[Federal Register Volume 69, Number 153 (Tuesday, August 10, 2004)]
[Rules and Regulations]
[Pages 48371-48386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18091]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 358

[Docket Number RM01-10-002; Order No. 2004-B]


Standards of Conduct for Transmission Providers

Issued August 2, 2004.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final Rule; Order on Rehearing of Order No. 2004-A.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) 
generally reaffirms its determinations in Order Nos. 2004 and 2004-A 
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-A. The Commission grants 
rehearing, in part, denies rehearing, in part, and provides 
clarification of Order No. 2004-A.

EFFECTIVE DATE: Revisions in this order on rehearing will be effective 
September 9, 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. Definition of a Transmission Provider
    B. Definition of an Energy Affiliate
    i. Scope of the LDC exemption
    ii. Treatment of LDC Divisions
    iii. Emergency LDC Activities
    iv. Gatherers and Processors
    v. Producers
    vi. Intrastate and Hinshaw Pipelines
    vii. Service Companies
    viii. Parent Companies
    ix. Affiliates Buying Power for Themselves
    C. 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
    D. Information to be posted on the Internet or OASIS
    i. Posting Organizational Charts
    ii. Posting of Merger Information
    iii. Transfer of Employees
    iv. Posting of Shared Facilities
    v. Posting of Discretionary Waivers
    E. Training
    F. Information Access and Disclosure Prohibitions
    i. No Conduit Rule
    ii. Operating Information Exemption
    iii. Transaction Specific Exemption and Scoping Meetings
    iv. Information Sharing for Jointly-Owned Transmission Providers
    G. Discounts
    H. Separate Books and Records
    I. Applicability of the Standards of Conduct to Newly Formed 
Transmission Providers
IV. Document Availability
V. Effective Date

    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. 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

[[Page 48372]]

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.\2\ Under Order No. 2004, the 
Standards of Conduct govern the relationships between Transmission 
Providers and all of their Marketing and Energy Affiliates. On April 
16, 2004, the Commission affirmed the legal and policy conclusions on 
which Order No. 2004 was based, granted and denied rehearing and 
offered clarification in Order No. 2004-A.\3\
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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 gas standards of conduct were codified at part 161 of 
the Commission's regualtions, 18 CFR part 161 (2003), and the 
electric standards of conduct were codified at 18 CFR 37.4 (2003).
    \3\ 69 FR 23562 (Apr. 29, 2004), III FERC Stats. & Regs. ] 
31,161 (Apr. 16, 2004).
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    2. In this order, the Commission addresses the requests for 
rehearing and/or clarification of Order No. 2004-A. As discussed below, 
the Commission grants rehearing, in part, denies rehearing, in part, 
and provides clarification of Order No. 2004 and 2004-A.
    3. Chief among the clarifications are that (1) Local distribution 
companies (LDCs) may release or acquire capacity in the capacity 
release market without becoming Energy Affiliates; (2) the Energy 
Affiliate exemption for LDCs extends to LDCs serving state-regulated 
load at cost-based rates that acquire interstate transmission capacity 
to purchase and resell gas only for on-system sales; (3) an LDC 
division of an electric public utility Transmission Provider will not 
be treated as an Energy Affiliate if it qualifies for the LDC exemption 
under Sec.  358.3(d)(6)(v); (4) LDCs that otherwise qualify for the LDC 
exemption under Sec.  358.3(d)(6)(v) do not change their status by 
responding to emergencies; however, each emergency activity shall be 
posted; (5) natural gas processors do not become Energy Affiliates by 
virtue of purchasing and transporting gas on affiliated Transmission 
Providers for plant thermal reduction purposes; (6) processors, 
gatherers, intrastate pipelines and Hinshaw pipelines may purchase gas 
for operational purposes and make de minimus sales as required to 
remain in balance without becoming Energy Affiliates; (7) service 
companies that do not engage in any activities described in Sec. Sec.  
358.3(d)(1), (2), (3) or (4) on their own behalf and whose employees 
assigned, dedicated or working on behalf of a particular entity are 
subject to the Standards of Conduct as if they were directly employed 
by that entity are not Energy Affiliates; (8) an affiliate that 
purchases natural gas solely for its own consumption is not an Energy 
Affiliate by virtue of those purchases; (9) Sec.  358.4(a)(5) does not 
prohibit senior officers who are Transmission Function Employees from 
receiving transmission-related information; (10) Transmission Providers 
need not post the identity of shared physical field infrastructure, 
such as substations, that do not house any employees; (11) posted logs 
of discretionary waivers need not disclose customer names; (12) all 
officers of the Transmission Provider as well its employees with access 
to transmission information or information concerning gas or electric 
purchases, sales or marketing must be trained concerning the 
requirements of the Standards of Conduct; (13) Transmission Providers 
need not post notice of or transcribe scoping meetings for purposes of 
the Standards of Conduct; and (14) a Transmission Provider that has a 
division that operates as a functional unit is not required to maintain 
separate books and records for that unit.

I. Background

    4. The Commission provided a detailed background of this proceeding 
in Order Nos. 2004 and 2004-A, which it will not repeat here.
    5. Thirty-five petitioners requested rehearing and/or clarification 
of Order No. 2004-A.\4\
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    \4\ A list of petitioners that requested rehearing and/or 
clarification is included in Appendix A.
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    6. On May 10, 2004, in Houston, Texas, the Commission hosted a 
Technical Conference to provide additional informal guidance on 
implementing the Standards of Conduct. Approximately 230 individuals 
participated in the conference, which was also audiocast. As a result 
of the conference, industry groups have been working to bring together 
Chief Compliance Officers in a collaborative fashion.

II. Need for the Rule

Order Nos. 2004 and 2004-A

    7. The Final Rule and the Order on Rehearing 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 the number of power marketers or entities with market-based 
rate authority.

Requests for Rehearing and/or Clarification and Commission Conclusions

    8. El Paso and INGAA request rehearing and repeat the arguments 
they previously made that the Standards of Conduct requirements in 
Order No. 2004 (and 2004-A) are overbroad and unsupported by 
substantial evidence. NGSA and Sempra filed comments stating that they 
support most aspects of the Standards of Conduct.
    9. For the reasons discussed in Order Nos. 2004 and 2004-A, the 
Commission denies the requests for rehearing. As the Commission 
previously stated, the Final Rule is needed to address the Commission's 
statutory mandate to prevent unduly discriminatory transmission service 
under sections 4 and 5 of the Natural Gas Act (NGA) and sections 205 
and 206 of the Federal Power Act (FPA). Order Nos. 2004 and 2004-A are 
needed to guide the behavior of Transmission Providers towards all of 
their affiliates who compete with non-affiliates for access to 
transmission capacity and compete in the wholesale commodity markets.
    10. Entergy, Kinder Morgan, Southern and Xcel have requested that 
the Commission postpone the date for Transmission Providers to comply 
with the requirements Order No. 2004. The Commission is deferring the 
implementation date by three weeks and Transmission Providers are 
required to comply with the Standards of Conduct by September 22, 2004.

III. Analysis of Requests for Rehearing and/or Clarification

A. Definition of a Transmission Provider

Order Nos. 2004 and 2004-A
    11. 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.''
Requests for Rehearing and/or Clarification and Commission Conclusions
    12. NASUCA repeats its previous request for rehearing arguing that 
the Commission should classify Hinshaw \5\

[[Page 48373]]

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) \6\ authorizes the Commission to condition the 
certificates that authorize Hinshaw and intrastate 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 markets and may 
fall between the cracks of federal and state regulation.
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    \5\ 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).
    \6\ 15 U.S.C. 3371 (2000).
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    13. For the reasons discussed in Order No. 2004-A (at P 36), the 
Commission denies NASUCA's request for rehearing and will not classify 
intrastate and Hinshaw pipelines as Transmission Providers under the 
Standards of Conduct. The Commission encourages shippers who are 
treated in a discriminatory fashion by an intrastate or Hinshaw 
pipeline that is providing service under section 311 of the NGPA to 
contact the Enforcement Hotline or file a complaint with the 
Commission.
    14. AGA, National Fuel--Distribution and Questar-Gas argue that 
LDCs should not be considered Transmission Providers as a result of 
transporting interstate natural gas under Order No. 63 Certificates. 
The Commission agrees and stated as much in Order No. 2004-A.\7\ To the 
extent an LDC is also a Hinshaw pipeline with Order No. 63 certificate 
authorization, it is not an Energy Affiliate unless it engages in 
Energy Affiliate activities beyond those allowed pursuant to Sec.  
358.3(d)(6)(v).
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    \7\ Order No. 2004-A at P 72 (special purpose exchange 
authorizations and section 7(f) service area determinations do not 
make an LDC a Transmission Provider or an Energy Affiliate) and 
Order No. 2004-A at P 93 (an LDC's status as a Hinshaw pipeline does 
not invalidate an otherwise appropriate exemption from the term 
Energy Affiliate).
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B. Definition of an Energy Affiliate

