmission Provider utilizes the services of a 
wholesale merchant function employee during an emergency circumstance 
affecting system reliability, the public utility Transmission Provider 
posts each such event on its OASIS and reports it to the Commission in 
an ``EY'' docket within 24 hours of a deviation. The Final Rule holds 
interstate natural gas pipeline Transmission Providers to the same 
requirement under proposed Sec.  358.4(a). Since 1998, the Commission 
has received as few as eight and as many as 18 reports of emergency 
circumstances necessitating deviations from the separation of functions 
requirement per year.
ii. Energy Affiliate Function or Commercial Function
    88. The NOPR proposed to govern the relationship between the 
Transmission Provider and all of its Energy Affiliates. This approach 
recognizes that the Commission has jurisdiction over the Transmission 
Provider and is exercising that jurisdiction by governing the behavior 
of the Transmission Provider to ensure that it does not provide any 
Energy Affiliate with any undue preferences. Thus, this approach, which 
focuses on the corporate entities (e.g., the Transmission Provider) and 
its employees, restricts the behavior and communications between the 
regulated Transmission Provider and its Energy Affiliates (Energy 
Affiliate Approach). The Commission uses this approach in the existing 
standards of conduct, i.e., the standards of conduct govern the 
relationship between the interstate natural gas pipeline and its 
Marketing Affiliates and the public utility Transmission Provider and 
its wholesale merchant function and affiliated power marketer(s).
    89. The majority of commenters supported the Energy Affiliate 
approach.\44\ The Energy Affiliate approach recognizes some of the 
efficiencies of vertical integration by permitting sharing of certain 
``support'' type functions and service.
---------------------------------------------------------------------------

    \44\ However, not all commenters supported the breadth of the 
definition of Energy Affiliates, i.e., expanding it beyond marketing 
affiliates.
---------------------------------------------------------------------------

    90. As an alternative, several commenters proposed the ``functional 
approach.'' Under a functional approach, the standards of conduct would 
govern the relationship between the ``transmission functions'' of a 
Transmission Provider and its Energy Affiliates and the ``commercial 
functions'' \45\ or the ``energy functions'' \46\ of the Transmission 
Provider and its Energy Affiliates (Commercial Function Approach). In a 
Commercial Function approach, the transmission function of a pipeline 
and the transmission function(s) of its affiliated LDCs, affiliated 
intrastate pipelines and other affiliates with transmission services 
would be able to share employees and communications with each other, 
and the sales function of a pipeline and the sales functions of any of 
its affiliates would be able to share employees and communications with 
each other. But the sales and transmission functions would be 
prohibited from sharing employees and information with each other. The 
functional approach prohibits the Transmission Provider's 
``transmission function'' from sharing employees or information with 
the ``commercial'' or ``energy'' function of the energy affiliates, but 
permits the sharing of employees and information with other ``non-
commercial'' functions of the Energy Affiliates.
---------------------------------------------------------------------------

    \45\ Dominion proposed defining commercial function employees as 
those who engage in certain day-to-day activities such as 
transmission transactions, buy, sell or trade gas or energy or 
manage or control transmission capacity.
    \46\ Entergy proposed defining energy function employees as 
those who engage in purchases for resale, sale, or trade of natural 
gas or electric energy, but does not capture those that ``control'' 
capacity, but do not ``hold'' it (asset managers).
---------------------------------------------------------------------------

    91. The functional approach was the subject of much discussion at 
the May 21 Conference, and 13 commenters supported the functional 
approach in their supplemental comments.\47\ NASUCA opposed the 
commercial function approach. Many of the trade associations that 
submitted comments on specific aspects of the NOPR were silent on the 
type of approach that should be used. Some of the proponents of the 
functional approach, including Portland, argue that the Commission's 
approach in the NOPR represents a departure from the requirements of 
Order No. 889.
---------------------------------------------------------------------------

    \47\ AEP, Cinergy, Duke (partially), Dominion, Entergy, EEI 
(partially), FPL, Keyspan, National Grid, PG&E, Portland General 
Electric, Ohio Commission and Xcel.
---------------------------------------------------------------------------

    92. The Commission has carefully considered the comments and 
alternative proposals for structuring the Final Rule and is adopting 
the Energy Affiliate approach. With respect to the Energy Affiliate 
approach, the regulated Transmission Provider is responsible for 
ensuring separation of functions and compliance with information 
disclosure prohibitions between itself and its Energy Affiliates. Under 
the Commercial Function approach, the responsibility for ensuring 
compliance would be shared by the transmission function of the 
Transmission Provider and the non-jurisdictional transmission functions 
of the unregulated Energy Affiliates. The Commission does not believe 
that such shared responsibility is workable. The Commission is 
concerned that it would not be able to enforce compliance with the 
standards of conduct based on a commercial function approach.
    93. The advocates of the Commercial Function approach argued that 
Transmission Providers would be permitted to share more ``support-
type'' employees than they would under the Energy Affiliate approach. 
While it may be less costly for some companies to implement the 
Commercial Function approach, particularly for those companies that are 
already structured on a functional basis, such as Dominion and Cinergy, 
the Commission is concerned that it does not have the jurisdiction to 
direct unregulated Energy Affiliates on how to structure their 
functions, operations and communications.
    94. The Energy Affiliate approach has worked successfully in the 
past and avoids concerns whether FERC has jurisdiction to direct an 
unregulated Energy Affiliate on how to structure its functions, 
operations and communications.
iii. Sharing of Non-Transmission Functions
    95. Forty-six commenters, including interstate natural gas 
pipelines, public utility Transmission Providers, AGA, Cleco Power, 
EEI, First Energy, 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. Several 
commenters, including INGAA, asked that the Commission specify which 
``support employees'' and ``field personnel'' can be shared between the 
Transmission Provider and its Energy Affiliates. Several commenters, 
including Cinergy and LG&E, requested that the Commission codify the 
proposed exception that allows the sharing of field and maintenance 
employees or identify the types of employees who would qualify as non-
operating, e.g., legal, accounting, human resources, and information 
technology.

[[Page 69147]]

    96. 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 Provider's transmission function and the marketing 
affiliate or wholesale merchant function. Under the 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 performing various non-
operating functions such as legal, accounting, human resources, travel 
and information technology.\48\
---------------------------------------------------------------------------

    \48\ Under Standard G, a pipeline's operating employees and the 
operating employees of its marketing affiliate must function 
independently of each other to the maximum extent practicable. See 
18 CFR 161.3(g) (2003). 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. See Order No. 
497-E, FERC Stats. & Regs., Regulations Preambles 1991-1996, at 
30,996.
---------------------------------------------------------------------------

    97. 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 
generally, would not be in a position to give a marketing affiliate 
undue preferences. 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. 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.\49\
---------------------------------------------------------------------------

    \49\ Id. at 30,996.
---------------------------------------------------------------------------

    98. When the Commission reviewed public utilities standards of 
conduct filings, it used a similar approach. The Commission stated that 
Transmission Providers may allow senior managers, officers or directors 
to have ultimate responsibility for both transmission system operations 
and wholesale merchant functions, as long as the persons with shared 
responsibilities do not participate in directing, organizing or 
executing transmission system operations or reliability functions or 
wholesale merchant functions. Further, the Commission stated that 
Transmission Providers may share ``support'' staff, such as legal 
counsel, accounting services and data processing who do not participate 
in operating activities.\50\
---------------------------------------------------------------------------

    \50\ AEP, 81 FERC at 62,515.
---------------------------------------------------------------------------

    99. The Commission has previously allowed the sharing of billing, 
accounting and legal employees. The rationale was that accountants and 
lawyers were obliged by professional responsibility to maintain the 
confidentiality of transmission or customer information. For those 
employees involved in ``billing,'' the rationale was that the employees 
produced the bills after the transmission took place, and those 
involved in billing would have little opportunity to give marketing 
affiliates undue preferences. However, the recent investigations 
indicate that staff has been improper conduits of transmission 
information.
    100. With respect to accountants, at most Transmission Providers, 
there are accountants who are responsible for day-to-day accounting 
functions, which may include billing, gas accounting and invoicing. 
There are also accountants or a ``finance department'' responsible for 
pulling together information for the corporation as a whole. The level 
of sharing of the accounting employees varies among Transmission 
Providers. In the Transco investigation, the Commission learned that 
marketing affiliate employees involved in billing and accounting had 
access to significant amounts of transmission information and 
confidential shipper information through shared databases and provided 
non-affiliate customer information to marketing affiliate 
employees.\51\ In an investigation of Cleco, the Commission learned 
that accounting and billing employees improperly re-designated certain 
power sales transactions between the utility's the wholesale merchant 
function and its affiliated power marketer.\52\
---------------------------------------------------------------------------

    \51\ Transco, 102 FERC ] 61,302 (2003).
    \52\ Cleco, 104 FERC ] 61,125 (2003).
---------------------------------------------------------------------------

    101. Accountants and personnel involved in billing have the ability 
to provide preferential information, or, as in the case of Cleco, alter 
the books after transactions, to benefit an affiliate. While the 
Commission recognizes the efficiencies in allowing Transmission 
Providers to share accountants and employees involved in billing with 
their Energy Affiliates, we are concerned about their behavior and 
ability to provide preferential treatment. Therefore, the Commission 
will require that Transmission Providers train all shared support 
employees regarding the standards of conduct and that shared employees 
sign affidavits that they will not be a conduit for sharing 
transmission, market or customer information with a Marketing or Energy 
Affiliate.
iv. Sharing of Senior Officers and Directors
    102. Many commenters urge the Commission to permit Transmission 
Providers to share senior officers and directors with their Marketing 
and Energy Affiliates consistent with current Commission practices.\53\
---------------------------------------------------------------------------

    \53\ On several occasions, the Commission has specifically 
addressed the sharing of employees. For example, in reviewing ANR 
Pipeline Company's standards of conduct, the Commission stated that 
the potential for abuse when there are shared officers or directors 
is minimized because the shared officers or directors normally 
should not receive confidential information from nonaffiliated 
shippers or potential nonaffiliated shippers nor would they be 
likely to receive transportation information.
---------------------------------------------------------------------------

    103. The Major Issues Analysis recommended that the Commission 
retain this exception. In follow-up comments, this proposal received 
support from virtually all the commenters. This exception, which 
impacts the ability of the senior officers and directors to engage in 
corporate governance functions is important and merits retention. 
Therefore, the Commission will codify this exception in the regulatory 
text.
    104. In the Final Rule, the Commission will continue to allow 
senior officers and directors who do not engage in transmission 
functions, including day-to-day duties and responsibilities for 
planning, directing, organizing or carrying out transmission-related 
operations to share such positions with the Transmission Provider and 
its Marketing or Energy affiliates. These shared executives may not 
serve as a conduit for sharing transmission, customer or market 
information with a Marketing or Energy Affiliate.
v. Sharing of Field and Maintenance Personnel
    105. Numerous commenters urged the Commission to permit 
Transmission Providers to share field and maintenance personnel with 
their Marketing and Energy Affiliates, consistent with the Commission's 
current practices. In Order No. 497-F and in reviewing Tennessee's 
standards of conduct, the Commission found that ``field employees,'' 
such as those who perform manual work (dig trenches) or purely 
technical duties (operate and

[[Page 69148]]

maintain the pipeline's equipment),\54\ are supportive in nature and 
would not have direct operational responsibilities. Similarly, field 
technicians or mechanics and their immediate supervisors would not be 
considered operating employees. The Commission added, however, that if 
supervisory field personnel can control a gas pipeline's operations, 
they are operating employees. The Commission also stated that if a 
supervisor has the ability to restrict or shut down the operation of a 
particular section of the pipeline, that supervisor is considered an 
operating employee.\55\
---------------------------------------------------------------------------

    \54\ Additional examples of field or maintenance employees 
include: those who read meters, locate lines, do snow removal and 
maintain the roadways.
    \55\ Order No. 497-F, 66 FERC ] 61,347 at 62,165; Tennessee Gas 
Pipeline Company, 55 FERC ] 61,285 (1990).
---------------------------------------------------------------------------

