[Federal Register Volume 69, Number 83 (Thursday, April 29, 2004)]
[Rules and Regulations]
[Pages 23562-23595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9357]



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Part II





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 358



Standards of Conduct for Transmission Providers; Final Rule

  Federal Register / Vol. 69, No. 83 / Thursday, April 29, 2004 / Rules 
and Regulations  

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 358

[Docket Number RM01-10-001; Order No. 2004-A]


Standards of Conduct for Transmission Providers

Issued April 16, 2004.
AGENCY: Federal Energy Regulatory Commission, DoE.

ACTION: Final rule; order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) 
generally reaffirms its determinations in Order No. 2004 and grants 
rehearing and clarifies certain provisions. Order No. 2004 requires all 
natural gas and public utility Transmission Providers to comply with 
Standards of Conduct that govern the relationship between the natural 
gas and public utility Transmission Providers and all of their Energy 
Affiliates.
    In this order, the Commission addresses the requests for rehearing 
and/or clarification of Order No. 2004. The Commission grants 
rehearing, in part, denies rehearing, in part, and provides 
clarification of Order No. 2004. This order (1) clarifies the 
definition of Energy Affiliate; (2) further codifies the definition of 
``Marketing Affiliate;'' (3) clarifies which Field and Maintenance 
employees a Transmission Provider may share with its Energy Affiliates; 
(4) clarifies that a Transmission Provider may share with its Energy 
Affiliates information necessary to maintain the operations of the 
transmission system; (5) codifies the exception that permits a 
Transmission Provider to share senior officers and directors with its 
Marketing and Energy Affiliates; (6) codifies the exception that 
permits a Transmission Provider to share the risk management function 
with its Marketing and Energy Affiliates; (7) codifies that a 
Transmission Provider may share information with certain employees it 
shares with its Marketing and Energy Affiliates; and (8) defers the 
implementation date to September 1, 2004.

DATES: Effective Date: Revisions in this order on rehearing will be 
effective June 1, 2004.

FOR FURTHER INFORMATION CONTACT: Demetra Anas, Office of Market 
Oversight and Investigations, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, (202) 502-8178.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Need for the Rule
III. Analysis of Requests for Rehearing and/or Clarification
    A. Applicability of the Standards of Conduct
    B. Definition of a Transmission Provider
    C. Definition of an Energy Affiliate
    i. Defining the Phrase ``Engages in or is Involved in 
Transmission Transactions''
    ii. LDCs as Energy Affiliates
    iii. Producers, Gatherers, and Processors
    iv. Intrastate and Hinshaw Pipelines
    v. Affiliated and Foreign Transmission Providers
    vi. Holding or Parent Companies
    vii. Service Companies
    viii. Affiliates Buying Power for Themselves
    D. Definition of Marketing, Sales or Brokering
    i. Treatment of Retail Sales Employees
    ii. Treatment of Electricity Provider of Last Resort Service 
(POLR)
    E. Definition of Transmission Function Employee
    F. Definition of Marketing Affiliate
    G. Independent Functioning
    i. Sharing of Senior Officers and Directors
    ii. Sharing of Field and Maintenance Personnel
    iii. Risk Management Employees
    iv. Lawyers as Transmission Function Employees
    H. Identification of Affiliates on Internet
    i. Posting Organizational Charts
    ii. Posting of Merger Information
    iii. Transfer of Employees
    iv. Posting Standards of Conduct Procedures
    v. Training
    vi. Chief Compliance Officer
    I. Information Access and Disclosure Prohibitions
    i. No Conduit Rule
    ii. Crucial Operating Information Exemption
    iii. Transaction Specific Exemption
    iv. Voluntary Consent Exemption
    v. Posting of Shared Information Requirement
    J. Discounts
    K. Accounting Treatment for Compliance Costs
    L. Request for Extension of Time
    M. Typographical Corrections
    N. Applicability of the Standards of Conduct to Newly Formed 
Providers
IV. Document Availability
V. Effective Date

Order on Rehearing and Clarification

Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.

    1. On November 25, 2003, the Federal Energy Regulatory Commission 
issued a Final Rule adopting Standards of Conduct for Transmission 
Providers (Order No. 2004 or Final Rule) \1\ which added Part 358 and 
revised Parts 37 and 161 of the Commission's regulations.\2\ The 
Commission adopted Standards of Conduct that apply uniformly to 
interstate natural gas pipelines and public utilities (jointly referred 
to as Transmission Providers) that were subject to the former gas 
Standards of Conduct in Part 161 of the Commission's regulations or the 
former electric Standards of Conduct in Part 37 of the Commission's 
regulations.\3\ Under Order No. 2004, the Standards of Conduct govern 
the relationships between Transmission Providers and all of their 
Marketing and Energy Affiliates. The Commission affirms here the legal 
and policy conclusions on which Order No. 2004 is based. The goal of 
the Standards of Conduct for Transmission Providers is to prevent undue 
discrimination. In this order, the Commission addresses the requests 
for rehearing and/or clarification of Order No. 2004. As discussed 
below, the Commission grants rehearing, in part, denies rehearing, in 
part, and provides clarification of Order No. 2004. This order (1) 
clarifies the definition of Energy Affiliate; (2) further codifies the 
definition of ``Marketing Affiliate;'' (3) clarifies which Field and 
Maintenance employees a Transmission Provider may share with its Energy 
Affiliates; (4) clarifies that a Transmission Provider may share with 
its Energy Affiliates information necessary to maintain the operations 
of the transmission system; (5) codifies the exception that permits a 
Transmission Provider to share senior officers and directors with its 
Marketing and Energy Affiliates; (6) codifies the exception that 
permits a Transmission Provider to share the risk management function 
with its Marketing and Energy Affiliates; (7) codifies that a 
Transmission Provider may share information with certain employees it 
shares with its Marketing and Energy Affiliates; and (8) defers the 
implementation date to September 1, 2004.
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    \1\ Standards of Conduct for Transmission Providers, 68 FR 69134 
(Dec. 11, 2003), III FERC Stats. & Regs., ] 31,155 (Nov. 25, 2003).
    \2\ The Commission also made minor conforming changes in Parts 
250 and 284.
    \3\ The gas standards of conduct were codified at Part 161 of 
the Commission's regulations, 18 CFR part 161 (2003), and the 
electric standards of conduct were codified at 18 CFR 37.4 (2003).
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I. Background

    2. Following issuance of Order No. 637,\4\ the Commission hosted a 
public

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conference on March 15, 2001, to discuss how the changes in the natural 
gas market affect the way in which the Commission should regulate 
transactions between pipelines and their affiliates, capacity managers 
and agents. Industry representatives urged the Commission to: (1) Apply 
the standards of conduct to all affiliates; (2) prohibit affiliates 
from holding capacity on affiliated pipelines; (3) limit an affiliate's 
capacity market share; or (4) take no action vis-[agrave]-vis affiliate 
relationships. Several industry representatives expressed a fear of 
retaliation for filing a complaint or inadequate resources to pursue 
complaints that result only prospective remedies.\5\ Commenters also 
expressed concern that regulated entities can transfer all the benefits 
of their regulated (monopolistic) status to their unregulated 
affiliates, which can then use these benefits to reap unregulated 
profits from the public.\6\
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    \4\ Regulation of Short-Term Natural Gas Transportation 
Services, Order No. 637, Final Rule, 65 FR 10156 (Feb. 25, 2000), 
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ] 
31,091 (Feb. 9, 2000), Order No. 637-A, order on reh'g, 65 FR 35705 
(June 5, 2000), FERC Stats. & Regs., Regulations Preambles July 
1996-December 2000 ] 31,099 (May 19, 2000).
    \5\ See, e.g., January 5, 2001 comments of Dynegy, Inc. and 
National Association of State Utility Consumer Advocates in PL00-1-
000.
    \6\ See, e.g., January 5, 2001 comments of Dynegy, Inc. and 
Amoco Production Company and BP Energy in PL00-1-000.
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    3. On September 27, 2001, the Commission issued a Notice of 
Proposed Rulemaking (NOPR) in this proceeding.\7\ Following review of 
the comments, in April 2002, the Commission published an ``Analysis of 
the Major Issues Raised in the Comments'' (Major Issues Analysis). At 
the request of commenters, the Commission also hosted a full-day 
technical conference in May 2002 giving interested persons the 
opportunity to discuss issues raised in the NOPR and the Major Issues 
Analysis. Panelists, interested persons and Commission staff discussed 
a variety of issues including: the impact of requiring the independent 
functioning between Transmission Providers and their Energy Affiliates; 
whether there were other ways to prevent discriminatory behavior; 
information disclosure issues; and proposed revisions to regulatory 
text and the definition of Energy Affiliate. About 100 interested 
persons submitted additional comments and/or draft regulatory text. On 
November 25, 2003, the Commission issued Order No. 2004, which became 
effective on February 9, 2004. Sixty-eight requests for rehearing and 
clarification and comments have been filed.\8\
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    \7\ Standards of Conduct for Transmission Providers, 66 FR 50919 
(Oct. 5, 2001), IV FERC Stats. & Regs. ] 32,555 (Sept. 27, 2001).
    \8\ Appendix A contains a list of each person that requested 
rehearing or clarification of Order No. 2004 or submitted additional 
comments regarding Order No. 2004. The abbreviations for the 
participants are identified in Appendix A.
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II. Need for the Rule

Final Rule

    4. The Final Rule identified a number of changes in the energy, 
natural gas, power and transmission markets that supported the need for 
enhancing the Standards of Conduct, including, but not limited to, 
open-access transmission, unbundling, changing commodity markets, 
increased mergers, convergence of gas and electric industries, asset 
management, electronic commodity trading and an increase in power 
marketers or entities with market-based rate authority. The gas 
industry also experienced consolidations in every sector--pipelines, 
producers, marketers and local distribution companies (LDCs)/utilities.
    5. The Commission noted that a Transmission Provider could transfer 
its market power to its affiliated businesses because the former 
standards of conduct did not cover all affiliate relationships. Non-
marketing affiliates of Transmission Providers compete against non-
affiliates for transmission services, in capacity release transactions, 
in commodity and futures markets, in power sales, and in siting new 
generation. In addition, in the natural gas industry, non-marketing 
affiliates of interstate natural gas pipelines, such as asset managers, 
control large amounts of capacity on their affiliated pipelines, yet 
they were not covered by the former standards of conduct because they 
do not actually hold pipeline capacity. Non-marketing affiliates can 
also abuse preferential access to information about the Transmission 
Provider either as shippers or traders in the transmission or commodity 
marketplace.
    6. The Standards of Conduct under former parts 37 and 161 did not 
address the sharing of information by Transmission Providers with 
Energy Affiliates. The Final Rule found that the preferential 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. The Commission 
was concerned, for example, that an interstate natural gas pipeline 
could inform its affiliated asset manager about a proposed pipeline 
expansion or upcoming curtailment before the Transmission Provider 
revealed that information to the asset manager's competition. The 
Commission stated that Transmission Providers' unduly preferential 
behavior towards their Energy Affiliates violates the statutory 
prohibitions against undue discrimination or preferences in the 
provision of interstate transmission services,\9\ and adopted the 
regulations in Final Rule to prevent such violations.
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    \9\ 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.
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    7. Given the need to maintain the reliability of the electric 
transmission and natural gas pipeline systems throughout the United 
States, the Commission noted that the Final Rule does not obstruct the 
free flow of information from any affiliated or non-affiliated customer 
to the transmission system operator. The Final Rule did not limit the 
ability of transmission system operators or pipeline system operators 
to work together with each other and affiliated or non-affiliated 
customers to reserve and schedule transmission or pipeline capacity 
usage on a non-discriminatory basis, nor did it limit the ability of 
system operators to issue any and all service-related directives to any 
customer, as necessary. And, during system emergencies, the Final Rule 
relaxed limitations on the flow of transmission information from the 
Transmission Provider to its Marketing or Energy Affiliates to 
facilitate any necessary reliability-related communications.
    8. Many petitioners support the Final Rule and state that it is 
necessary. For example, Dominion states that the new regulations 
appropriately addressed changes in the industry and appropriately 
balanced the potential misuse of a Transmission Provider's market power 
against losing efficiencies of integrated operations. NiSource called 
Order No. 2004 a ``substantial improvement'' over the NOPR. Similarly 
APGA, APPA, CAPP, IPAA, IOGA-WV, NASUCA, NGSA, PGC and Transmission 
Dependent Utilities Systems welcomed the Final Rule and urged the 
Commission to refrain from taking any action that would diminish this 
important initiative. They claim that their silence on rehearing 
reflects satisfaction with the direction of Order No. 2004. NASUCA 
states that the reason there have been very few

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complaints about anti-competitive behavior favoring affiliates other 
than Marketing Affiliates is because such behavior would not have 
violated the former standards of conduct.

Requests for Rehearing and/or Clarification and Commission Conclusions

    9. El Paso, INGAA, Questar and Williams argue on rehearing that the 
Final Rule is overbroad and unsupported by substantial evidence. INGAA 
also argues that the industry changes cited by the Commission have been 
pro-competitive and do not justify the rule. Further, INGAA claims that 
the new services described in the Final Rule, such as capacity release, 
e-commerce and asset management are not new phenomena.
    10. The Commission finds that the Final Rule is needed. The FPA and 
NGA require the Commission to prevent unduly discriminatory 
transmission service. For the Commission to meet that goal, the 
Standards of Conduct must guide the relationships between Transmission 
Providers and their affiliates that would use transmission information 
to compete unfairly with non-affiliates. As the identity of affiliates 
that engage in such competition has changed over time, the Standards of 
Conduct have had to change as well. Thus, the former standards of 
conduct focused on preventing the Transmission Provider from giving its 
merchant affiliate undue preferences by restricting the behavior 
between the Transmission Provider and its marketing affiliate or 
wholesale merchant function or affiliated power marketer.\10\ The 1988 
natural gas Standards of Conduct in Order No. 497 \11\ reflected market 
changes in the natural gas industry during the last half of the 1980s, 
as the natural gas industry reacted to natural gas wellhead price 
decontrol, long-term contract reformation, and open-access 
transportation. The 1996 electric Standards of Conduct in Order No. 889 
\12\ were a companion to Order No. 888, which required public utilities 
to offer open access transmission service.
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    \10\ Many marketing affiliates were originally created to help 
interstate natural gas pipelines that had historically offered 
bundled sales and transportation services, move towards 
transportation-only services, and sell gas supply committed under 
long-term take-or-pay contracts.
    \11\ 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 (DC 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).
    \12\ Open Access Same-Time Information System (Formerly Real-
Time Information Network) and Standards of Conduct, 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).
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    11. For example, Transmission Providers have economic incentives to 
unduly prefer agents or asset managers. Specifically, the introduction 
of a natural gas futures market by NYMEX in 1990, and the evolution of 
the use of these financial markets to hedge has prompted customers to 
use agents or asset managers to manage price risk. This allows those 
affiliates to aggregate, manage and control significant volumes of 
interstate pipeline capacity.
    12. In the past, agency arrangements have been abused. For example, 
when Transcontinental Gas Pipeline Company authorized Williams Energy 
Marketing and Trading (WEM&T), its marketing affiliate, to act as agent 
for its merchant functions sales, it also gave WEM&T access to its 
nonaffiliated customers' contract data, invoice data, and 
transportation data. That information was not made available to non-
affiliated customers.\13\ Agency agreements were also a factor in the 
violations where an affiliated power marketer was acting as agent for 
Cleco Power LLC (Cleco) and its affiliated electric wholesale 
generators (EWGs). Through the agency agreements, the affiliated power 
marketer performed for Cleco and its affiliated EWGs a variety of 
services, including: resource coordination, commodity trading, retail 
and wholesale marketing, monitoring energy management, transmission 
scheduling services, optimizing the use of transmission paths to 
decrease transmission needed from outside the control area and market 
test power. Because the agency agreements empowered the affiliated 
power marketer, it had superior access to customer and transmission 
information, and shared employees with the Transmission Provider.\14\
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    \13\ Transcontinental Gas Pipe Line Corporation, et al., 102 
FERC ] 61,302 (2003).
    \14\ Cleco Corp., 104 FERC ] 61,125 (2003).
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    13. The guidance provided by the Final Rule will compel 
Transmission Providers to provide no more information to affiliated 
agents and asset managers than the Transmission Providers provide to 
non-affiliates. Such requirements need to be spelled out in the 
Standards of Conduct to give Transmission Providers a clear 
understanding of their obligations to provide non-discriminatory 
service, as required by the NGA and the FPA.
    14. The Final Rule also properly takes into account the convergence 
of the gas and electric industries.\15\ Over the past decade, newly 
constructed electric generation has chosen natural gas as the fuel of 
choice. Mergers of electric utilities with natural gas companies have 
created corporate families with business activities across both 
industries.\16\ Transmission Providers have economic incentives to 
favor any affiliate that is involved in transmission on their systems, 
not only those that directly market natural gas or power. Indeed, in 
some regions, notably California and the Northeast, the interdependence 
of natural gas and wholesale electric markets has raised concerns about 
reliability and prices of converging supply and demand forces

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in the two industries.\17\ As a result, the Standards of Conduct 
properly apply to Energy Affiliates across industries. INGAA argues 
that there is no harm to the market from Transmission Providers' 
interaction with their Energy Affiliates, particularly with natural gas 
producers, gas processors, gatherers and intrastate pipelines. The 
Commission disagrees.
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    \15\ Final Rule at P 8.
    \16\ For example, NiSource, Inc. merged with Columbia Energy 
Group, Dominion Resources, Inc. merged with Consolidated Natural Gas 
Company, Duke Energy merged with the Coastal Companies, and Enron 
Corporation merged with Portland General Electric.
    \17\ See e.g., ``New England Maintains Deliveries Despite Record 
Demand, Bitter Cold,'' Natural Gas Intelligence, January 19, 2004, 
p. 1.
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    15. For example, under the Final Rule, producer affiliates are 
Energy Affiliates, which reflects their significant control over 
pipeline capacity. Historically, in the late 1980s, producers and 
producer affiliates held very little capacity on natural gas 
Transmission Providers. But, as the role of marketers in the industry 
has decreased, producers have increased significantly the amount of 
capacity they hold on interstate natural gas pipelines. In 1998, only 
three producers were among the top 20 marketers.\18\ However, by the 
fourth quarter of 2003, 14 of the top 20 marketers were producers.\19\ 
Of the 14 producer/marketers, nine of them are affiliated with natural 
gas Transmission Providers.
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    \18\ Inside F.E.R.C. Gas Market Report, June 25, 1999, p. 12.
    \19\ There are no Marketing Affiliates in the list of the top 20 
marketers for the fourth quarter of 2003. Gas Daily, March 23, 2004, 
p. 6.
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    16. Contrary to INGAA's argument, the Commission need not wait 
until there have been many adjudicated cases of unduly discriminatory 
conduct between producers or asset managers, on the one hand, and their 
affiliated Transmission Providers on the other hand before the 
Commission can issue Standards of Conduct that prevent them from 
straying into violations. The economic incentives for Transmission 
Providers to favor their Energy Affiliates are real.
    17. While the Commission's actions have encouraged competition, 
competition has not eliminated the economic incentives that encourage a 
Transmission Provider to give its affiliates unduly preferential 
treatment. Rather, the evolution of wholesale energy markets has 
created new commercial methods of doing business, and along with them, 
new opportunities for Transmission Provider affiliates to profit from 
unduly preferential information or transmission access. Given the 
increased competition, a Transmission Provider may have more incentive 
to give its affiliate preferential service or preferential access to 
information to benefit the corporate family. Moreover, those who 
operate the transmission infrastructure continue to face limited 
competition and in most parts of the country, continue to hold 
significant market power. Now the Commission is concerned that 
Transmission Providers may be giving Energy Affiliates other than 
Marketing Affiliates unduly preferential treatment.
    18. Unduly preferential behavior can and does harm customers. 
Although harm to the market is difficult to quantify,\20\ the 
Commission has been able to quantify harm resulting from unduly 
preferential treatment in some cases. For example, Idaho Power Company 
gave its marketing affiliate unduly preferential access to its 
transmission system by treating the marketing affiliate's transmission 
requests as if the service was needed for native load. This unduly 
preferential behavior in favor of Idaho Power Company's merchant 
affiliate harmed the retail customers of Idaho in the amount of $5.8 
million.\21\ In another example, the retail customers of Louisiana were 
harmed approximately $2.1 million when Cleco Power favored its 
affiliates.\22\ The Commission is ensuring that Transmission Providers 
do not give their Energy Affiliates similar unduly preferential 
treatment.
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    \20\ For example, the Commission could not quantify the harm 
when the Public Service Company of New Mexico failed to comply with 
the independent functioning requirement of the standards of conduct; 
when Ameren Corporation's transmission employees engaged in non-
public, off-OASIS communications with wholesale merchant function 
employees and other customers; or when PacifiCorp allowed its 
wholesale merchant function employees to participate in bi-weekly 
meetings with transmission employees regarding reliability. See 
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; September 27, 2002 Letter from John Delaware, Deputy 
Director and Chief Accountant to Ameren Corporation in Docket Nos. 
FA01-5-000, FA01-6-000 and FA01-7-000; See December 18, 2003 Letter 
from William Hederman, Director of the Office of Market Oversight 
and Investigations, to PacifiCorp in Docket No. PA04-5-000.
    \21\ Idaho Power Co., IDACORP Energy, L.P., and IDACORP, Inc., 
103 FERC ] 61,182 (2003).
    \22\ Cleco Corp., 104 FERC ] 61,125 (2003).
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    19. INGAA and the New York State Department also argue that the 
Commission failed to adequately consider the costs of compliance and 
did not conduct an extensive cost-benefit analysis. Contrary to these 
assertions, the Commission did consider the costs of compliance, and 
revised some of the proposals originally included in the NOPR, in part, 
to appropriately balance the costs of complying with the Standards of 
Conduct. The Commission reduced the costs of compliance by permitting 
integrated activities wherever possible without compromising the goals 
of the Final Rule. For example, the Commission permitted Transmission 
Providers and their Marketing and Energy Affiliates to share field and 
maintenance employees and support employees with appropriate 
safeguards. The Commission also permitted Transmission Providers and 
their Marketing and Energy Affiliates to share computer systems, Energy 
Management System (EMS) and Supervisory Control and Data Acquisition 
(SCADA) as long as transmission and customer information itself is not 
shared.
    20. The Commission has given interested persons the opportunity to 
identify their estimated costs to comply with the Standards of Conduct. 
Transmission Providers claimed that it would cost them between $75,000 
to $300 million to comply with the Standards of Conduct as originally 
proposed in the NOPR.\23\ The Commission also encouraged Transmission 
Providers to submit estimates of costs in the Notice soliciting 
comments after the May 21, 2002 Conference,\24\ and the Final Rule 
encouraged Transmission Providers to include in their Informational 
Filings estimates of the costs associated with complying with the Final 
Rule. A review of comments and Informational Filings confirms that 
changes incorporated in the Final Rule have decreased the Transmission 
Providers' costs of complying with the Standards of Conduct.\25\ For 
example, Cinergy, which originally anticipated annual costs of 
$36,000,000-$39,000,000,\26\ now estimates its annual costs at 
approximately $225,000.\27\ Similarly, Alliance, which originally 
anticipated one-time compliance costs of $20-$30