Order Nos. 2004 and 2004-A
    15. 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 LDC division of an electric public utility Transmission 
Provider shall be considered the functional equivalent of an Energy 
Affiliate.
    (6) 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 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;
    (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 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 remain in 
balance under applicable pipeline tariff requirements.
i. Scope of the LDC Exemption
Requests for Rehearing and Clarification and Commission Conclusions
    16. Several petitioners repeat previous requests for an outright 
exemption for LDCs and all their activities. For the reasons discussed 
in Order No. 2004-A, the Commission denies this request.
    17. AGA, Cinergy, Duke, Questar-Gas, Gulf South and National Fuel--
Distribution seek rehearing and reconsideration of the Commission's 
decision to exempt from Energy Affiliate status only those LDCs that do 
not participate in wholesale market functions such as hedging. Some 
petitioners argue that the Commission should allow LDCs to participate 
in financial markets and to hedge to support on-system sales. 
Petitioners argue that hedging and capacity release are essential 
functions that allow LDCs to control costs and ensure reliability. 
Petitioners argue that capacity release, like de minimus sales, allows 
LDCs to balance their upstream transmission capacity commitments 
throughout the year and minimize costs to retail ratepayers. In 
addition, some petitioners argue that the de minimus exception for 
balancing sales is too vague.
    18. The Commission is retaining the current version of the rule 
with some clarification. Specifically, an LDC would not be able to 
engage in financial or futures transactions or hedging without becoming 
an Energy Affiliate. As stated in Order Nos. 2004 and 2004-A, the 
Commission is concerned that transmission information could be valuable 
in the financial and futures markets and could be unduly preferential 
to an Energy Affiliate. Although several petitioners urge the 
Commission to narrow the definition of Energy Affiliate to permit LDCs 
to participate in futures markets or hedging to the extent necessary to 
support on-system sales, it is virtually impossible to distinguish 
between financial or futures transactions in a speculative market 
versus those needed to support on-system sales.
    19. With respect to LDCs' participation in the capacity release 
market, the Commission did not intend to restrict the capacity release 
market and clarifies that LDCs may release or acquire capacity in the 
capacity release market without becoming Energy Affiliates. KM 
Pipelines requested rehearing of the Commission's statement in Order 
No. 2004-A, that its affiliated LDC makes off-system sales and 
therefore falls squarely within the definition of Energy Affiliate. 
(Order No. 2004-A at P 105.) KM Pipelines argue that its affiliated 
LDC, KMI, only makes purchases or sales of gas that are ``necessary to 
support on-system customer sales'' and does not make ``off-system 
sales.''
    20. KM Pipeline's request for rehearing on this issue has 
identified to the Commission an error in the regulatory text of Sec.  
358.3(d)(6)(v) of the Commission's regulations, which references both 
``on-system customers'' and ``on-system customer sales.'' The 
Commission will revise the regulatory text at Sec.  358.3(d)(6)(v) so 
that the term ``on-system sales'' is consistently used. We intend this 
correction to limit the LDC exemption to LDCs serving state-regulated 
load at cost-based rates, and not LDCs competing in competitive retail 
markets.

[[Page 48374]]

    21. With respect to KM Pipelines's specific request, although the 
Commission erroneously labeled KMI's activities as ``off-system,'' the 
Commission finds that KMI nonetheless may not qualify for the LDC 
exemption. The Commission is concerned that an LDC which also acts as a 
competitive retail service provider in a state-approved retail access 
program could use preferential access to interstate transmission system 
to frustrate other competitive merchants seeking to serve the same 
customers. Affiliated retail merchant functions will compete against 
other non-affiliated retail merchants for upstream pipeline capacity, 
storage services, and the best gas purchase alternatives available in 
the wholesale energy market. Also, a competitive retail merchant has a 
strong profit motive in this line of its business.\8\ While the 
Commission supports retail competition under state approved programs, 
the Commission must also ensure fair and non-discriminatory access to 
interstate transmission and storage services to all who participate in 
competitive retail markets.
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    \8\ Unlike a traditional LDC serving bundled franchised public 
utility load in a state prescribed service territory at state-
approved rates, a retail service provider selling in a competitive 
retail market is authorized by the state to compete at prices 
established by the market not by regulators. Any reductions in costs 
will typically accrue as profits to the retail merchant, while 
increases in costs may result in losses.
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ii. Treatment of LDC Divisions
Order on Rehearing
    22. In Order No. 2004-A, the Commission stated that an LDC division 
of an electric Transmission Provider would be treated as an Energy 
Affiliate.\9\
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    \9\ See Order No. 2004-A at P 68; see also 18 CFR 358.3(d)(5).
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Requests for Rehearing and Clarification and Commission Conclusions
    23. AEP and EEI request rehearing arguing that the Commission has 
shown no potential for affiliate abuse relating to the sharing of 
employees, facilities, or information between an LDC division and its 
affiliated electric Transmission Provider. Because an LDC division that 
makes only on-system sales and does not participate in other Energy 
Affiliate activities is not defined as an Energy Affiliate, this 
question only pertains to LDC divisions that are making off-system 
sales or participating in Energy Affiliate activities. The Commission 
will revise the regulatory text to reflect the Commission's intent that 
an LDC division would not be treated as an Energy Affiliate to the 
extent that it qualifies for the LDC exemption at Sec.  358.3(d)(6)(v).
    24. With respect to LDCs that are Energy Affiliates, the Commission 
denies rehearing. If an LDC division provides natural gas to an 
electric generator in exchange for power and then sells the power, the 
LDC division would unduly benefit from preferential access to electric 
transmission information and competitors would be unduly disadvantaged. 
Application of the Standards of Conduct ensures that the affiliated LDC 
has no more information than unaffiliated competitors.
    25. Entergy, Cinergy and National Grid request the Commission to 
clarify that both gas and electric LDCs qualify for an exemption from 
the definition of Energy Affiliate in Sec.  385.3(d)(6)(v). They note 
that the Commission's revision to Sec.  358.3(d)(6)(v) focuses on LDCs 
that are natural gas distributors and does not reference electric LDCs. 
They argue, however, that elsewhere in Order No. 2004-A, the Commission 
implied that LDC includes both natural gas and electric retail 
operations. They argue that provided a Transmission Provider's 
marketing and sales unit is treated as an Energy Affiliate, the 
Transmission Provider's bundled electric retail distribution function 
should not be treated as an Energy Affiliate. Therefore, they request 
the Commission to revise Sec.  358.3(d)(6)(v) to reflect that a state-
regulated LDC that acquires interstate transmission capacity to 
purchase and resell gas or electricity only for on-system customers is 
not an Energy Affiliate.
    26. The Commission denies these requests for rehearing. This is one 
instance where the Commission's Standards of Conduct Rules were 
modified to reflect differences in the gas and electric industries. Gas 
LDCs make de minimus sales and purchases of gas to maintain line pack 
and keep their systems in balance. Electric LDCs do not make sales to 
stay in balance but instead they purchase ancillary services from the 
Transmission Provider or adjust generation. Electric utilities, 
therefore, do not need a de minimus exception for balancing.
iii. Emergency LDC Activities
Requests for Rehearing and Clarification and Commission Conclusions
    27. AGA asks the Commission to exempt LDCs' responses to emergency 
situations. AGA argues that LDCs should not become Energy Affiliates in 
the event they make off-system sales, or take other actions in the 
wholesale market place in response to emergencies. The Commission 
clarifies that LDCs do not change their status under the LDC exemption 
by responding to emergencies. The LDC should inform its affiliated 
Transmission Provider of the emergency and the Transmission Provider is 
directed to comply with the requirements of Sec.  358.4(a)(2) and post 
on the OASIS or Internet Web site, as applicable, each emergency 
activity of the LDC, within 24 hours of such emergency.
iv. Gatherers and Processors
Order Nos. 2004 and 2004-A
    28. In Order No. 2004-A at P 97, the Commission clarified that 
gatherers and processors affiliated with interstate pipelines are not 
Energy Affiliates in certain circumstances. Further, the Commission 
ruled that 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 other 
transmission-related activities, then it is not an Energy Affiliate. 
The Commission explained that when gatherers and processors engage only 
in gathering and processing, they provide services to wholesale market 
participants but do not compete with them. Order No. 2004-A further 
held that an affiliate may use an affiliated Transmission Provider to 
transport power or gas for its own consumption without becoming and 
Energy Affiliate as defined in the rule. See Order No. 2004-A at P 118.
Requests for Rehearing and/or Clarification and Commission Conclusions
    29. El Paso requests that the Commission confirm that to the extent 
a processor purchases gas for plant thermal reduction (PTR) purposes, 
it is doing so to supply its operational needs and is not an Energy 
Affiliate. El Paso further requests that the Commission clarify that 
the transportation of gas for PTR purposes is not an activity that 
would make a processor an Energy Affiliate. The Commission grants this 
requested clarification.
    30. CenterPoint, Duke Energy, El Paso and INGAA argue that it is 
arbitrary and capricious for the Commission to recognize that gatherers 
and processors affiliated with interstate transmission providers may 
purchase gas for operational purposes, but not to acknowledge that such 
entities also may engage in sales of gas for similar reasons. The 
Commission will grant clarification that processors and gatherers may 
purchase gas for