    106. The Major Issues Analysis recommended that the Commission 
retain this exception. In follow-up comments, this proposal received 
support from all the commenters. This exception merits retention. 
Therefore, the Final Rule will codify this exception in the regulatory 
text. In the Final Rule, the Commission will continue to allow the 
sharing of field and maintenance personnel.
vi. Transmission Employees That Engage in Operational Purchases
    107. Several interstate natural gas pipelines, as well as INGAA, 
noted that the NOPR does not appear to retain the historical exclusion 
that permits 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.\56\
---------------------------------------------------------------------------

    \56\ See, e.g., East Tennessee Natural Gas Co., 63 FERC ] 
61,578, order on reh'g, 64 FERC ] 61,159 (1993).
---------------------------------------------------------------------------

    108. The Major Issues Analysis recommended that the Commission 
retain this exception. In follow-up comments, this proposal received 
support from many commenters, including AdHoc Marketers. This 
exception, which impacts practical operations of the transmission 
system is important and merits retention. Therefore, the Commission 
will codify this exception in the regulatory text.
vii. Risk Management Employees
    109. Many commenters, including Ad Hoc Marketers, Basin Electric 
Coop, Florida Power Corp., Gulf South, Carolina Power & Light, Cinergy, 
PGE, EEI, INGAA, NEMA, NiSource, Pinnacle West, BPA, Atlantic City and 
Delmarva, urged the Commission to permit the sharing of risk-management 
employees or functions. Discussions during the May 21 Conference 
revealed that there are many different definitions, uses and 
applications of the term risk management and credit management. For 
example, risk management functions can include: (1) Managing corporate-
wide business risk exposure of the corporation and/or its affiliates; 
(2) business risk exposure for third parties; (3) managing overall 
corporate investment for the entire corporation; (4) assessing credit 
risk for counter-parties; (5) approving expansion projects; and (6) 
establishing spending, trading and capital authorities for each 
business unit. EEI claims that corporate-wide risk management employees 
must understand the exposure of the entire corporation, including the 
Transmission Provider, the wholesale merchant function and Energy 
Affiliates, so that the corporation may fulfill its fiduciary duties to 
shareholders and corporate lending covenants. NiSource claims that risk 
management mitigates the corporation's overall risk and does not profit 
from transmission or energy commodity markets.
    110. There are two issues that relate to risk management: (1) 
Whether it may be a shared function; and (2) if so, how to handle the 
transmission, customer and market information received by the risk 
management employees. According to Carolina Power & Light, Florida 
Power Corp. and EEI, risk information from business units filters up to 
senior management or a risk management committee, but then the risk 
management function does not provide any operational unit with 
information derived from any other business units and will not be a 
conduit for sharing information.
    111. Several commenters, including FirstEnergy, state that risk 
management has become a core concern of the ratings organizations and 
urge the Commission to permit shared risk management. Portland General 
Electric states that risk management employees cannot use their access 
to transmission information to the detriment of third parties.
    112. Risk management employees are in a position to use 
transmission, customer and market information to give Energy Affiliates 
an undue advantage where the members of the risk management committee 
are made up of employees from the transmission function and the Energy 
Affiliates. Therefore, any shared risk management employees may not be 
operating employees of either the Transmission Providers or the 
Marketing or Energy Affiliates nor can they be a conduit for improperly 
sharing information.
viii. Costs of Compliance
    113. In determining the extent of independent functioning between 
the Transmission Providers and Energy Affiliates, the Commission has to 
balance the associated costs of separating shared functions against the 
benefit to competition and the elimination of discriminatory behavior.
    114. As noted by many of the commenters, there will be costs, and 
for some transmission companies that have fully integrated production, 
gathering, generation, transmission and distribution functions, those 
costs could be considerable. In their comments, gas Transmission 
Providers provided one-time cost estimates to function independently of 
their affiliated LDCs that ranged from $8,000,000 (Pauite) to 
$210,000,000 (Questar),\57\ while annual cost estimates ranged from 
$5,000,000 (Paiute) to $16,000,000 (National Fuel). Similarly, public 
utility Transmission Providers provided one-time cost estimates to 
function independently of their retail function that ranged from 
$750,000 (Colorado Springs) to $1,000,000 (DTE), while annual cost 
estimates ranged from $1,500,000 (Conectiv) to $95,000,000 
(Cinergy).\58\
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    \57\ Questar's estimate includes capital investments, 
transmission investments, investment in additional systems, legal 
fees, design engineers, state regulatory efforts, duplicate SCADA 
and duplicate field operations.
    \58\ Few public utility transmission providers provided one-time 
cost estimates; several, like Cinergy and Southern provided 
estimates over a multi-year basis, $180,000,000 over two years and 
$350,000,000 over five years, respectively.
---------------------------------------------------------------------------

    115. Commenters provided estimates of costs in varying levels of 
detail, but the majority of the commenters' projected costs the 
independent functioning requirement reflect the ``worst-case'' 
scenario, that assumed the Commission would require a complete 
separation of affiliated Transmission Providers, holding companies and 
other Energy Affiliates as well as prohibit the sharing of support 
services and field personnel.\59\ As Duke recognized, however, the 
magnitude of these increased costs depends on whether an LDC or load 
serving entity is defined as an Energy Affiliate, how the separation is 
implemented and whether specific functions, like administrative or 
support functions, and certain information, like specific transaction 
or reliability information, can be shared between the

[[Page 69149]]

transmission function and the retail sales function.
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    \59\ Generally, the projected costs included: duplication of 
system control or control center facilities; duplication of field, 
maintenance, human resources, information technology, travel and 
other support-type personnel, duplication of customer service, load 
forecasting and scheduling employees, duplication of office 
facilities, computers, software, SCADA, as well as administrative 
and leasing costs.
---------------------------------------------------------------------------

    116. The Final Rule will not be as costly as anticipated by the 
commenters because the Final Rule excludes certain categories of 
affiliates, such as LDCs making only on-system sales, from the 
definition of Energy Affiliate, does not include solely bundled retail 
sales employees in the definition of Marketing Affiliate, allows the 
sharing of certain support and field personnel, and adopts the no-
conduit rule as well as other exceptions to the informational 
disclosure prohibitions. The level of separation of functions required 
by the Final Rule is needed to ensure that Transmission Providers do 
not use their access to information about transmission to the detriment 
of customers or competitors. EPSA states that the long-term benefits 
could amount to several billion dollars.
    117. The Commission disagrees with commenters' arguments that there 
is no harm to the market under the current level of sharing between 
Transmission Providers and their Energy Affiliates. There is harm to 
the market. For example, unduly preferential behavior in favor of a 
marketing affiliate harmed the retail customers of Idaho in the amount 
of $5.8 million until the Commission required a refund as a condition 
of a settlement.\60\ Similarly, the retail customers of Louisiana were 
harmed approximately $2.1 million until the Commission required a 
refund as a condition of settlement.\61\ Although there was no specific 
quantification of harm caused by the unduly preferential behavior 
described in the Transco settlement, it was of sufficient magnitude 
that the Commission required the marketing affiliate to exit the 
market, and Transco paid a record civil penalty of $20 million.
---------------------------------------------------------------------------

    \60\ Idaho Power Co., IDACORP Energy, L.P., and IDACORP, Inc., 
103 FERC ] 61,182 (2003).
    \61\ Cleco, 104 FERC ] 61,125 (2003).
---------------------------------------------------------------------------

ix. Conclusion
    118. The independent functioning requirement is a central component 
of the standards of conduct which limits 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, the 
Commission will continue to permit the sharing of certain non-
transmission function employees between the Transmission Provider and 
its Marketing and Energy Affiliates in the Final Rule.
    119. However, in an investigation of Transco, the Commission 
learned that there are instances in which a shared information 
technology function provided a marketing affiliate an undue 
preference.\62\ Specifically, a shared IT employee designed a software 
program for the marketing affiliate that gave the marketing affiliate 
access to the pipeline's mainframe databases and used the pipeline's 
modeling information to optimize the marketing affiliate's nominations 
on the pipeline's transmission system. In these circumstances, the IT 
employees were no longer ``support'' employees, and gave the marketing 
affiliate unduly preferential access to valuable transmission 
information.
---------------------------------------------------------------------------

    \62\ Transco, 102 FERC ] 61,302 (2003).
---------------------------------------------------------------------------

    120. Similarly, if lawyers are participating in directing, 
organizing or executing transmission system operations or reliability 
functions or direct the policy of the Transmission Provider, they are 
not ``support staff,'' rather they are transmission function operating 
employees who are subject to the standards of conduct. The exemption of 
``support employees'' is not a mechanism to circumvent the prohibition 
on providing a Marketing or Energy Affiliate an undue preference 
relating to transmission or preferential access to transmission 
information.
    121. Although the majority of ``support employees'' are genuinely 
performing supporting functions, some have or receive access to 
transmission or customer information. Therefore, the Final Rule will 
require Transmission Providers to train all of the ``support'' 
employees in the standards of conduct and prohibit them from acting as 
conduits for sharing information with marketing or Energy Affiliates. 
In addition, Transmission Providers with shared support employees will 
be subject to greater audit scrutiny.

E. Identification of Affiliates on Internet

    122. Section 358.4(b) requires all Transmission Providers to post 
information with respect to their marketing and sales employees and 
energy affiliates on their OASIS or Internet Web sites, as applicable. 
Gas pipelines already post this information with respect to their 
marketing affiliates under Sec.  161.3(l). Although the current 
regulations do not require public utility Transmission Providers to 
post the names and addresses of their marketing affiliates on the 
OASIS, the Commission did require the posting of organizational charts 
and job descriptions when it reviewed the electric Transmission 
Providers' implementation of the standards of conduct.\63\ The Major 
Issues Analysis recommended that the Commission revise some of the 
posting requirements consistent with some of the commenters' 
suggestions. Commenters have submitted follow-up comments, which make 
additional arguments and suggestions. The Final rule requires:
---------------------------------------------------------------------------

    \63\ American Electric Power Service Corporation, 81 FERC ] 
61,332 (1997), order on reh'g, 82 FERC ] 61,131 (1998); order on 
reh'g, 83 FERC ] 61,357 (1998).

    (1) A Transmission Provider must post the names and addresses of 
its sales and marketing units and Energy Affiliates on its OASIS or 
Internet Web site.
    (2) A Transmission Provider must post on its OASIS or Internet 
Web site, as applicable, a complete list of the facilities shared by 
the Transmission Provider and its marketing or sales units or any 
Energy Affiliates, including the types of facilities shared and 
their addresses.
    (3) A Transmission Provider must post comprehensive 
organizational charts showing:
    (i) The organizational structure of the parent corporation with 
the relative position in the corporate structure of the Transmission 
Provider, marketing and sales units and any Energy Affiliates;
    (ii) For the Transmission Provider, the business units, job 
titles and descriptions, and chain of command for all positions, 
including officers and directors, with the exception of clerical, 
maintenance, and field positions. The job titles and descriptions 
must include the employee's title, the employee's duties, whether 
the employee is involved in transmission or sales, and the name of 
the supervisory employees who manage non-clerical employees involved 
in transmission or sales.
    (iii) For all employees who are engaged in transmission 
functions for the Transmission Provider and marketing or sales 
functions or who are engaged in transmission functions for the 
Transmission Provider and are employed by any of the Energy 
Affiliates, the Transmission Provider must post the name of the 
business unit within the marketing or sales unit or the energy 
affiliate, the organizational structure in which the employee is 
located, the employee's name, job title and job description in the 
marketing or sales unit or energy affiliate, and the employee's 
position within the chain of command of the marketing or sales unit 
or energy affiliate.
    (iv) The Transmission Provider must update the information on 
its OASIS or Internet website, as applicable, required by Sec. Sec.  
358.4(1), (2) and (3) within seven business days of any change, 
posting the date on which the information was updated.
    (v) The Transmission Provider must post information concerning 
potential merger partners as affiliates within seven days after the 
merger is announced.
    (vi) All OASIS or Internet website postings required by Part 358 
must comply, as applicable, with the requirements of Sec.  37.3 or 
Sec. Sec.  284.12(a) and (c)(3)(v) of this chapter.