[[Page 23566]]

million,\28\ now estimates its compliance cost at $250,000.\29\ 
Finally, Kinder Morgan Pipelines, which originally anticipated an 
increase of $22,600,000 annually and $5.8 million in a one-time cost to 
comply,\30\ now estimates that it will cost approximately $200,000 for 
all four Kinder Morgan Pipelines if their rehearing requests are 
granted and $400,000-$500,000 if their rehearing requests are 
denied.\31\ As discussed in the NOPR, the Major Issues Analysis and the 
Final Rule, the Commission has considered the costs of compliance with 
the revised Standards of Conduct, and finds, on balance, that the costs 
are reasonable to achieve the Commission's goal of preventing unduly 
discriminatory behavior in a competitive market. Further, 
clarifications made in this order will further reduce some of the 
compliance costs.
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    \23\ Major Issues Analysis at pp. 13-15 and Final Rule at P 114.
    \24\ April 25, 2002 Notice of Staff Conference in Docket No. 
RM01-10-000.
    \25\ Review of the Transmission Providers' Informational Filings 
in their respective ``TS'' dockets reveals the following estimated 
costs to comply with the Standards of Conduct: (a) 5 Transmission 
Providers stated that the costs would be ``minimal,'' but did not 
give dollar figures; (b) 27 Transmission Providers stated it would 
cost them less than $50,000; (c) 29 Transmission Providers stated it 
would cost them between $50,000-$100,000; (d) 69 Transmission 
Providers stated it would cost them between $100,000-$500,000; (e) 
11 Transmission Providers stated it would cost them between 
$500,000-$1,000,000; and (f) 12 Transmission Providers stated it 
would cost them more than $1,000,000. These include Questar 
Pipeline, which alone claimed higher costs from the Final Rule than 
from the NOPR.
    \26\ June 2, 2002 Supplemental Comments of Cinergy Services, 
Inc. in Docket No. RM01-10-000.
    \27\ February 9, 2004 Informational Filing by Cinergy Services, 
Inc. in Docket No. TS04-43-000.
    \28\ June 14, 2002 Post-Technical Conference Comments of 
Alliance Pipeline L.P. in Docket No. RM01-10-000.
    \29\ February 9, 2004 Informational Filing of Alliance Pipeline 
L.P. in Docket No. TS04-84-000.
    \30\ June 28, 2002 Comments of Kinder Morgan, Inc. in Docket No. 
RM01-10-000.
    \31\ February 9, 2004 Informational Filing of Kinder Morgan 
Interstate Gas Transmission, L.L.C in Docket No. TS04-88-000.
---------------------------------------------------------------------------

    21. INGAA also challenges the Commission's review and analysis of 
the Index of Customers data \32\ listed in the Final Rule.\33\ These 
data identify the amount of capacity affiliates held on their 
affiliated gas pipelines. INGAA argues that the Commission should have 
calculated the total amount of the capacity held by affiliates compared 
to the total amount of pipeline capacity on an aggregate basis, rather 
than calculating the percentage of capacity held by an affiliate on its 
affiliated Transmission Provider. INGAA also use a volume-weighted 
average, rather than a simple average.
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    \32\ Although INGAA also urges the Commission to publish its 
analysis of the Index of Customers data, it was able to duplicate 
the Commission's calculations and make its own calculations and 
analysis from the publicly available information in the October 2003 
Index of Customers. At INGAA's urging, the Commission is attaching 
its updated analysis to the Order on Rehearing.
    \33\ Final Rule at P 10 and 67.
---------------------------------------------------------------------------

    22. Evaluating the amount of capacity held by an affiliate on its 
affiliated Transmission Provider is a more accurate indication of the 
natural gas Transmission Provider's incentives to give its affiliate an 
undue preference. In some instances, a volume-weighted average 
minimizes the apparent incentives of Transmission Providers to favor 
their Energy Affiliates.\34\ And the impact of Energy Affiliates other 
than Marketing Affiliates is pronounced. Producers' roles have evolved 
and, now, Gas Daily reported that producers have solidified their hold 
on marketer rankings as traditional marketers have vanished.\35\
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    \34\ For example, under INGAA's analysis using a volume-weighted 
calculation, production affiliates held only 1.6 percent of the 
capacity on all 87 gas Transmission Providers. However, using a 
simple average calculation, 16 production affiliates held 37 percent 
of the capacity on their affiliate gas Transmission Providers with 
production affiliates.
    \35\ Gas Daily, ``Producers solidify hold on marketer 
rankings,'' March 23, 2004.
---------------------------------------------------------------------------

    23. Consideration of INGAA's concerns caused the Commission to look 
closer at the shipper data from the October 2003 Index of Customers 
information. The Commission found that of 87 pipelines examined, 58 had 
contracts with their affiliates for firm transportation, firm storage 
or both types of services. Of the 18 pipelines with LDC affiliate 
contracts, the affiliated LDCs held about 46 percent of the contracted 
capacity on those 18 pipelines and 48 percent of the pipelines' 
contracted storage capacity.\36\ On nine of these 18 pipelines, LDC 
affiliates held in excess of 50 percent of the contracted firm 
transmission capacity. Of the 16 natural gas pipelines affiliated with 
natural gas producers, producer affiliates held about 37 percent of the 
firm transportation capacity.\37\ On six of these pipelines, producer 
affiliates held more than 60 percent of the firm transportation 
capacity. These data paint a very different picture than the aggregate, 
volume-weighted data produced by INGAA. The Commission's analysis more 
accurately reflects the relationship between an individual Transmission 
Provider and its Marketing or Energy Affiliates.
---------------------------------------------------------------------------

    \36\ Carnegie Interstate Pipeline Company, CenterPoint Energy 
Gas Transmission, Columbia Gas Transmission Corporation, Columbia 
Gulf Transmission Company, Dominion Transmission, Inc., Eastern 
Shore Natural Gas Company, Equitrans, L.P., Granite State Gas 
Transmission Inc., Guardian Pipeline L.L.C., Kinder Morgan 
Interstate Gas Transmission Company, Mississippi River Transmission 
Corp., National Fuel Gas Supply Corp., Paiute Pipeline Company, 
Panhandle Eastern Pipeline Company, Questar Pipeline Company, Vector 
Pipeline, L.P., Westgas Interstate Inc., and Williston Basin 
Interstate Pipeline.
    \37\ CenterPoint Energy Gas Transmission, Chandeleur Pipe Line 
Company, Columbia Gas Transmission Corporation, Dauphin Island 
Gathering Partners, Destin Pipeline Company, L.L.C., Equitrans L.P., 
Garden Banks Gas Pipeline, L.L.C., Maritimes & Northeast Pipeline 
L.L.C., Mississippi Canyon Gas Pipeline, L.L.C., National Fuel Gas 
Supply Corporation, Northwest Pipeline Corporation, Nautilus 
Pipeline Company, L.L.C., Sabine Pipe Line L.L.C., TransColorado Gas 
Transmission Company, Venice Gathering System, L.L.C., and Wyoming 
Interstate Company, Ltd.
---------------------------------------------------------------------------

    24. Moreover, the Index of Customer data does not always identify 
the level of an affiliate's involvement, either as an asset manager or 
agent or as a replacement shipper. For example, review of Texas Eastern 
Transmission Company's Capacity Release information from January 1, 
2002 through July 31, 2003, shows that Duke Energy Trading Company, an 
affiliated marketer, released capacity to Energy Plus, another 
marketing affiliate, on 141 occasions and Energy Plus released capacity 
to Duke Energy Trading Company on 47 occasions, yet a comparable review 
of Texas Eastern's Index of Customers does not identify Energy Plus as 
an affiliate holding firm pipeline capacity.
    25. BP argues that the Final Rule did not impose sufficient 
restrictions or prohibitions on Transmission Providers. Specifically, 
BP argues that the Commission should have adopted pipeline allocation 
procedures for affiliates holding capacity on affiliated gas pipeline 
Transmission Providers. The Commission denies rehearing. While the 
Commission considered additional measures, such as those recommended by 
BP, it decided not to adopt them on a generic basis. However, the 
Commission will consider additional remedies on a case-by-case basis if 
a Transmission Provider violates the Standards of Conduct.

III. Analysis of Requests for Rehearing and/or Clarification

    26. The Commission has received many requests for rehearing or 
clarification with alternative requests for waiver, partial waiver or 
exemption with respect to individual Transmission Providers' specific 
circumstances. Many petitioners also filed requests for waiver, partial 
waiver or exemption in their individual ``TS'' filings on the same 
issues.\38\ The Commission will address the individual requests for 
exemption, waiver or partial waiver in orders in the individual ``TS'' 
filings, and in this order will address the generic issues.
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    \38\ On January 16, 2004, the Commission issued a notice that it 
had created the docket prefix ``TS'' or Transmission Standards for 
all Informational Filings and requests for waiver or exemption under 
Order No. 2004.
---------------------------------------------------------------------------

A. Applicability of the Standards of Conduct

Final Rule
    27. Pursuant to Sec. Sec.  358.1(a), (b) and (c), the Standards of 
Conduct apply to Transmission Providers, but not to Commission-approved 
Independent System Operators (ISOs) or Regional Transmission 
Organizations (RTOs). Section 358.1(c) also provides that a public 
utility transmission owner that participates in a Commission-approved

[[Page 23567]]

RTO or ISO and does not operate or control its transmission facilities 
and has no access to transmission, customer or market information 
covered by Sec.  358.5(b) may request an exemption from the Standards 
of Conduct.\39\ The Final Rule also states that the Standards of 
Conduct also apply to non-public utility Transmission Providers \40\ 
through the reciprocity provisions of Order No. 888.\41\ Generation and 
transmission cooperatives (G&T) are not subject to the Standards of 
Conduct consistent with the policies established under Order No. 
888.\42\
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    \39\ This approach, rather than a codified exemption, recognizes 
that:
    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. 
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.
    Final Rule at P 20. No petitioner sought rehearing on this 
point.
    \40\ See Final Rule at P 28.
    \41\ Promoting Wholesale Competition Through Open Access Non-
Discrimination Transmission Service by Public Utilities and Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, FERC Stats. & Regs., Regulations Preambles January 
1991-June 1996 ] 31,036 (1996), order on reh'g, Order No. 888-A, 
FERC Stats. & Regs., Regulations Preambles July 1996-Dec. 2000 ] 
31,048 (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 Group, et 
al. v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York, 
et al. v. FERC, 535 U.S. 1 (2002).
    \42\ Order No. 888-A, FERC Stats. & Regs., Regulations Preambles 
July 1996-December 2000 ] 31,048 at 30,366. In Order No. 888-A, the 
Commission clarified that if a distribution cooperative sought open 
access transmission service from a Transmission Provider, only the 
distribution cooperative (not its member distribution cooperatives) 
would be required to offer transmission service. The Commission 
excluded from the definition of affiliate distribution cooperative 
members of a generation and transmission cooperative.
---------------------------------------------------------------------------

    28. In the Final Rule, the Commission continues the exemptions and 
partial waivers of the Standards of Conduct for the entities that 
previously received exemptions or partial waivers under Order No. 889 
or Order No. 497, and states that Transmission Providers may request 
waivers or exemptions from all or some of the requirements of Part 358 
for good cause. See 18 CFR 358.1(d).
Requests for Rehearing and/or Clarification and Commission Conclusions
    29. BP requests clarification that the Commission will grant 
exemptions only for good cause. The Commission grants the request for 
clarification. As discussed in the Final Rule, the Commission will 
review the merits of each exemption request to determine whether a 
Transmission Provider qualifies for a full or partial waiver of the 
Standards of Conduct. See Final Rule at P 27.
    30. USG and B-R request rehearing of the Commission's decision not 
to categorically exempt small pipelines, for example, those less than 
25 miles long, with limited operations that serve one or a few 
affiliated and/or non-affiliated customers. The Commission grants 
rehearing. The Commission will exempt small pipelines, based on the 
size of the company, the number of employees and level of interest in 
transportation on the pipeline, and where appropriate, whether the 
company has separated to the maximum extent practicable from its 
Marketing or Energy Affiliates. These are the criteria the Commission 
used in determining whether small pipelines qualified for partial 
exemptions from the requirements of Order No. 497.\43\
---------------------------------------------------------------------------

    \43\ See e.g., Ringwood Gathering Company, 55 FERC ] 61,300 
(1991), Caprock Pipeline Company, et al., 58 FERC ] 61,141 (1992).
---------------------------------------------------------------------------

    31. Applying these criteria to the circumstances on USG and B-R, 
the Commission finds that partial exemptions are appropriate. The 
information in B-R's request for exemption in Docket No. TS04-183-000 
indicates that B-R is 17-mile pipeline, is managed by U.S. Gypsum (its 
affiliate) and does not have any employees, is a free-flow, delivery 
only pipeline that is not interconnected with any other pipeline. 
Similarly, the information in USG's request for exemption in Docket No. 
TS04-103-000 indicates that USG is a 13-mile pipeline, is also managed 
by U.S. Gypsum and does not have any employees, is a free-flow, 
delivery only pipeline that is not interconnected with any other 
pipeline. USG and B-R are exempt from the Independent Functioning 
requirements of Sec.  358.4 and the information disclosure prohibitions 
in Sec.  358.5(a) and (b). They are not exempt from the remainder of 
the Standards of Conduct.
    32. WPSC and UPPC request clarification that Order No. 2004 does 
not prohibit a future request for an exemption from the Standards of 
Conduct. The Commission so clarifies. Order No. 2004 does not limit the 
time for filing requests for exemptions or waivers.

B. Definition of a Transmission Provider

Final Rule
    33. Section 358.3(a) defines a Transmission Provider as: ``(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.''
    34. The Final Rule codified two general principles concerning 
Transmission Providers' behavior. The first requires Transmission 
Providers' employees engaged in transmission system operations to 
function independently from the employees of the Transmission 
Providers' Marketing or Energy Affiliates. The second, in essence, the 
golden rule, is that 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 a Marketing or Energy Affiliate. See Final Rule 
at P 30.
Requests for Rehearing and/or Clarification and Commission Conclusions
    35. NASUCA requests reconsideration of the Commission's decision 
not to classify Hinshaw \44\ or intrastate pipelines as Transmission 
Providers under the Standards of Conduct. NASUCA argues that section 
311 of the Natural Gas Policy Act of 1978 (NGPA) \45\ authorizes the 
Commission to condition the certificates that authorize these pipelines 
to engage in transmission transactions. NASUCA claims that intrastate 
pipelines have the same incentives to transfer market power to their 
Energy Affiliates as do other Transmission Providers. NASUCA argues 
that requiring the independent functioning of employees would limit the 
opportunities for intrastate pipelines to give preferential treatment 
to marketing affiliates that compete with non-affiliated shippers on 
intrastate pipelines. NASUCA claims that discriminatory intrastate 
transactions have the potential to distort wholesale

[[Page 23568]]

markets, and may fall between the cracks of Federal and State 
regulation.
---------------------------------------------------------------------------

    \44\ 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 of 1978. See Order No. 63, 
FERC Stats. & Regs., Regulations Preambles 1977-1981 ] 30,118 
(1980).
    \45\ 15 U.S.C. 3371 (2000).
---------------------------------------------------------------------------

    36. The Commission denies rehearing requested by NASUCA and will 
not classify intrastate and Hinshaws pipelines as Transmission 
Providers under the Standards of Conduct. As will be discussed further 
below, Hinshaws are State-regulated entities and are also frequently 
local distribution companies (LDCs). Not including Hinshaws in the 
definition of Transmission Provider is consistent with our treatment of 
LDCs. Both are regulated by States, which have jurisdiction to prevent 
undue discrimination on such facilities. Similarly, intrastate 
pipelines are regulated by the States and States may require them to 
observe separation of functions and non-disclosure requirements with 
respect to intrastate transactions. As discussed further below, both 
intrastate and Hinshaw pipelines may be classified as Energy Affiliates 
if they engage in Energy Affiliate activities described in Sec.  
358.3(d), and Transmission Providers subject to the Commission's 
jurisdiction must observe the separation of functions and disclosure 
requirements of the Standards of Conduct with respect to them. 
Consequently, no compelling purpose will be served by defining Hinshaws 
and intrastate pipelines as Transmission Providers.
    37. WPSC and UPPC request clarification that ownership of a 
financial interest in transmission facilities, by an entity that does 
not directly own, operate or control transmission facilities does not 
make the entity a Transmission Provider.\46\ The Commission clarifies 
that an entity that owns a financial interest in transmission 
facilities, but does not otherwise own, operate or control transmission 
facilities, is not a Transmission Provider, as defined. Although, 
owning a financial interest or controlling 10 percent or more of the 
voting interest \47\ would make WPSC and UPPC an Affiliate of the 
Transmission Provider.
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    \46\ Based on the pleading, it appears that WPSC and UPPC own 
financial interests in ATCLLC, a Transmission Provider, which is a 
transmission-owning member of Midwestern Independent System Operator 
(MISO), but they do not directly own any transmission facilities. 
WPSC's and UPPC's request to withdraw their previous standards of 
conduct under Order No. 889 is pending before the Commission in 
Docket No. TS04-130-000, and will be addressed in a separate order 
on the merits of the request.
    \47\ Control is defined at 18 CFR 358.3(c) and Affiliate is 
defined at 18 CFR 358.3(b).
---------------------------------------------------------------------------

    38. Encana argues on rehearing that Transmission Providers with no 
market power should be exempt from the requirements of Order No. 2004, 
particularly independent storage providers that are not interconnected 
with the facilities of affiliated pipelines. Encana argues that such 
storage providers cannot exercise market power, having: No market power 
(as found by Commission order); no exclusive franchise area; no captive 
ratepayers; no cost-of service; no guaranteed rate of return; no 
ability to cross-subsidize at-risk business with ratepayer 
contributions; and no affiliation with any Transmission Provider to 
which it interconnects.
    39. The Commission grants Encana's request to generically exempt 
from the definition of Transmission Provider natural gas storage 
providers authorized to charge market-based rates that are not 
interconnected with the jurisdictional facilities of any affiliated 
interstate natural gas pipeline, have no exclusive franchise area, no 
captive ratepayers and no market power. Such storage providers will be 
treated as Energy Affiliates if they are affiliated with any 
Transmission Providers.
    40. NW Natural and Kelso Beaver request rehearing of the definition 
of Transmission Provider to the extent that it covers non-open access 
natural gas pipelines that transport gas for others solely under 
subpart A of part 157 of the Commission's regulations. These entities 
were not previously subject to the former standards of conduct, and 
petitioners argue that the original notice did not propose to expand 
the Standards of Conduct to cover entities that had not previously been 
subject to the rule. They also argue that the majority of pipelines 
certificated under part 157 are small and serve one or few 
customers.\48\
---------------------------------------------------------------------------

    \48\ NW Natural and Kelso Beaver also filed a joint request for 
exemption in Docket No. TS04-2-000, which the Commission will 
address by separate order.
---------------------------------------------------------------------------

    41. The Commission denies rehearing. Contrary to petitioners' 
assertion, the regulatory text in the NOPR gave notice that the 
Commission proposed that the Standards of Conduct would govern the 
behavior of natural gas pipelines providing transmission service under 
part 157 of the Commission's regulations.\49\ Such pipelines may seek 
an exemption or waiver on a case-by-case basis.
---------------------------------------------------------------------------

    \49\ FERC Stats. & Regs., Proposed Regulations 1999-2003 at 
34,093.
---------------------------------------------------------------------------

C. Definition of an Energy Affiliate

Final Rule
    42. The Final Rule defined Energy Affiliate in Sec.  358.3(d) as an 
affiliate 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; or
    (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; 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.
i. Defining the Phrase ``Engages in or Is Involved in Transmission 
Transactions''
Requests for Rehearing and/or Clarification and Commission Conclusions
    43. INGAA, Cinergy, Dominion and Entergy urge the Commission to 
provide additional clarification on the meaning of Sec.  358.3(d)(1) 
because the Commission did not define the meaning of the terms 
``engages in'' or ``is involved in.'' INGAA argues that those phrases 
do not sufficiently describe the activities that would make an 
Affiliate an Energy Affiliate.
    44. The Commission grants petitioners' clarification request. The 
term ``engages in'' transmission transactions means the Affiliate holds 
(or is requesting) transmission capacity on a Transmission Provider as 
a shipper or customer or buys or sells transmission capacity in the 
secondary capacity market. When the Commission uses the phrase 
``involved in'' it means acting as agent, asset manager, broker or in 
some fashion managing, controlling or aggregating capacity on behalf of 
transmission customers or shippers. Other transmission-related 
interactions between a Transmission Provider and its interconnected 
Affiliate, such as confirming nominations and schedules with upstream 
producers and gathering facilities, exchanging operational data