[[Page 48375]]

operational purposes and make de minimus sales as required from time to 
time to remain in balance without becoming Energy Affiliates. The 
regulatory text will be modified to reflect this (see discussion of 
Sec.  358.3(d)(6)(vi) infra).
    31. CenterPoint also argues that gatherers and processors should be 
exempt from the definition of Energy Affiliate if they buy and sell gas 
from their own facilities and act as nominating/scheduling agents. 
CenterPoint argues that the ability to buy gas at the wellhead and 
resell it is a critical aspect of the gathering business model because 
the gatherer knows that a specific volume of gas will be gathered at a 
particular point and is better able to ensure maximum utilization of 
its investment in pipeline gathering facilities. CenterPoint claims 
that such certainty improves the affiliated gatherer's ability to plan 
and implement expansion of its gathering system.
    32. The Commission denied rehearing on this point in Order No. 
2004-A, and CenterPoint offers no basis for the Commission to 
reconsider its determination there.\10\ To the extent a gatherer 
aggregates supply produced by others and resells that gas to the 
wholesale market, the gatherer is clearly acting as a marketer, and the 
Transmission Provider must treat it as such. To the extent CenterPoint 
wishes to continue to pursue its business model as a field aggregator 
it is not prohibited from doing so, but it must comply with the 
separation required of Transmission Providers and their Energy 
Affiliates.
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    \10\ Order No. 2004-A, PP 77-83.
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v. Producers
Order Nos. 2004 and 2004-A
    33. In the Final Rule and the Order on Rehearing, the Commission 
concluded that producers that perform Energy Affiliate activities as 
described in Sec.  358.3(d) are not exempt from the definition of 
Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
    34. Shell Offshore and Shell Gas disagree with the Commission's 
decision not to include a producer exemption in the new Part 358 
Standards of Conduct. For the reasons stated in Order No. 2004-A, 
rehearing is denied.\11\
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    \11\ Order No. 2004-A at PP 84-87.
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    35. Shell Offshore argues that because two Commissioners voted to 
grant rehearing of Order No. 2004 and include a producer exemption 
there was no majority for the Energy Affiliate definition in Sec.  
358.3(d). Shell Offshore argues that defining a producer that performs 
Energy Affiliate functions as an Energy Affiliate under the rule 
contravenes the requirement in the Department of Energy Authorization 
Act that Commission actions must be approved by a majority vote of the 
Commission. Shell Offshore requests a stay of Order No. 2004 until a 
valid rehearing order is issued.
    36. The Commission denies Shell Offshore's request for stay. Shell 
Offshore states that two Commissioners voted to include a producer 
exemption. This is incorrect. Commissioner Brownell, in her dissent in 
part, stated that she would have retained the existing exemption under 
Order No. 497 for affiliated producers. Commissioner Kelliher, in his 
dissent in part, would have, among other things, expanded the scope of 
the LDC exemption and granted an exemption for Part 157 pipelines. He 
did not, however, state that he would have granted an exemption for 
affiliated producers. Nonetheless, the decision to define producers (as 
well as gatherers, processors, intrastate pipelines and Hinshaw 
pipelines) that perform Energy Affiliate functions as Energy Affiliates 
was originally made in Order No. 2004 with a 2-1 majority vote of the 
Commission. As there was no majority to exempt producers from the 
definition of Energy Affiliate on rehearing in Order No. 2004-A, 
producers have no blanket exemption from the definition of Energy 
Affiliates.
    37. Shell Offshore and Shell Gas disagree with the Commission's 
decision not to include a producer exemption in the new Part 358 
Standards of Conduct. Shell Offshore argues that there is no evidence 
to support the Commission's decision to expand the Standards of Conduct 
to cover ``traditionally exempt entities such as producers shipping 
solely their own production.'' Shell Offshore argues that the two Gas 
Daily articles cited in Order No. 2004-A were published after the 
issuance of Order No. 2004, were not in the record of this proceeding, 
were not available for public comment, are not relevant to the 
elimination of the producer exemption, and have been misinterpreted by 
the Commission in reaching its conclusions. Shell Offshore argues that, 
at best, the articles stand for the proposition that producers hold 
pipeline capacity only to fill the void left from the collapse of the 
marketers.
    38. The Commission denies rehearing of a blanket exemption for 
producers shipping solely their own production. We do not accept Shell 
Offshore's argument that the Commission should categorically exempt a 
producer when it is shipping solely its own production over the 
affiliated pipeline. Such a scenario does not eliminate the possibility 
of the producer being in a position to take undue advantage of 
preferential access to transmission system information.\12\
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    \12\ For example, if the producer received information about a 
curtailment of capacity on the affiliated pipeline before non-
affiliated shippers, it would be in a position to make mid-day 
nominations on the affiliated pipeline to remedy the situation 
before other non-affiliated shippers became aware of the situation. 
Such an event, if it resulted in the allocation of the remaining 
capacity at the only alternative delivery point on the system to the 
affiliated producer, would leave no capacity available to other 
shippers. This would allow the affiliated producer to continue to 
deliver its gas while non-affiliated producers would be shut in. The 
fact that the affiliated producer flows only its own production over 
the affiliated pipeline does not alleviate the Commission's concern 
about such an undue preference taking place.
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    As the Commission stated in Order No. 2004:
    Producers that are selling energy are competing with other non-
affiliated shippers for access to the pipelines' transmission systems. 
Whether a producer is selling gas from its own production or from the 
production of another, it is competing with non-affiliates for access 
to the pipeline's transportation system.\13\
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    \13\ Order No. 2004 at P 71.
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    Producers, as first sellers of natural gas, are always in a 
position to potentially benefit from preferential access to 
transmission system information.\14\ While producers can and sometimes 
do conduct business in ways that minimize that potential, such as when 
a producer sells all of its gas under firm fixed-price, long-term 
contracts at the wellhead, such strategic decisions are choices that 
producers may change at will.
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    \14\ For example, knowledge of damage to a neighboring pipeline 
might allow a producer to demand a higher price for its uncommitted 
gas.
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    39. The Commission's use of the Gas Daily articles in Order No. 
2004-A was neither inappropriate nor misplaced. The articles merely 
illustrate the point that producers have a significant presence in the 
wholesale commodity marketplace.\15\ Producers sell significant 
quantities of natural gas at points downstream of the producing fields, 
and preferential access to transmission system information would unduly

[[Page 48376]]

prefer their wholesale merchant function activities whether they are 
first sales or sales for resale.
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    \15\ See also ``Top N. American Marketers, Gas Daily's Quarterly 
Look at Marketer rankings,'' Gas Daily, September 5, 2002 (BP, 
Conoco, Chevron Texaco and Exxon Mobil among the top 15 marketers in 
2002 and 2001); ``Top Players Shift in Latest Marketer Rankings,'' 
Gas Daily, August 17, 2001 (BP number two for second quarter 2001 
with 12.3 Bcf/d in trading); ``Top 30 Gas Marketers,'' Inside FERC's 
Gas Market Report, June 25, 1999 (Coral, Conoco, BP/Amoco, and 
Texaco among top 19 marketers in 1998).
---------------------------------------------------------------------------