[[Page 69150]]

i. Posting Organizational Charts
    123. The NOPR proposed that organizational charts and job 
descriptions be updated within three days of a change. Under the 
current gas standards of conduct, interstate natural gas pipelines are 
required to make changes to the postings within three days of a change. 
The Commission has never addressed the frequency of changes to be 
madder under the electric standards of conduct. Commenters asked the 
Commission to reconsider this proposal. They argued that there would be 
significantly more information to post if the Commission adopts a broad 
definition of the term Energy Affiliate. Williston Basin, Sempra and 
others urged that the organizational charts be updated every seven 
days. EEI, AEP, Basin Electric, Carolina Power & Light, Florida Power 
Corp. and PacifiCorp, urged that organizational charts be updated on a 
quarterly basis. Several commenters, including Carolina Power & Light 
and Florida Power Corp., argued that the posting of organizational 
charts is too broad and burdensome and others argued that it may be 
difficult to post all changes within three days given the complexity of 
some mergers or buy-outs. While some companies link their employee or 
human resource databases to the posted organizational charts and job 
descriptions, so that automatic downloads or updates take place each 
day, not all Transmission Providers have that capability. In balancing 
the burden associated with updating information with the efforts that 
would be needed to post organizational charts, the Commission has 
decided it would be reasonable to require the information to be posted 
within seven business days of a change.
    124. Currently, the gas standards of conduct and the posting 
requirements at Sec.  284.12, required gas Transmission Providers to 
retain information concerning organizational charts and job 
descriptions for three years. While Sec.  37.6 of the Commission's 
regulations, 18 CFR 37.6 (2003), requires public utility Transmission 
Providers to retain OASIS postings for three years, this section did 
not specifically refer to the posting of organizational chart and job 
descriptions. Basin Electric recommended that all Transmission 
Providers be required to retain, for three years, all posted 
organizational charts and job descriptions to facilitate the 
Commission's monitoring and enforcement efforts. To avoid any 
confusion, the Commission will adopt this suggestion in the Final Rule.
    125. Several commenters also argued that Transmission Providers 
that share support employees that are of no interest to the Commission, 
such as legal, accounting, human resources, information technology, and 
customer service should not be required to post detailed information 
and job descriptions for each of these employees. With respect to 
posting organizational information where a Transmission Provider shares 
support, field or maintenance employees with its Marketing or Energy 
Affiliates, the Transmission Provider must clearly identify the 
business units for the shared employees and provide a description of 
the shared services functions or responsibilities, but is not required 
to provide names or job descriptions for the support or field or 
maintenance employees.
ii. Posting of Merger Information
    126. The Commission's current policy with respect to announced 
mergers is to treat the potential merger partners as affiliates.\64\ 
The NOPR solicited comments on whether the Standards of Conduct should 
require the posting of the potential merger partners on the OASIS or 
Internet Website. In response to the NOPR, several commenters, 
including APGA, Michigan Commission, New Power, Oklahoma Commission, 
Ohio Commission, Reliant and the CPUC, supported this proposal as being 
consistent with the Commission's current policy. Pan Canadian Energy 
urged that the Commission adopt the same posting requirements as the 
SEC. In contrast, Niagara Mohawk, Williston Basin, Calpine, Carolina 
Power and Light, Florida Power Corp., National Grid and Questar opposed 
posting merger information. EEI urged the posting of mergers after they 
are announced.
---------------------------------------------------------------------------

    \64\ Revised Filing Requirements Under Part 33 of the 
Commission's Regulations, Order No. 642, 65 FR 70983 (Nov. 28, 
2000), FERC Stats. & Regs., Regulations Preambles 1996-2000 ] 31,111 
at 31,887 (Nov. 15, 2000), reh'g denied, Order No. 642-A, 94 FERC ] 
61,289 (Mar. 15, 2001).
---------------------------------------------------------------------------

    127. Following a review of the comments, the Commission will 
require the posting of merger information within seven days after a 
potential merger is announced as it is consistent with the Commission's 
policy on potential merger partners. The Transmission Provider shall 
post the name(s) and address(es) of potential merger partner(s) and 
Energy Affiliates on the OASIS or Internet website with the information 
in Sec.  358.4(b), which requires a Transmission Provider to post the 
names and addresses of its sales and marketing units and Energy 
Affiliates on the OASIS or Internet website.
iii. Transfer of Employees
    128. Proposed Sec.  358.4(c) parallels the current requirements of 
Sec.  37.4(b)(2) of the electric standards of conduct, which permits 
Transmission Provider employees, marketing and sales employees and 
Energy Affiliate employees to transfer between such functions, as long 
as such transfers are not used as a means to circumvent the standards 
of conduct. Notices of employee transfers would be posted on the OASIS 
or Internet website. Several commenters sought clarification that the 
Commission did not intend to capture the transfer of all employees 
between the Energy and Marketing Affiliates. The Commission is granting 
the clarification. The Commission did not intend to require the posting 
of employees that transfer between the Energy and Marketing Affiliates.
    129. Some commenters, such as Avista and PSE&G opposed the 
requirement to post the transfers between a Transmission Provider and 
its Energy Affiliates. While the Industrials urged the Commission to 
enhance and enforce posting requirements regarding employee transfers, 
Exelon, National Grid, and AEP asked for clarification that the posting 
of employees is for those employees that transfer between the 
Transmission Provider and the Marketing or Energy Affiliate, and not 
the transfer of employees among all the Marketing and Energy 
Affiliates.
    130. The Commission is adopting Sec.  358.4(c) as proposed. The 
transfer of employees between transmission and marketing or sales 
functions or between a Transmission Provider and its Energy Affiliates 
presents opportunities for the inappropriate sharing of information in 
circumvention of the standards of conduct. While a one-time transfer of 
an employee from the Transmission Provider to the marketing or sales 
function or energy affiliate (or vice versa) may not be a problem, 
transferring an employee multiple times (i.e., cycling) is inconsistent 
with the independent functioning requirement. In KN Interstate Gas 
Transmission Company (KN), the Commission prohibited the cycling of 
employees and held that transferred employees may not use, in their new 
jobs, transportation information that is not publicly available.\65\
---------------------------------------------------------------------------

    \65\ 80 FERC ] 61,212 (1997). For example, in KN, the Commission 
suggested that a transferred employee could be restricted to 
assignments or responsibilities that would not use information 
obtained from non-affiliated or potential non-affiliated shippers or 
by showing that the transportation information has lost its 
commercial value, i.e., a ``cooling off'' period before or after the 
transfer.

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[[Page 69151]]

    131. The cycling of employees between the Transmission Provider, 
the Marketing or Energy Affiliates facilitates the sharing of 
preferential information between these functions. The posting of 
transfer information provides a technique to detect possible improper 
cycling of employees.\66\ This enables the Commission and the public to 
monitor all transfers and to ensure that employees are not cycling 
between functions.
---------------------------------------------------------------------------

    \66\ See e.g., Kinder Morgan Interstate Gas Transmission, 
L.L.C., et al., 90 FERC ] 61,310 (2000).
---------------------------------------------------------------------------

F. Books and Records

    132. Proposed Sec.  358.4(d) parallels current Sec. Sec.  161.3(j) 
and 37.4(b)(6). Under this requirement, Transmission Providers must 
keep separate books and records from those of their Energy Affiliates. 
This ensures that the companies operate independently. It also helps to 
ensure that the regulated companies are not used to subsidize or 
support the unregulated companies. There were no comments regarding 
proposed Sec.  358.4(d), and the Commission adopts it as proposed in 
the NOPR.

G. Written Procedures

    133. The NOPR proposed that Sec.  358.4(e) would replace the 
requirements of Sec. Sec.  161.3(i) and 37.4(c), by requiring 
Transmission Providers to file with the Commission written procedures 
implementing the standards of conduct as follows:

    The Transmission Provider must file with the Commission and post 
on the OASIS or Internet website, current written procedures 
implementing the standards of conduct as will enable customers and 
the Commission to determine that the Transmission Provider is in 
compliance with the requirements of this section.

    134. The NOPR solicited comments on whether it is sufficient to 
file this information with the Commission or whether it should also be 
posted on the OASIS and Internet websites. As discussed in more detail 
below, several commenters suggested that it would be sufficient to post 
the procedures, rather than file them with the Commission, and made 
several other recommendations that the Commission is adopting in the 
Final Rule, as follows:

    (e) Written procedures.
    (1) By February 9, 2004, each Transmission Provider is required 
to file with the Commission and post on the OASIS or Internet 
website a plan and schedule for implementing the standards of 
conduct.
    (2) Each Transmission Provider must be in full compliance with 
the standards of conduct by June 1, 2004.
    (3) Each Transmission Provider must post on the OASIS or 
Internet website, current written procedures implementing the 
standards of conduct in such detail as will enable customers and the 
Commission to determine that the Transmission Provider is in 
compliance with the requirements of this section by June 1, 2004 or 
within 30 days of becoming subject to the requirements of this part.
    (4) Transmission Providers will distribute the written 
procedures to all Transmission Provider employees and employees of 
the Marketing and Energy Affiliates.
    (5) Transmission Providers shall require all of their employees 
to attend training and sign an affidavit certifying that they have 
been trained regarding the standards of conduct requirements.
    (6) Transmission Providers are required to designate a Chief 
Compliance Officer who will be responsible for standards of conduct 
compliance.

i. Posting Standards of Conduct Procedures.
    135. Several commenters recommended that the Commission require the 
posting of the Transmission Provider's written procedures implementing 
the Standards of Conduct on the OASIS or Internet website in lieu of 
filing them with the Commission. The Commission is adopting this 
suggestion and will modify Sec.  358.4(e) to include a posting 
requirement instead of a filing requirement. Posting the written 
procedures on the OASIS or Internet website gives users immediate 
access to the information and does not create additional administrative 
burdens for the Commission. Filing the written procedures is not 
required because the Commission has sufficient mechanisms to address 
problems through the Enforcement Hotline and complaints under the FPA 
or the NGA. Moreover, Commission staff will aggressively monitor 
standards of conduct compliance. Each Transmission Provider is required 
to post on its OASIS or Internet website written procedures 
implementing the Standards of Conduct no later than June 1, 2004 or 
within 30 days of becoming subject to the requirements of Part 358.
    136. With respect to the standards of conduct procedures that 
Transmission Providers will post on their OASIS or Internet Website 
merely restating the regulations or incorporating them by reference 
will not show acceptable compliance. The Transmission Providers must 
explain the measures they use to implement the standards of conduct, 
e.g., how transmission information and confidential customer 
information is kept secure, whether the standards of conduct have been 
distributed to employees, whether employees have been offered training 
on the standards of conduct, and whether employees are required to read 
and sign acknowledgment forms.
    137. In addition, within 60 days of publication of the Final Rule 
in the Federal Register, each Transmission Provider is required to file 
with the Commission and post on the OASIS or Internet website an 
informational filing that includes a plan and schedule for implementing 
the standards of conduct by June 1, 2004, and the Transmission 
Provider's projected costs of complying with the standards of conduct.
ii. Training
    138. Standards of Conduct training for employees was not discussed 
in the NOPR, although it is one of the factors the Commission 
historically looks at when determining if a Transmission Provider has 
complied with She standards of Conduct. In response to the NOPR, 
Cinergy, Ohio Commission, PGE and other commenters urged the Commission 
to require training and evaluation or to formalize the training 
requirement.
    139. The Commission likes this suggestion, and will revise Sec.  
358.4(e) to adopt it.
iii. Chief Compliance Officer
    140. The Ohio Commission recommended that the Commission should 
require the creation of a corporate ethics officer for each 
Transmission Provider, who would investigate and certify, on a periodic 
basis, whether the Transmission Provider is complying with the 
standards of conduct requirements. In several recent settlements, the 
Commission has required the hiring or designation of a Chief Compliance 
Officer. These individuals have a working knowledge of the company, its 
structure and operations and have been invaluable in post-settlement 
compliance activities.
    141. It is appropriate to designate an individual to be responsible 
for standards of conduct compliance. Therefore, in the Final Rule, the 
Commission is requiring that each Transmission Provider hire or 
designate a Chief Compliance Officer. This individual will be 
responsible for employee training, answering employee questions and 
coordinating audits and investigations with Commission Staff, as well 
as duties to ensure that the Transmission Provider complies with the 
standards of conduct.