[[Page 23569]]

relating to interconnection points, and communications relating to 
maintenance of interconnected facilities are not included in the 
definition of the terms ``engaged in'' or ``involved in.'' This 
clarification has the practical effect of addressing many of the 
concerns raised by interconnected gatherers, processors or intrastate 
pipelines. The majority of gatherers, processors and intrastate 
pipelines do not participate in the activities described in Sec.  
358.3(d) and, thus, they will no longer be treated as Energy 
Affiliates. As discussed further below, this clarification will reduce 
the number of gatherers, processors, intrastate pipelines and Hinshaw 
pipelines that are Energy Affiliates under the rule.
ii. LDCs as Energy Affiliates
Requests for Rehearing and/or Clarification and Commission Conclusions
    45. INGAA argues that the expanded definition of Energy Affiliate 
in Order No. 2004 applies to entities that are not subject to the 
Commission's jurisdiction. Similarly, New York State Department argues 
that the imposition of Standards of Conduct on LDCs' employees not 
engaged in sales for resale is an unlawful exercise of jurisdiction, 
contrary to section 1(c) of the NGA and section 201 of the FPA. New 
York State Department reads the Final Rule as subjecting the entire 
retail distribution unit to Federal regulation if the electric 
distribution unit sells excess energy through the New York Independent 
System Operator (NYISO).
    46. The Commission disagrees with INGAA's and New York State 
Department's assertions that the Commission is attempting to exercise 
jurisdiction over non-jurisdictional activities. The Standards of 
Conduct are imposed only on Transmission Providers, not Marketing or 
Energy Affiliates. The Commission has very clear statutory mandates to 
ensure that interstate commerce in natural gas and electricity takes 
place at rates and terms and conditions of service that are just and 
reasonable and not unduly discriminatory or preferential.\50\
---------------------------------------------------------------------------

    \50\ See section 4 of the NGA and section 205 of the FPA.
---------------------------------------------------------------------------

    47. The Standards of Conduct apply to a Transmission Provider's 
relationship with an affiliated LDC (gas and/or electric) that makes 
off-system sales. In response to the New York State Department, the 
Commission finds that if a retail sales function also engages in off-
system sales of excess electric power in the wholesale market, the 
Transmission Provider must observe the Standards of Conduct vis-
[agrave]-vis the retail sales function.\51\ However, that retail sales 
function itself does not become subject to Federal jurisdiction. 
Further, the Commission sees no conflict between the Standards of 
Conduct and New York's State-imposed standards of conduct which govern 
the behavior of New York's LDCs. In our view, these Standards of 
Conduct will complement each other rather than conflict.
---------------------------------------------------------------------------

    \51\ A Transmission Provider that is a member of the NYISO, 
relinquishes control over its operations to the NYISO and does not 
have access to transmission or customer information may request an 
exemption from the Standards of Conduct.
---------------------------------------------------------------------------

    48. This rule does not regulate--directly or indirectly--the 
provision of rates, terms and conditions of service for local 
distribution, production, gathering, processing or intrastate 
transmission. The Standards of Conduct provide rules that help define 
activities that would be unduly discriminatory or preferential in a 
Transmission Provider's conduct towards affiliates that are also 
involved in interstate natural gas and wholesale electricity markets. 
Preventing such violations is at the heart of the Commission's 
statutory mandate, and the Commission has not exceeded this mandate in 
limiting Transmission Providers' interactions with other Energy 
Affiliates.
a. Regulatory Text of the LDC Exemption
    49. The preamble discussion in the Final Rule, which exempts from 
the definition of Energy Affiliate State-regulated LDCs that solely 
engage in retail service and make no off-system sales (Final Rule at P 
44) does not exactly track the regulatory text in Sec.  358.3(d)(5)(v), 
which exempts from the definition of Energy Affiliate State-regulated 
LDCs that do not engage in off-system sales. CenterPoint notes this 
inconsistency and argues that LDCs should be allowed to participate in 
wholesale energy market activities other than off-system sales, such as 
asset management.\52\
---------------------------------------------------------------------------

    \52\ See February 9, 2004 Informational Filing of CenterPoint 
Energy Gas Transmission Company in Docket No. TS04-2-000.
---------------------------------------------------------------------------

    50. For example, under CenterPoint's proposal, a State-regulated 
affiliated LDC that does not engage in off-system sales, but manages or 
controls transmission capacity of another, buys, sells, trades, or 
administers natural gas or electric energy, or engages in financial 
transactions relating to the sale or transmission of natural gas or 
electricity would be exempt from the definition of Energy Affiliate.
    51. The Commission will not extend the LDC exemption to include an 
LDC that engages in Energy Affiliate activities that are not directly 
related to its State-regulated retail sales functions. Such Energy 
Affiliate activities include, acting as a merchant, agent, or asset-
manager for others. Moreover the Commission will amend the regulation 
at Sec.  358.3(d)(5)(v) to clarify that a State-regulated LDC is exempt 
from the definition of Energy Affiliate if it provides solely retail 
service and engages in no off-system or other Energy Affiliate 
activities. This is consistent with the discussion in the preamble of 
the Final Rule at P 44. The new regulatory text will exempt: ``A State-
regulated local distribution company that acquires interstate 
transmission capacity to purchase and resell gas only for on-system 
customers, and otherwise does not engage in the activities described in 
Sec. Sec.  358.3(d)(1), (2), (3) or (4) * * *.''
b. Retention of the LDC Exemption
    52. IOGA-WV argues that the Commission erred in exempting any LDCs 
from the definition of Energy Affiliate. IOGA-WV argues that in 
Appalachia, integrated natural gas companies utilize their affiliated 
LDCs to share information and dominate the interstate natural gas 
market. IOGA-WV argues that LDCs can easily avoid the constraints of 
the Final Rule, without making off-system sales. IOGA-WV argues that 
LDCs can create marketing affiliates which make off-system sales while 
allowing their parent LDCs to continue to qualify for the exemption in 
the definition of Energy Affiliate, and thereby circumvent the 
Standards of Conduct. IOGA-WV argues that Sec.  358.3(d)(5)(v) should 
be amended to eliminate this loophole.
    53. The Commission denies rehearing on this issue. The Commission 
does not find that this is a realistic concern. And, any sales from the 
LDC to its marketing affiliate would be off-system sales and void the 
LDC's exemption from the Standards of Conduct.
    Any marketing affiliate of the LDC would also be the affiliated 
Transmission Provider's Marketing or Energy Affiliate. In either case, 
an exemption from the definition of Energy Affiliate would not apply.
c. Scope of the LDC Exemption
    54. Questar supports the exemption granted to State-regulated LDCs 
provided they do not make off-system sales.
    55. On the other hand, AGA, Dominion, INGAA, National Fuel-
Distribution, National Fuel-Supply, New York State Department, NICOR, 
NiSource, NW Natural and Kelso

[[Page 23570]]

Beaver, ONEOK, PA-OCA, PS&EG, and Xcel argue that the Commission erred 
in exempting from the definition of Energy Affiliate only LDCs that 
make no off-system sales. They argue that to the extent LDCs make off-
system sales on non-affiliated Transmission Providers, there is no 
threat of affiliate abuse. AGA and PA-OCA argue that prohibiting LDCs 
from making off-system sales will increase costs to the LDCs' retail 
customers or impose additional compliance costs on LDCs. AGA also 
argues that ``this formulation of the exemption is contrary to the way 
in which the Commission applied the exemption for local distribution 
companies in Order No. 497.'' (footnote omitted.) AGA also cites to 
National Fuel Gas Supply Corp., 64 FERC ] 61,192 at 62,582 (1993), 
where under the previous rules, the Commission did not treat National 
Fuel-Distribution (an affiliated LDC) as a marketing affiliate to the 
extent its off-system sales were not transported by its affiliated 
pipeline, National Fuel-Supply. AGA argues that LDCs, faced with State-
mandated obligations to serve, must stand ready to meet peak load 
requirements. Off-peak, AGA argues, LDCs need the flexibility to make 
off-system sales (and capacity releases) to minimize their costs.
    56. Dominion argues that ``it is difficult to envision a material 
advantage that a pipeline could provide its affiliated LDC with respect 
to off-system sales that do not involve that pipeline.'' \53\ Dominion 
adds that if a pipeline were to find a way to afford an affiliate an 
advantage on another pipeline, ``its action would likely violate the 
Commission's open access regulations, the antitrust laws, or other laws 
and regulations.''
---------------------------------------------------------------------------

    \53\ Dominion at p. 12.
---------------------------------------------------------------------------

    57. National Fuel-Distribution argues that restricting an LDC's 
firm participation in off-system sales would reduce market 
efficiencies, increase the cost of gas to the LDC's customers, and 
reduce price transparency. National Fuel-Distribution states that 99 
percent of its off-system sales are conducted in the daily gas market 
and argues that the probability of its affiliated pipeline, National 
Fuel-Supply, having any information that could affect the market, if 
divulged, is remote. In addition, National Fuel-Distribution claims the 
affiliated LDC will gain no advantage over a non-affiliated LDC with 
affiliated pipeline information.
    58. NW Natural and Kelso Beaver argue that it is arbitrary and 
capricious to subject it to compliance with the Standards of Conduct if 
it chooses to make off-system sales, while non-affiliated LDCs face no 
such burden.
    59. The Commission denies rehearing requested by those who seek to 
expand the LDC exception to include those LDCs that make off-system 
sales which are not transported on an affiliated Transmission Provider. 
The Commission does not agree that in these circumstances there can be 
no harm.
    60. Under the expansion of the LDC exemption sought by petitioners, 
Transmission Providers would be free to share transmission-related and 
customers' market information with their affiliated LDCs. In most 
states, large natural gas customers often take advantage of retail 
transportation programs by purchasing natural gas from competing 
wholesale suppliers; the local LDC also competes for these markets. Any 
LDC making off-system wholesale sales has a powerful incentive to 
maximize its revenues in those sales regardless of whether the sales 
take place on its affiliated Transmission Provider's system or off-
system.\54\ An LDC which makes off-system sales would be in a position 
to benefit from preferential information as would any other marketer.
---------------------------------------------------------------------------

    \54\ To the extent an LDC can reduce its costs of purchasing 
natural gas through off-system sales, this may reduce cost to retail 
ratepayers--a laudable goal--to the extent those cost savings are 
passed through the retail rates. However, some states permit the 
revenues from off-system sales to be shared with stockholders. Under 
these circumstances, the benefits of off-system sales to retail 
ratepayers claimed by petitioners is overstated because these 
benefits are shared with the LDC's stockholders.
---------------------------------------------------------------------------

    61. The Commission recognizes that an LDC serving only its on-
system customers must comply with pipeline balancing requirements and 
may be required to buy or sell de minimus quantities of natural gas in 
the wholesale commodity market, purchase short-term park and loan and 
storage services, buy or sell imbalances in the pipeline's cash out 
mechanism, or take other steps to meet pipeline tariff balancing 
tolerances on a daily or monthly basis. LDCs with limited participation 
in wholesale markets to satisfy these needs will continue to be exempt 
from the definition of Energy Affiliate as long as they are not 
participating in the other activities described in Sec.  358.3(d).
    62. The Commission also notes that the level of LDCs' off-system 
sales varies significantly. For example, National Fuel-Distribution, 
the affiliated LDC of National Gas-Supply, makes off-system sales of 
approximately $63,000,000.\55\
---------------------------------------------------------------------------

    \55\ National Fuel Gas Company, 2002 Annual Report and Form 10-
K.
---------------------------------------------------------------------------

    63. In some circumstances transmission activities on the affiliated 
Transmission Provider will have a large and direct impact on the prices 
of natural gas and wholesale electricity on points upstream or 
downstream of the affiliated Transmission Provider's system.\56\ For 
example, an operational flow order (OFO) on one of the three large 
interstate natural gas pipelines serving New York City-area markets or 
on one of the regional storage fields could have a direct and 
significant effect on the price of gas in that market. In today's spot 
markets, advance information of an OFO would allow an LDC to use that 
knowledge to position itself at the expense of other market 
participants.
---------------------------------------------------------------------------

    \56\ Energy Information Administration, ``Northeast Pipeline 
Restrictions Ease Following Weather Reprieve,'' Natural Gas Weekly 
Update (January 22, 2004). (``Operational Flow Orders (OFOs), which 
can vary significantly in severity, were issued by a variety of 
pipelines last week during the record cold snap in the Northeast. 
When these restrictions are in place, customers without firm 
contracted capacity on the pipeline generally are interrupted and 
cannot access Gulf supplies because transportation through the 
pipeline grid is not available. Thus, prices in the Northeast and 
Gulf region become disconnected as customers in the Northeast 
without firm contracted capacity seek incremental supplies only in 
local market areas. The result last week was that prices at some 
Northeast trading locations spiked to $45 per MMBtu or more for gas 
deliveries the following day.'') See also Energy NewsData, Western 
Price Survey, ``Spring Housekeeping Stymies Some Shipping'' (April 
12, 2002). (``Gas prices were skewed by a host of maintenance on 
pipelines and storage facilities coming out of the Rocky Mountains. 
Aside from some maintenance on El Paso's San Juan lateral the 
temporary closure of the big Clay Basin storage facility in 
northeast Utah meant that shippers without firm capacity on West-
bound pipelines had no place to put their supplies. The San Juan 
Basin index price plummeted to $0.99/MMBtu Tuesday and pipelines 
were ordering their customers to follow their reservations or face 
penalties.'')
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    64. It would be difficult for an LDC whose shared employees 
operated both the Transmission Provider and LDC systems not to have 
advance notice of a Transmission Provider's OFO. An affiliated LDC 
would have a head start in responding to an OFO, and would have a first 
shot at the spot market to sell off stranded supply or purchase needed 
make-up supply. Any advantage afforded by transmission information not 
available to non-affiliates would come at the expense of other 
wholesale market competitors. When the LDC does not make off-system 
sales, this degree of vertical integration does not harm wholesale 
markets or non-affiliated competitors.
    65. Contrary to National Fuel-Distribution's argument, early 
knowledge of events or circumstances on an affiliated pipeline system 
has value. As noted by National Fuel-

[[Page 23571]]

Distribution, daily trading occurs over a compressed time period. Other 
market participants have little time to obtain rapidly breaking news 
that can affect spot prices. Yet the affiliated LDC, were it not 
considered an Energy Affiliate, would have the ability to get the 
relevant news first, and act on it before other market participants had 
access to the information. Contrary to National Fuel-Distribution's 
assertion, this would be an unduly preferential advantage.
    66. As to NW Natural's and Kelso Beaver's assertions that they are 
placed at a competitive disadvantage relative to non-affiliated LDCs 
making off-system sales, the Commission disagrees. The Standards of 
Conduct do not put affiliated LDCs at a disadvantage with respect to 
non-affiliated LDCs. Rather, affiliates and non-affiliates are on an 
equal footing because all market participants will have the same access 
to transmission information and transmission services. Non-affiliated 
market participants do not have access to the Transmission Providers' 
transmission or customer information. The petitioners have not provided 
any explanation why an affiliated LDC that is participating in the 
wholesale sales market or is providing asset management services for a 
customer is entitled to unduly preferential access to the Transmission 
Providers' transmission or customer information.
    67. The Commission wishes to make clear that it is not the purpose 
or the effect of this Final Rule to prohibit LDCs from making off-
system sales. Rather, if an LDC chooses to make off-system sales, its 
affiliated Transmission Provider must comply with the Standards of 
Conduct vis-[agrave]-vis its affiliated LDC as an Energy Affiliate. The 
Transmission Provider's compliance with the Standards of Conduct places 
all wholesale market participants, affiliated and non-affiliated, on an 
equal footing.
d. Treatment of LDC Divisions
    68. AGA requests clarification whether the LDC division of an 
electric Transmission Provider would be considered an Energy Affiliate 
because the division does not meet the definition of ``Affiliate'' in 
Sec.  358.3(b). The Commission clarifies that an LDC division of an 
electric Transmission Provider shall be considered the functional 
equivalent of an Energy Affiliate if it engages in the activities 
described in Sec. Sec.  358.3(d)(1), (2), (3) or (4), and codifies this 
at Sec.  353.3(d)(5). Although the division is not technically an 
``affiliate,'' it is functionally equivalent to an affiliate. This is 
consistent with Sec.  284.286, where the Commission treats a pipeline's 
sales operating unit as if it were a marketing affiliate for purposes 
of the Standards of Conduct.
    69. PSEG makes a similar request for rehearing arguing that the 
Hinshaw pipeline division of an electric Transmission Provider is not 
an ``Affiliate'' and thus the relationship between an electric 
Transmission Provider and its Hinshaw pipeline division \57\ should not 
be governed by the Standards of Conduct. PSEG claims that the 
Commission should not be concerned about the relationship between an 
electric Transmission Provider and its Hinshaw pipeline division 
because there is no potential for abuse. Further, PSEG argues that it 
would be unduly burdensome citing its joint operations between its 
wires and pipes divisions in storm restoration efforts, customer 
operations/call centers and applicance service operations.
---------------------------------------------------------------------------

    \57\ PSEG claims that its Hinshaw pipeline division possesses a 
limited-jurisdiction certificate from the Commission under Order No. 
63.
---------------------------------------------------------------------------

    70. The Commission denies PSEG's request to categorically exclude 
an electric Transmission Provider's Hinshaw gas pipeline division from 
the definition of Energy Affiliate. There are instances in which the 
Commission is concerned about the relationship between the electric 
Transmission Providers and gas divisions. For example, to the extent a 
combined electric/gas utility's Hinshaw pipeline affiliate provided 
transportation services delivering natural gas to third-party 
independent generators which compete in the same wholesale markets for 
electricity, either directly, or indirectly, through the release of 
interstate transmission capacity on an upstream pipeline, the events of 
its day-to-day operation,\58\ would have an impact on the competitors 
and markets for wholesale electricity in that region. The Hinshaw 
pipeline also collects information about the natural gas scheduled to 
flow to the competing generators, and to the natural gas-fired 
generation operated and self-scheduled by the combination utility's 
electric Transmission Provider. Knowledge of sudden changes in the 
availability of natural gas transmission capacity could be of 
competitive value to the electric Transmission Provider (in the 
wholesale real-time markets), the Hinshaw pipeline (the NYMEX futures 
exchange and spot markets), and to each of its Energy Affiliates (in 
all three areas) if it could be acquired shortly before such knowledge 
became publicly available. However, in the example of shared services 
that PSEG raises, employees who provide storm restoration efforts, 
staff customer operations/retail call centers and appliance service 
operations would be the types of support or field and maintenance 
employees that could be shared under Sec.  358.4(a)(4).
---------------------------------------------------------------------------

    \58\ These events might include capacity constraints caused by 
competing demands, scheduled maintenance, unscheduled equipment 
breakdowns, and unexpected significant fluctuations in demand or 
supply.
---------------------------------------------------------------------------

    71. The Commission will revise the definition of Affiliate at Sec.  
358.3(b) to incorporate this clarification as follows: ``[a]n Affiliate 
includes a division that operates as a functional unit.''
e. Applicability of the Standards of Conduct to Special Purpose 
Certificated Interstate Service
    72. National Fuel-Distribution raises the issue of its status as a 
holder of limited-jurisdictional certificates authorizing interstate 
exchanges and NGA section 7(f) authorizations. Specifically, National 
Fuel-Distribution also raises the issue of whether its status under its 
special purpose interstate exchange certificate or NGA section 7(f) 
service area determinations subject it to being considered as either a 
Transmission Provider or an Energy Affiliate. National Fuel-
Distribution asks the Commission to clarify that this is not the case. 
The Commission clarifies that National Fuel-Distribution's special 
purpose interstate exchange certificate and NGA section 7(f) service 
area determinations do not make it either a Transmission Provider or an 
Energy Affiliate.
iii. Producers, Gatherers, and Processors
Final Rule
    73. In the Final Rule, the Commission defines Energy Affiliate to 
include any affiliate of a Transmission Provider that conducts any of 
the following activities in U.S. energy markets: Engages in or is 
involved in transmission transactions; manages or controls transmission 
capacity; buys, sells, trades, or administers natural gas or electric 
energy; or engages in financial transactions relating to the sale or 
transmission of natural gas or electric energy (collectively Energy 
Affiliate activities).\59\ Producers, gatherers and processors that 
perform such activities are Energy Affiliates as defined in the Final 
Rule.
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    \59\ These are the characteristics of an Energy Affiliate, as 
defined in 18 CFR 358.3(d).