    40. While the Commission will deny rehearing, there may be 
circumstances where an individual interstate natural gas pipeline with 
an affiliated producer can demonstrate that the Commission's general 
concerns do not apply in a particular case. The Commission will 
consider requests for exemptions or waiver of the Standards of Conduct 
on a case-by-case basis.
vi. Intrastate and Hinshaw Pipelines
Order Nos. 2004 and 2004-A
    41. In the Order on Rehearing, the Commission clarified that 
intrastate and Hinshaw pipelines affiliated with interstate pipelines 
are not Energy Affiliates in certain circumstances. The Commission 
stated that 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, 
the Commission also stated that if a Hinshaw pipeline makes off-system 
sales or participates in Energy Affiliate activities, it is an Energy 
Affiliate. See Order No. 2004-A at P 93. If an intrastate pipeline 
makes sales of natural gas, holds transmission capacity or engages in 
Energy Affiliate activities, it is an Energy Affiliate. See Order No. 
2004-A at P 94.
Requests for Rehearing and/or Clarification and Commission Conclusions
    42. Duke Energy, El Paso and INGAA request rehearing and urge the 
Commission to permit intrastate and non-LDC Hinshaw pipelines to make 
purchases and sales for operational reasons without triggering Energy 
Affiliate status. INGAA and El Paso argue that forcing only affiliates 
to rely exclusively on cash-out mechanisms to balance places them at a 
distinct disadvantage compared to any other company that must balance.
    43. The Commission grants rehearing on this point. We agree with 
INGAA and El Paso that intrastate and Hinshaw pipelines should be 
permitted to make de minimus sales and purchases of natural gas to keep 
their systems in balance without becoming Energy Affiliates on account 
of that balancing. The Commission will codify in a new section (Sec.  
358.3(d)(6)(vi)) as follows: A producer, gatherer, Hinshaw pipeline or 
an intrastate pipeline that makes incidental purchases or sales of de 
minimus volumes of natural gas to remain in balance under applicable 
pipeline tariff requirements and otherwise does not engage in the 
activities described in Sec. Sec.  358.3(d)(1), (2), (3) or (4).
    44. Duke Energy adds that intrastate and non-LDC Hinshaws should 
also be permitted to hedge financial risk without triggering Energy 
Affiliate status. The Commission denies rehearing. Duke Energy's 
request that intrastate and Hinshaw pipelines be permitted to hedge 
financial risk is denied because hedging financial risk is a commodity 
function. There is no reason that entities performing that commodity 
function should have preferential access to transmission information.
vii. Service Companies
Order Nos. 2004 and 2004-A
    45. In Order Nos. 2004 and 2004-A, the Commission stated that 
service companies that do not engage in energy or natural gas commodity 
markets and are not involved in transmission transactions in U.S. 
markets are not Energy Affiliates. See Order No. 2004 at PP 52-58 and 
Order No. 2004-A at PP 108-115. The Commission also stated that if a 
Transmission Provider utilizes a service corporation or other 
subsidiary as a mechanism for employment, all 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 as if they were directly employed by the Transmission 
Provider or Energy Affiliate. See Order No. 2004-A at P 110. However, 
in Order No. 2004-A, the Commission also noted that agency agreements 
can be used to aggregate control over transmission capacity and 
clarified 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. The Commission also stated that if the 
service company/agent is involved in energy-related activities, it is 
an Energy Affiliate. See Order No. 2004-A at P 115.
Requests for Rehearing and Clarification and Commission Conclusions
    46. EEI, INGAA, AEP, Cinergy, Entergy, Southern and Xcel argue that 
service companies should not become Energy Affiliates simply by acting 
as agents for energy-related activities. EEI claims that many service 
companies would have to be split in to two separate service companies 
and urges the Commission to allow employees to function separately 
within the service company by observing the Standards of Conduct. AEP 
argues that service companies are not Energy Affiliates unless the 
service companies are also entering into energy-related contracts on 
their own behalf. AEP also suggests that another alternative would be 
to prohibit the service company from entering into energy-related 
agreements on behalf of both the Transmission Provider and its 
Marketing/Energy Affiliates. Cinergy argues that the Commission has not 
provided any support for prohibiting an SEC-approved service company 
from acting as agent for its affiliates with respect to energy-related 
activities. Several petitioners urge the Commission to state that 
service companies are not Energy Affiliates provided they maintain the 
separation of functions requirements when acting on behalf of a 
Transmission Provider or Energy Affiliate. Southern argues that the 
Public Utility Holding Company Act of 1935 (PUHCA) requires service 
companies to act on behalf of all their affiliates.
    47. The Commission grants clarification, in part. Petitioners raise 
a valid point that the language in P 115 swallows the exception 
described in Order No. 2004 and the previous paragraphs in Order No. 
2004-A. In addition, although Order No. 2004-A expressed some concern 
about service company employees acting as agents for energy-related 
transactions, such service company employees will be subject to the 
Standards of Conduct, and the Commission will treat them as if they 
were directly employed by the Transmission Provider or Marketing/Energy 
Affiliate. Accordingly, the Commission adopts petitioners' requests and 
excludes service companies from the definition of Energy Affiliate 
unless they are engaging on their own behalf in any energy-related 
transactions covered under Sec. Sec.  358.3(d)(1), (2), (3) or (4) and 
on the condition that the service company employees assigned, dedicated 
or working on behalf of a particular entity are subject to the 
Standards of Conduct as if they were directly employed by that entity.
viii. Parent Companies
Order Nos. 2004 and 2004-A
    48. Section 358.3(d)(6)(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. In Order No. 2004-

[[Page 48377]]

A,\16\ the Commission noted in response to a question from Kinder 
Morgan Pipelines that it would consider individual requests if a parent 
company/LDC can demonstrate an acceptable level of independent 
functioning by an LDC division.
---------------------------------------------------------------------------

    \16\ See Order No. 2004-A at P 105.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    49. Kinder Morgan Pipelines request clarification that its parent 
company will not lose the exemption from Energy Affiliate status 
afforded by Sec.  358.3(d)(6)(iii) due to the fact that its parent 
company is an LDC which participates in wholesale energy and capacity 
markets to serve on-system load, as long as its LDC operations also 
qualify for the exemption afforded in Sec.  358.3(d)(6)(v). Kinder 
Morgan Pipelines argue that the Commission erroneously concluded that 
its LDC function made off-system sales in concluding that Kinder Morgan 
Pipelines' parent company did not qualify for the parent company 
exemption.\17\ Kinder Morgan Pipelines argue that its parent company/
LDC does not make off-system sales, and therefore should qualify for 
the exemption afforded LDCs.
---------------------------------------------------------------------------

    \17\ KM Pipelines cite to Order No. 2004-A, P 105.
---------------------------------------------------------------------------

    50. The Commission clarifies that a parent or holding company will 
not lose the exemption from Energy Affiliate status provided by Sec.  
358.3(d)(6)(iii) if it is also an LDC, as long as the LDC qualifies for 
the LDC exemption provided by Sec.  358.3(d)(6)(v). However, as noted 
in our earlier discussion, Kinder Morgan Pipelines' LDC operations, to 
the extent they include service to competitive retail markets, at 
market-based prices would not qualify for the LDC exemption of Sec.  
358.3(d)(6)(v).
ix. Affiliates Buying Power for Themselves
Order Nos. 2004 and 2004-A
    51. Section 358.3(d)(6)(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.'' In Order No. 
2004-A, the Commission clarified that an affiliate buying gas or power 
for its own consumption ``may use an affiliated Transmission 
Provider,'' and cautioned that ``the Transmission Provider must treat 
the affiliate as an Energy Affiliate unless the gas or power is for its 
own consumption.'' See Order No. 2004-A at P 118.
Requests for Rehearing and/or Clarification and Commission Conclusions
    52. To reflect the Commission's intent, INGAA requests that the 
Commission revise the regulatory text of Sec.  358.3(d)(6)(iv) to 
delete the words ``and does not use an affiliated Transmission Provider 
for transmission of that natural gas or energy.'' The Commission agrees 
that the regulatory text at Sec.  358.3(d)(6)(iv) needs to be revised 
to reflect the Commission's clarifications in Order No. 2004-A. 
However, the specific change suggested would not fully reflect the 
Commission's intent because it is overly broad. Accordingly, the 
Commission will revise Sec.  358.3(d)(6)(iv) to read as follows:
    (iv) An affiliate that purchases natural gas or energy solely for 
its own consumption. ``Solely for its own consumption'' does not 
include the purchase of natural gas or energy for the subsequent 
generation of electricity.