[[Page 69152]]

H. Non-Discrimination Requirements--Sec.  358.5

    142. The principle underlying these requirements is that the 
Transmission Provider is prohibited from giving the employees of its 
Marketing or Energy Affiliates any undue preferential treatment. The 
proposed standards specify the ways in which a Transmission Provider 
must ensure equal treatment and equal access to information.
i. Information Access and Disclosure Prohibitions
    143. The NOPR proposed information access and disclosure 
prohibitions that tracked the requirements of Sec. Sec.  161.3(e) and 
(f) and 37.4(b)(3) and (4) from the gas and electric standards of 
conduct. The proposed prohibitions prevent a Transmission Provider from 
giving its Marketing or Energy Affiliates undue preferences over their 
unaffiliated customers through the exchange of ``insider'' information. 
The existing gas and electric standards of conduct concerning the 
permissible flow of information between affiliates are not consistent 
with each other, so as a result, the positions of the commenters 
varied. As discussed below, proposed Sec.  358.5(a) and (b) generated a 
large volume of comments. Few commenters identified substantive 
concerns with the specific language of the proposed regulations; 
rather, they focused on what was not discussed in the NOPR, 
implementation of the information disclosure prohibitions. The Major 
Issues Analysis made a variety of recommendations and provided draft 
regulatory text. Virtually all of the follow-up comments addressed the 
information requirements. As discussed in more detail below, the 
Commission is revising the information requirements and, as recommended 
by commenters, codifying several exceptions. The Final Rule requires:

    (a) Information access.
    (1) The Transmission Provider must ensure that any employee of 
the Transmission Provider engaged in marketing or sales or any 
employee of any Energy Affiliate may only have access to that 
information available to the Transmission Provider's transmission 
customers (i.e., the information posted on the OASIS or Internet 
website, as applicable), and must not have access to any information 
about the Transmission Provider's transmission system that is not 
available to all users of an OASIS or Internet website, as 
applicable.
    (2) The Transmission Provider must ensure that any employee of 
the Transmission Provider engaged in marketing or sales or any 
employee of any Energy Affiliate is prohibited from obtaining 
information about the Transmission Provider's transmission system 
(including, but not limited to, information about available 
transmission capability, price, curtailments, storage, ancillary 
services, balancing, maintenance activity, capacity expansion plans 
or similar information) through access to information not posted on 
the OASIS or Internet website or that is not otherwise also 
available to the general public without restriction.
    (b) Prohibited disclosure.
    (1) An employee of the Transmission Provider may not disclose to 
its marketing or sales employees, or to employees of the 
Transmission Provider's Energy Affiliates any information concerning 
the transmission system of the Transmission Provider or the 
transmission system of another (including, but not limited to, 
information received from non-affiliates or information about 
available transmission capability, price, curtailments, storage, 
ancillary services, balancing, maintenance activity, capacity 
expansion plans, or similar information) through non-public 
communications conducted off the OASIS or Internet website, through 
access to information not posted on the OASIS or Internet Website 
that is not contemporaneously available to the public, or through 
information on the OASIS or Internet website that is not at the same 
time publicly available.
    (2) A Transmission Provider may not share any information, 
acquired from nonaffiliated transmission customers or potential 
nonaffiliated transmission customers, or developed in the course of 
responding to requests for transmission or ancillary service on the 
OASIS or Internet website, with employees of its Marketing or Energy 
Affiliates, except to the limited extent information is required to 
be posted on the OASIS or Internet website in response to a request 
for transmission service or ancillary services.
    (3) If an employee of the Transmission Provider discloses 
information in a manner contrary to the requirements Sec.  
358.5(b)(1) and (2), the Transmission Provider must immediately post 
such information on the OASIS or Internet website.
    (4) A non-affiliated transmission customer may voluntarily 
consent, in writing, to allow the Transmission Provider to share the 
non-affiliated customer's information with a Marketing or Energy 
Affiliate.
    (5) A Transmission Provider is not required to contemporaneously 
disclose to all transmission customers or potential transmission 
customers information covered by Sec.  358.5(b)(1) if it relates 
solely to a Marketing or Energy Affiliate's specific request for 
transmission service.
    (6) A Transmission Provider may share generation information 
necessary to perform generation dispatch with its Marketing and 
Energy Affiliate that does not include specific information about 
individual third party transmission transactions or potential 
transmission arrangements.
    (7) Neither a Transmission Provider nor an employee of a 
Transmission Provider is permitted to use anyone as a conduit for 
sharing information covered by the prohibitions of Sec.  358.5(b)(1) 
and (2) with a Marketing or Energy Affiliate.
    (8) A Transmission Provider is permitted to share crucial 
operating information with its Energy Affiliates to maintain the 
reliability of the transmission system.

A. ``No Conduit'' or ``Automatic Imputation''

    144. Current Policies: Under the current gas standards of conduct, 
when an interstate natural gas pipeline company shares transportation 
information with its marketing affiliate, the pipeline must 
contemporaneously share that information with non-affiliates.\67\ This 
requirement is designed to prevent a Transmission Provider from giving 
its marketing affiliate undue preferences over its unaffiliated 
customers through the exchange of transmission information. 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 customer information).\68\ The 
gas industry commonly refers to this as the ``automatic imputation 
rule'' because the Commission's policy is that when an employee who 
performs functions for the pipeline and its marketing affiliate 
receives confidential shipper information, the information is 
automatically divulged or imputed to 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.\69\
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    \67\ Standard F 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. 
See 18 CFR 161.3(f) (2003).
    \68\ Standard E states that a pipeline may not disclose to its 
marketing affiliate any information the pipeline receives from a 
nonaffiliated shipper or potential nonaffiliated shipper. See 18 CFR 
161.3(e) (2003).
    \69\ Tenneco Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992) 
(affirmed in part and remanded in part).
---------------------------------------------------------------------------

    145. Over the past 15 years, several interstate 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.'' \70\ Up until now,

[[Page 69153]]

Commission has rejected the ``no-conduit rule'' for the gas 
industry.\71\
---------------------------------------------------------------------------

    \70\ 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 actively sharing the 
information with the marketing affiliate or wholesale merchant 
function.
    \71\ See Order Nos. 497-E and F; Amoco Production Co. and Amoco 
Energy Trading Co. v. Natural Gas Pipeline Company of America, 83 
FERC ] 61,197 at 61,849 (1998).
---------------------------------------------------------------------------

    146. In contrast, under the current electric standards of conduct, 
which contain 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.\72\ In implementing Order 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.\73\ When the Commission reviewed the standards of 
conduct for public utility Transmission Providers, the Commission 
adopted the ``no-conduit'' rule, rather than applying the ``automatic 
imputation rule.''\74\
---------------------------------------------------------------------------

    \72\ 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 requirement applies to transmission and market 
information and prohibits off-OASIS communications. See 18 CFR 
37.4(4) and 161.3(f) (2003).
    \73\ 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 CFR 
161.3(g) (2003). 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 CFR 37.4(a)(1) (2003). The key difference 
is the flexibility under the term ``maximum extent practicable,'' 
which permits, in certain situations, the sharing of operating 
employees.
    \74\ Allegheny Power Service Corp., et al., 84 FERC ] 61,316 at 
62,425 (1998).
---------------------------------------------------------------------------

    147. The NOPR 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. In their Initial Comments, many commenters from both the gas 
and electric industries, requested, without much explanation, that the 
Commission codify the ``no-conduit rule'' and apply to it all 
Transmission Providers. The Major Issues Analysis proposed to apply the 
automatic imputation rule. After much discussion at the May 21st 
Conference, the Commission received more than 100 supplemental comments 
on this issue. Almost every segment of the industry and all major 
industry trade associations that opposed the automatic imputation rule 
argued that it could force the break-up of service companies and that 
the limitations on the sharing of information would restrict a 
director, officer or senior manager's ability to engage in corporate 
governance functions. Of the states that commented, Connecticut favored 
the automatic imputation rule, while Alabama, Indiana, Nebraska, and 
Ohio favored the no-conduit rule.
    148. A few commenters supported the ``automatic-imputation'' 
proposal. NASUCA stated that the no-conduit rule fails to recognize the 
reality that a person who gains access to important information is 
likely to act upon that information. Rather than advocate a particular 
position with respect to these options, the Industrials merely stated 
that officers and directors should be allowed to discharge their 
duties. Sempra raised a valid point--the potential for harm is great 
when the Commission permits the sharing of operating employees, but the 
danger is low when the shared employees are engaged in ``support-type'' 
services, while the potential for cost savings by permitting the 
sharing of ``support-type'' services is significant.
    149. One significant event that occurred after the NOPR was the 
passage of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which 
requires corporate officers to engage in informed oversight and 
requires CEOs to personally vouch for the veracity, timeliness and 
fairness of their companies' public disclosures.\75\ In addition, there 
is significant industry-wide concern that the automatic imputation rule 
would limit the information a director, officer or senior manager could 
receive, effectively restricting his or her ability to engage in the 
corporate governance function under the Sarbanes-Oxley Act.\76\
---------------------------------------------------------------------------

    \75\ Effective August 29, 2002, the Securities and Exchange 
Commission adopted a Final Rule that requires the principal 
executive and financial officers each to certify the financial and 
other information submitted in quarterly and annual reports to the 
SEC. See Ownership Reports and Trading by Officers, Directors and 
Principal Security Holders, Final Rule and Request for Comments, 67 
FR 56461 (Sept. 3, 2002).
    \76\ In July 2003, Commission staff met with representatives of 
the Securities and Exchange Commission (SEC) to get a better 
understanding how the SEC implements the Sarbanes-Oxley Act, and how 
the Commission's proposed information disclosure prohibitions would 
affect compliance with the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

    150. After carefully considering the comments, the Final Rule will 
adopt the ``no-conduit rule.'' As a result, interstate natural gas 
Transmission Providers, which have been operating under the stricter 
``automatic imputation rule'' since 1987, will now be covered by the 
more flexible ``no conduit rule.'' This rule will prohibit employees of 
a Transmission Provider from using any affiliate or employee of an 
affiliate as a conduit for sharing information that is prohibited by 
Sec.  358.5(b)(1) and (2).

B. Sharing of Operational Information

    151. Many commenters from virtually all segments of the gas 
industry argued 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 affiliated producers, gatherers or LDCs. They 
argued that prohibiting certain of these communications will endanger 
the reliability of the gas transmission systems. NGSA proposed that 
employees who are responsible solely for the physical operations of 
their structure (infrastructure operators) be permitted to share 
operational information because those infrastructure operators are not 
involved in other functions. Several commenters argued 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. The Major Issues Analysis recommended 
that Transmission Providers and their Energy Affiliates be permitted to 
share crucial operational information necessary to maintain the 
reliability of the transmission system.
    152. In supplemental comments, many commenters, including Alliance, 
BP America, EEI, Duke, First Energy, INGAA, National Grid, and 
Williston Basin supported the Staff's proposal. NiSource expressed 
concern that the exception may be too narrow because certain day-to-day 
information is needed on both sides of the meter to ensure that a gas 
pipeline meets its service obligations, regardless of whether the 
interconnected party is an affiliate. Several commenters encouraged the 
Commission to create a list of permissible communications. However, the 
AdHoc Marketers, Cinergy and Shell Offshore discouraged the Commission 
from creating a ``laundry list'' of permissible communications because 
it would be inadequate and incomplete and create regulatory 
uncertainty.
    153. The Commission is declining to create a list of permissible 
communications. However,

[[Page 69154]]

Transmission Providers are encouraged to contact the Hotline for 
guidance regarding permissible communications. Although the Commission 
will permit Transmission Providers and their Energy Affiliates to share 
crucial operational information necessary to maintain the reliability 
of the transmission system, we caution that this is not to be a 
mechanism to circumvent the rules.