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[[Page 23572]]

Requests for Rehearing and/or Clarification and Commission Conclusions 
Gatherers and Processors
    74. Petitioners \60\ assert that gatherers and processors 
performing their traditional functions do not hold transmission 
capacity on affiliated pipelines and, similar to the LDCs, should not 
be considered Energy Affiliates. Several petitioners argue that it is 
inconsistent for the Commission to treat gatherers and processors 
differently than LDCs. Questar argues that gatherers and processors 
should not be defined as Energy Affiliates if they do not sell natural 
gas for resale, buy natural gas only for consumption of their own 
processing operational needs and do not ship natural gas on their 
affiliated interstate pipelines.
---------------------------------------------------------------------------

    \60\ CenterPoint, El Paso, Questar, Shell Transmission, 
Williston Basin and Williams.
---------------------------------------------------------------------------

    75. Shell Transmission and others argue that elimination of the 
prior exception from the Standards of Conduct issued under Order No. 
497 for producers, gatherers, and processors will lead to significant 
duplication of costs for multiple offshore pipeline and gathering lines 
that are currently operated from one common operations center with 
consolidated staff (e.g., contract administrators, engineers, gas 
control operators).
    76. INGAA, CenterPoint, Dominion, Duke Energy and El Paso argue 
that it is important to allow affiliated pipelines, gatherers, 
producers, and processors to share information during planning and 
financing of new infrastructure to ensure that needed supplies are 
brought efficiently and promptly to market, especially during periods 
of tight supply. Duke, Shell Transmission and Shell Offshore argue that 
separation of gathering functions from transmission functions, and the 
associated restrictions on communications, will impede pipeline 
operations. A number of small independent producers request that the 
Commission allow gatherers to buy the gas that the independent 
producers sell without converting the gatherers into Energy 
Affiliates.\61\
---------------------------------------------------------------------------

    \61\ Letters were addressed to Chairman Pat Wood from Mr. Bruce 
Morain, INOK Investments, L.L.C. (dated February 18, 2004); Mr. 
Jerry G. Kerr, Plymouth Resources, Inc. (dated February 24, 2004); 
Mr. Web Carr, C and E Operators, Inc. (dated February 27, 2004); Mr. 
Carlos Barton ``Scooter'' Griffin, Jr.--President, GeoVest 
Incorporated (February 20, 2004), Mr. Robert T. Wilson, AGS Oil and 
Gas Ventures, Inc. (dated February 12, 2004); and C & L Oil and Gas 
Corp (dated March 9, 2004). Each of these letters has been placed in 
the public record in Docket No. RM01-10-000.
---------------------------------------------------------------------------

    77. The Commission clarifies that gatherers and processors that are 
not involved in or engage in transmission transactions; do not manage 
or control transmission capacity; do not buy, sell, trade or administer 
natural gas or electric energy; and do not engage in financial 
transactions relating to the sale or transmission or natural gas or 
electric energy are not Energy Affiliates. If a gatherer or processor 
merely provides a gathering or processing service and only purchases 
natural gas to supply operational needs (such as compression fuel), and 
does not engage in any of the other activities described above, it is 
not an Energy Affiliate. In these roles, gatherers and processors 
provide services to wholesale market participants but do not compete 
with them. When their operations are limited to this service-provider 
role, they are not defined as Energy Affiliates and do not become 
subject to the separation of functions requirement and information 
disclosure prohibitions of the Standards of Conduct. However, gatherers 
or processors that buy gas for resale or hold or manage transmission 
capacity are Energy Affiliates as defined in Sec.  358.3(d)(3).
    78. Further, the Final Rule neither prohibits nor hinders the kinds 
of cooperation and communications Shell Transmission notes among its 
producing and gathering affiliates, such as producer personnel at 
platforms routinely performing field maintenance and operation 
activities, such as launching pigs on behalf of gathering affiliates or 
sharing operational status information. Many of the petitioners' 
concerns regarding defining producers, gatherers and processors as 
Energy Affiliates focus on the sharing of field and maintenance 
personnel and the sharing of operational information. As discussed in 
more detail below, the Commission is providing additional 
clarifications that address the petitioners' concerns regarding the 
sharing of information and field and maintenance employees between a 
Transmission Provider and its Marketing or Energy Affiliates.\62\
---------------------------------------------------------------------------

    \62\ See also the discussions of the Sharing of Field and 
Maintenance Personnel, and Critical Operating Information 
Exceptions, below.
---------------------------------------------------------------------------

    79. The Commission will not, however, grant a blanket exemption 
from the Standards of Conduct for gatherers or processors.
    80. Specifically, CenterPoint argues that:

    Although a trading or financial affiliate might benefit from 
preferential access to information about the interstate pipeline's 
operations (by trading in natural gas or a related financial 
instrument whose value may be affected by a constraint on the 
pipeline), a similar benefit is unlikely to be conferred on a 
traditional gatherer.\63\
---------------------------------------------------------------------------

    \63\ CenterPoint at pp. 8-9.

    The Commission agrees with CenterPoint in both aspects of its 
argument: Trading and financial affiliates might benefit from 
preferential access to information about an interstate pipeline's 
operations; and a gatherer that does not conduct Energy Affiliate 
activities is unlikely to benefit from such information in the 
wholesale energy marketplace.
    81. Accordingly, the Commission will continue to include producers, 
gatherers and processors in the definition of Energy Affiliate to the 
extent they engage in Energy Affiliate activities. A gatherer or 
processor is in a position to profit from preferential information if 
it engages in Energy Affiliate activities. Under the Commission's 
regulations, a gatherer or processor is not limited to selling at the 
terminus of its own physical facilities. Similarly, any entity, 
including a gatherer or processor, may also buy and sell energy futures 
traded on the NYMEX. Allowing preferential access to information about 
transmission capacity or third party customers would confer an undue 
competitive advantage on such an entity. A gatherer or processor which 
also participates in Energy Affiliate activities is indistinguishable 
from any other Energy Affiliate in this regard.
    82. Furthermore, preferential access to market information gives 
Transmission Provider affiliates fuller, more complete, and more timely 
information about market conditions, potentially contestable markets 
and the prices other market participants will be willing to accept.\64\ 
The Commission finds that such preferential access to information is 
contrary to the Commission's statutory mandate to prevent undue 
discrimination or preferences.
---------------------------------------------------------------------------

    \64\ In addition, this information will be available to the 
Transmission Provider affiliates at little or no cost. Transmission 
Providers acquire market-relevant information in the normal course 
of operating transmission facilities, with the expenses of this 
information collection generally recovered through their regulated 
cost-based rates. In contrast, independent wholesale market 
participants incur significant costs to gather market intelligence 
of inferior scope and completeness. Absent Commission-mandated 
disclosure of transmission information, much of this market 
information will not be available to independent wholesale market 
participants at any price. And under the Commission's requirements, 
sensitive information is often protected from disclosure, or subject 
to delays in disclosure to protect shippers from competitive harm. 
For independent wholesale market participants, the market is opaque, 
blurry and constantly changing, but for affiliates allowed to share 
employees or information with a Transmission Provider, the market 
will be transparent and relatively clear.

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[[Page 23573]]

    83. The Commission's ruling here does not prohibit gatherers or 
processors from buying or selling natural gas. The Standards of Conduct 
do not prohibit those activities. Rather, a Transmission Provider must 
observe the Standards of Conduct vis-[agrave]-vis gatherers and 
processors that choose to participate in wholesale commodity markets or 
engage in Energy Affiliate activities to ensure that the Transmission 
Provider treats its affiliated entities the same way it treats non-
affiliated entities.
Producers
    84. The Commission denies rehearing to the extent petitioners argue 
that producers should be exempt from definition as Energy Affiliates. 
Natural gas producers affiliated with Transmission Providers are Energy 
Affiliates as defined in Sec.  358.3(d). Producers are perhaps the 
largest marketers of natural gas.\65\ First sales of natural gas are 
fully deregulated.\66\ In addition, like any other willing entity in 
the natural gas industry, producers are authorized to make sales for 
resale.\67\ These sales take place at points throughout the interstate 
natural gas delivery network, not just at the point of production in 
the producing fields. Affiliated producers, because they have the same 
opportunities to exploit Transmission Provider information for undue 
advantage, are Energy Affiliates under the Final Rule.
---------------------------------------------------------------------------

    \65\ Gas Daily, ``Producers solidify hold on marketer 
rankings,'' March 23, 2004, p. 1 and p. 12. See also, Gas Daily, 
``Midtier players dominate Q3 marketer rankings,'' December 9, 2003. 
(Producers BP, Shell and ConocoPhillips were ranked first, third and 
fourth, representing nearly 40 percent of the total reported volumes 
used in the rankings of 22 marketers. Thirteen of the top 22 
marketers listed were producers.)
    \66\ Natural Gas Wellhead Decontrol Act of 1989, Pub L. 101-60, 
103 Stat. 157 (1989).
    \67\ 18 CFR 284.402 (2003).
---------------------------------------------------------------------------

    85. Contrary to the concerns of petitioners, defining producers as 
Energy Affiliates will not subject them to inappropriate public release 
of competitively-sensitive information under the Standards of Conduct. 
An affiliated producer seeking information about the potential 
expansion of infrastructure necessary to secure connections to new 
production is afforded the same confidential treatment as any other 
shipper seeking new service under the transaction-specific protections 
of the Final Rule.\68\ To the extent an affiliated producer is neither 
a potential shipper nor supporting the request of a potential shipper, 
its access to information on capacity or the availability of service to 
transport new supplies will be appropriately limited to the same 
information available to any other party.
---------------------------------------------------------------------------

    \68\ See 18 CFR 358.5(b)(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.'')
---------------------------------------------------------------------------

    86. Open access interstate natural gas pipelines are required to 
post on their Internet websites timely and accurate information about 
available capacity and services.\69\ Those who believe that posted 
information does not meet the requirements of the Commission's 
regulations requiring disclosure of available capacity \70\ may contact 
the Commission's Enforcement Hotline or file a formal complaint. The 
Commission does not believe that the equitable treatment afforded 
transmission information will hinder the development of new 
infrastructure.\71\
---------------------------------------------------------------------------

    \69\ See 18 CFR 284.13 (2003).
    \70\ Id.
    \71\ To the extent posted information is not sufficient for 
producers' needs, this concern is appropriately addressed to the 
Transmission Providers, affiliated and otherwise, who may wish to 
consider the needs of their customers and other industry 
stakeholders for timely and adequate information about available 
capacity and system capabilities on their Internet website postings.
---------------------------------------------------------------------------

    87. Dominion requests the Commission to exclude from the definition 
of an Energy Affiliate a producer that sells its own production to 
another affiliated company. The Commission denies Dominion's request. 
Dominion has not provided any justification why a Transmission Provider 
should be allowed to share employees and transportation or customer 
information with its affiliated producer. Specifically, the Commission 
is concerned that a Transmission Provider's non-affiliated customers 
could be harmed if a Transmission Provider could freely share customer 
information with affiliated producers. Nor has Dominion explained why 
the producer's sale to an affiliate eliminates the Commission's 
concerns about affiliate abuse.
iv. Intrastate and Hinshaw Pipelines
The Final Rule
    88. Intrastate and Hinshaw pipelines are included in the definition 
of Energy Affiliate to the extent that they engage in or are involved 
in transmission transactions in U.S. energy markets or participate in 
the other activities described in Sec.  358.3(d). Allowing such 
intrastate pipeline or Hinshaw pipeline to have preferential access to 
a transmission system or information would be inconsistent with the 
prohibitions against undue preferences or discrimination in section 4 
of the NGA in the provision of interstate transportation service.
Requests for Rehearing and/or Clarification and Commission Conclusions
    89. Several petitioners \72\ request clarification that LDCs which 
are also Hinshaw pipelines will nonetheless continue to qualify for the 
LDC exemption from Energy Affiliate status. They argue that Hinshaws 
are State-regulated and nearly always are LDCs. Empire argues that a 
Hinshaw pipeline, by definition, must be regulated by a State to 
qualify for the Hinshaw exemption.
---------------------------------------------------------------------------

    \72\ See, e.g., AGA, Dominion, Duke Energy, Empire, INGAA, 
Kinder Morgan Pipelines, National Fuel-Distribution, National Fuel-
Supply, NICOR, Questar, Southwest Gas, and Xcel.
---------------------------------------------------------------------------

    90. Saltville and SCG argue that there is no difference between a 
Hinshaw pipeline and an LDC in terms of their relationship with 
jurisdictional pipelines, and therefore there is no basis for this 
asymmetrical regulation. Questar argues that Hinshaw pipelines which 
are also State-regulated LDCs should not be counted as Energy 
Affiliates under the Standards of Conduct. To do so, Questar argues, 
would destroy vertical integration efficiencies, increase costs,\73\ 
reduce service reliability, reduce firm transportation capacity by 
105,000 Dth per day, or more, and reduce the service flexibility 
available to all shippers.
---------------------------------------------------------------------------

    \73\ Questar argues that full separation of functions would 
require the construction of new pipeline facilities costing $44 
million, which would increase Questar's annual cost-of-service by 
$14.4 million.
---------------------------------------------------------------------------

    91. Kinder Morgan Pipelines argue that even Hinshaw pipelines which 
are not LDCs should be exempt because they are State regulated and 
analogous to affiliated Transmission Providers, which are not defined 
as Energy Affiliates.
    92. Kinder Morgan Pipelines argue that intrastate pipelines, 
including Hinshaw pipelines, which provide State-regulated intrastate 
transportation, bundled commodity sales, and interstate transportation 
pursuant to section 311 of the NGPA, but do not make any off-system 
sales should be excluded from the definition of Energy Affiliate.\74\ 
The Texas Pipeline Association, an association of nineteen intrastate 
natural gas pipelines operating in Texas, and Williams also object to 
categorizing intrastate pipelines and Hinshaw pipelines as Energy 
Affiliates.
---------------------------------------------------------------------------

    \74\ Kinder Morgan Pipelines also filed a request for exemption 
in Docket No. TS04-249-000, which the Commission will consider by 
separate order.
---------------------------------------------------------------------------

    93. The Commission agrees generally with the requests that an LDC's 
status as

[[Page 23574]]

a Hinshaw pipeline does not invalidate its treatment as an LDC under 
the Standards of Conduct. Hinshaw pipelines are typically LDCs, 
regulated by State commissions, and primarily focused on providing 
retail service within their States. To the extent Hinshaw pipelines are 
state-regulated LDCs, make no off-system sales and do not engage in any 
of the activities described in Sec.  358.3(d), they are not Energy 
Affiliates. However, as is the case for LDCs, Hinshaw pipelines which 
make off-system sales or participate in Energy Affiliate activities 
will continue to be defined as Energy Affiliates.
    94. The Commission clarifies that intrastate pipelines that do not 
engage in Energy Affiliate activities described in Sec.  358.3(d) are 
not defined as Energy Affiliates. To the extent that an intrastate 
pipeline makes sales or hold interstate transmission capacity or 
engages in Energy Affiliate activities, they are Energy Affiliates.
v. Affiliated and Foreign Transmission Providers
Final Rule
    95. Section 358.3(d)(5)(ii) excludes affiliated Transmission 
Providers from the definition of Energy Affiliate because they are 
already subject to the requirements of the Standards of Conduct. 
Section 358.3(d)(5)(i) excludes foreign affiliates that do not 
participate in U.S. energy markets. In the Final Rule, the Commission 
also stated that affiliated gas pipeline Transmission Providers that 
cross the United States international border will not be treated as 
Energy Affiliates as long as neither the Transmission Provider nor the 
affiliated international pipeline shares employees or information with 
its Marketing or Energy Affiliate.\75\ However, this was not codified 
in the regulatory text for Sec.  358.3(d)(5)(i).
---------------------------------------------------------------------------

    \75\ Final Rule at P 60.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusion
    96. INGAA requests clarification because foreign affiliated 
Transmission Providers do not fit within the definition of a 
``Transmission Provider,'' which transmits energy or gas in U.S. 
interstate commerce under parts 157 or 284 of the Commission's 
regulations. See 18 CFR 358.3(a). INGAA and Enbridge also argue that 
the Commission cannot regulate the behavior of foreign affiliated 
pipelines.
    97. The Commission is granting rehearing and revising the 
regulatory text to better reflect our intent that foreign affiliates 
that engage in transmission activities that cross the U.S. 
international border, which activities are regulated by the state, 
province or national regulatory board of the foreign country in which 
the facilities are located, will not be treated as Energy Affiliates. 
Nonetheless, a Transmission Provider cannot use a foreign affiliate as 
a conduit to circumvent the independent functioning requirement or 
information sharing prohibitions of the Standards of Conduct. Contrary 
to petitioners' assertions, the Commission is not regulating the 
behavior of a foreign corporation, but merely regulating the behavior 
of the jurisdictional Transmission Provider. The Commission does not 
prohibit Canadian pipelines from sharing Canadian transmission 
information or employees with its Canadian Affiliates. However, a 
Transmission Provider may not share information and employees with its 
Canadian-affiliated Transmission Provider if it is a conduit for 
sharing information with an Energy Affiliate doing business in the U.S. 
commodity or transmission markets. A Canadian Energy Affiliate that 
does business in the U.S. commodity and transmission markets should not 
be afforded undue preferences or services.
vi. Holding or Parent Companies
Final Rule
    98. Section 358.3(d)(5)(iii) excludes from the definition of Energy 
Affiliate, 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.\76\
---------------------------------------------------------------------------

    \76\ Generally, a holding company is registered with the 
Securities and Exchange Commission under the Public Utility Holding 
Company Act of 1935. A parent company or corporation is a company or 
corporation with multiple subsidiaries and/or controls other 
companies. A service company is usually a subsidiary of a holding or 
parent company/corporation that generally provides shared services 
to the parent or holding company's subsidiaries and/or affiliates 
and/or serves as a mechanism to employ all corporate employees.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusion
    99. NiSource, Dominion, EEI, INGAA and AGA request clarification 
that a parent or holding company does not become an Energy Affiliate of 
a Transmission Provider by acting as a guarantor on a contract or 
approving financial expenditures for the subsidiary Transmission 
Provider. EEI states that if such parent or holding companies providing 
financial security are deemed to be Energy Affiliates, few entities 
will qualify for the exemption. The petitioners argue that the parent/
holding company is not engaged in a financial transaction and thus 
should not become an Energy Affiliate. Similarly, National Fuel-
Distribution and Duke Energy request clarification that the performance 
of corporate functions by a parent or holding company will not make the 
parent or holding company an Energy Affiliate. On the other hand, 
NASUCA argues that service companies that engage in financial 
transactions should be included in the definition of Energy Affiliate.
    100. One of the roles of a parent or holding company is to act as 
guarantor or provide financial security for its subsidiaries. 
Generally, when a parent or holding company acts as guarantor for a 
Transmission Provider or its Marketing or Energy Affiliate, the parent 
or holding company is not engaging in any transmission transactions or 
in energy or natural gas commodity markets. Thus, the Commission 
clarifies that it is permissible for a parent or holding company to act 
as guarantor or to provide financial security for its subsidiaries 
without becoming an Energy Affiliate. A parent or holding company may 
also approve the financial expenditures for its affiliated Transmission 
Provider. But, as discussed later, when a parent or holding company 
engages in financial transactions that are the functional equivalent of 
physical transactions in the commodity market, it acts as an Energy 
Affiliate under the Standards of Conduct.
    101. Duke Energy, INGAA and Kinder Morgan Pipelines request 
rehearing of the Commission's decision to exclude only parent or 
holding companies that are not involved in energy or natural gas 
markets or transmission transactions. They argue that a parent or 
holding company should not be considered an Energy Affiliate if it is 
involved in energy or transmission transactions. The Commission rejects 
this request for a categorical exemption because parent or holding 
companies could then be used to circumvent the Standards of Conduct. 
However, on a case-by-case basis, the Commission will consider specific 
requests.
Requests for Clarification Regarding Parent Companies
    102. CenterPoint requests clarification that certain divisions of a 
parent company could be Energy Affiliates while the remainder of the 
parent company would not be considered an Energy Affiliate. The 
Commission cannot answer this question generically. The Commission will 
review this issue on a case-by-case basis after evaluating

[[Page 23575]]

the individual structure of the Transmission Provider and its parent 
company.
    103. Duke Energy requests that the Commission clarify how it will 
treat a parent company that is also a Transmission Provider. At Duke 
Energy, the electric utility Transmission Provider, which engages in 
retail and wholesale sales, is a division of the parent company, which 
is also the parent company for several natural gas Transmission 
Providers. Because the parent company is also the electric public 
utility that engages in wholesale sales of power, Duke Energy is 
concerned that its parent company does not qualify for the parent 
company exemption. Duke Energy proposes that the Commission treat its 
parent company as an affiliated Transmission Provider. Under this 
scenario, Duke Energy pipeline subsidiaries will be permitted to 
provide non-public information to Duke Energy management for corporate 
governance purposes; but Duke Energy will be prohibited from sharing 
such information with the sales or marketing unit of Duke Energy or of 
any other Energy Affiliate. Duke Energy argues that this is also 
consistent with the codification at Sec.  358.4(a)(5) that allows a 
Transmission Provider to share senior officers and directors with their 
Marketing and Energy Affiliates.
    104. Duke Energy's proposal is an acceptable means to comply with 
the Standards of Conduct. As a parent company/Transmission Provider, 
Duke Energy is subject to the independent functioning requirements and 
information sharing prohibitions of the Standards of Conduct. It is 
already required to put in place mechanisms to ensure that the unit/
division that engages in wholesale sales of power functions 
independently and does not have access to transmission or customer 
information.
    105. Kinder Morgan Pipelines also ask for clarification that its 
parent company, which has LDC assets, qualifies for the parent company 
exemption. The fact that the LDC is a parent company is no reason to 
exempt it from its status as an Energy Affiliate. Unlike the situation 
at Duke Energy, where the parent company/Transmission Provider is 
responsible for implementing all of the Standards of Conduct, Kinder 
Morgan Pipelines on the other hand are seeking an exemption from the 
Standards of Conduct. As an LDC making off-system sales, it falls 
squarely within the definition of Energy Affiliate. Therefore, the 
Commission denies Kinder Morgan Pipelines' request. However, the 
Commission will consider individual requests if the parent company/LDC 
can demonstrate an acceptable level of independent functioning for the 
LDC division and ensure that there are adequate safeguards to restrict 
the sharing of transmission and customer information.
    106. Finally, Enbridge urges the Commission to clarify that a 
foreign parent company can use the parent company exemption if it 
otherwise qualifies. The Commission so clarifies.
vii. Service Companies
Final Rule
    107. The Final Rule excludes from the definition of Energy 
Affiliate service companies that do not engage in energy or natural gas 
commodity markets or are not involved in transmission transactions in 
U.S. energy markets. See 18 CFR 358.3(d)(5)(iii). The Final Rule also 
states 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, such 
as 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.\77\
---------------------------------------------------------------------------