C. Independent Functioning

    53. One of the most significant elements of the Standards of 
Conduct is the requirement that Transmission Providers function 
independently of their 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. Therefore, Sec.  358.4(a)(1) requires the transmission 
function employees of the Transmission Provider to function 
independently of the Transmission Provider's Marketing or Energy 
Affiliates' employees.\18\ In Order Nos. 2004 and 2004-A, the 
Commission codified certain exceptions that permit a Transmission 
Provider to share certain categories of employees with its Marketing or 
Energy Affiliate. Specifically, a Transmission Provider may share with 
its Marketing and/or Energy Affiliates: (1) Support employees and field 
and maintenance employees; \19\ (2) senior officers and directors who 
are not Transmission Function Employees; \20\ and (3) risk management 
employees that are not engaged in Transmission Functions of sales or 
commodity functions.\21\ However, the Commission has also stated that 
although certain categories of employees are permitted to be shared, 
the Commission will look to employees' actual functions and duties to 
determine whether the Transmission Provider is appropriately applying 
this exemption to particular employees. See Order No. 2004-A at P 131.
---------------------------------------------------------------------------

    \18\ Section 358.4(a)(2) provides an exception to this 
requirement in the event of emergency circumstances that affect 
system reliability.
    \19\ See 18 CFR 358.4(a)(4).
    \20\ See 18 CFR 358.4(a)(5).
    \21\ See 18 CFR 358.4(a)(6).
---------------------------------------------------------------------------

i. Sharing of Senior Officers and Directors
Order Nos. 2004 and 2004-A
    54. In Order No. 2004, 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.
    55. In Order No. 2004-A, the Commission codified the exemption for 
senior officers and directors in the regulatory text.\22\ In addition, 
the Commission revised the regulatory text in Sec.  358.4(a)(5) to 
better reflect that the Commission did not intend to restrict corporate 
governance functions.\23\
---------------------------------------------------------------------------

    \22\ The Commission had included the language for the regulatory 
text in the preamble of Order No. 2004, but inadvertently omitted it 
from the regulatory text for codification.
    \23\ Section 358.4(a)(5) of the Commission's regulations 
provides that ``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 system operations or 
marketing functions; or (2) act as a conduit to share such 
information with a Marketing or Energy Affiliate.''
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    56. AGA, INGAA, LPPC, NiSource, Southern and Xcel requested 
clarification regarding the sharing of senior officers and directors. 
Southern claims that it is still unclear regarding which officers and 
directors can be shared. NiSource argues that Transmission Providers 
should be permitted to share senior officers and directors serving 
policy roles that do not involve day-to-day transmission operations 
with their Energy Affiliates and make it clear that such senior 
officers and directors may communicate with their counterparts employed 
by the Energy Affiliates. AGA queries whether a senior officer or 
director who approves a limited number of transactions or

[[Page 48378]]

investments or who is involved in corporate planning (capacity 
expansion), as opposed to day-to-day planning for transmission is a 
Transmission Function Employee. LPPC seeks clarification that senior 
officers and directors may, upon occasion, review and execute 
transmission function or energy affiliate transactions when such 
transactions exceed the delegated authority for middle management to 
approve.
    57. Permitting the sharing of high-level officers and directors is 
a balance between the Commission's requirement to have a Transmission 
Provider function independently of its Marketing/Energy Affiliates and 
the need for the company to have officers and directors who are 
accountable, can exercise their fiduciary responsibilities and can 
engage in corporate governance functions. High-level officers and 
directors have significantly different roles and responsibilities at 
various Transmission Providers. To the extent that senior officers or 
directors conduct transmission functions or are involved in planning, 
directing or organizing transmission functions, the officers' or 
directors' status does not automatically exempt them from also being a 
Transmission Function Employee.
    58. INGAA requests clarification and regulatory text revisions that 
Sec.  358.3(a)(5) does not prohibit senior officers of the pipeline who 
are Transmission Function Employees from receiving transmission-related 
information. The Commission so clarifies, and will clarify the 
regulatory text to indicate that Sec.  358.3(a)(5) pertains to shared 
senior officers and directors.
ii. Sharing of Field and Maintenance Personnel
Order Nos. 2004 and 2004-A
    59. 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. In Order No. 
2004-A, the Commission clarified that shared field and maintenance 
employees include field supervisors who do not take part in advance 
planning for facility closures or are involved in shutting down 
facilities based on economic reasons. The Commission also clarified 
that the field and maintenance employees' exception applies to 
technicians, mechanics and their immediate supervisors who are 
responsible for electric transmission activities. See Order No. 2004-A 
at PP 145 and 146.
Requests for Rehearing and Clarification and Commission Conclusions
    60. Shell Offshore questions whether it is permissible to share 
second-level supervisors, some of whom are located onshore, that 
``control'' a gas pipeline's operations such as shutting in production 
on a platform.
    61. Without reviewing the specific job descriptions for Shell 
Offshore's second-level supervisors, the Commission cannot generically 
state whether these individuals are permissibly shared field and 
maintenance personnel. The field and maintenance personnel exception 
was developed to allow the sharing of employees who would not be in a 
position to give undue preferences to Energy Affiliates either by 
sharing information or through physical control of facilities.
    62. Shell Offshore may request that the Commission address its 
specific configuration in an individual filing in which it describes in 
detail the duties and functions of affected employees.
iii. Risk Management Employees
Order Nos. 2004 and 2004-A
    63. Order No. 2004 prohibits the sharing of risk management 
employees who are operating employees of either Transmission Providers 
or their Marketing or Energy Affiliates.\24\ The Final Rule also 
prohibits risk management employees from being conduits 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. In Order No. 2004-A, the Commission codified an 
exception in Sec.  358.4(a)(6) that permits Transmission Providers to 
share risk management employees that are not engaged in transmission 
functions or sales or commodity functions with their Marketing and 
Energy Affiliates. The Commission also stated 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. See Order No. 2004-A at P 
153. However, the Commission stated that the risk management function 
is not permitted to assess creditworthiness of a particular customer 
under a pipeline's tariff. Id. 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.'' \25\ Finally, in 
Order No. 2004-A, the Commission emphasized that the risk management 
function cannot be used to share information with Marketing or Energy 
Affiliates that the Transmission Provider is prohibited from sharing 
under Sec.  358.5(a). The limitations on shared risk management 
functions or employees are intended to prevent unduly discriminatory 
behavior in favor of a Marketing or Energy Affiliate. See Order No. 
2004-A at P 154.
---------------------------------------------------------------------------

    \24\ Order No. 2004 at P 112.
    \25\ See Vector Pipeline, L.P., 97 FERC ] 61,085 (2001).
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    64. Duke Energy, EEI and INGAA request additional clarification 
and/or rehearing regarding the employees engaged in risk management 
functions for Transmission Providers and their Marketing/Energy 
Affiliates.
    65. EEI claims that the Commission should permit the sharing of 
certain critical functions, such as risk management, because such 
employees must be knowledgeable and have intimate knowledge of their 
companies, the customers and the various issues affecting transmission 
service and retail/wholesale energy sales. Duke Energy expressed 
concern because Commission Staff stated at the May 10, 2004, Technical 
Conference that under the Standards of Conduct, risk management 
employees would be prohibited from engaging in certain activities or 
receiving certain information. Duke Energy requests clarification that 
the Standards of Conduct will not restrict the essential functions of 
corporate risk management.
    66. INGAA claims that for a corporate risk management group to be 
able to function, it must be able to understand, and obtain information 
from all business units concerning their business and their business 
strategies. INGAA is concerned that the Commission allows the risk 
management group to evaluate risk, but will not allow the risk 
management group to take action on the risks because such action would 
make the risk management employees operating employees of an Energy 
Affiliate. INGAA also requests clarification whether the risk