C. Generation Dispatch

    154. Many commenters argued that the separation of functions and 
the information disclosure prohibitions suggested by the NOPR would 
prohibit a Transmission Provider from communicating crucial operational 
information with its affiliated retail sales function. They argue that 
prohibiting certain of these communications will endanger the 
reliability of the 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.\77\ Cinergy and 
PGE urge the Commission to codify the case-specific exemption that 
permits Transmission Providers to share with generation dispatch 
employees information necessary to perform such dispatch, provided that 
such information does not include specific information about individual 
third-party transmission arrangements.\78\ Although the Commission is 
not providing a list of types of communications, we will codify the 
exception that permits the sharing of generation-related information. 
For example, the Marketing and Energy Affiliates may have access to 
information such as area control error, regulation rates, but not the 
specific load of third party transmission customers. Likewise, 
wholesale merchant function employees or employees of the Energy 
Affiliates may not have access to information that would enable them to 
determine, directly or indirectly, the interchange schedules of third 
party customers, consistent with Commission precedent.\79\
---------------------------------------------------------------------------

    \77\ See, e.g., American Electric Power Service Corp., et al., 
81 FERC ] 61,332 (1997); Allegheny Power Service Corporation, et 
al., 81 FERC ] 61,339 (1997); Allegheny Power Service Corporation, 
et al., 84 FERC ] 61,131 (1998).
    \78\ See, e.g., Indianapolis Power and Light Co., 90 FERC ] 
61,174 (2000).
    \79\ APS, 84 FERC ] 61,131 (1998).
---------------------------------------------------------------------------

    155. Exelon notes that nuclear plant operators belonging to an 
Energy Affiliate of a Transmission Provider would be prohibited from 
receiving information they need to satisfy certain requirements of the 
Nuclear Regulatory Commission's regulations. For example, station 
blackout rules require that nuclear stations have real-time information 
on grid disturbances and the duration of power unavailability under 10 
CFR 50.63 (2003). The Transmission Provider would be permitted to share 
this type of information with its Energy Affiliate under this 
exception.

D. Voluntary Consent

    156. Although the NOPR did not discuss whether a non-affiliate 
could voluntarily consent, in writing, to allow a Transmission Provider 
to share the non-affiliate's information with the marketing affiliate, 
numerous commenters suggested that the Commission codify this 
exception.\80\ The Major Issues Analysis concurred with the commenters' 
suggestions and provided draft regulatory text to codify this policy. 
Carolina Power & Light, Duke Energy, EEI and Florida Power Corp., among 
others, supported the Staff's recommendation. However, in follow-up 
comments, several commenters, including Indicated Shippers, BP America, 
BP Energy, Exxon-Mobil, and Occidental Energy Marketing urged the 
Commission not to adopt the voluntary consent provision. They argue 
that it is anti-competitive because even if a shipper agreed to 
disclose the information, the consent may not truly be voluntary 
because the Transmission Provider could be exercising market power.
---------------------------------------------------------------------------

    \80\ See, e.g., Southern Natural Gas Company, 70 FERC ] 61,348 
(1995).
---------------------------------------------------------------------------

    157. The Commission is adopting this voluntary consent exception, 
which impacts practical operations of the transmission system, and is 
incorporated into the regulatory text of the Final Rule. Any shipper 
may file a formal complaint or approach the Enforcement Hotline on a 
confidential basis if a Transmission Provider is abusing this 
exception. Transmission Providers are required to preserve all written 
consents, and any amendments, transfers or withdrawals of them.

E. Transaction Specific Exemption

    158. Under current policy regarding the gas standards of conduct, 
an interstate natural gas pipeline is not required to contemporaneously 
disclose to all shippers information relating to a marketing 
affiliate's specific request for transportation service.
    159. In contrast, current Sec.  37.4(b)(3) and (4) of the 
Commission's regulations, 18 CFR 37.4(b)(3) and (4) (2003), prohibit 
the disclosure of any transmission information to wholesale merchant 
employees by off-OASIS communications. Order No. 889 did clarify that 
this does not foreclose customers, including wholesale merchant 
employees, from obtaining information about the status of particular 
transactions.\81\ However, the Transmission Provider must provide the 
same types of information with the same level of detail to all 
customers presenting similar requests.
---------------------------------------------------------------------------

    \81\ FERC Stats. & Regs., Regulation Preambles 1991-1996 ] 
31,035 at 31,597.
---------------------------------------------------------------------------

    160. The NOPR did not specifically address this issue.
    161. Virtually every segment of the gas industry requested 
clarification whether the Commission would continue the ``specific-
transaction exception.'' The Major Issues Analysis recommended that the 
Commission codify this policy and provided draft regulatory text for 
comment. All the follow-up comments from the gas industry, as well as 
Cinergy, EEI and Exelon supported the Major Issues Analysis and draft 
regulatory text. This exception, which impacts practical operations of 
the transmission system merits retention, and the regulatory text has 
been revised accordingly.
ii. Implementing Tariffs
    162. Proposed Sec.  358.5(c) combines Sec. Sec.  161.3(a), (b), 
(c), (d) and (k) and Sec.  37.4(b)(5), under which Transmission 
Providers are required to treat all customers in a fair and impartial 
manner. For example, Transmission Providers must apply tariff 
provisions in a manner that treats all transmission customers in a non-
discriminatory manner. Transmission Providers would be prohibited from 
giving their marketing and sales employees and Energy Affiliates' 
employees preferential treatment, such as more flexible service. There 
were no comments on this proposed section in response to the NOPR, and 
the Final Rule adopts the language as originally proposed.

I. Discounts

    163. The NOPR proposed that Sec.  358.5(d) would combine the 
requirements of Sec. Sec.  161.3(h) and 37.6(c)(3). The NOPR stated 
that proposed Sec.  358.5(d) is consistent with the way electric 
Transmission Providers currently treat discounts--any offer of a

[[Page 69155]]

discount for any transmission service made by the Transmission Provider 
must be announced to all potential customers solely by posting on the 
OASIS. The NOPR did not propose to change the OASIS requirements 
currently codified at Sec.  37.6(c)(3).
    164. Proposed Sec.  358.5(d) would change current discounting 
requirements for natural gas pipelines, however. Currently, Sec.  
161.3(h)(1), states that if a pipeline offers a discount to its 
marketing affiliate, the pipeline must make a comparable discount 
contemporaneously available to all similarly situated non-affiliated 
shippers. However, under current Sec.  161.3(h)(2), the pipeline is 
required to post relevant information (name of affiliate, maximum rate, 
discounted rate, delivery points, quantity of gas and conditions) on 
its Internet website within 24 hours of the time at which gas first 
flows under a discounted transaction. The NOPR also solicited comments 
on whether it would be necessary to continue posting discount 
information for gas transactions under proposed Sec.  358.5(d) when 
rate information is required to be posted under Sec. Sec.  284.13(b)(1) 
and (2) of the Commission's regulations.\82\
---------------------------------------------------------------------------

    \82\ Under 18 CFR 284.13(b)(1) and (2), a pipeline must post on 
its Internet Web site, no later than the time of the first 
nomination under a transaction, firm contract information and 
interruptible agreement information, including the charged rate, the 
quantity of gas scheduled, receipt and delivery points, the identity 
of the shipper, and whether the shipper is affiliated.
---------------------------------------------------------------------------

    165. Commenters from the electric industry were largely silent on 
this issue.
    166. A few commenters, APGA, Amoco/BP, CPUC and Reliant, offered 
unqualified support for the requirement to offer all discounts by 
posting on OASIS or Internet websites. In addition, the Ohio 
Commission, Michigan Commission, and Oklahoma Commission stated that 
advance knowledge of discounts enables affiliates to profit from 
``insider trading.'' Twenty-six commenters, primarily from the natural 
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 industries. In the gas industry, pipelines 
face pipeline-to-pipeline competition and competition from alternative 
fuel sources. They argue that the posting requirement is inconsistent 
with selective discounting for the gas industry and that this proposal 
would discourage discounting. Many expressed concern about the 
vagueness of the word ``offer'' and offered various definitions or 
proposals for when the information should be posted. Several 
commenters, AGA, Dominion, Industrials and NiSource, recommended that 
discounts be posted after they are executed.
    167. The Major Issues Analysis recommended that the Final Rule 
require the transmission provider to post a discount at the conclusion 
of negotiations, ``when the discount offer is contractually binding.'' 
The majority of follow-up comments supported the Major Issues Analysis 
recommendation. However, the Transmission Group is concerned that the 
discount posting requirements will discourage shippers from making 
early commitments to pipeline projects, e.g., precedent agreements.
    168. The Final Rule adopts Commission staff's recommendation. This 
result balances the importance of equal and timely access to discount 
information with clarity. The term ``offer'' could have been 
interpreted in a variety of ways and the text proposed by staff 
provided additional clarification on the timing of the posting. 
However, the current requirement, under Sec.  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 markets.
    169. The Transmission Group has not provided any reason for 
claiming that the posting of a discount ``when the discount offer is 
contractually binding'' would discourage a potential shipper from 
entering into a precedent agreement. The Commission disagrees with the 
Transmission Group's suggestion that the posting of discounts will 
discourage precedent agreements.

V. Conforming Changes

    170. The Commission proposes to make conforming changes to the 
regulations to delete references to Parts 37 and 161, as necessary, and 
add references to Part 358.

VI. Additional Policy Changes Not Adopted

    171. The NOPR also solicited comments on specific additional policy 
suggestions, such as structural remedies, capacity limits, revising 
capacity allocation methods, disgorgement of opportunity costs 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 discussed in the NOPR. Very few commenters supported any of 
the measures. At this time, the Commission is not adopting any of these 
additional measures. However, we note that these are the some of the 
types of remedies that may be imposed if a Transmission Provider 
violates the standards of conduct.
    172. The NOPR also solicited comments on whether the Commission 
should, in this proceeding or in a separate proceeding, codify the 
electric market-based rate power sales codes of conduct to govern the 
relationship between public utilities and their power marketing 
affiliates. The Commission has decided not to codify the codes of 
conduct at this time, but may do so in a separate proceeding.

VII. Regulatory Flexibility Act Certification

    173. The Regulatory Flexibility Act \83\ requires rulemakings to 
contain either a description and analysis of the effect that a rule 
will have on small entities or to certify that the rule will not have a 
significant economic effect on a substantial number of small entities. 
Because most Transmission Providers do not fall within the definition 
of ``small entity,'' \84\ the Commission certifies that this rule will 
not have a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \83\ 5 U.S.C. 601-612 (2000).
    \84\ See 5 U.S.C. 601(3) (2000).
---------------------------------------------------------------------------

VIII. Information Collection Statement

    174. The Office of Management and Budget's (OMB) regulations 
require approval of certain information collection requirements imposed 
by agency rules.\85\ Upon approval of a collection of information, OMB 
will assign an OMB control number and an expiration date. Respondents 
subject to the filing requirements of this rule will not be penalized 
for failing to respond to these collections of information unless the 
collections of information display a valid OMB control number.
---------------------------------------------------------------------------

    \85\ 5 CFR 1320.11 (2003).
---------------------------------------------------------------------------

    175. The Final Rule replaces existing rules under Parts 161 and 37 
with comparable rules at Part 358. Under the current requirements at 
Parts 161 and 37, Transmission Providers are posting certain 
information with respect to their marketing affiliates or wholesale 
merchant functions on their respective OASIS nodes or Internet 
websites. The final rule also requires the Transmission Providers to 
post the same information on their OASIS or Internet websites with 
respect to the Transmission

[[Page 69156]]

Providers' Energy Affiliates. This information helps potential 
customers and the Commission determine whether or not there has been 
discrimination in pipeline/affiliate/nonaffiliated transactions.
    176. The Commission is submitting these posting requirements to OMB 
for its review and approval under Section 3507(d) of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3507(d) (2000). Interested persons may 
obtain information on the reporting requirements by contacting the 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426 (Attention: Michael Miller, Office of the 
Executive Director, 202-502-8415) or from the Office of Management and 
Budget (Attention: Desk Officer for the Federal Energy Regulatory 
Commission, fax: 202-395-7285, e-mail [email protected].).
Public Reporting Burden
    177. The Commission did not receive specific comments concerning 
its burden estimates and uses the same estimates here in the Final 
Rule. Comments on the substantive issues raised in the NOPR are 
addressed elsewhere in the Final Rule.