    \77\ Final Rule at P 57.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    108. SCG requests that the Standards of Conduct not apply to 
service company employees. In addition, Dominion requests clarification 
that only service company employees who devote all or nearly all of 
their time to a Transmission Provider or Energy Affiliate will be 
subject to the Standards of Conduct.
    109. NASUCA, on the other hand, wants clarification that all 
employees of the Transmission Provider, Marketing or Energy Affiliate 
will be covered by the definition of Energy Affiliate. NASUCA also 
argues that service (or parent or holding) companies that engage in 
financial transactions relating to the sale or transmission of natural 
gas or electric energy should not be exempt from the definition of 
Energy Affiliate. NASUCA expresses concern that financial transactions 
that are the functional equivalent of physical transactions are not 
subject to the Standards of Conduct and could enable transmission or 
customer information about counterparties to a transaction to be passed 
among Energy Affiliates.
    110. The Commission rejects SCG's rehearing request. Service 
company employees are properly subject to the Standards of Conduct if 
they are working on behalf of the Transmission Provider or Energy 
Affiliates. Otherwise, such service companies would become mechanisms 
by which to circumvent the Standards of Conduct. Employees working on 
behalf of a Transmission Provider or its Marketing or Energy Affiliates 
are subject to the Standards of Conduct as if those individuals were 
directly employed by the respective companies. If service company 
employees only provide support services, they can be shared. But, if 
they have any energy-affiliated or transmission-related functions, they 
cannot be shared.
    111. With respect to NASUCA's concerns, service (or parent/holding) 
companies may engage in certain types of financial activities that 
include capital funding, creditworthiness and risk management type 
activities, as discussed herein. However, when a service company (or 
parent/holding company) engages in financial transactions that may be 
functionally equivalent to physical transactions in the commodity and 
transmission markets, it will be treated as an Energy Affiliate. For 
example, the purchase or sale of financial transmission rights in an 
RTO or trading in NYMEX natural gas or electric futures will give a 
service company a stake in wholesale energy markets because they are 
engaging in wholesale commodity activities. Whenever the service 
company has such a stake, it will be treated as an Energy Affiliate 
under the Standards of Conduct.
    112. Cinergy, Enbridge, Entergy, NiSource, Southern and Xcel raise 
a concern that when employees of a service company are assigned to an 
Energy Affiliate, the service company could be deemed to be 
``involved'' or ``engaged'' in transmission transactions on behalf of 
an affiliate. Xcel claims that service companies regularly employ 
transmission and marketing employees, but segregate employees to comply 
with the Standards of Conduct, which is consistent with the preamble 
language of the Final Rule at Paragraph 57, but not the service company 
exemption included in the regulatory text at Sec.  358.3(d)(5)(iii). 
Cinergy requests clarification that only those service company 
employees who are assigned, dedicated or working on behalf of the 
Transmission Provider or Energy Affiliate, and not the entire service 
company will be subject to the Standards of Conduct.
    113. EEI requests clarification on the functions that can be shared 
in a service company. Similarly, Enbridge, INGAA,

[[Page 23576]]

NICOR, NiSource and Southern request clarification that service 
companies, such as those with operating control centers that conduct 
operations on behalf of Transmission Providers or which have a 
substantial number of employees assigned to perform Energy Affiliate 
functions, are not themselves Energy Affiliates.
    114. The Commission clarifies that a service company will not 
become an Energy Affiliate merely by providing Transmission or 
Marketing or Energy Affiliate employees. However, the service company 
must segregate those employees if they are assigned to those functions. 
Service companies use an assortment of mechanisms to assign employees 
to their affiliates, such as work orders, loans, and agency agreements. 
While the service company does not necessarily become an Energy 
Affiliate, the Transmission Provider is ultimately responsible to 
ensure that all employees assigned or dedicated to it observe the 
independent functioning and information sharing prohibitions of the 
Standards of Conduct.
    115. EEI requests clarification that, when a service company acts 
as agent for a Transmission Provider, it is not involved in energy 
markets or transmission transactions. In several investigations of 
entities that violated the former standards of conduct, the Commission 
discovered that agency agreements resulted in improper sharing of 
information or abusing native load preferences.\78\ Agency agreements 
can also be used to aggregate control over transmission capacity. 
Therefore, the Commission clarifies that a service company may act as 
agent for its affiliated Transmission Provider, Marketing or Energy 
Affiliate without becoming an Energy Affiliate so long as the service 
company is involved in only non-energy related activities, e.g., acting 
as an agent to lease office space or to obtain cleaning service. 
However, if the service company/agent is involved in energy-related 
activities, it is an Energy Affiliate.
---------------------------------------------------------------------------

    \78\ See Transcontinental Gas Pipe Line Corp., 102 FERC ] 61,302 
(2003) (Transco); Idaho Power Corp., 103 FERC ] 61,182 (2003) (Idaho 
Power); and Cleco Corp., 104 FERC ] 61,125 (2003) (Cleco).
---------------------------------------------------------------------------

viii. Affiliates Buying Power for Themselves
Final Rule
    116. Section 358.3(d)(5)(iv) excludes from the definition of Energy 
Affiliate, ``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.''
Requests for Rehearing and/or Clarification and Commission Conclusions
    117. EEI argues that an affiliate should not be prohibited from 
using its affiliated Transmission Provider if it is buying power or gas 
for its own consumption. EEI argues that the term ``using'' is unclear 
and should be revised to reflect the Commission's concern with the 
affiliate ``arranging'' transmission on the affiliated Transmission 
Provider.
    118. The Commission clarifies that the affiliate may use an 
affiliated Transmission Provider to buy power or gas for its own 
consumption. However, to ensure that the Transmission Provider does not 
provide undue preferences to an affiliate, the Transmission Provider 
must treat the affiliate as an Energy Affiliate unless the gas or power 
is for its own consumption. Therefore, an electric generator that is 
using electric energy or natural gas transported on the affiliated 
Transmission Provider for the subsequent generation of electricity will 
not be exempt from the definition of Energy Affiliate.

D. Definition of Marketing, Sales or Brokering

Final Rule
    119. Section 358.3(e) defines marketing, sales or brokering as ``a 
sale for resale of natural gas or electric energy in interstate 
commerce.'' A 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,\79\ and (2) a public utility 
Transmission Provider's energy sales unit, unless such unit engages 
solely in bundled retail sales.\80\ See 18 CFR Sec. Sec.  358.3(e)(1) 
and (2).
---------------------------------------------------------------------------

    \79\ 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).
    \80\ 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.
---------------------------------------------------------------------------

    120. The Final Rule retains the exemption of Order No. 889, which 
permits sharing between the bundled retail sales function and the 
public utility Transmission Provider's interstate transmission 
function. However, the Final Rule emphasizes, that 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 access programs.\81\ In the Final Rule, the Commission also 
emphasizes 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.\82\ 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. When a wholesale merchant 
function does take advantage of its affiliate status, customers, 
competitors and the market are harmed. Therefore, as stated in the 
Final Rule, if a retail sales unit engages in any wholesale sales, the 
separation of functions requirement will apply.\83\
i. Treatment of Retail Sales Employees
---------------------------------------------------------------------------

    \81\ 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.'' FERC Stats. & Regs., Regulation Preambles January 
1991-June 1996 ] 31,036 at 31,781. See also, American Electric Power 
Service Corporation, 81 FERC ] 61,332 (1997), order on reh'g, 82 
FERC ] 61,131 (1998), order on reh'g, 82 FERC ] 31,357 (1998). See 
also, New York et al. v. FERC et al., 535 U.S. 1 (2002).
    \82\ See Final Rule at P 78-79.
    \83\ The Commission wants to prevent an employee that is shared 
between the bundled retail sales function and the wholesale merchant 
function from taking advantage of the preferences afforded retail 
service or utilizing information that may be shared with the retail 
function but not the wholesale function.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    121. Calpine and TAPS request rehearing of the Commission's 
decision to retain the exemption of Order Nos. 888 and 889. Calpine 
claims that the Commission failed to carry out its statutory duties 
under section 205 of the FPA by allowing the Transmission Provider to 
use the same employees for its interstate transmission business and 
bundled retail business. Similarly, TAPS argues that the Commission 
identified discrimination and failed to remedy it. TAPS argues that the 
Commission has the jurisdiction to eliminate the loophole and should do 
so.
    122. Calpine also urges the Commission to limit retail sales 
function employees from getting any undue preferences when they go into 
the wholesale market to buy power to

[[Page 23577]]

satisfy native load. Calpine claims that when retail sales function 
employees buy power to serve native load, they have an incentive to 
favor their own generation or to grant a preference to affiliated 
wholesale suppliers over competitive suppliers.
    123. The Commission rejects petitioners' request for rehearing. An 
electric public utility Transmission Provider engaging in bundled 
retail sales is providing a service that is somewhat similar to the 
service provided by an LDC when it makes on-system sales. Where an 
electric public utility Transmission Provider's wholesale merchant 
function solely engages in bundled retail sales, the Transmission 
Provider is not required to treat its merchant function as a Marketing 
Affiliate. Similarly, if a natural gas Transmission Provider's 
affiliated LDC solely makes on-system sales, the Transmission Provider 
is not required to treat the LDC as an Energy Affiliate. As stated in 
the Final Rule, a public utility Transmission Provider is permitted to 
use the same employees for its interstate transmission business and its 
bundled retail sales business.\84\ However, when the merchant function 
of an electric public utility Transmission Provider participates in the 
wholesale market, the Transmission Provider must treat the merchant 
function as a Marketing Affiliate.
---------------------------------------------------------------------------

    \84\ Final Rule at P 78.
---------------------------------------------------------------------------

ii. Treatment of Electricity Provider of Last Resort Service (POLR)
Requests for Clarification and Commission Conclusion
    124. Cinergy seeks clarification that a Transmission Provider 
serving as the Provider of Last Resort (POLR) in a State that has 
adopted a retail choice program is permitted to continue to serve 
retail customers as it had prior to the introduction of competitive 
retail electric service. Essentially, Cinergy wants POLR employees to 
fall outside the definition of marketing or sales unit personnel under 
Order No. 2004 because, in Cinergy's view, POLR service is essentially 
the same as the bundled retail sales service for which Order No. 2004 
provides an exemption.\85\
---------------------------------------------------------------------------

    \85\ Section 358.3(e)(2) states ``sales and marketing employee 
or unit includes * * * [a] public utility Transmission Provider's 
energy sales unit, unless such unit engages solely in bundled retail 
sales.''
---------------------------------------------------------------------------

    125. Cinergy claims that CG&E, its affiliate located in Ohio, 
provides unbundled electric transmission service with the prices of 
electric generation supply, transmission and distribution separately 
stated and regulated pursuant to Ohio's electric retail competition 
program. Cinergy suggests that, other than the Ohio requirement to 
allow retail customers to purchase electric generation from an 
alternative supplier, CG&E's POLR service is a ``package'' of electric 
generation, transmission and distribution service virtually identical 
to the bundled retail service offered by another Cinergy affiliate, 
PSI, in Indiana, which has not adopted a retail choice program.
    126. Cinergy contends further that CG&E's Account Representatives, 
who support Cinergy's retail customers, are subject to the independent 
functioning requirement of the Standards of Conduct because they 
provide services related to POLR generation, regulated distribution and 
transmission services. Cinergy also states that in Ohio, the 
competitive retail electric affiliates must be separate from the 
Transmission Function and Ohio has promulgated a code of conduct to 
prevent competitive advantages to affiliates.\86\ Cinergy claims that 
CG&E's POLR employees do not reserve or schedule transmission service; 
these functions are handled by Cinergy's marketing unit, which observes 
the Standards of Conduct.
---------------------------------------------------------------------------

    \86\ See Cinergy at p. 9, referencing Ohio Rev. Code Ann. 
section 4928.17 (Anderson 2003) and Ohio Admin Code section 5901; 1-
20-16.
---------------------------------------------------------------------------

    127. The Commission is not prepared to adopt Cinergy's proposed 
rule change and amendment to the definition of ``marketing, sales or 
brokering'' to accord POLR service the same treatment, on a generic 
basis, as the Commission has accorded bundled retail sales. Since the 
details surrounding CG&E's POLR service or the POLR services of other 
Transmission Providers are not available, the Commission will not 
modify the definition of ``marketing, sales or brokering'' to allow 
automatic exemptions in all cases. Nonetheless, the Commission does not 
rule out the possibility that a particular POLR service deserves 
treatment equivalent to that accorded bundled retail sales treatment.
    Accordingly, the Commission will entertain case-by-case requests 
for exemption of a POLR service based on the relevant facts and 
circumstances.

E. Definition of a Transmission Function Employee

Final Rule
    128. Section 358.3(j) defines the term ``Transmission Function 
Employee'' as 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.
Requests for Rehearing and/or Clarification and Commission Conclusions
    129. INGAA and Dominion request clarification on whether the 
Commission intended that the term ``operating employee'' (at P 112) of 
the Final Rule have the same meaning as by the term ``Transmission 
Function Employee.'' Similarly, INGAA is also concerned that Paragraph 
120 of Final Rule states that a Transmission Function Employee is 
``participating in directing, organizing or executing transmission 
system or reliability functions of a Transmission Provider,'' but that 
phrase is not identical to the language contained in the definition of 
Transmission Function Employee in Sec.  358.3(j). LG&E/KU urge the 
Commission to replace the phrase ``including day-to-day duties and 
activities * * *'' in the definition of Transmission Function Employee 
with ``defined as the * * *'' LG&E states that by using the phrase 
``including day-to-day'' there is still some doubt as to whether 
certain employees, specifically officers and directors, would be 
considered Transmission Function Employees because the term 
``including'' implies that this is not an exhaustive list of the types 
of activities that could be considered transmission functions.
    130. Order No. 2004 replaced the term ``operating employee,'' which 
was originally defined in Order Nos. 497-E and 497-F, with the term 
``Transmission Function Employee.'' The term ``operating employee'' and 
``Transmission Function Employee'' are not identical. In Order No. 497-
E, the Commission defined ``operating employee'' as ``an individual who 
has 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.'' \87\ 
``Operating employee'' was used in discussions for both a Transmission 
Provider as well as its Marketing Affiliate, hence the references to 
gas sales or gas marketing activities. Whereas the term ``Transmission 
Function Employee'' is defined as ``an employee, contractor, consultant 
or agent of a Transmission Provider who conducts transmission

[[Page 23578]]

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.'' See 18 CFR 358.3(j). Consequently, the term ``operating 
employee'' also covered employees engaged in gas sales or marketing 
functions whereas the term Transmission Function employees does not.
---------------------------------------------------------------------------

    \87\ Order No. 497-E, FERC Stats. & Regs., Regulations Preambles 
January 1991-June 1996 ] 30,987 at 30,996.
---------------------------------------------------------------------------

    131. With respect to LG&E/KU's specific question, the discussion at 
Paragraph 120 of the Final Rule was intended to provide additional 
guidance on the definition of the term Transmission Function Employee, 
which uses the phrase ``including, but not limited to.'' There is no 
real distinction between the preamble discussion and the regulatory 
text because the regulatory text did not attempt to capture every 
activity of a Transmission Function Employee. As the Commission stated 
in the preamble of the Final Rule, and in a series of cases 
interpreting the term ``operating employee,'' this definition includes, 
but is not limited to, employees engaged in ``day-to-day'' activities. 
There may be ``Transmission Function Employees'' who do not engage in 
``day-to-day'' activities, but are performing, on less frequent, but 
equally as significant basis, transmission functions, such as 
organizing expansion of capacity or deciding on whether to construct an 
interconnection. In the past, the Commission looked at the actual 
duties and responsibilities of the individuals. For example, when 
considering the responsibilities of a particular officer, the 
Commission evaluated whether he participated in directing, organizing 
or executing transmission or wholesale merchant functions, including 
whether he had direct access to transmission or reliability information 
on the EMS or other databases and whether he approved contracts or 
transactions.\88\
---------------------------------------------------------------------------

    \88\ See Ameren Services Company, 87 FERC ] 61,145 at 61,600 
(1999).
---------------------------------------------------------------------------

F. Definition of Marketing Affiliate

    132. Several petitioners, including Dominion, state on rehearing 
that the Commission did not define the term ``Marketing Affiliate,'' 
although it is used in the Final Rule and in the regulatory text. 
Dominion urges the Commission to adopt a formal definition of the term 
Marketing Affiliate to promote understanding.
    133. The Final Rule defines marketing at 18 CFR 358.3(e) and 
affiliate at 18 CFR 358.3(b). However, since the Commission uses the 
term Marketing Affiliate throughout the Final Rule and regulatory text, 
the Commission is adopting Dominion's request and will codify a 
definition of Marketing Affiliate at Sec.  358.3(k): ``Marketing 
Affiliate means an Affiliate as that term is defined in Sec.  358.3(b) 
or a unit that engages in marketing, sales or brokering activities as 
that term is defined in Sec.  358.3(e).''

G. Independent Functioning

    134. One of the most significant elements of the Standards of 
Conduct is the requirement that the Transmission Provider function 
independent of its Marketing and Energy Affiliates. The independent 
functioning of the Transmission Provider limits its ability to give its 
Marketing and Energy Affiliates unduly preferential service or access 
to information. However, the Commission also recognizes that a 
Transmission Provider and its Marketing and Energy Affiliate should be 
permitted to share employees to conduct corporate governance functions, 
to take advantage of the efficiencies of corporate integration and to 
respond to emergency circumstances. As a result, the Commission has 
permitted the sharing of officers and directors, support service 
employees, and field and maintenance employees between a Transmission 
Provider and its Marketing/Energy Affiliates in most circumstances. 
Although the Commission has permitted sharing for the categories of 
employees noted above, the Commission will evaluate in compliance 
audits and investigations, employees' actual functions and duties to 
determine whether the Transmission Provider is appropriately applying 
this exemption.
i. Sharing of Senior Officers and Directors
Final Rule
    135. In the Final Rule, the Commission stated that it would allow 
senior officers and directors who do not engage in transmission 
functions, or have day-to-day duties and responsibilities for planning, 
directing, organizing or carrying out transmission-related operations 
to maintain such positions with the Transmission Provider and its 
Marketing or Energy Affiliates. The Commission, however, cautioned that 
shared executives may not serve as conduits for sharing transmission, 
customer or market information with a Marketing or Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
    136. On rehearing, AGA, Cinergy, Dominion, Duke Energy, EEI, 
Entergy, INGAA, NICOR, NiSource and Shell Offshore request that the 
Commission codify the exemption for senior officers and directors in 
the regulatory text. The Commission agrees with this request and will 
codify the exception at Sec.  358.4(a)(5) as follows: Transmission 
Providers are permitted to share with their Marketing and Energy 
Affiliates senior officers and directors who are not ``Transmission 
Function Employees'' as that term is defined in Sec.  358.3(j).
    137. LG&E/KU argue that the codification for the senior officers 
and directors exemption should be broader in scope. They argue that 
certain executives may have dual supervisory responsibility for the 
company's transmission and merchant functions with a fiduciary 
obligation to manage both functions.
    138. The Commission denies LG&E/KU's request. An executive who has 
day-to-day transmission-related responsibilities should not have a role 
in Marketing or Energy Affiliates. The Final Rule has taken into 
account the fiduciary obligation of high-level officers and directors 
(who may be shared) by adopting the more flexible ``no conduit'' rule 
regarding the sharing of information rather than the more stringent 
``automatic imputation'' rule. See Discussion in Final Rule at P 144-
150. This enables the limited number of shared officers and directors 
to oversee all functions of the company without violating the Standards 
of Conduct. If LG&E/KU or any Transmission Provider has a specific 
concern about the roles of its executive employees, the Transmission 
Provider can seek clarification from the Commission as to whether 
sharing is permitted under this Final Rule.
    139. Duke Energy also requests that when the Commission codify the 
officers and directors section, it also clarify that the information 
sharing prohibitions do not limit officers' and directors' ability 
obtain information necessary to engage in corporate governance 
functions. The Commission also incorporates regulatory text in Sec.  
358.4(a)(5) to better reflect that the Commission does not intend to 
restrict corporate governance functions as follows: ``A Transmission 
Provider may share transmission information covered by Sec. Sec.  
358.5(a) and (b) with its senior officers and directors provided that 
they do not (1) participate in directing, organizing or executing 
transmission