[[Page 48379]]

management personnel would be allowed to direct action (subject to a no 
conduit rule) to minimize risk.
    67. INGAA also requests clarification that the corporate risk 
management unit is permitted to receive creditworthiness information 
from the pipeline, evaluate and communicate the results of that 
creditworthiness analysis to the pipeline. In INGAA's view, the 
corporate risk management unit could communicate to an Energy Affiliate 
that a particular company had exceeded its corporate-wide credit limit 
or that the customer's credit rating had been downgraded, but could not 
inform the Energy Affiliate that the particular company had not paid 
its pipeline transportation fees or had acquired significant amounts of 
additional pipeline capacity.
    68. The Commission is denying the requests for clarification. 
Sharing of risk management functions is permitted to allow companies to 
assess corporate-wide risk. It is not intended to allow the shared risk 
management employees to serve as operators of Transmission Providers or 
Marketing/Energy Affiliates. Therefore, shared risk management 
employees should not direct Transmission Providers' or Marketing/Energy 
Affiliates' responses to the risks they identify. A shared risk 
management employee cannot decide whether a transmission customer 
receives service, sets prices, or sets other rates, terms or conditions 
of transmission service, such as a specific amount of collateral a non-
creditworthy shipper must post before receiving service. A shared risk 
management employee may: (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.\26\
---------------------------------------------------------------------------

    \26\ Also, INGAA is correct that the Standards of Conduct 
prohibit a risk management employee from disclosing to an Energy 
Affiliate that a transmission customer has not paid its transmission 
bills.
---------------------------------------------------------------------------

    69. Furthermore, the Commission is troubled by the implication, as 
suggested by INGAA, that in the absence of specific tariff authority a 
Transmission Provider might use communications from a corporate-level 
risk management group as a reason to deny service to particular 
customers. A Transmission Provider's creditworthiness process must be 
described in its tariff so that the Commission may determine whether 
any use of corporate-wide credit review and screening processes are 
just and reasonable and not unduly discriminatory.
iv. Lawyers as Transmission Function Employees
Order Nos. 2004 and 2004-A
    70. INGAA and others requested clarification of Order No. 2004 
regarding the classification of lawyers as Transmission Function 
Employees. In Order No. 2004-A, the Commission stated 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.'' See Order No. 2004-A at P 
157.
Requests for Rehearing and/or Clarification and Commission Conclusions
    71. EEI, Entergy, INGAA and Sempra request rehearing and/or 
additional clarification on when lawyers become Transmission Function 
Employees. Specifically, EEI requests that the Commission clarify that 
lawyers acting in their traditional and fiduciary role of providing 
advice to their clients can continue to be shared employees and be 
housed in shared services legal departments. Entergy repeats some of 
its previous rehearing requests and seeks further guidance on the 
Commission's clarification on when lawyers become Transmission Function 
Employees. Specifically, Entergy points out that lawyers are often 
called upon by individuals involved in business decisions to provide 
legal opinions regarding regulatory requirements and the impact of 
those requirements on business decisions. Entergy seeks clarification 
that the provision of legal advice to a business person does not 
constitute a Transmission Function or Energy Affiliate activity, and 
does not render the employee as improperly shared between the 
Transmission Provider and Marketing or Energy Affiliate. Entergy also 
seeks clarification whether Order Nos. 2004 and 2004-A mandate separate 
legal departments, physical separation of lawyers within such 
departments, or lack of physical access by Energy Affiliate employees 
to legal department offices or floors where there are lawyers who meet 
the definition of Transmission Function Employee.
    72. INGAA requests the Commission to clarify that a Transmission 
Provider's lawyer's participation in a Transmission Provider's business 
decisions is for the exclusive or predominant purpose of rendering 
legal or regulatory advice, and that such lawyers are not treated as 
Transmission Function Employees. INGAA argues that a lawyer whose 
participation is limited solely or predominantly to rendering legal or 
regulatory advice should not be considered a Transmission Function 
employee because s/he is not ``conducting'' transmission system 
operations or planning, directing or organizing transmission-related 
operations. INGAA claims the court affirmed the Commission's previous 
determination that lawyers could be shared by stating that 
``professionals such as attorneys and accountants are regularly 
entrusted with information which they must hold confidential from other 
clients, the public and even other personnel in their own firms or 
companies.'' \27\ Finally, INGAA identifies cases, in the context of 
attorney-client privilege, which distinguishes the lawyer's traditional 
role as a legal advisor in business decisions.
---------------------------------------------------------------------------

    \27\ INGAA cites Tenneco v. FERC, 969 F.2d 1187 at 1207-8 (D.C. 
Cir. 1992).
---------------------------------------------------------------------------

    73. Sempra expresses concern whether shared services lawyers and 
other shared services personnel who help develop and advocate policy in 
public forums are deemed Transmission Function Employees for purposes 
of the Standards of Conduct. Sempra queries whether the lawyer who 
drafts pleadings, provides legal and regulatory advice relating to 
public policy positions but does not have transmission information can 
be shared. Sempra also queries whether shared services lawyers who 
advise Transmission Function Employees on legal and regulatory 
requirements associated with business operations should be deemed 
Transmission Function Employees. If a lawyer performs some Transmission 
functions, is s/he dedicated to that function and can no longer be 
shared.
    74. The Commission clarifies that lawyers may provide legal or 
regulatory advice in their traditional roles without becoming 
Transmission Function Employees. However, to the extent that they 
conduct transmission functions, or

[[Page 48380]]

are involved in planning, directing or organizing transmission 
functions, the lawyers' status as ``lawyers'' does not exempt them from 
also being Transmission Function Employees. If a lawyer performs some 
Transmission Functions, then s/he is dedicated to that function, and 
cannot be shared with the Marketing or Energy Affiliate. Lawyers who 
help develop and advocate policy in public forums are not necessarily 
Transmission Function Employees. Such advocacy may fall within the 
lawyers' traditional role of publicly representing their clients' 
positions.
    75. In many instances, lawyers have a significant amount of access 
to the Transmission Providers' transmission, customer and marketing 
information. Lawyers, like other employees or agents, are prohibited 
from being conduits for improperly sharing information between a 
Transmission Provider and its Marketing or Energy Affiliates. See 18 
CFR 358.5(b)(7). Lawyers, like other Transmission Provider employees 
are expected to restrict access to transmission, customer or market 
information using appropriate measures, such as locked file rooms/
drawers and password protection for computer files. Securing the 
Transmission Providers' information will limit the ability of 
Marketing/Energy Affiliate employees to improperly obtain access to 
information while visiting the legal department offices or floors where 
lawyers work. The Commission is not mandating separate legal 
departments or physical separation of lawyers within a legal 
department, although either of those measures might simplify 
compliance. A Transmission Provider's organizational chart should 
reflect any sharing of lawyers. Shared office space should also be 
identified as required by Sec.  358.4(b)(2).

D. Information To Be Posted on the Internet or OASIS

i. Posting Organizational Charts
Order Nos. 2004 and 2004-A
    76. 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. The Transmission Provider is also required to update the 
organizational charts and job descriptions within seven business days 
of a change. In Order No. 2004-A, the Commission explained that 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.
Requests for Rehearing and/or Clarification and Commission Conclusions
    77. On rehearing, NiSource argues that the Commission should: (1) 
Make clear that Transmission Providers need only post information 
identifying the particular support units (non-Transmission Function 
Employees) that are shared with their Energy Affiliates; (2) clarify 
that Transmission Providers are not required to post full 
organizational charts for their service companies or shared support 
units; and (3) not require that Transmission Providers post 
organizational charts for non-affiliated companies that may provide 
certain non-transmission related services to the Transmission Provider.
    78. As the Commission stated in Order No. 2004-A (at P 163), the 
Transmission Provider must 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. The Transmission Provider is not required to post detailed 
organizational charts for the shared non-Transmission Function support 
units, but these units must be identified as shared in the 
organizational chart that identifies the corporate structure of the 
Transmission Provider and its relative position to the parent company 
and other Marketing/Energy Affiliates.
    79. Similarly, the Transmission Provider must include the service 
company in the organizational chart that identifies the corporate 
structure. With respect to whether a detailed organizational chart is 
also required for a service company, the answer depends on the 
functions that the service company is performing. If the service 
company is performing transmission functions, additional detail is 
required. As the Commission stated in Order No. 2004-A at P 163, there 
may be instances where a corporation should post both functional and 
structural organizational charts to accurately reflect its operations. 
NiSource may seek specific guidance from the Commission on the 
information to include in its organizational chart postings with 
respect to service companies.
    80. With respect to NiSource's last request, the Commission 
clarifies that Transmission Providers are not required to post 
organizational charts regarding non-affiliated companies that may 
provide non-transmission functions for the Transmission Provider.
    81. Section 358.4(b)(3)(iii) provides that, 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.
    82. On rehearing, INGAA argues that as written, Sec.  
358.4(b)(3)(iii), which requires the posting of all shared employees 
engaged in transmission functions, appears to contradict the 
independent functioning requirement in Sec.  358.4(a) by suggesting 
that employees engaged in transmission functions for the Transmission 
Provider can be employees of an Energy Affiliate. INGAA, therefore, 
requests the Commission to reword Sec.  358.4(b)(3)(iii) to avoid 
contradicting Sec.  358.4(a), or if the Commission so intended, to 
clarify under what non-emergency circumstances an Energy Affiliate 
employee may perform transmission functions for the Transmission 
Provider. The Commission denies the request for clarification. Section 
358.4(b)(3)(iii) is intended to identify the shared employees of 
Transmission Providers which have received exemptions of the 
independent functioning requirements of the Standards of Conduct.\28\
---------------------------------------------------------------------------