----------------------------------------------------------------------------------------------------------------
                                                 Number of        Number of        Hours per       Total annual
               Data collection                  respondents       responses         response          hours
----------------------------------------------------------------------------------------------------------------
                                                         257                1               65           16,705
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection: (Reporting + Recordkeeping, (if 
appropriate)) = 16,705.
    Information Collection Costs:
    178. The Commission sought comments on the costs to comply with 
these requirements. No comments were received. The Commission is 
projecting the average annualized cost per respondent to be the 
following: total hours divided by 2,080 (total work hours in a year) 
times $117,041 = $939,985.53.

 
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Annual Capital/Startup costs.................................         $0
Annualized Costs (Operations & Maintenance)..................    939,985
                                                              ----------
    Total Annualized Costs...................................    939,985
------------------------------------------------------------------------

    Title: FERC-592 and 717.
    Action: Revision of Currently Approved Collection of Information.
    OMB Control No: 1902-0157 and 1902-173.
    Respondents: Business or other for profit.
    Frequency of Responses: On occasion.
    Necessity of the Information:
    179. The information is necessary to ensure that all regulated 
transmission providers treat all transmission customers in a non-
discriminatory basis. By requiring the posting of information regarding 
transmission, all non-affiliated customers have the ability to acquire 
information simultaneously with affiliated customers in a pro-
competitive environment. The information also permits the market 
participants and the Commission to monitor the transmission market in a 
timely and efficient manner.
Internal Review
    180. The Commission has reviewed the requirements pertaining to 
natural gas pipelines and transmitting electric utilities and 
determined the revisions in the final rule are necessary because of the 
evolving energy market. The Commission is consolidating the standards 
of conduct to govern the relationships between regulated transmission 
providers and their affiliates that engage in or are involved in 
transmission transactions or manage or control transmission capacity. 
Although the current standards of conduct limit a Transmission 
Provider's ability to make or grant undue preferences to the wholesale 
merchant function of their businesses (in the electric area) or to 
their marketing affiliates, they do not cover the Transmission 
Providers' other non-marketing affiliates.
    181. These requirements conform to the Commission's plan for 
efficient information collection, communication, and management within 
the gas and electric industries. The Commission has assured itself, by 
means of internal review, that there is specific, objective support for 
the burden estimates associated with the information requirements.
    182. Interested persons may obtain information on the reporting 
requirements by contacting: Federal Energy Regulatory Commission, 888 
First Street, NE, Washington, DC 20426, Attention: Michael Miller, 
Office of the Chief Information Officer, Phone: (202) 208-1415, fax: 
(202) 208-2425, e-mail: [email protected].
    183. Comments on the requirements of the Final Rule may also be 
sent to the Office of Information and Regulatory Affairs, Office of 
Management and Budget, Washington, DC 20503 [Attention: Desk Officer 
for the Federal Energy Regulatory Commission].

IX. Environmental Statement

    184. Commission regulations require that an environmental 
assessment or an environmental impact statement be prepared for any 
Commission action that may have a significant adverse effect on the 
human environment.\86\ The Commission has categorically excluded 
certain actions from these requirements as not having a significant 
effect on the human environment.\87\ This final rule falls within the 
categorical exclusions provided in the Commission's regulations.\88\ 
Therefore, an environmental assessment is unnecessary and has not been 
prepared in this rulemaking.
---------------------------------------------------------------------------

    \86\ Regulations Implementing National Environmental Policy Act, 
52 FR 47897 (Dec. 17, 1987); FERC Stats. & Regs. ] 30,783 (1987).
    \87\ 18 CFR 380.4 (2003).
    \88\ 18 CFR 380.4(a)(2)(ii) and 380.4(a)(5) (2003).
---------------------------------------------------------------------------

X. Document Availability

    185. In addition to publishing the full text of this document in 
the Federal Register, the Commission also provides all interested 
persons an opportunity to view and/or print the contents of this 
document via the Internet through the Commission's home page http://www.ferc.gov and in the Commission'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.
    186. From the Commission's home page on the Internet, this 
information is available in the eLibrary. The full text of this 
document is available on eLibrary in PDF and Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    187. User assistance is available for eLibrary and the Commission's 
web site during normal business hours from FERC Online Support (by 
phone at (866) 208-3676 (toll free) or for TTY, contact (202) 502-6652, 
or by e-mail at [email protected], for TTY (202) 502-8659.

[[Page 69157]]

XI. Effective Date and Congressional Notification

    188. This final rule will take effect on February 9, 2004. The 
Commission has determined with the concurrence of the Administrator of 
the Office of Information and Regulatory Affairs of the Office of 
Management and Budget that this rule is a ``non-major rule'' within the 
meaning of Section 251 of the Small Business Regulatory Enforcement 
Fairness Act of 1996.\89\ The Commission will submit the final rule to 
both houses of Congress and the General Accounting Office.\90\
---------------------------------------------------------------------------

    \89\ 5 U.S.C. 804(2) (2000).
    \90\ 5 U.S.C. 801(a)(1)(A) (2000).
---------------------------------------------------------------------------

List of Subjects

18 CFR Part 37

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

18 CFR Part 161

    Natural gas, Reporting and recordkeeping requirements.

18 CFR Part 250

    Natural gas, Reporting and recordkeeping requirements.

18 CFR Part 284

    Continental Shelf, Natural gas, Reporting and recordkeeping 
requirements.

18 CFR Part 358

    Electric power plants, Electric utilities, Natural gas, Reporting 
and recordkeeping requirements.

    By the Commission. Commissioner Brownell dissenting in part with 
a separate statement attached.

Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends Chapter I, 
Title 18 of the Code of Federal Regulations, as follows:

PART 37--OPEN ACCESS SAME-TIME INFORMATION SYSTEMS

0
1. The authority citation for part 37 continues to read as follows:

    Authority: 16 U.S.C. 791-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.


0
2. In part 37, the heading is revised to read as set forth above.


Sec.  37.4  [Removed and Reserved]

0
3. Section 37.4 is removed and reserved.


Sec.  37.6  [Amended]

0
4. In Sec.  37.6(g)(3), the word ``Sec.  37.4(b)(2)'' is removed and 
the word ``Sec.  358.4(c)'' is added in its place and in Sec.  
37.6(g)(4), the word ``Sec.  37.4(b)(5)(iii)'' is removed and the word 
``Sec.  358.5(c)(4)'' is added in its place.

PART 161--[REMOVED]

0
5. Part 161 is removed in its entirety.

PART 250--FORMS

0
6. The authority citation for part 250 continues to read as follows:

    Authority: 16 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352.


Sec.  250.16  [Amended]

0
7. In Sec.  250.16(a), the word ``Sec.  161.2'' is removed and the word 
``Sec.  358.3'' is added in its place and in Sec.  250.16(e), the word 
``Sec.  161.3'' is removed and the words ``Sec. Sec.  358.4 and 358.5'' 
are added in its place.

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES


Sec.  284.13  [Amended]

0
8. In Sec.  284.13(a), the word ``Part 161'' is removed and the word 
``part 358'' is added in its place.


Sec.  284.286  [Amended]

0
9. In Sec.  284.286(c), the words ``Sec.  161.3(a), (b), (d), and (k) 
of this chapter and comply with Sec.  161.3(c), (e), (f), (g), (h), and 
(l) of this chapter'' are removed and the word ``part 358'' is added in 
their place.

0
10. Subchapter S, consisting of part 358, is added to read as follows:

SUBCHAPTER S--STANDARDS OF CONDUCT FOR TRANSMISSION PROVIDERS

PART 358--STANDARDS OF CONDUCT

Sec.
358.1 Applicability.
358.2 General principles.
358.3 Definitions.
358.4 Independent functioning.
358.5 Non-discrimination requirements.

    Authority: 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 791-825r, 
2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7352.


Sec.  358.1  Applicability.

    (a) This part applies to any interstate natural gas pipeline that 
transports gas for others pursuant to subpart A of part 157 or subparts 
B or G of part 284 of this chapter.
    (b) This part applies to any public utility that owns, operates, or 
controls facilities used for the transmission of electric energy in 
interstate commerce.
    (c) This part does not apply to a public utility Transmission 
Provider that is a Commission-approved Independent System Operator 
(ISO) or Regional Transmission Organization (RTO). If a public utility 
transmission owner participates in a Commission-approved ISO or RTO and 
does not operate or control its transmission facilities and has no 
access to transmission, customer or market information covered by Sec.  
385.5(b), it may request an exemption from this part.
    (d) A Transmission Provider may file a request for an exemption 
from all or some of the requirements of this part for good cause.


Sec.  358.2  General principles.

    (a) A Transmission Provider's employees engaged in transmission 
system operations must function independently from the Transmission 
Provider's marketing and sales employees, and from any employees of its 
Energy Affiliates.
    (b) A Transmission Provider must treat all transmission customers, 
affiliated and non-affiliated, on a non-discriminatory basis, and must 
not operate its transmission system to preferentially benefit an Energy 
Affiliate.


Sec.  358.3  Definitions.

    (a) Transmission Provider means:
    (1) Any public utility that owns, operates or controls facilities 
used for the transmission of electric energy in interstate commerce; or
    (2) Any interstate natural gas pipeline that transports gas for 
others pursuant to subpart A of part 157 or subparts B or G of part 284 
of this chapter.
    (b) Affiliate means:
    (1) Another person which controls, is controlled by or is under 
common control with, such person, and
    (2) For any exempt wholesale generator, as defined under Section 
32(a) of the Public Utility Holding Company Act of 1935, as amended, 
the same as provided in Section 214 of the Federal Power Act.
    (c) Control (including the terms ``controlling,'' ``controlled 
by,'' and ``under common control with'') as used in this part and Sec.  
250.16 of this chapter, includes, but is not limited to, the 
possession, directly or indirectly and whether acting alone or in 
conjunction with others, of the authority to direct or cause the 
direction of the management or policies of a company. A voting

[[Page 69158]]

interest of 10 percent or more creates a rebuttable presumption of 
control.
    (d) 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.
    (5) An Energy Affiliate does not include:
    (i) A foreign affiliate that does not participate in U.S. energy 
markets;
    (ii) An affiliated Transmission Provider;
    (iii) A holding, parent or service company that does not engage in 
energy or natural gas commodity markets or is not involved in 
transmission transactions in U.S. energy markets;
    (iv) An affiliate that purchases natural gas or energy solely for 
its own consumption and does not use an affiliated Transmission 
Provider for transmission of that natural gas or energy.
    (v) A state-regulated local distribution company that does not make 
any off-system sales.
    (e) Marketing, sales or brokering means a sale for resale of 
natural gas or electric energy in interstate commerce. Sales and 
marketing employee or unit includes:
    (1) An interstate natural gas pipeline's sales operating unit, to 
the extent provided in Sec.  284.286 of this chapter, and
    (2) A public utility Transmission Provider's energy sales unit, 
unless such unit engages solely in bundled retail sales.
    (3) Marketing or sales does not include incidental purchases or 
sales of natural gas to operate interstate natural gas pipeline 
transmission facilities.
    (f) Transmission means natural gas transportation, storage, 
exchange, backhaul, or displacement service provided pursuant to 
subpart A of part 157 or subparts B or G of part 284 of this chapter; 
and electric transmission, network or point-to-point service, 
reliability service, ancillary services or other methods of 
transportation or the interconnection with jurisdictional transmission 
facilities.
    (g) Transmission Customer means any eligible customer, shipper or 
designated agent that can or does execute a transmission service 
agreement or can or does receive transmission service, including all 
persons who have pending requests for transmission service or for 
information regarding transmission.
    (h) Open Access Same-time Information System or OASIS refers to the 
Internet location where a public utility posts the information, by 
electronic means, required by part 37 of this chapter.
    (i) Internet Web site refers to the Internet location where an 
interstate natural gas pipeline posts the information, by electronic 
means, required by Sec. Sec.  284.12 and 284.13 of this chapter.
    (j) Transmission Function employee means an employee, contractor, 
consultant or agent of a Transmission Provider who conducts 
transmission system operations or reliability functions, including, but 
not limited to, those who are engaged in day-to-day duties and 
responsibilities for planning, directing, organizing or carrying out 
transmission-related operations.