[[Page 23579]]

system operations or marketing functions; or (2) act as a conduit to 
share such information with a Marketing or Energy Affiliate.
    140. Williams filed a motion for clarification that incorporates a 
proposal to revise the Final Rule to create a two-tier exemption for 
senior officers and directors to facilitate corporate governance 
functions. Under Williams' proposal, the ``Group A'' category would 
include directors of the parent company, the Chief Executive Officer 
(CEO), the Chief Finance Officer (CFO) and the General Counsel, who 
would have unfettered access to information to discharge their 
corporate governance duties. Williams proposes that these individuals 
never be considered Transmission Function employees even if they 
occasionally engage in some Transmission Functions, such as approving a 
significant transaction for a particular business unit. Williams 
proposes that ``Group B'' would include a small group of senior 
officers who are involved in the day-to-day operations of their 
respective business units, including Gas Pipelines (transmission), 
Midstream, Exploration and Production and Power. Williams argues that 
the Group A officers need input and advice from the Group B officers 
and should jointly constitute an ``Executive Officer Team.'' Williams 
proposes seven ``protections'' for the Group B officers that it argues 
are consistent with the Commission's goals of Order No. 2004. 
Allegheny, Cinergy, Duquesne, KCPL and PGE filed motions in support of 
Williams' request. However, INGAA and El Paso urged the Commission to 
avoid imposing Williams' suggested approach on a generic basis to other 
companies. INGAA and El Paso caution the Commission not to assume that 
the approach proposed by Williams is appropriate or workable for all 
companies. Similarly, EEI similarly states while that the Williams 
approach may address corporate governance concerns at Williams, the 
Commission should not assume that the Williams' approach is appropriate 
for all companies.
    141. The Commission denies Williams' proposal for revision. As 
discussed in the Final Rule, the Commission has already taken into 
account the need for the CEO and CFO to comply with the certification 
requirements of section 302 and section 906 of the Sarbanes-Oxley Act 
of 2002 (Sarbanes-Oxley Act) by adopting the no-conduit rule. The 
Commission clarifies that in most circumstances, the ``Group A'' 
executives Williams identifies would not be Transmission Function 
Employees, as that term is defined. The CEO, CFO or General Counsel of 
a company would not become a ``Transmission Function Employee'' by 
approving major capital expenditures for the company. The Commission 
will not approve the creation of an ``Executive Officer Team'' that 
includes ``Transmission Function Employees'' and employees of a 
Marketing or Energy Affiliate that do not qualify for shared treatment. 
The goals of Order No. 2004 cannot be achieved if Group B employees who 
are involved in the day-to-day operations of the Marketing or Energy 
Affiliates had access to the Transmission Providers' transmission and 
customer information.
ii. Sharing of Field and Maintenance Personnel
Final Rule
    142. Section 358.4(a)(4) codifies the Commission's historical 
policy of allowing Transmission Providers to share field and 
maintenance personnel with their Marketing and Energy Affiliates.
Requests for Rehearing and Clarification and Commission Conclusions
    143. INGAA, Dominion, NiSource and Shell Gas seek clarification 
that a ``field supervisor'' who has the ability to restrict or shut 
down the operation of a particular section of a pipeline will not be 
treated as an operating employee, despite the language of Order No. 
497-F.\89\ INGAA claims that virtually any field employee may restrict 
or shut down the operation of a particular stretch of pipeline in a 
particular set of circumstances, and that this function alone should 
not render those field personnel ``Transmission Function Employees.'' 
In lieu of controlling the flow on the pipeline, INGAA and Dominion 
urge the Commission to adopt a definition that would be limited to 
those supervisory employees who may plan to shut down a pipeline in 
advance or may choose to shut down based on economic factors.
---------------------------------------------------------------------------

    \89\ In Order No 497-F, the Commission stated, ``to the extent 
that supervisory field personnel have the ability to control a 
pipeline's gas operations, they would be considered operating 
employees.'' Order No. 497-F, 66 FERC ] 61,347 at 62,167.
---------------------------------------------------------------------------

    144. In addition, Dominion urges the Commission to clarify that the 
exception for field and maintenance employees also applies to 
technicians, mechanics and their immediate supervisors who are 
responsible for electric transmission activities.
    145. The Commission clarifies that shared field personnel may 
include field supervisors who do not take part in advance planning for 
facility shut downs or are involved in shutting down facilities based 
on economic reasons.
    146. The Commission also clarifies that the field and maintenance 
employees exception also applies to technicians, mechanics and their 
immediate supervisors who are responsible for electric transmission 
activities.
iii. Risk Management Employees
Final Rule
    147. The Final Rule prohibits the sharing of risk management 
employees who are operating employees of either the Transmission 
Providers or their Marketing or Energy Affiliates.\90\ The Final Rule 
also prohibits risk management employees from being a conduit for 
improperly sharing information because they are in a position to use 
transmission, customer and market information to give Marketing and 
Energy Affiliates undue advantages.
---------------------------------------------------------------------------

    \90\ Final Rule at P 112.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    148. SCG and its affiliate SCE&G request rehearing of the 
prohibition against sharing risk management employees who are also 
operating employees of the Transmission Provider or Marketing or Energy 
Affiliate.
    149. Cinergy, NiSource, Dominion, Duke Energy, EEI and Entergy 
request that the Commission codify that risk management employees can 
be shared so long as they are not operating employees of the 
Transmission Provider or Marketing or Energy Affiliate.
    150. Dominion, INGAA and NiSource urge the Commission to clarify 
that the types of risk management functions described in the Final Rule 
do not constitute transmission functions.\91\ INGAA also urges that 
risk management employees should be permitted to make general 
appraisals of creditworthiness of particular counterparties (governed 
by business standards and not tariffs) and set appropriate exposure 
limits to which corporations are willing to be exposed. Similarly, 
Dominion argues that managing corporate-wide risk and investment, 
approving expansions and establishing spending limits should not

[[Page 23580]]

be considered risk management functions. Dominion and INGAA also urge 
the Commission to permit the management of corporate exposure including 
financial transactions for the sole purpose of hedging risks.
---------------------------------------------------------------------------

    \91\ In the Final Rule, the Commission identified various 
examples of risk management functions, including: (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. Final Rule at P 109.
---------------------------------------------------------------------------

    151. The Commission rejects the rehearing requests of SCG and 
SCE&G. Risk management employees will have access to valuable 
transmission, customer and market information that can be used to the 
detriment of third parties.
    152. As per the request of several petitioners, the Commission will 
codify the exception that permits Transmission Providers to share risk 
management employees with their Marketing and Energy Affiliates at 
Sec.  358.4(a)(6).
    153. With respect to the petitioners' requests to identify certain 
risk management activities that can be shared between a Transmission 
Provider and its Marketing and Energy Affiliates, the Commission finds 
that it is permissible for the risk management function to: (1) Manage 
corporate-wide business risk exposure of the corporation and/or its 
affiliates; (2) evaluate business risk exposure for third parties on an 
aggregate basis; (3) manage overall corporate investment for the entire 
corporation; (4) approve expansion projects; and (5) establish 
spending, trading and capital authorities for each business unit. 
However, the risk management function is not permitted to assess 
creditworthiness of a particular customer under a pipeline's tariff. 
This is consistent with the Commission's previously articulated policy, 
in which the Commission held that the ``act of deciding whether a 
potential shipper can become an actual shipper by satisfying the 
creditworthiness requirements under [a pipeline's] tariff is a 
transportation function.'' \92\
---------------------------------------------------------------------------

    \92\ See Vector Pipeline, L.P., 97 FERC ] 61,085 (2001).
---------------------------------------------------------------------------

    154. While risk management function employees are permitted to 
engage in the types of activities identified in the preceding 
paragraphs, the employee must pay particular attention to 
communications with Marketing and Energy Affiliates. Certainly, 
transmission and customer information are not a part of setting 
corporate-wide limits or managing corporate investment. A risk 
management function employee cannot share transmission or customer 
information obtained from the Transmission Provider with its Marketing 
or Energy Affiliates. For example, the risk management function 
employee can communicate to the Marketing or Energy Affiliate that 
Company X has reached or exceeded its corporate-wide credit limit or 
its credit rating has been downgraded by non-affiliated financial 
rating entities, but the risk management function employee is 
prohibited from telling the Marketing or Energy Affiliate that Company 
X has reached or exceeded its corporate-wide credit limit because it 
had not paid its transmission fees. The distinction is subtle, but 
important. The Commission will not permit the risk management function 
employee to be used as a vehicle to share information with the 
Marketing or Energy Affiliates that the Transmission Provider is 
prohibited from sharing under Sec.  358.5(a).
iv. Lawyers as Transmission Function Employees
Final Rule
    155. The Final Rule does not prohibit a Transmission Provider from 
sharing support employees with its Marketing and Energy Affiliates. 
But, if employees, such as lawyers, are engaging in transmission 
functions, they are not ``support'' staff; rather, they are 
Transmission Function Employees who are subject to the Standards of 
Conduct. The Commission will not permit a Transmission Provider to 
label individuals or categories of employees as ``support'' to 
circumvent the independent functioning requirement.
Requests for Rehearing and/or Clarification and Commission Response
    156. Dominion, INGAA, Entergy and SCE&G requested clarification on 
when lawyers become Transmission Function Employees. Entergy argues 
that when lawyers provide legal or regulatory advice or set policy they 
should not become Transmission Function Employees. Dominion urges the 
Commission to clarify that lawyers can be considered shared support 
employees, and only if they engage in transmission functions would they 
be considered Transmission Function Employees and could not be shared.
    157. The Commission clarifies that if lawyers participate in 
transmission policy decisions on behalf of a Transmission Provider, the 
Commission considers that activity as a Transmission Function and the 
lawyer is a Transmission Function Employee. For example, a lawyer who 
participates in a decision on whether the Transmission Provider should 
seek a contract with a customer is acting as a Transmission Function 
Employee. If, however, the lawyer is asked to implement the 
Transmission Provider's business decision and negotiate a contract with 
that customer, the lawyer would not be a Transmission Function 
Employee.

H. Identification of Affiliates on Internet

i. Posting Organizational Charts.
Final Rule
    158. Section 358.4(b) requires all Transmission Providers to post 
information, including organizational charts and job descriptions, with 
respect to Marketing and Energy Affiliates on their OASIS or Internet 
websites.
    159. Specifically, Sec.  358.4(b)(3) requires Transmission 
Providers to post organizational charts and job descriptions on their 
respective Internet websites or OASIS. The Transmission Provider is 
also required to update the organizational charts and job descriptions 
within seven business days of a change. In addition, where a 
Transmission Provider shares clerical, 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 it is not required to provide names or job 
descriptions for the clerical or field or maintenance employees. See 18 
CFR 358.4(b)(3)(ii).
Requests for Rehearing and/or Clarification and Commission Conclusions
    160. Shell Gas requests that the Commission reconsider the website 
postings and argues that the complexity of organizational charts for 
affiliates is an unjustified burden.
    161. On the other hand, Calpine urges the Commission to require 
Transmission Providers to post full identification of all affiliates 
with a statement of each affiliate's activities and a designation of 
which affiliates are considered by the Transmission Provider to be 
Marketing Affiliate or providing wholesale merchant functions. Calpine 
further urges the Commission to require the Transmission Provider to 
post, for each affiliate it claims to be exempt from the definition of 
Energy Affiliate, a full and complete explanation for the basis of the 
determination.
    162. Duke Energy requests that the Commission clarify that the 
requirement to post Transmission Provider job titles applies only to 
employees involved in transmission or wholesale sales functions and 
their managers. Dominion notes that the Final Rule contemplated (at P 
125) a Transmission Provider posting organizational charts and job 
descriptions for business units that are shared between a Transmission 
Provider

[[Page 23581]]

and its affiliated Marketing or Energy Affiliates and urges the 
Commission to codify this requirement.
    163. The purpose of posting organizational charts and job 
descriptions is to provide a mechanism for the Commission and market 
participants to determine whether the Transmission Provider is 
functioning independently of its Marketing and Energy Affiliates. This 
transparency is an integral component of the independent functioning 
requirement. Hence, the requirement to post an organizational chart 
that identifies the parent corporation with the relative position in 
the corporate structure of the Transmission Provider, Marketing and 
Energy Affiliates. See 18 CFR 358.4(b)(3)(i). When posting the business 
unit for the Transmission Provider as required by Sec.  
358.4(b)(3)(ii), it must identify whether any of those business units 
are shared with the Marketing or Energy Affiliates. If a corporation 
uses a service company as the employment mechanism for the Transmission 
Provider and its Marketing or Energy Affiliates, the organizational 
charts should clearly specify those circumstances. Similarly, if a 
corporation uses both functional and structural organizational charts 
for its management, the organizational charts must accurately reflect 
its operations. Support units that are shared between a Transmission 
Provider and its Marketing or Energy Affiliates must be clearly 
identified.
    164. Several petitioners, including EEI, argue that the Commission 
should eliminate the requirement of Sec.  358.4(b)(3)(ii) to post 
employees that are shared between the Transmission Provider and Energy 
or Marketing Affiliates since Transmission Providers are not permitted 
to share employees. The Commission rejects petitioners' request. There 
may be circumstances where a Transmission Provider will be permitted to 
share employees with its Marketing or Energy Affiliates, such as when 
officers and directors are shared or when a Transmission Provider 
obtains a partial waiver. Therefore, the Commission will retain the 
requirement to post shared employees.
    165. In addition, the organizational charts should accurately 
reflect when Transmission Providers use service company employees to 
staff the Transmission Provider or its Marketing or Energy Affiliates. 
The organizational charts should be well organized and self-explanatory 
and company specific acronyms should be explained in a legend. In 
several recent investigations, the Commission found that organizational 
charts and job descriptions were incomplete, inaccurate or difficult to 
understand, and in some instances, did not include all the required job 
titles, names of managers and job descriptions.\93\
---------------------------------------------------------------------------

    \93\ See Transco supra note 86. See also National Fuel Gas 
Supply Corporation, 103 FERC ] 61,192 (2003).
---------------------------------------------------------------------------

    166. EEI also urges the Commission to reconsider the time when 
information should be posted and recommends that the Commission require 
the information to be updated within 14 days, rather than the seven 
days in the Final Rule. The Commission already considered EEI's request 
in the comments to the NOPR. Originally, the Commission proposed that 
the OASIS and Internet websites be updated within three days. However, 
upon consideration of the petitioners' requests for additional time to 
update the information, the Commission balanced the need for 
transparency and updated information with the Transmission Providers' 
ability to actually update the information and determined that updating 
the information within seven days was the appropriate balance.
    167. Southwest Gas also requests clarification whether the posting 
requirements apply to a Transmission Provider that has no Marketing or 
Energy Affiliate. The Commission clarifies that the Transmission 
Provider should still post the information (as well as develop 
procedures and designate a Chief Compliance Officer).
ii. Posting of Merger Information
Final Rule
    168. Section 358.4(b) requires the Transmission Provider to post 
the name(s) and address(es) of potential merger partner(s) and Energy 
Affiliates on the OASIS or Internet website. This is consistent with 
the Commission's current policy, which treats potential merger partners 
as affiliates.\94\
---------------------------------------------------------------------------

    \94\ 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 (2001).
---------------------------------------------------------------------------

Requests for Clarification and Commission Conclusion
    169. Several petitioners query whether it is acceptable to put a 
link to potential merger partners' websites in lieu of posting all the 
required information on its own website. The Commission finds that it 
is acceptable, so long as the link sends the user directly to the 
appropriate location and is kept up to date.
    170. Dominion also requests clarification regarding the timing of 
the posting of merger information because the regulatory text at Sec.  
358.4(b)(3)(iv) requires the posting within seven days of when the 
merger is announced, but the preamble discussion stated that the merger 
information should be posted within seven days after a potential merger 
is announced. See Final Rule at P 127. The Commission clarifies that 
the information should be posted within seven days of when a potential 
merger is announced and will revise the regulatory text to reflect the 
discussion in the preamble of the Final Rule and herein.
iii. Transfer of Employees
Final Rule
    171. Section 358.4(c) requires a Transmission Provider to post 
notices of employee transfers on the OASIS or Internet website.
Requests for Rehearing and/or Clarification and Commission Conclusions
    172. Dominion requests clarification on whether the Transmission 
Provider is also required to post the transfers between the Marketing 
and Energy Affiliates. Dominion argues that the regulatory text at 
Sec.  358.4(c) does not accurately reflect the discussion in the Final 
Rule at P 128.
    173. The Commission so clarifies. The Final Rule is intended to 
capture the transfers between a Transmission Provider on the one hand 
and its Marketing or Energy Affiliates on the other. The first line of 
regulatory text at Sec.  358.4(c) is, therefore, revised, as follows: 
``Employees of the Transmission Provider, Marketing 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 between the 
Transmission Provider, on the one hand, and the Marketing or Energy 
Affiliates, on the other, must be posted on the OASIS or Internet 
website, as applicable.'' \95\
---------------------------------------------------------------------------

    \95\ The remainder of the regulatory text at 18 CFR 358.4(c) 
remains the same.
---------------------------------------------------------------------------

iv. Posting Standards of Conduct Procedures
Final Rule
    174. Section 358.4(e) requires Transmission Providers to post 
written procedures implementing the Standards of Conduct on their OASIS 
or Internet websites in lieu of filing them with the Commission.

[[Page 23582]]

Requests for Rehearing and/or Clarification and Commission Conclusions
    175. Shell Offshore and Xcel request rehearing and would require 
Transmission Providers to submit their compliance procedures to the 
Commission for review and approval. Petitioners argue that there is no 
assurance that the Transmission Providers' Standards of Conduct 
procedures will conform to the Commission's intent in Order No. 2004. 
They ask that the Commission provide a formal review procedure under 
which the Commission will review and approve each Transmission 
Provider's compliance procedures. Shell Offshore claims that, over the 
years, the Commission often required several ``rounds'' of compliance 
filings before it approved a Transmission Provider's Standards of 
Conduct procedures.
    176. The Commission denies rehearing. Previously, the Commission 
gave little generic guidance on acceptable implementation of the 
Standards of Conduct. In the Final Rule, the Commission identified the 
types of information that should be included in the compliance 
procedures,\96\ and we provide more guidance herein.\97\
---------------------------------------------------------------------------

    \96\ Final Rule at P 36.
    \97\ A Transmission Provider is required to prepare written 
procedures explaining how it will comply with each of the Standards 
of Conduct and distribute the procedures to its employees. At a 
minimum, the Standards of Conduct procedures should: (1) Identify 
and explain the measures the Transmission Provider uses to keep 
secure transmission information and confidential customer 
information, such as locked file rooms, card-key access to control 
center and/or password restricted databases (more extensive 
information should be included where the Transmission Provider also 
shares facilities, including computer facilities, with its Marketing 
or Energy Affiliates); (2) identify the Chief Compliance Officer, 
describe his or her general duties and functions, and provide 
contact information; (3) identify any categories of employees shared 
between the Transmission Provider and its Marketing or Energy 
Affiliates (it is not necessary to identify the names of the shared 
support employees); (4) identify procedures that will be used to 
make sure that the names and addresses of its Marketing and Energy 
Affiliates, organizational charts and job descriptions, merger, 
transfer, tariff waiver and discount information are kept up-to-date 
on the OASIS or Internet website, and are archived consistent with 
the requirements of Parts 37 and 284 of the Commission's 
regulations; and (5) identify procedures to ensure that information, 
including documents and communications, are retained to demonstrate 
that the Transmission Provider is in compliance with the Standards 
of Conduct.
---------------------------------------------------------------------------

    177. Moreover, 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. 
Commission staff will be monitoring Standards of Conduct compliance 
closely. Although some petitioners expressed concern that the Hotline 
may not provide consistent advice or adequate mechanisms to respond to 
inquiries regarding the Standards of Conduct, the Commission finds that 
the Hotline is experienced in providing advice on and interpreting the 
Standards of Conduct.
    178. NiSource requests clarification on where an electric utility 
Transmission Provider that no longer has an OASIS, presumably because 
it participates in an RTO or ISO with an OASIS, should post the 
required information. The Commission clarifies that the Transmission 
Provider should make arrangements, as is the current practice for some, 
to have the OASIS provider, e.g., the RTO or ISO, include a link to the 
Transmission Provider's information. The link should be directly to the 
information postings, so the user does not have to search the website 
for the relevant information.
v. Training
Final Rule
    179. At the request of petitioners, the Final Rule included a 
provision, at Sec.  358.4(e)(5), that formalizes the requirement to 
train employees in the Standards of Conduct as follows: ``Transmission 
Providers shall require all their employees to attend training and sign 
an affidavit certifying that they have been trained regarding the 
Standards of Conduct requirements.''
Requests for Rehearing and/or Clarification and Commission Conclusions
    180. Petitioners that request rehearing and clarification focus on 
two issues with regard to training: (1) Who should be trained; and (2) 
what types of training and certification are acceptable. INGAA and 
Alliance argue that a Transmission Provider should not be required to 
distribute the Standards of Conduct to the employees of its Marketing 
and Energy Affiliates because the Transmission Provider may not know 
the names of all those employees.
    181. Some petitioners, including Alliance, BP, Cinergy, Dominion, 
Duke Energy, EEI, Entergy and INGAA, argue that training all employees 
would include employees who have no involvement in energy, gas, power 
or transmission functions and/or do not have access to information 
related to those functions. The Commission clarifies that it is the 
Transmission Provider's responsibility to ensure that all Transmission 
Provider employees and Marketing and Energy Affiliate employees with 
access to information about transmission, energy, power or marketing 
receive a copy of the Standards of Conduct and training.
    182. EEI notes that the regulatory text requires training of all 
employees while the preamble identified several categories of employees 
who should be trained, such as shared support employees and risk 
management employees. EEI urges that training cover: (1) Transmission 
Function employees (and not all employees of the Transmission 
Provider); (2) Marketing Affiliate Employees; (3) shared support 
employees; (4) risk management employees who support the Marketing and 
Energy Affiliates; and (5) shared management employees. EEI also claims 
that some union contracts contain provisions restricting the ability to 
require the signing of affidavits by union employees. Also, according 
to EEI, for some workers, training does not seem appropriate, e.g., 
cafeteria, building maintenance and field workers.
    183. One of the goals of training of a broad group of employees is 
to ensure that employees with access to information about transmission, 
energy, power, gas or marketing functions understand the restrictions 
on sharing information and the prohibition on acting as a conduit for 
sharing information. For those employees without access to information 
about transmission, energy, or natural gas functions, however, training 
will not be required.
    184. The purpose of distributing the Standards of Conduct and 
training is to ensure that employees are knowledgeable about their 
obligations under the Standards of Conduct. The Transmission Provider 
may implement this requirement by ensuring that the Marketing and 
Energy Affiliates distribute the Standards of Conduct to their 
employees, either in paper copy or electronically. As suggested by 
INGAA, this can be accomplished by sending a copy of the written 
procedures to the person designated to receive service at each of the 
Marketing and Energy Affiliates. The Chief Compliance Officer will be 
responsible for following up with the Marketing and Energy Affiliates 
to ensure that the Standards of Conduct were actually distributed to 
the appropriate employees.
    185. Computer-based or electronic training is an acceptable method 
of training, as is a computer-generated certificate of training, in 
lieu of an affidavit from the employee certifying she or he has been 
trained.\98\ The Chief Compliance Officer will be responsible

[[Page 23583]]

for ensuring that employees participate in the Standards of Conduct 
training.
---------------------------------------------------------------------------

    \98\ With some computer-based training programs, a certificate 
of completion is generated when the student completes the entire 
training program.
---------------------------------------------------------------------------

vi. Chief Compliance Officer
Final Rule
    186. Section 358.4(e)(6) requires Transmission Providers to 
designate Chief Compliance Officers who will be responsible for 
Standards of Conduct compliance.
Requests for Clarification and Commission Conclusions
    187. Entergy expresses concern that a Chief Compliance Officer, who 
may be a lawyer, does not become a Transmission Function Employee 
because she or he is involved in directing policy. Rather, Entergy 
urges that the Chief Compliance Officer be bound by the no-conduit rule 
for information she or he has access to. A Chief Compliance Officer 
does not become a Transmission Function Employee when she or he is 
involved in organizing a Transmission Provider's policies and 
procedures to comply with the Standards of Conduct. She or he will have 
access to transmission and customer information and is prohibited from 
being a conduit for sharing this information with the Marketing or 
Energy Affiliates.
    188. NiSource requests clarification that one Chief Compliance 
Officer may be appointed for several affiliated Transmission Providers 
within the same corporate family. The Commission so clarifies. Several 
affiliated Transmission Providers within the same corporate family may 
designate the same Chief Compliance Officer who will be responsible for 
Standards of Conduct compliance activities.