    \28\ See Bear Creek Storage Company, 108 FERC ] 61,011 (2004.
---------------------------------------------------------------------------

ii. Posting of Merger Information
Order Nos. 2004 and 2004-A
    83. Section 358.4(b)(v) requires the Transmission Provider to post 
on the OASIS or Internet website the name(s) and address(es) of 
potential merger partner(s) as affiliates within seven days after the 
potential merger is announced.
Requests for Clarification and Commission Conclusions
    84. INGAA and Enbridge urge the Commission to clarify that the 
seven-day posting requirement is only triggered by a public 
announcement, when, and to the extent, such an announcement is required 
by other applicable law, such as the securities laws administered by 
the Securities and Exchange Commission (SEC). They argue that the 
Commission should

[[Page 48381]]

clarify that Order No. 2004-A does not impose any new, independent 
obligation to publicly announce a proposed merger.
    85. As noted by INGAA, mergers are customarily subject to various 
contingencies that must be satisfied prior to consummation. The 
Commission clarifies that it is not imposing a new, independent 
obligation to publicly announce a proposed merger in advance of 
applicable SEC requirements. However, once a public announcement has 
been made, the Transmission Provider must post the name(s) and 
address(es) of potential merger partner(s) and related Energy 
Affiliates on the OASIS or internet Web site.
iii. Transfer of Employees
Order Nos. 2004 and 2004-A
    86. Section 358.4(c) requires a Transmission Provider to post 
notices of employee transfers on the OASIS or Internet Web site. In 
Order No. 2004-A, the Commission clarified that the requirement is 
intended to capture the transfers between a Transmission Provider on 
the one hand and its Marketing or Energy Affiliates on the other.
Requests for Rehearing and/or Clarification and Commission Conclusions
    87. NiSource requests clarification whether the Commission is 
requiring the posting of transfers between Energy and Marketing 
Affiliates. The Commission clarifies that it is not requiring the 
posting of transfers between Energy and Marketing Affiliates. The 
posting requirement applies only to transfers involving both a 
Transmission Provider and an Energy or Marketing Affiliate.
iv. Posting of Shared Facilities
Order Nos. 2004 and 2004-A
    88. Section 358.4(b)(2) requires Transmission Providers to post the 
facilities shared with Marketing or Energy Affiliates.
Requests for Clarification and Commission Conclusions
    89. Allegheny, AEP and NiSource request clarification on the 
information that needs to be posted with respect to shared facilities. 
ITC and NiSource assert that Transmission Providers should not be 
required to post all field facilities that are shared by a Transmission 
Provider and Marketing/Energy Affiliate. Similarly, Allegheny seeks 
clarification as to what shared facilities need to be identified. It 
claims that if a Transmission Provider has spun off generation to an 
affiliate, shared facilities would include every substation where such 
generation interconnects with the Transmission Provider. Allegheny and 
ITC request that the Commission clarify that the types of facilities 
that are required to be posted are office buildings and computer 
systems, and not physical infrastructure (such as substations or other 
transmission equipment that do not house transmission personnel).
    90. The Commission grants the requests for clarification. 
Transmission Providers need not post notice of shared physical field 
infrastructure such as substations or other transmission equipment that 
is not housed with any employees.
v. Posting of Discretionary Waivers
Order Nos. 2004 and 2004-A
91. As proposed in the NOPR and codified in the Final Rule, Sec.  
358.5(c)(4) requires a Transmission Provider to maintain a written log, 
available for Commission audit, detailing the circumstances and manner 
in which it exercised its discretion under any terms of its tariff. The 
information contained in the log is to be posted on the OASIS or 
internet Web site within 24 hours of when a Transmission Provider 
exercises its discretion under any terms of the tariff. This 
requirement superseded former Standard K from the gas Standards of 
Conduct,\29\ but used language identical to the former electric 
Standards of Conduct at 18 CFR 37.4(b)(5)(iii). There were no timely 
requests for rehearing of this provision following issuance of Order 
No. 2004 and this provision was not referenced in Order No. 2004-A.
---------------------------------------------------------------------------

    \29\ Under former 18 CFR 161.3(k)(2003), the Commission required 
a pipeline to maintain a written log of waivers that the pipeline 
grants with respect to tariff provisions that provide for such 
discretionary waivers and provide the log to any person requesting 
it within 24 hours of the request.
---------------------------------------------------------------------------

Requests for Clarification and Commission Conclusions
    92. Questar Pipeline claims, as a procedural matter, that the 
requirement to post exercises of discretion was a ``new'' burden that 
was not disclosed in the rulemaking proceeding or to the Office of 
Management and Budget. The Commission rejects Questar Pipeline's 
argument as incorrect. The Commission included the proposed regulatory 
text for Sec.  358.5(c)(4) in the NOPR and in the regulatory text of 
Order No. 2004. See NOPR, FERC Stats. & Regs., Proposed Regulations 
1999--2003 ] 32,555 at 34,096 and in proposed regulatory text and Final 
Rule at P 162 and in regulatory text. Moreover, Questar Pipeline's 
request is untimely because all requests for rehearing of the Final 
Rule were due within 30 days of its issuance (by December 29, 2003). 
See section 19a of the NGA, 15 U.S.C. 717r (2000) and section 313 of 
the FPA, 16 U.S.C. 825l(a) (2000).
    93. AGA, Duke Energy, El Paso, INGAA and Questar Pipeline each 
sought additional clarifications on implementation of the requirement 
to post exercises of discretion. INGAA and Duke Energy are concerned 
that the Order No. 2004 requirement is much broader than the former 
Standards of Conduct and would apply to any number of Gas Tariff 
provisions which use discretionary terms such as ``may,'' ``may in its 
discretion,'' and ``may use its best efforts.'' Petitioners are 
concerned that it could be a burden if a pipeline has to post every 
discretionary action and might result in the pipelines reducing service 
flexibility. El Paso argues that the Commission should clarify that the 
discretionary posting requirement only applies where the pipeline 
exercises such discretion with regard to a shipper requirement under 
its FERC Gas Tariff.
    94. INGAA requests that the waiver log posting not apply to the 
following discretionary activities: (1) Operational activities; (2) 
when the service itself has a discretionary component; or (3) when 
posting is already mandated by regulation or tariff provision.
    95. INGAA also argues that with respect to some tariff provisions, 
for example those involving interruptible service, discretion is an 
inherent part of the service. INGAA notes that for some exercises of 
discretion, the Commission has already required or approved posting 
obligations, e.g., curtailment of interruptible services, discounts or 
issuance of operational flow orders.
    96. AGA, INGAA, and Questar Pipeline request clarification that the 
posting requirement does not apply where a pipeline exercises 
flexibility, the pipeline's tariff specifies the flexibility that is 
available and all parties are on notice (through the tariff) that the 
flexibility is available. For example, correction of an invoice due to 
a mutual mistake of fact or additional nomination opportunities if the 
pipeline can accommodate such requests on a best efforts basis. AGA is 
concerned that this requirement will present a disincentive for 
pipelines to provide valued flexibility to any customer.
    97. Finally, Questar Pipeline urges that the Commission not require 
the posting of discretionary waivers where the posting might reveal 
customers' identity or sensitive business