Sec.  358.4  Independent functioning.

    (a) Separation of functions.
    (1) Except in emergency circumstances affecting system reliability, 
the transmission function employees of the Transmission Provider must 
function independently of the Transmission Provider's Marketing or 
Energy Affiliates' employees.
    (2) Notwithstanding any other provisions in this section, in 
emergency circumstances affecting system reliability, a Transmission 
Provider may take whatever steps are necessary to keep the system in 
operation. Transmission Providers must report to the Commission and 
post on the OASIS or Internet website, as applicable, each emergency 
that resulted in any deviation from the standards of conduct, within 24 
hours of such deviation.
    (3) The Transmission Provider is prohibited from permitting the 
employees of its Marketing or Energy Affiliates from:
    (i) Conducting transmission system operations or reliability 
functions; and
    (ii) Having access to the system control center or similar 
facilities used for transmission operations or reliability functions 
that differs in any way from the access available to other transmission 
customers.
    (4) Transmission Providers are permitted to share support employees 
and field and maintenance employees with their Marketing and Energy 
Affiliates.
    (b) Identifying affiliates on the public Internet.
    (1) A Transmission Provider must post the names and addresses of 
its sales and marketing units and Energy Affiliates on its OASIS or 
Internet Web site.
    (2) A Transmission Provider must post on its OASIS or Internet Web 
site, as applicable, a complete list of the facilities shared by the 
Transmission Provider and its marketing or sales units or any Energy 
Affiliates, including the types of facilities shared and their 
addresses.
    (3) A Transmission Provider must post comprehensive organizational 
charts showing:
    (i) The organizational structure of the parent corporation with the 
relative position in the corporate structure of the Transmission 
Provider, marketing and sales units and any Energy Affiliates;
    (ii) For the Transmission Provider, the business units, job titles 
and descriptions, and chain of command for all positions, including 
officers and directors, with the exception of clerical, maintenance, 
and field positions. The job titles and descriptions must include the 
employee's title, the employee's duties, whether the employee is 
involved in transmission or sales, and the name of the supervisory 
employees who manage non-clerical employees involved in transmission or 
sales.
    (iii) For all employees who are engaged in transmission functions 
for the Transmission Provider and marketing or sales functions or who 
are engaged in transmission functions for the Transmission Provider and 
are employed by any of the Energy Affiliates, the Transmission Provider 
must post the name of the business unit within the marketing or sales 
unit or the Energy Affiliate, the organizational structure in which the 
employee is located, the employee's name, job title and job description 
in the marketing or sales unit or Energy Affiliate, and the employee's 
position within the chain of command of the marketing or sales unit or 
Energy Affiliate.
    (iv) The Transmission Provider must update the information on its 
OASIS or Internet website, as applicable, required by Sec. Sec.  
358.4(1), (2) and (3) within seven business days of any change, and 
post the date on which the information was updated.
    (v) The Transmission Provider must post information concerning 
potential merger partners as affiliates within seven days after the 
merger is announced.
    (vi) All OASIS or Internet website postings required by part 358 
must comply, as applicable, with the requirements of Sec.  37.3 or 
Sec. Sec.  284.12(a) and (c)(3)(v) of this chapter.
    (c) Transfers. Employees of the Transmission Provider, marketing or

[[Page 69159]]

sales unit or Energy Affiliates are not precluded from transferring 
among such functions as long as such transfer is not used as a means to 
circumvent the standards of conduct. Notices of any employee transfers 
must be posted on the OASIS or Internet website, as applicable. The 
information to be posted must include: the name of the transferring 
employee, the respective titles held while performing each function 
(i.e., on behalf of the Transmission Provider, Marketing Function or 
Energy Affiliate), and the effective date of the transfer. The 
information posted under this section must remain on the OASIS or 
Internet website, as applicable, for 90 days.
    (d) Books and records. A Transmission Provider must maintain its 
books of account and records (as prescribed under parts 101, 125, 201 
and 225 of this chapter) separately from those of its Energy Affiliates 
and these must be available for Commission inspections.
    (e) Written procedures.
    (1) By February 9, 2004, each Transmission Provider is required to 
file with the Commission and post on the OASIS or Internet website a 
plan and schedule for implementing the standards of conduct.
    (2) Each Transmission Provider must be in full compliance with the 
standards of conduct by June 1, 2004.
    (3) The Transmission Provider must post on the OASIS or Internet 
website, current written procedures implementing the standards of 
conduct in such detail as will enable customers and the Commission to 
determine that the Transmission Provider is in compliance with the 
requirements of this section by June 1, 2004 or within 30 days of 
becoming subject to the requirements of part 358.
    (4) Transmission Providers will distribute the written procedures 
to all Transmission Provider employees and employees of the Marketing 
and Energy Affiliates.
    (5) Transmission Providers shall require all of their employees to 
attend training and sign an affidavit certifying that they have been 
trained regarding the standards of conduct requirements.
    (6) Transmission Providers are required to designate a Chief 
Compliance Officer who will be responsible for standards of conduct 
compliance.


Sec.  358.5  Non-discrimination requirements.

    (a) Information access.
    (1) The Transmission Provider must ensure that any employee of the 
Transmission Provider engaged in marketing or sales or any employee of 
any Energy Affiliate may only have access to that information available 
to the Transmission Provider's transmission customers (i.e., the 
information posted on the OASIS or Internet website, as applicable), 
and must not have access to any information about the Transmission 
Provider's transmission system that is not available to all users of an 
OASIS or Internet website, as applicable.
    (2) The Transmission Provider must ensure that any employee of the 
Transmission Provider engaged in marketing or sales or any employee of 
any Energy Affiliate is prohibited from obtaining information about the 
Transmission Provider's transmission system (including, but not limited 
to, information about available transmission capability, price, 
curtailments, storage, ancillary services, balancing, maintenance 
activity, capacity expansion plans or similar information) through 
access to information not posted on the OASIS or Internet website or 
that is not otherwise also available to the general public without 
restriction.
    (b) Prohibited disclosure.
    (1) An employee of the Transmission Provider may not disclose to 
its marketing or sales employees, or to employees of the Transmission 
Provider's Energy Affiliates any information concerning the 
transmission system of the Transmission Provider or the transmission 
system of another (including, but not limited to, information received 
from non-affiliates or information about available transmission 
capability, price, curtailments, storage, ancillary services, 
balancing, maintenance activity, capacity expansion plans, or similar 
information) through non-public communications conducted off the OASIS 
or Internet Web site, through access to information not posted on the 
OASIS or Internet Web site that is not contemporaneously available to 
the public, or through information on the OASIS or Internet Web site 
that is not at the same time publicly available.
    (2) A Transmission Provider may not share any information, acquired 
from nonaffiliated transmission customers or potential nonaffiliated 
transmission customers, or developed in the course of responding to 
requests for transmission or ancillary service on the OASIS or Internet 
website, with employees of its marketing or Energy Affiliates, except 
to the limited extent information is required to be posted on the OASIS 
or Internet website in response to a request for transmission service 
or ancillary services.
    (3) If an employee of the Transmission Provider discloses 
information in a manner contrary to the requirements of Sec.  
358.5(b)(1) and (2), the Transmission Provider must immediately post 
such information on the OASIS or Internet Web site.
    (4) A non-affiliated transmission customer may voluntarily consent, 
in writing, to allow the Transmission Provider to share the non-
affiliated customer's information with a marketing or Energy Affiliate.
    (5) A Transmission Provider is not required to contemporaneously 
disclose to all transmission customers or potential transmission 
customers information covered by Sec.  358.5(b)(1) if it relates solely 
to a Marketing or Energy Affiliate's specific request for transmission 
service.
    (6) A Transmission Provider may share generation information 
necessary to perform generation dispatch with its Marketing and Energy 
Affiliate that does not include specific information about individual 
third party transmission transactions or potential transmission 
arrangements.
    (7) Neither a Transmission Provider nor an employee of a 
Transmission Provider is permitted to use anyone as a conduit for 
sharing information covered by the prohibitions of Sec.  358.5(b)(1) 
and (2) with a marketing or Energy Affiliate.
    (8) A Transmission Provider is permitted to share crucial operating 
information with its Energy Affiliate to maintain the reliability of 
the transmission system.
    (c) Implementing tariffs.
    (1) A Transmission Provider must strictly enforce all tariff 
provisions relating to the sale or purchase of open access transmission 
service, if these tariff provisions do not permit the use of 
discretion.
    (2) A Transmission Provider must apply all tariff provisions 
relating to the sale or purchase of open access transmission service in 
a fair and impartial manner that treats all transmission customers in a 
non-discriminatory manner, if these tariff provisions permit the use of 
discretion.
    (3) A Transmission Provider must process all similar requests for 
transmission in the same manner and within the same period of time.
    (4) The Transmission Provider must maintain a written log, 
available for Commission audit, detailing the circumstances and manner 
in which it exercised its discretion under any terms of the tariff. The 
information contained in this log is to be posted on the OASIS or 
Internet Web site within 24 hours of when a Transmission Provider 
exercises

[[Page 69160]]

its discretion under any terms of the tariff.
    (5) The Transmission Provider may not, through its tariffs or 
otherwise, give preference to its own marketing or sales function or to 
any Energy Affiliate, over any other wholesale customer in matters 
relating to the sale or purchase of transmission service (including, 
but not limited to, issues of price, curtailments, scheduling, 
priority, ancillary services, or balancing).
    (d) Discounts.
    Any offer of a discount for any transmission service made by the 
Transmission Provider must be posted on the OASIS or Internet Web site 
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 Web site for 
60 days from the date of posting.

    Note: The following Attachments will not be published in the 
Code of Federal Regulations.