I. Information Access and Disclosure Prohibitions

    189. Section 358.5(a) requires Transmission Providers to ensure 
that employees of their Marketing and Energy Affiliates have access 
only to that information that is made available to the Transmission 
Providers' other transmission customers (i.e., information posted on an 
OASIS or Internet website, concerning transmission capability, price, 
curtailments, storage, ancillary services, balancing, maintenance 
activity, capacity expansion plans or similar information).
    190. The Final Rule also prohibits a Transmission Provider from 
disclosing to the employee of the Transmission Provider's Marketing or 
Energy Affiliates any information concerning the transmission system of 
the Transmission Provider or the transmission system of another 
Transmission Provider.\99\ The Final Rule also prohibits the 
Transmission Provider from sharing any information acquired from non-
affiliated transmission customers or potential non-affiliated 
transmission customers or developed in the course of responding to 
requests for transmission or ancillary services on the OASIS or 
Internet website with employees of its Marketing of 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 service.\100\
---------------------------------------------------------------------------

    \99\ 18 CFR 358.5(b)(1).
    \100\ 18 CFR 358.5(b)(2).
---------------------------------------------------------------------------

    191. The Commission established the following specific exemptions 
from the information disclosure prohibitions that permit a Transmission 
Provider to communicate with its Marketing or Energy Affiliate: (1) 
Information relating to specific transactions (transaction specific 
exemption); \101\ (2) crucial operating information (crucial operating 
information exemption); \102\ (3) information regarding a customer with 
that customer's voluntary consent (voluntary consent exemption); \103\ 
and (4) certain limited generation information necessary to perform 
generation dispatch (generation dispatch exemption).\104\
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    \101\ 18 CFR 358.5(b)(5).
    \102\ 18 CFR 358.5(b)(8).
    \103\ 18 CFR 358.5(b)(4).
    \104\ 18 CFR 358.5(b)(6).
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    192. Duke Energy argues the Commission to clarify that the 
Standards of Conduct do not interfere with the ability of co-owners of 
jointly-venture gas pipeline Transmission Providers to communicate with 
each other regarding the operations of the jointly owned pipeline.\105\ 
Duke Energy explains that a bar on communication of transmission 
information could prevent a pipeline operator from sharing information 
with the Transmission Provider's management committee. Duke Energy 
argues that if the Final Rule prohibits such communications, then 
business partners will not be able to manage their investments, thus 
inhibiting additional corporate infrastructure development.
---------------------------------------------------------------------------

    \105\ Duke Energy explains that many joint-venture pipelines are 
operated by a management committee that makes operating decisions 
for the pipeline.
---------------------------------------------------------------------------

    193. The Commission denies Duke Energy's request for rehearing. 
Duke Energy seems to be concerned that the rule prohibits pipeline-to-
pipeline information that is necessary for operations. That is not the 
case. Transmission Providers may share information with affiliated 
Transmission providers (an affiliated Transmission Provider is not 
considered an Energy Affiliate) and may share crucial operating 
information consistent with Sec.  358.3(b)(8)).

i. No Conduit Rule
Final Rule
    194. Section 358.5(b)(7) provides that 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. The 
Final Rule also states that the Commission would adopt the ``No-Conduit 
Rule'' vis-[agrave]-vis shared employees.\106\
---------------------------------------------------------------------------

    \106\ See Final Rule at P 145-150. Under a ``no-conduit rule,'' 
an employee that may be shared by a Transmission Provider and its 
Marketing or Energy Affiliate could receive transmission or customer 
information as long as the shared employee did not act as a conduit 
for sharing the information with the Marketing or Energy Affiliate.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    195. Petitioners, including EEI, Entergy, Cinergy and Duke Energy, 
argue that, although the discussion in the Final Rule purportedly 
adopts the ``no conduit'' rule, the regulatory text for Sec.  
358.5(b)(7) operates like an ``automatic imputation'' rule because it 
does not expressly permit the disclosure of information to permissibly 
shared employees, such as shared officers and directors. See Final Rule 
at P 145-150.
    196. According to petitioners, the no-conduit rule has two 
purposes: (1) To prohibit the Transmission Provider from using anyone 
as a conduit to share transmission or customer information with a 
Marketing or Energy Affiliate; and (2) to allow certain information to 
be shared with shared, non-operating employees, such as officers and 
directors, as long as those employees are not a conduit for sharing 
transmission or customer information with a Marketing or Energy 
Affiliate.
    197. The Commission grants petitioners' request. Sections 
358.5(b)(1) and (2) expressly prohibit a Transmission Provider from 
sharing certain information with its Marketing or Energy Affiliates. 
Notwithstanding the prohibitions of Sec. Sec.  358.5(b)(1) and (2), the 
Commission intends to allow a Transmission Provider to share such 
information with employees that may be

[[Page 23584]]

shared so that they can engage in certain functions, e.g., corporate 
governance, risk management or certain ``support-type'' services. 
Accordingly, the Commission is adopting additional regulatory text to 
reflect its intent to adopt the no-conduit rule in Sec.  358.5(b)(7), 
as follows: ``A Transmission Provider may share information covered by 
Sec. Sec.  358.5(b)(1) and (2) with employees permitted to be shared 
under Sec. Sec.  358.4(a)(4), (5) and (6) provided that such employees 
do not act as a conduit to share such information with any Marketing or 
Energy Affiliates.''
ii. Crucial Operating Information Exemption
Final Rule
    198. In the Final Rule, Sec.  358.5(b)(8) permits a Transmission 
Provider to share crucial operating information with its Energy 
Affiliates to maintain the reliability of the transmission system.
Requests for Rehearing and/or Clarification and Commission Conclusions
    199. Many petitioners, including Shell Gas, Duke Energy, NiSource, 
INGAA, and El Paso, challenge the Commission's decision to limit shared 
information to crucial operating information and argue that such a 
limitation may jeopardize a Transmission Provider's ability to operate 
safely by limiting the Transmission Providers' ability to communicate 
with interconnected facility operators. They argue that Transmission 
Providers should be allowed to share crucial operating information 
during circumstances other than those needed to maintain the 
reliability of the transmission system for a variety of reasons, 
including to confirm nominations. NiSource encourages the Commission to 
revise the regulatory text to include information transmitted between 
interconnected parties, whether affiliated or not, as needed to 
maintain normal operating conditions, to ensure system integrity or to 
ensure safe and reliable operations.
    200. New York State Department seeks clarification that the general 
prohibition of Sec.  358.4(a)(1) which provides that, 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, and is not intended to limit the specific 
exemption for sharing ``crucial operating information'' with an Energy 
Affiliate to maintain the reliability of the transmission system on a 
daily basis as provided in Sec.  358.5(b)(8).
    201. NiSource and Xcel request the Commission to clarify the types 
of operating information that may be shared or, in the alternative, 
require Transmission Providers to specify or list the operational 
information they intend to share in their respective Standards of 
Conduct. El Paso suggests that such a list include operational 
information regarding future expansions and how and when capacity will 
be available in the future. According to petitioners, the failure to 
require such a listing will create uncertainty as to what information 
will, or will not, be shared. INGAA and El Paso claim that companies 
need to be able to communicate with affiliates about future expansions 
and how and when capacity could be made available in the future, and to 
have a free exchange of operating information between a pipeline and 
its upstream affiliates.
    202. NiSource and Shell Offshore challenge the Commission's 
suggestion that entities consult the Hotline as a source for guidance 
on a permissible communications. They argue that the Hotline may get 
inundated with calls and may give inconsistent advice. They question 
what a Transmission Provider should do if it does not agree with the 
Hotline's advice.
    203. It appears that several petitioners have interpreted the 
phrase ``crucial operating information to maintain the reliability of 
the transmission system'' to mean information only needed during 
emergency circumstances to maintain system reliability. That was not 
the Commission's intent in the Final Rule. ``Crucial'' operating 
information is that information necessary to operate and maintain the 
transmission system on a day-to-day basis; it does not include 
transmission or marketing information that would give a Transmission 
Provider's Marketing or Energy Affiliate undue preference over a 
Transmission Provider's nonaffiliated customers in the energy 
marketplace. In using the term ``crucial operating information,'' the 
Commission intended that Transmission Providers would be permitted to 
share day-to-day operational-type information with interconnected 
Energy Affiliates necessary to maintain the pipelines' operations; such 
information includes confirmations, nominations and schedules with 
upstream producers and gathering facilities, operational data relating 
to interconnection points, and communications relating to maintenance 
of interconnected facilities. The Commission expects that these types 
of communications will take place between the operators of the pipeline 
or gas control facilities. Those operators are prohibited from being a 
conduit for sharing transmission or customer information with other 
employees of the Marketing or Energy Affiliates. To better reflect the 
Commission's intent, the Commission is revising the regulatory text at 
Sec.  358.5(b)(8) as follows: ``A Transmission Provider is permitted to 
share information necessary to maintain the operations of the 
transmission system with its Energy Affiliates.''
    204. The Commission declines to develop a list of the types of 
operating information that would be deemed ``crucial'' operating 
information. Such a list, whether created by the Commission, or created 
and posted by the Transmission Provider, likely would not identify all 
types of crucial operating information.
    205. The Commission rejects petitioners' challenge to the 
Enforcement Hotline's ability to handle questions about crucial 
operating information. A Transmission Provider that does not agree with 
advice offered by the Enforcement Hotline is free to file a request for 
declaratory order or a complaint with the Commission.
    206. Finally, Entergy argues that the Final Rule fails to codify a 
specific exemption to allow sharing of certain information required to 
comply with requirements imposed on operators of nuclear generating 
facilities by the Nuclear Regulatory Commission. The Commission 
declines to revise the regulatory text of Sec.  358.5(b)(6) as 
requested by Entergy. The Commission stated in the Final Rule that a 
Transmission Provider will be permitted to share information required 
by other regulatory agencies such as NRC with its Energy 
Affiliate.\107\ This type of information is covered by the crucial 
operating information exemption in Sec.  358.5(b)(8), and further 
codification is not necessary.
iii. Transaction Specific Exemption
---------------------------------------------------------------------------

    \107\ Final Rule at P 155.
---------------------------------------------------------------------------

Final Rule
    207. In the Final Rule, the Commission retained the ``transaction 
specific exemption'' by codifying it in Sec.  358.5(b)(5). Under the 
exemption, Transmission Providers do not have to contemporaneously 
disclose information covered by Sec.  358.5(b)(1) if it relates solely 
to a Marketing or Energy Affiliate's specific request for transmission 
service.

[[Page 23585]]

Requests for Rehearing and/or Clarification and Commission Conclusions
    208. INGAA, National Fuel-Supply and Shell Offshore each request 
that the Commission clarify whether the transaction specific exemption 
covers requests by the Marketing or Energy Affiliate for the expansion 
or extension of the Transmission Provider's existing system, 
interconnection requests or discussions about building new 
infrastructure. Shell Offshore states that it is concerned about its 
ability to discuss available capacity or new capacity solutions for 
transportation of gas from reserves that have yet to be discovered or 
developed. Shell Offshore is concerned that such general discussions 
with a Marketing or Energy Affiliate would have to be disclosed because 
they do not fit within the scope of the transaction specific exemption. 
Similarly, National Fuel-Supply is concerned that not all requests 
seeking the establishment of an interconnection and the construction of 
related facilities are associated with a specific request for 
transportation service.
    209. The Commission addressed a similar concern about the 
transaction specific exemption in its recent Order on Rehearing of 
Order No. 2003, the Standardization of Generator Interconnection 
Agreements and Procedures.\108\ In that proceeding, the Commission 
addressed a request for clarification as to whether a Transmission 
Provider would violate the Standards of Conduct if it shared technical 
information regarding its transmission system with an interconnection 
customer that is an affiliate. The Commission noted that the definition 
of ``Transmission Service'' under Sec.  358.3(f) includes 
interconnection service. Final Rule at P 105.
---------------------------------------------------------------------------

    \108\ Standardization of Generator Interconnection Agreements 
and Procedures, Order No. 2003, 68 FR 49845 (Aug. 19, 2003), III 
FERC Stats. & Regs. ] 31,146 (2003), order on reh'g, 106 FERC ] 
61,220 (2004).
---------------------------------------------------------------------------

    210. The Commission is balancing its concerns that a Transmission 
Provider will abuse its relationship with a Marketing or Energy 
Affiliate by providing it unduly preferential access to information 
about potential expansion plans or new production areas against the 
need to facilitate infrastructure development by allowing the 
Transmission Provider to coordinate construction and planning with an 
interconnecting gatherer, pipeline or producer. Therefore, the 
Commission clarifies that ``Transmission'' also includes an 
interconnection to facilitate gas transportation service. Thus, 
discussions between a natural gas Transmission Provider and an Energy 
Affiliate to provide an interconnection or expansion for the Energy 
Affiliate would be covered by the transaction specific exception. 
Interconnecting entities may discuss, the location, practicality and 
cost of potential interconnections with an affiliated Transmission 
Provider. The purpose of this is to encourage the Transmission Provider 
and an interconnecting Energy Affiliate to work together to develop 
additional infrastructure and facilitate development of production.
    211. However, consistent with the requirements of Order No. 2003-A, 
the Commission will require the following additional safeguards to 
ensure that the Transmission Provider does not give its Energy 
Affiliate an undue preference. Specifically, when a Transmission 
Provider and an Energy Affiliate participate in scoping meetings or 
discussions about capacity expansion or new development, the 
Transmission Provider must: (1) Post an advance notice to the public on 
its OASIS or Internet website of its intent to conduct a meeting with 
its Energy Affiliate; (2) transcribe the meeting in its entirety; and 
(3) retain the transcript of the scoping meeting for three years and 
make it available to the Commission upon request.
    212. Of course, Transmission Providers must provide interconnection 
and expansion service in a non-discriminatory fashion to similarly 
situated non-affiliated requestors. Moreover, a Transmission Provider 
cannot provide advance information to a Marketing or Energy Affiliate 
regarding a general expansion project because that would not be 
transaction-specific and such information would give the Marketing or 
Energy Affiliate an undue competitive advantage.
    213. National Fuel-Supply also requests the Commission to ``cure 
the ambiguity in the regulatory text'' that limits the exemption to a 
Marketing or Energy Affiliate's specific ``request'' for transmission 
service in Sec.  358.5(b)(5). National Fuel-Supply states that, in a 
narrow sense, a ``request'' for transmission is satisfied when a 
pipeline and a shipper enter into a transportation agreement. National 
Fuel-Supply suggests that the Commission revise the regulatory text to 
include an agreement resulting from a specific request. The Commission 
denies National Fuel-Supply's request to revise the regulatory text, 
but clarifies that by using the term ``relate'' in the phrase ``if it 
relates solely to a Marketing or Energy Affiliate's specific request 
for transmission service,'' the Commission intended to include the 
corresponding transportation service agreements that result from a 
``request.''
iv. Voluntary Consent Exemption
Final Rule
    214. Section 358.5(b)(4) provides that a non-affiliated 
transmission customer may voluntarily consent, in writing, to allow a 
Transmission Provider to share that customer's information with a 
Marketing or Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
    215. BP argues that the Commission should eliminate the ``voluntary 
consent'' exemption because, in the natural gas area, there is no 
business reason why a customer would allow the Transmission Provider to 
share that customer's information with a Transmission Provider's 
Marketing or Energy Affiliate. According to BP, Transmission Providers 
could coerce the customer to consent; therefore, such consent is not 
truly voluntary. BP proposes that the Commission require Transmission 
Providers to post any voluntary consent on their OASIS or Internet 
websites along with a statement that no tying arrangement was required 
and that no preferences, either operational or rate-related, were 
granted for the voluntary consent.
    216. The Commission denies BP's request to eliminate the voluntary 
consent exemption. As discussed in the Final Rule, the Commission has 
permitted customers, in writing, to allow a Transmission Provider to 
share the non-affiliate's information with a Marketing Affiliate.\109\ 
There are circumstances where a customer authorizes the Marketing 
Affiliate to act as its agent or asset manager regarding transmission 
transactions on the affiliated Transmission Provider. For example, a 
municipality may authorize a Marketing Affiliate to perform its 
scheduling or nominations on the Transmission Provider. The Commission 
does not intend to discourage these types of services. Customers may 
use an affiliate to provide it these services. The customer must 
provide the Transmission Provider, in writing, permission for that 
entity to act on its behalf and/or authorize the Transmission Provider 
to share the customer's information with that entity.
---------------------------------------------------------------------------

    \109\ Final Rule at P 156.
---------------------------------------------------------------------------

    217. However, the Commission will adopt BP's second proposal. If a 
transmission customer voluntarily

[[Page 23586]]

authorizes the Transmission Provider to share the customer's 
information with a Marketing or Energy Affiliate, the Transmission 
Provider is required to post notice on the OASIS or Internet website of 
that consent along with a statement that it did not provide any 
preferences, either operational or rate-related, in exchange for that 
voluntary consent.
    218. Finally, customers who feel ``coerced'' can file a complaint 
with the Commission or seek informal resolution through the Enforcement 
Hotline.
v. Posting of Shared Information Requirement
Final Rule
    219. Section 358.5(b)(3) provides that, if a Transmission 
Provider's employee discloses information in a manner contrary to the 
Standards of Conduct requirements of Sec. Sec.  358.5(b)(1) and (2) 
(the information sharing and disclosing prohibitions), the Transmission 
Provider must immediately post this information on its OASIS or 
Internet website.
Requests for Rehearing and/or Clarification and Commission Conclusions
    220. El Paso, INGAA and Shell Gas argue that it will be impractical 
for pipelines to post contemporaneously the numerous intra-day 
communications and information shared and disclosed between a pipeline 
and its Marketing or Energy Affiliates. El Paso argues that operational 
information by necessity must be communicated in real-time and 
continuously between operators of interconnected natural gas systems. 
They argue further that it is inefficient for the Transmission Provider 
to post and report each time its gas control personnel communicates 
with gatherers. They also argue that this posting requirement will harm 
Energy Affiliates by disclosing sensitive information that might reveal 
the marketing strategies of the Energy Affiliate. NiSource requests 
that the Commission clarify that any public utility that no longer 
maintains an OASIS must post the shared information on its website.
    221. The petitioners' arguments assume that the crucial operating 
exemption does not allow them to share various day-to-day 
communications with interconnecting affiliates, and, thus, they are 
required to post information relating to those communications on the 
OASIS or Internet website under Sec.  358.5(b)(3).
    222. As discussed above, the Transmission Provider may share 
certain information with its Energy Affiliates covered under Sec.  
358.5(b)(8) without triggering the posting requirements under Sec.  
358.5(b)(3). The clarification above addresses the petitioners' 
concerns about voluminous intra-day communications.
    223. The Commission emphasizes that if a Transmission Provider does 
disclose information contrary to the Standards of Conduct, it must 
immediately post that information on the OASIS or Internet website. 
Contemporaneous posting and transparency are one of the most effective 
deterrents to favoritism, undue discrimination and anti-competitive 
conduct.
    224. Finally, we clarify that, in the event a Transmission Provider 
does not maintain an OASIS, it must post the shared information on an 
Internet website.

J. Discounts

Final Rule
    225. Section 358.5(d) requires a Transmission Provider to post on 
its OASIS or Internet website, any offer of a discount at the 
conclusion of negotiations, ``contemporaneous with the time that the 
offer is contractually binding.'' In the Final Rule, the Commission 
stated that this result balances the importance of equal and timely 
access to discount information with clarity. The Commission noted that 
the former requirement to post gas discounts within 24 hours of gas 
flow\110\ was too late to afford a non-affiliated competitor the 
opportunity to negotiate a comparable deal in today's fast-paced 
markets.
---------------------------------------------------------------------------

    \110\ Former 18 CFR 161.3(h)(2) of the Commission's regulations.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    226. INGAA, NiSource and National Fuel-Supply separately request 
the Commission to clarify that in the context of a precedent agreement, 
the requirement to post discounts should not occur until the conditions 
in the precedent agreement are satisfied. They argue that to hold 
otherwise would place a chilling effect on contract negotiations and 
note that a precedent agreement is not binding until all of the 
conditions are met.
    227. The Commission denies the proposal to delay the posting 
requirement for discounts of precedent agreement until all of the terms 
and conditions are met. This would be an exemption that would swallow 
the rule because the purpose of the timing of the posting requirement 
is that it provides time for a non-affiliated competitor to negotiate a 
comparable discount. The Commission clarifies that a Transmission 
Provider must comply with the discount posting requirement at the time 
a precedent agreement containing the discount has been reached.
    228. Shell Offshore requests that the Commission clarify whether 
``contractually binding'' means legally executed, asserting that the 
``conclusion of negotiations'' is not a defined term or term of art. 
NiSource requests that the Commission clarify that the posting of 
discounts is not required until both parties are bound to the contract. 
NiSource argues that the posting should not be made at the time of the 
offer and that under contract law it could be argued that that a 
Transmission Provider could be bound when it extends the discount 
offer.
    229. The Commission clarifies that the time the offer is 
contractually binding means the time that both parties are bound.
    230. NiSource also asks the Commission to clarify that the posting 
requirements in Order No. 637 remain applicable to discounts given to 
non-affiliated customers. Under Order No. 637, discounts must be posted 
prior to the first nomination on a new or amended contract. The 
Commission clarifies that the Final Rule does not affect the posting 
requirements for non-affiliate discounts under Order No. 637.

K. Accounting Treatment for Compliance Costs

    231. The Final Rule was silent on the accounting treatment to be 
used for compliance costs.
    232. Xcel requests that the Commission allow Transmission Providers 
to record their compliance costs as regulatory assets in Account No. 
182.3, Other Regulatory Assets, with amortization of the compliance 
costs over a period of years in future FERC jurisdictional rates. Xcel 
argues that anticipated compliance costs will be substantial and are 
not reflected in its currently effective transmission rates. Allowing 
such accounting treatment under the Uniform System of Accounts, Xcel 
argues, will promote compliance by providing jurisdictional entities a 
means to recover the initial and ongoing compliance costs over time. 
Xcel notes as support for its position that the Commission allowed 
regulatory asset treatment for market start-up costs incurred by the 
Midwest Independent System Operator (MISO).
    233. The Commission denies rehearing. The Commission will not make 
a generic determination that

[[Page 23587]]

regulatory asset accounting treatment is appropriate for the costs 
incurred to implement the Standards of Conduct, nor agree to allow the 
amortization of those costs over a period of years in a Transmission 
Provider's future FERC jurisdictional rates. The Commission's 
determination in MISO does not support Xcel's position. In MISO, the 
Commission responded to concerns about the ability of member public 
utilities to recover costs billed by MISO but incurred by the public 
utilities. Here the issue is costs directly incurred by a Transmission 
Provider to operate and administer its transmission system. The costs 
at issue here are like the costs of implementing business practice 
standards, which are not treated as regulatory assets.

L. Request for Extension of Time

    234. On March 22, 2004, EEI submitted a motion for an extension of 
time for compliance with Order No. 2004. EEI argues that the Commission 
should defer the deadline for compliance with Order No. 2004 until 
September 1, 2004. Alternatively, EEI urges the Commission to consider 
extending the time for training of employees under Sec.  358.4(e)(5) 
and the posting requirements under Sec.  358.4(b) until September 1, 
2004. EEI argues that if a rehearing order changes the rules after 
training has occurred, Transmission Providers would have to revise 
their training programs or modules. The Commission grants EEI's request 
to extend the deadline for compliance with Order No. 2004. See 18 CFR 
358.4(e)(2).

M. Typographical Corrections

    235. The Commission is also making some corrections to the 
regulatory text to reflect the term ``Marketing Affiliate,'' and to 
correct typographical errors.

N. Applicability of the Standards of Conduct to Newly Formed 
Transmission Providers

    236. The Commission will also address the issue of when a newly 
created Transmission Provider becomes subject to part 358 Standards of 
Conduct. The Commission clarifies that the Standards of Conduct apply 
to any Transmission Provider, including those which have not yet begun 
operations. The statutory requirement that Transmission Providers act 
in a manner that is not unduly discriminatory or preferential applies 
before the Transmission Provider begins to provide transmission 
services. For example, it has become a common practice for project 
sponsors of new interstate natural gas pipeline projects to hold open 
seasons to reach the largest economically feasible market for their 
enterprises, and to avoid creating perceptions of undue discrimination 
during project development. As a general principle, the Commission 
believes that new Transmission Providers should take the appropriate 
steps to comply with the Standards of Conduct as soon as practicable.
    237. A newly-formed company will, of course, take the requirements 
of Part 358 into account when establishing its initial corporate 
organization. However, the Commission recognizes that some aspects of 
the Standards of Conduct may have no meaningful applicability until the 
company has been staffed and begins to perform transmission functions, 
such as soliciting business, or negotiating contracts. To the extent a 
prospective Transmission Provider is unsure of the adequacy of its 
compliance with the Standards of Conduct, it may seek specific guidance 
from the Commission.

IV. Document Availability

    238. 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.
    239. 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.
    240. 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) 502-8659, 
or by e-mail at [email protected].

V. Effective Date

    241. The revisions in this order on rehearing will be effective 
June 1, 2004.

List of Subjects in 18 CFR Part 358

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

    By the Commission. Commissioners Brownell and Kelliher 
dissenting in part with separate statements attached.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends Part 358, 
Chapter I, Title 18 of the Code of Federal Regulations, as follows:

PART 358--STANDARDS OF CONDUCT

0
1. The authority citation for Part 358 continues to read as follows:

    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.


0
2. In Sec.  358.1, paragraph (c), the word ``Sec.  385.5(b)'' is 
removed and the word ``Sec.  358.5(b)'' is inserted in its place.

0
3. Section 358.2 is revised as follows:


Sec.  358.2  General principles.

    (a) A Transmission Provider's employees engaged in transmission 
system operations must function independent from the employees of its 
Marketing and 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 its 
Marketing or Energy Affiliates.
    4. In Sec.  358.3, paragraph (a)(3) is added, paragraph (b)(1) is 
revised, paragraph (d)(5) is redesignated as (d)(6), a new paragraph 
(d)(5) is added, redesignated paragraphs (d)(6)(ii) and (d)(6)(v) are 
revised and a new paragraph (k) is added to read as follows:


Sec.  358.3  Definitions.

    (a) * * *
    (3) A Transmission Provider does not include a natural gas storage 
provider authorized to charge market-based rates that is not 
interconnected with the jurisdictional facilities of any affiliated 
interstate natural gas pipeline, has no exclusive franchise area, no 
captive rate payers and no market power.
    (b) * * *
    (1) Another person which controls, is controlled by or is under 
common control with, such person. An Affiliate includes a division that 
operates as a functional unit, and
* * * * *
    (d) * * *
    (5) An LDC division of an electric public utility Transmission 
Provider shall be considered the functional equivalent of an Energy 
Affiliate.
    (6) * * *

[[Page 23588]]

    (ii) An affiliated Transmission Provider or an interconnected 
foreign affiliated natural gas pipeline that is engaged in natural gas 
transmission activities which are regulated by the state, provincial or 
national regulatory boards of the foreign country in which such 
facilities are located.
* * * * *
    (v) A State-regulated local distribution company that acquires 
interstate transmission capacity to purchase and resell gas only for 
on-system customers, and otherwise does not engage in the activities 
described in Sec. Sec.  358.3(d)(1), (2), (3) or (4), except to the 
limited extent necessary to support on-system customer sales and to 
engage in de minimus sales necessary to remaining in balance under 
applicable pipeline tariff requirements.
* * * * *
    (k) Marketing Affiliate means an Affiliate as that term is defined 
in Sec.  358.3(b) or a unit that engages in marketing, sales or 
brokering activities as those terms are defined at Sec.  358.3(e).
    5. In Sec.  358.4, paragraphs (a)(5) and (a)(6) are added and 
paragraphs (b)(1), (b)(2), (b)(3)(i), (b)(3)(iii), (b)(3)(iv), 
(b)(3)(v), (c), (e)(3) and (e)(5) are revised to read as follows:


Sec.  358.4  Independent functioning.

    (a) Separation of functions.
* * * * *
    (5) Transmission Providers are permitted to share with their 
Marketing or Energy Affiliates senior officers and directors who are 
not ``Transmission Function Employees'' as that term is defined in 
Sec.  358.3(j). A Transmission Provider may share transmission 
information covered by Sec.  358.5(a) and (b) with its senior officers 
and directors provided that they do not participate in directing, 
organizing or executing transmission system operations or marketing 
functions; or act as a conduit to share such information with a 
Marketing or Energy Affiliate.
    (6) Transmission Providers are permitted to share risk management 
employees that are not engaged in Transmission Functions or sales or 
commodity Functions with their Marketing and Energy Affiliates.
    (b) * * *
    (1) A Transmission Provider must post the names and addresses of 
Marketing and Energy Affiliates on its OASIS or Internet website.
    (2) A Transmission Provider must post on its OASIS or Internet 
website, as applicable, a complete list of the facilities shared by the 
Transmission Provider and its Marketing and Energy Affiliates, 
including the types of facilities shared and their addresses.
    (3) * * *
    (i) The organizational structure of the parent corporation with the 
relative position in the corporate structure of the Transmission 
Provider, Marketing and Energy Affiliates;
* * * * *
    (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 Energy 
Affiliate.
    (iv) The Transmission Provider must update the information on its 
OASIS or Internet website, as applicable, required by Sec. Sec.  
358.4(b)(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 
potential merger is announced.
* * * * *
    (c) Transfers. Employees of the Transmission Provider, Marketing 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 between the 
Transmission Provider, on the one hand, and the Marketing or Energy 
Affiliates, on the other, 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 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.
* * * * *
    (e) * * *
    (2) Each Transmission Provider must be in full compliance with the 
Standards of Conduct by September 1, 2004.
    (3) The Transmission Provider must post on the OASIS or Internet 
web site, 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 September 1, 2004 or within 30 days of 
becoming subject to the requirements of part 358.
* * * * *
    (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. Electronic 
certification is an acceptable substitute for an affidavit.
* * * * *
    6. In Sec.  358.5, paragraphs (a)(1), (a)(2), (b)(1), (b)(2), 
(b)(4), (b)(7), (b)(8), (c)(5) and (d) are revised to read as follows:


Sec.  358.5  Non-discrimination requirements.

    (a) * * *
    (1) The Transmission Provider must ensure that any employee of its 
Marketing or 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 its 
Marketing or 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) * * *
    (1) An employee of the Transmission Provider may not disclose to 
its Marketing or 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

[[Page 23589]]

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 non-affiliated transmission customers or potential non-affiliated 
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.
* * * * *
    (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. 
If a non-affiliated customer authorizes the Transmission Provider to 
share its information with a Marketing or Energy Affiliate, the 
Transmission Provider must post notice on the OASIS or Internet website 
of that consent along with a statement that it did not provide any 
preferences, either operational or rate-related, in exchange for that 
voluntary consent.
* * * * *
    (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. Sec.  
358.5(b)(1) and (2) with a marketing or Energy Affiliate. A 
Transmission Provider may share information covered by Sec. Sec.  
358.5(b)(1) and (2) with employees permitted to be shared under 
Sec. Sec.  358.4(a)(4), (5) and (6) provided that such employees do not 
act as a conduit to share such information with any Marketing or Energy 
Affiliates.
    (8) A Transmission Provider is permitted to share information 
necessary to maintain the operations of the transmission system with 
its Energy Affiliates.
    (c) * * *
    (5) The Transmission Provider may not, through its tariffs or 
otherwise, give preference to its Marketing or 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 website 
contemporaneous 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 website for 
60 days from the date of posting.

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

Attachment A--List of Petitioners Requesting Rehearing or Clarification 
or Submitting Comments

AGS Oil and Gas Ventures, Inc. (AGS)
Allegheny Energy, Inc. (Allegheny)
Alliance Pipeline, LP (Alliance)
American Gas Association (AGA)
American Public Gas Association (APGA)
American Public Power Association (APPA)
BP America Production and BP Energy Company (BP)
Canadian Association of Petroleum Producers (CAPP)
C and E Operators, Inc. (C&E)
C and L Oil and Gas Corp (C&L)
Calpine Corporation (Calpine)
CenterPoint Energy Gas Transmission Company (CenterPoint)
Cinergy Services, Inc. (Cinergy)
Dominion Resources, Inc. (Dominion)
Duquesne Light Company (Duquesne)
Duke Energy Corporation (Duke Energy)
Edison Electric Institute (EEI)
El Paso Corporation (El Paso)
Empire District Electric Co. (Empire)
Enbridge, Inc. (Enbridge)
Encana Gas Storage Inc. (Encana)
Entergy Services, Inc. (Entergy)
Fairview Production Co.
Florida Power and Light (FPL)
GeoVest Incorporated (GeoVest)
Independent Oil & Gas Association of West Virginia (IOGA-WV)
Independent Petroleum Association of America (IPAA)
Independent Producers Association (IPA)
INOK Investments (INOK)
Interstate Natural Gas Association of America (INGAA)
Jack Forrester
Kansas City Power and Light (KCPL)
Kinder Morgan Interstate Pipelines (Kinder Morgan Pipelines)
LG&E Energy Corporation and Kentucky Utilities Company (LG&E/KU)
National Association of State Utility Consumer Advocates (NASUCA)
National Fuel Gas Distribution Corporation (National Fuel--
Distribution)
National Fuel Gas Supply Corporation (National Fuel--Supply)
National Grid USA (National Grid)
National Rural Electric Cooperative Association (NRECA)
Natural Gas Supply Association (NGSA)
New York State Public Service Commission (New York State Department)
NICOR Gas (NICOR)
NiSource, Inc. (NiSource)
Northwest Natural Gas Company and Kelso Beaver Pipeline Company (NW 
Natural and Kelso Beaver)
ONEOK
Pennsylvania Office of Consumer Advocate (PA-OCA)
Plymouth Resources, Inc. (Plymouth)
Portland General Electric (PGE)
Process Gas Consumers (PGC)
PSEG Companies (PSEG)
Questar Pipeline Co., Questar Gas Co., Questar Regulated Services 
Co. (Questar)
Saltville Gas Storage Co., LLC (Saltville)
SCG Pipeline Inc. (SCG)
Shell Gas Transmission, LLC (Shell Transmission)
Shell Offshore, Inc. (Shell Offshore)
South Carolina Electric & Gas Co. (SCE&G)
Southern Company Services, Inc. (Southern)
Southwest Gas Corporation (Southwest Gas)
Texas Pipeline Association (Texas Pipeline Association)
Transmission Access Policy Study Group (TAPS)
Transmission Dependent Utilities Systems
Transmission Group
USG Pipeline Company, B-R Pipeline and U.S. Gypsum Company (USG and 
B-R)
Utah Associated Municipal Power Systems (Utah Munis)
Williams Companies (Williams)
Williston Basin Interstate Pipeline Company (Williston Basin)
Wisconsin Public Service Corp. and Upper Peninsula Power Co. (WPSC 
and UPPC)
XCEL Energy Services, Inc. (Xcel)

Attachment B--Staff Analysis of Interstate Natural Gas Pipeline Index 
of Customers Data

    Staff compiled index of customers data from all 87 pipelines for 
which it was available for the October 1, 2003 filing.
    Staff identified 63 pipelines which had reported affiliated 
transactions. Staff noted that 5 of these pipelines had contracts 
only with Transmission Provider affiliates and removed these from 
the study as a special category. The remaining 58 pipelines were 
then examined in more detail.
    Staff then identified the type of affiliation, e.g., marketer, 
LDC, producer, for each customer from publicly available 
information.
    The table ``Summary of Natural Gas Pipeline Affiliate 
Information'' shows summary affiliate information by pipeline and 
type of affiliation. Totals are shown also for all 58 pipelines 
examined. The information was derived from the detailed affiliated 
customer data as follows:

--Table rows labeled ``Affil Vols (MMBtu)'' are simply total volumes 
by affiliation type for individual pipelines or the group of 58

[[Page 23590]]

pipelines aggregated from the data for individual affiliated 
customers.
--Table rows for each pipeline labeled ``Pct of P/L Total Vols'' are 
the affiliate volumes shown divided by the total contracted volumes 
for the pipeline.
--The table row labeled ``Pct of Relevant PL Tot Vols (WA)'' for the 
group of 58 pipelines are the affiliate volumes shown divided by the 
total contracted volumes only for those pipelines that have 
affiliated customers of the type shown in that column of the table. 
This is a weighted average.
--The Table row labeled ``Pct of Relevant PL Tot Vols (SA) is the 
simple average of the ``% of P/L Total Vols'' figures for each 
pipeline with data in that column.

    Some pipelines have more than one type of affiliate, and would 
be included in the summary information compiled under each affiliate 
type.
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Brownell, Commissioner, dissenting in part.
    1. For the reasons set forth in my dissent in part to Order No. 
2004, Standards of Conduct for Transmission Providers, 68 FR 69134 
(Dec 11, 2003), III FERC Stats. & Regs. ]31,155 (Nov. 25, 2003), I 
would have retained the existing exemptions under Order No. 497 for 
affiliated producers, gatherers, processors, intrastate pipelines, 
and Hinshaw pipelines.
    2. For these reasons, I respectfully dissent in part.

Nora Mead Brownell,
Commissioner.

Kelliher, Commissioner, dissenting in part:
    I am writing separately to explain my reasoning with respect to 
the Standards of Conduct Final Rule. I support the Rehearing Order, 
but do so with some discomfort, because I believe the rehearing 
order improves what is a flawed Final Rule.
    In my view, the flaw in the Standards of Conduct Final Rule is 
the lack of record evidence to support expanding the scope beyond 
Marketing Affiliates. The basis for the rule is the observation that 
``significant changes have occurred [in the electricity and gas 
industries] since the standards of conduct were first adopted,'' \1\ 
that there has been a proliferation of energy affiliates,\2\ and a 
suspicion that affiliate abuse is occurring in the dealings between 
Transmission Providers and Energy Affiliates.
---------------------------------------------------------------------------

    \1\ Standards of Conduct for Transmission Providers, 68 FR 
69,134 (December 11, 2003), III FERC Stats. & Regs., ] 31,155 at ] 6 
(Nov. 25, 2003).
    \2\ Id.
---------------------------------------------------------------------------

    I agree significant changes have occurred in the electricity and 
gas industries, and pipelines and utilities do have a wider array of 
energy affiliates than previously. However, suspicion is not a 
sufficient basis for expanding the scope of Standards of Conduct 
beyond Marketing Affiliates.
    The Final Rule and the Rehearing Order cite a number of 
instances where affiliate abuse has occurred. The cases cited by the 
orders all relate to preference in dealings between a Transmission 
Provider and a Marketing Affiliate, not other Energy Affiliates. I 
do not see how a record of affiliate abuse limited to Marketing 
Affiliates argues in favor of expanding the scope of the rule beyond 
Marketing Affiliates. To my mind, it argues in favor of keeping the 
scope of the rule where it was. Indeed, there appears to be no 
factual basis to support expanding the scope beyond Marketing 
Affiliates.
    With respect to the discrete policy calls made in the rehearing 
order, I largely agree with them. I would have gone further in some 
areas in limiting application of the Standards of Conduct. In 
particular, I would have expanded the scope of the local 
distribution company exemption to include local distribution 
companies that make no off-system sales on affiliated pipelines. The 
prospect of affiliate abuse involving off-system sales on 
nonaffiliated pipelines appears remote. Of course, there is no 
record of affiliate abuse involving such sales.
    Commission policy has promoted off-system sales in order to 
encourage greater efficiency and enable local distribution companies 
to lower their costs. In my view, expanding the local distribution 
company exemption would have been consistent with this policy 
direction. The Rehearing Order notes that National Fuel-Distribution 
made $63 million in off-system sales. It is worth observing that all 
of those sales were made on nonaffiliated pipelines.
    In addition, I would have granted an exemption to Part 157 
pipelines. These pipelines serve one or few customers, and the 
prospect of affiliate abuse appears remote. There certainly is no 
record of affiliate abuse to merit applying the Standards of Conduct 
to Part 157 pipelines.
    Finally, I also would have granted the rehearing request by The 
Williams Companies to clarify the role of senior officers and 
directors in managing their companies in a manner consistent with 
their fiduciary duties and principles of sound corporate governance. 
Under the Final Rule, senior officers and directors may be shared 
between a transmission business unit and the marketing unit or 
energy affiliate only if they ``do not engage in transmission 
functions.''\3\ Commission case law suggests that a senior officer 
or director who approves even a limited number of transactions or 
investments would become an ``operating'' employee of a Transmission 
Provider, and could not qualify as a shared employee. Currently, 
decisions on large transactions and investments are often reserved 
to senior corporate officers and directors. The Final Rule forces 
these corporate officers to make a Hobson's choice: either they 
continue to make these decisions, and thereby become construed as 
operating employees of a Transmission Provider, and are thereby 
disqualified to serve as a shared employee, with all the resultant 
limitations on information sharing, or they divest themselves of 
responsibility to make these decisions. I believe the Final Rule may 
impede the ability of corporate management to engage in informed 
decisionmaking, and runs counter to principles of sound corporate 
governance.
---------------------------------------------------------------------------

    \3\ Id. at ] 104.
---------------------------------------------------------------------------

    Two years ago, the U.S. Court of Appeals for the District of 
Columbia Circuit overturned a Commission order extending application 
of Standards of Conduct beyond the marketing affiliates of Dominion 
Resources. In part, the Court was concerned that doing so would 
``destroy[] * * * [corporate] efficiencies'' without 
justification.\4\ I have some of the same concerns about the Final 
Rule.
---------------------------------------------------------------------------

    \4\ Dominion Resources, Inc. v. FERC, 286 F.3d 586, 593 (DC Cir. 
2002).
---------------------------------------------------------------------------

    To be clear, I support the goal of the Standard of Conduct Final 
Rule, namely the prevention of unduly discriminatory behavior. 
However, for the reasons stated above, I do not believe the Final 
Rule advances this goal.

Joseph Kelliher.

[FR Doc. 04-9357 Filed 4-28-04; 8:45 am]
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