List of Commenters

Ad Hoc Marketers Group (Ad Hoc Marketers)
AEC Storage and Hub Services, Inc.
Alabama Electric Cooperative, Inc.
Alabama Public Service Commission
Allegheny Energy Service Corporation
Allegheny Power
Algonquin Gas Transmission, LP (Algonquin)
Alliance Pipeline, LP (Alliance)
Alcoa Power Generating, Inc.
Apache Corporation
American Antitrust Institute (AAI)
American Electric Power Service Corporation (AEP)
American Forest and Paper Association (AFPA)
American Gas Association (AGA)
American Iron & Steel Institute
American Public Gas Association (APGA)
American Public Power Association (APPA)
Amoco Production Company and BP Energy Co. (Amoco/BP)
Arkansas Electric Cooperative Corporation
Association of Texas Intrastate Natural Gas Pipelines
Atlanta Gas Light Company
Atlantic City Electric Company and Delmarva Power and Light Co.
Atmos Energy Corporation
Avista Corporation (Avista)
B-R Pipeline Company (B-R Pipeline)
BP Energy Co. (BP)
Bangor Hydro-Electric Company
Basin Electric Power Cooperative, Inc. (Basin Electric)
Bonneville Power Administration (BPA)
Bowater, Inc.
Businesses Advocating Tariff Equity
California Dairy Coalition
California Natural Gas Producers Association
California Oil & Gas Association
California Independent Petroleum Association
California Public Utilities Commission (CPUC)
Calpine Corporation (Calpine)
Canadian Association of Petroleum Producers
Carolina Power & Light Company (CP&L)
CenterPoint Energy Gas Transmission Company (CEGT)
Chattanooga Gas Company
Cheyenne Light Fuel & Power Company
Cinergy Services, Inc. (Cinergy)
City of Memphis
City of New Orleans
CLECO Power LLC (Cleco)
CMS Energy, Inc. (CMS)
Coalition of Midwest Transmission Customers
Colorado Springs Utilities (Colorado Springs)
Commonwealth Edison Company
Congressman Michael Oxley
Connecticut DPUC (Connecticut Commission)
Connecticut Industrial Energy Consumers (New England Pool)
Connexus Energy
Consolidated Edison Company of New York
Delmarva Power & Light Co.
Dairyland Power Cooperative
Discovery Gas Transmission LLC (Discovery)
Discovery Producer Services LLC
Distrigas of Massachusetts Corporation (Distrigas of Massachusetts)
Dominion Resources, Inc. (Dominion)
DTE Energy
Duke Energy Corporation (Duke Energy)
Dynegy, Inc. (Dynegy)
Dynegy Power Marketing, Inc.
East Texas Electric Cooperative, Inc.
Edison Electric Institute (EEI)
El Paso Corporation
El Paso Energy Partners, LP
El Paso Merchant Energy, LP
Electric Power Supply Association (EPSA)
Electricity Consumers Resource Council
Empire District Electric Co.
Enbridge, Inc.
Energy East Companies and Rochester Gas and Electric Corporation
Entergy-Koch Trading, LP
Entergy Services, Inc. (Entergy)
Equitable Resources, Inc. (Equitable)
Exelon Corporation (Exelon)
Exelon Generation Co., LLC
Federal Trade Commission (FTC)
First Electric Cooperative Corp.
FirstEnergy Corporation
Florida Power Corporation (FPC)
Florida Power & Light Company (FP&L)
Florida Public Service Commission (Florida Commission)
Fort Chicago Energy Partners, LP
Gas Processors Association
Georgia Industrial Group
Green Mountain Power Corporation
Gulf South Pipeline Company (Gulf South)
Gulfstream Natural Gas System, LLC
Hampshire Storage Company
Idaho Public Utilities Commission (Idaho Commission)
Illinois Commerce Commission (Illinois Commission)
Illinois Oil & Gas Association
Industrial Gas Users of Florida
Independent Oil & Gas Association of West Virginia (IOGA)
Independent Oil & Gas Association of Pennsylvania
Independent Petroleum Association of America, including, California 
Natural Gas Producers Association, California Oil and Gas 
Association, Illinois Oil and Gas Association, International 
Association of GeoPhysical Contractors, Kansas Independent Oil and 
Gas Association, Michigan Oil and Gas Association, Ohio Oil and Gas 
Association, Pennsylvania Oil and Gas Association, Permian Basin 
Petroleum Association, Independent Oil and Gas Association of West 
Virginia and Wyoming
Independent Producers Association (IPAA)
Industrial Energy Consumers of Pennsylvania
Industrial Energy Users
Interstate Natural Gas Association of America (INGAA)
International Association of Geophysical Contractors
Kansas Independent Oil & Gas Association
Keyspan Corporation (Keyspan)
Kinder Morgan (KM)
Kinder Morgan Interstate Gas Transmission LLC
Kinder Morgan Interstate Pipelines
Large Public Power Council
LG&E Energy Corporation (LG&E)
Long Island Lighting Company (LILCO)
Long Island Power Authority (LIPA)
M&N Management Company
Maritimes & Northeast Pipeline, LLC (Maritimes & Northeast Pipeline)
Michigan Oil & Gas Association
Michigan Public Service Commission (Michigan Commission)
Midwest Energy, Inc.
Midwest ISO (MISO)
Midwest United Energy LLC
MIGC, Inc. (MIGC)
Minnesota Department of Commerce (Minnesota Commission)
Mirant Americas Energy Marketing (Mirant)
Mississippi Public Utilities Staff (Mississippi Commission)
Modesto Irrigation District (MID)
Monongahela Power Company
Montana Power Co.
Montana-Dakota Utilities Company
National Association of Regulatory Utilities Commissioners (NARUC)
National Association of State Utility Consumer Advocates (NASUCA)
National Energy Marketers Association (NEMA)
National Fuel Gas Distribution Corporation
National Fuel Gas Supply Corporation
National Grid USA (National Grid)
National Propane Gas Association
National Rural Electric Cooperative Association (NRECA)
Natural Gas Pipeline Co. of America
Natural Gas Supply Association (NGSA)
NEPOOL Industrial Customer Coalition
New York Independent System Operator (NYISO)
New York State Public Service Commission (New York Commission)

[[Page 69161]]

NICOR Gas
Niagara Mohawk Power Corporation
NiSource, Inc. (NiSource)
North Carolina Utilities Commission (North Carolina Commission)
Northeast Utilities Service Company
Northeastern Independent Transmission Co.
Northern States Power Company
Northwest Natural Gas Company
Ohio Oil & Gas Association
Oklahoma Corporation Commission (Oklahoma Commission)
Oklahoma Gas and Electric Company (OGE)
Orlando Utilities Commission
PacifiCorp
Pancanadian Energy Services, Inc.
PECO Energy Company
Pennsylvania Oil & Gas Association
Pennsylvania Public Utility Commission (Pennsylvania Commission)
Permian Basin Petroleum Association
Piedmont Natural Gas Company
Pinnacle West Companies (Pinnacle West)
Pinnacle West Capital Corporation
PJM Industrial Customer Coalition
Portland General Electric Company
Portland Natural Gas Transmission System
Potomac Edison Company
PPL Companies
Process Gas Consumers Group, including American Forest and Paper 
Association, American Iron and Steel Institute, Georgia Industrial 
Group, Industrial Gas Users of Florida, Florida Industrial Gas 
Users, U.S. Gypsum Co. (Industrials)
Proliance Energy, LLC
PSEG Companies
Public Alliance for Community Energy
Public Service Co. of Colorado
Public Service Co. of North Carolina
Public Utilities Commission of Ohio (Ohio Commission)
Public Utilities Commission of Michigan (Michigan Commission)
Puget Sound Energy, Inc.
Questar Corporation
Questar Market Resources, Inc.
Questar Pipeline Co., Questar Gas Co., Questar Regulated Services 
Co. (Questar)
Reliant Resource, Inc. (Reliant)
Rural Utilities Service of the U.S. Department of Agriculture (Rural 
Utilities Service)
Salt River Project
SCANA Energy Marketing, Inc.
SCANA Services, Inc.
SCG Pipeline, Inc. (SCG)
Seminole Electric Cooperative, Inc.
Sempra Energy
Shell Gas Transmission, LLC (Shell Gas)
Shell Offshore, Inc. (Shell Offshore)
South Carolina Electric & Gas Co.
South Carolina Pipeline Corporation
South Carolina Public Service Authority
Southern California Edison Co.
Southern Company Services, Inc. (Southern)
Southwest Gas Corporation (Southwest Gas)
Southwest Transmission Cooperative
Southwestern Public Service Co.
State of Arkansas
State of Colorado
State of Illinois
State of New York
State of Pennsylvania
State of Washington
State of Wyoming
Superior Natural Gas Corporation
Teco Energy, Inc.
Texas Eastern Transmission Company
The New Power Company
Transcanada Pipelines Limited
Transmission Access Policy Study Group (TAPS)
Transmission Group (Northern Natural Gas Co. et al.)
Unaffiliated Marketers
UtiliCorp United, Inc.
United States Gypsum Company
Upper Peninsula Power Company
US Gypsum Corporation
USG Pipeline Company
Utah Associated Municipal Power Systems
Utah Division of Public Utilities (Utah Commission)
Vector Pipeline
Vermont Department of Public Service (Vermont Commission)
Viking Gas Transmission Co. (Viking)
Virginia Natural Gas Company
Walter Oil & Gas Corporation
Wastach Energy Corporation
Washington Gas Light Company
Washington Utilities & Transportation Commission (Washington 
Commission)
Wells Rural Electric Company
West Penn Power Company
West Virginia Energy Users Group
Western Resources, Inc., including Kansas Power & Light (Western 
Resources)
Westgas Interstate, Inc.
Williams Companies (Williams)
Williams Energy Marketing & Trading Co. (WEMT)
Williston Basin Interstate Pipeline Company (Williston Basin)
Wisconsin Electric Power Co.
Wisconsin Gas Company
Wisconsin Public Service Corporation
Wyoming Independent Producers Association
Wyoming Public Service Commission (Wyoming Commission)
XCEL Energy Companies (Xcel)
XCEL Energy Services, Inc.

Brownell, Commissioner, dissenting in part
    1. The proposed changes to our standards of conduct generated a 
great amount of comment. There were many questions raised, 
clarifications requested and alternative proposals advocated. Many 
commenters argued that a general rule was unnecessary. I disagree. 
The current standards of conduct do not reflect the significant 
changes that have occurred in the electric and gas industries since 
they were first adopted. In particular, the current standards of 
conduct do not reflect the interplay between physical and financial 
transactions that is now present in the energy markets.
    2. We had a lot of process and debate. After carefully 
considering all the comments, we revised and clarified many of the 
proposed changes to the current standards of conduct. The revised 
standards of conduct adopted in the Final Rule are a positive step 
toward eliminating undue discrimination and undue preferences in the 
provision of interstate transmission service. In particular, the 
Final Rule:
    [sbull] Uses the same standards of conduct language for the 
interstate natural gas pipelines and public utility transmission 
providers;
    [sbull] Adopts the ``no conduit rule'' for implementing 
information disclosure prohibitions (currently used by public 
utility transmission providers), which is more flexible than the 
``automatic imputation rule'' (currently used by interstate natural 
gas pipeline transmission providers);
    [sbull] Prohibits the Transmission Provider from sharing 
employees and information with its Energy Affiliates, including 
affiliated asset managers, and trading and financial affiliates;
    [sbull] Prohibits the sharing of employees and information 
across industries (e.g., between a natural gas pipeline and an 
affiliated generator); and
    [sbull] Requires mandatory training for employees and the 
designation of a Chief Compliance Officer.
    I support these provisions of the Final Rule.
    3. The Final Rule retains the existing exemption from Order No. 
497 for affiliated local distribution companies (LDCs) and the 
existing exemption from Order No. 889 for the bundled retail sales 
function. In contrast, the Final Rule eliminates the existing 
exemption in Order No. 497 for affiliated producers, gatherers, 
processors, intrastate pipelines, and Hinshaw pipelines. The facts 
and equity support maintaining the existing exemption for affiliated 
producers, gatherers, processors, intrastate pipelines, and Hinshaw 
pipelines. Therefore, I will dissent on this one point.
    4. There is no practical distinction in the relationship between 
a jurisdictional pipeline and its affiliated LDCs and the 
relationship between a jurisdictional pipeline and an affiliated 
intrastate or Hinshaw pipeline that warrants applying the standards 
of conduct in an asymmetrical manner. Furthermore, we exempt FERC-
jurisdictional transmission providers from the definition of Energy 
Affiliates. Consequently, for example, affiliated jurisdictional 
pipelines are permitted to share transmission function employees and 
information. Again, there appears to be no significant difference in 
the relationships to support disparate treatment.
    5. Under the current standards of conduct, a producer is exempt 
when selling gas solely from its own production and an LDC is exempt 
if it only makes on-system sales. There does not appear to be any 
reason that undue discrimination and undue preferences in the 
provision of interstate transmission service are more likely to 
occur with a producer than with an LDC. Furthermore, as the Final 
Rule notes, there was much discussion at the May 21, 2002 conference 
about the possibility that expanding the standards of conduct to 
producers, gatherers and processors would harm deepwater operations 
and future off-shore development efforts.
    6. Lastly, there appears to be insufficient evidence to support 
eliminating the exemption for affiliated producers, gatherers, and 
processors. The Final Rule cites Shell Offshore Inc. v. 
Transcontinental Gas Pipe Line Corp., et al., 100 FERC ] 61,254 
(2002), order on reh'g, 103 FERC ] 61,177 (2003), appeal filed June 
27, 2003 (D.C. Cir. No. 03-1179) as the basis for eliminating the 
exemption for producers, gatherers and

[[Page 69162]]

processors. I dissented in that case because, inter alia, the 
evidence of cooperative action was mixed.
    7. For these reasons, I respectfully dissent in part.

Nora Mead Brownell,

Commissioner.

[FR Doc. 03-30444 Filed 12-10-03; 8:45 am]
BILLING CODE 6717-01-P