[[Page 48382]]

information. For example, if a pipeline makes a negative determination 
of a customer's credit, is the pipeline required to post on its website 
a log detailing the circumstances and manner in which it determined to 
deny credit or require collateral. Questar Pipeline is concerned about 
the impact that such a posting might have on a customer's dealings with 
other creditors.
    98. The Commission clarifies that when a posting is already 
mandated by the tariff or other requirement, such as operational flow 
orders, available capacity or curtailments, the requirement to post 
exercises of discretion will not trigger a duplicate posting 
requirement.\30\ Also, in response to Questar Pipeline, a posting need 
not reveal confidential customer information or sensitive business 
information. Rather, a Transmission Provider shall post information 
regarding the date of its action and the type of discretion it 
exercised (e.g., a creditworthiness determination) without revealing 
the name of the customer.
---------------------------------------------------------------------------

    \30\ See Part II(G) for the discussion concerning posting of 
discounts.
---------------------------------------------------------------------------

    99. INGAA's request not to post waivers logs with respect to 
pipeline operations, such as determinations of available capacity, has 
merit. The Commission's regulations at Sec.  284.13 already require the 
posting of capacity information. But, INGAA's request not to post 
waiver logs with respect to services that have discretionary components 
is too broad. The purpose of this rule, which is to allow non-
affiliates to determine whether they have been treated in a non-
discriminatory manner, would not be achieved under INGAA's service 
proposal. The way in which a pipeline exercises its discretion in 
providing services is valuable information in assessing its compliance 
with the non-discrimination requirements of the NGA. As El Paso 
acknowledges, exercises of discretion with respect to shipper 
requirements should be posted.

E. Training

Order Nos. 2004 and 2004-A
    100. Section 358.4(e)(5) requires a Transmission Provider to train 
all of its employees and sign an affidavit certifying that they have 
been trained regarding the Standards of Conduct. In Order No. 2004-A, 
the Commission revised the regulatory text to state that electronic 
certification is an acceptable substitute for an affidavit to permit 
Transmission Providers to use computer-based training.
    101. In Order No. 2004-A, the Commission stated that one of the 
goals of training 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. Therefore, the Commission clarified that for employees 
without access to information about transmission, energy or natural gas 
functions training would not be required.
Requests for Rehearing and/or Clarification and Commission Conclusions
    102. Questions at the May 10th Technical Conference and petitions 
for clarification reveal that some Transmission Providers are still 
unclear about which employees must be trained. See requests of 
CenterPoint, EEI, El Paso, INGAA, NiSource, Texas Gas and Xcel. 
Petitioners urge the Commission to acknowledge that employees without 
access to information regarding transmission, energy or gas functions 
need not be trained and that only employees with access to transmission 
information or information about gas or electric purchases or sales or 
marketing must be trained. The Commission so clarifies, and as 
discussed below, will revise the regulatory text accordingly. In 
addition, the Commission denies EEI's suggestion that the decision to 
train Marketing or Energy Affiliate employees or other Transmission 
Provider employees should be left to the discretion of the Transmission 
Provider.
    103. The Commission clarifies that all officers and directors of 
the Transmission Provider, as well as its employee with access to 
transmission information or information concerning gas or electric 
purchases, sales or marketing functions must be trained. For those 
employees without access to transmission information or information 
concerning gas or electric purchases, sales or marketing functions, 
however, training will not be required.
    104. CenterPoint urges the Commission to clarify that the 
Transmission Provider is obliged to distribute Standards of Conduct 
material to the employees of the Transmission Provider and Marketing 
and Energy Affiliates, but is not obliged to train the employees of the 
Marketing or Energy Affiliates. At PP 181 and 184 of Order No. 2004-A, 
the Commission stated that Transmission Providers are not required to 
train employees of their Marketing or Energy Affiliates, but must 
distribute the Standards of Conduct to those employees with access 
transmission information or information regarding gas or electric 
purchases or sales or marketing either in paper copy or electronically. 
Marketing and Energy Affiliates should train their employees to ensure 
that they understand and observe the Standards of Conduct requirements.
    105. INGAA, Texas Gas, Westar and Xcel note that the regulatory 
text is inconsistent with the preamble language in Order No. 2004-A 
because the regulatory text requires the training of all employees, yet 
the discussion in Order No. 2004-A stated that training was not 
required for all employees.
    106. Finally, EEI, Texas Gas and Xcel ask the Commission to delete 
the ``affidavit'' requirement and, as was discussed at the May 10th 
Technical Conference, require adequate documentation in a reasonable 
form, such as electronic certification or sign in sheets.
    107. The Commission will grant the requests and revise the 
regulatory text of Sec.  358.4(e)(5) as follows:
    Transmission Providers shall train officers and directors as well 
as employees with access to transmission information or information 
concerning gas or electric purchases, sales or marketing functions. The 
Transmission Provider shall require each employee to sign a document or 
certify electronically signifying that s/he has participated in the 
training.

F. Information Access and Disclosure Prohibitions

Order Nos. 2004 and 2004-A
    108. Generally, Sec. Sec.  358.5(a) and (b) prevent a Transmission 
Provider from giving its Marketing or Energy Affiliate unduly 
preferential access to transmission, customer or marketing information. 
The Commission has also established several specific exemptions from 
the information disclosure prohibitions that permit a Transmission 
Provider to communicate with its Marketing or Energy Affiliate, 
including: (1) Information relating to specific transactions 
(transaction specific exemption); \31\ and (2) crucial operating 
information (crucial operating information exemption).\32\
---------------------------------------------------------------------------

    \31\ 18 CFR 358.5(b)(5).
    \32\ 18 CFR 358.5(b)(8).
---------------------------------------------------------------------------

i. No Conduit Rule
    109. In Order No. 2004-A, the Commission added additional 
regulatory text in Sec.  358.4(a)(5) to provide that ``A Transmission 
Provider may share transmission information * * * with its senior 
officers and

[[Page 48383]]

directors provided that they do not (1) participate in directing, 
organizing or executing transmission system operations or marketing 
functions; or (2) act as a conduit to share such information with a 
Marketing or Energy Affiliate.'' The Commission also revised Sec.  
358.5(b)(7) to provide that ``A Transmission Provider may share 
information * * * 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.''
Requests for Rehearing and/or Clarification and Commission Conclusions
    110. On rehearing, Entergy argues that these revisions may 
reinstate an ``automatic imputation rule,\33\ because shared employees 
receiving the information will themselves be employees of Marketing or 
Energy Affiliates. Entergy seeks clarification that the Commission 
means what it said and the regulatory revisions in Sec. Sec.  
358.4(a)(5) and 358.4(b)(7) result in a No Conduit Rule without the 
overlay of the automatic imputation rule.
---------------------------------------------------------------------------

    \33\ Under an ``automatic imputation rule,'' any transmission 
information given to an employee shared by the Transmission Provider 
and it Marketing or Energy Affiliate would be deemed to have been 
given to the Marketing or energy Affiliate.
---------------------------------------------------------------------------

    111. The Commission clarifies that the additional regulatory text 
added in Sec. Sec.  358.4(a)(5) and 358.5(b)(7) was not intended to 
impose the automatic imputation rule on the No Conduit Rule. As 
provided in Sec.  358.5(b)(7), neither a Transmission Provider nor an 
employee of a Transmission Provider is permitted to use anyone as a 
conduit for sharing information covered by the prohibitions of Sec.  
358.5(b)(1) and (2) with a Marketing or Energy Affiliate. As the 
Commission stated in Order No. 2004-A, notwithstanding the prohibitions 
of Sec. Sec.  358.5(b)(1) and (2), the Commission intends to allow a 
Transmission Provider to share information with employees that 
permissibly may be shared so that they can engage in certain functions, 
e.g., corporate governance, risk management, or certain ``support-
type'' services. The additional regulatory text was intended to reflect 
that the No Conduit Rule also will apply to such shared employees.
ii. Operating Information Exemption
Order Nos. 2004 and 2004-A
    112. Order No. 2004 permitted a Transmission Provider to share 
crucial operating information with its Energy Affiliates to maintain 
the reliability of the transmission system. In Order No. 2004-A, the 
Commission clarified that ``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. The Commission 
revised the regulatory text at Sec.  358.5(b)(8) eliminating the term 
``crucial'' and providing that a Transmission Provider is permitted to 
share information necessary to maintain the operations of the 
transmission system with its Energy Affiliates.
Requests for Rehearing and/or Clarification and Commission Conclusions
    113. Shell Offshore requests the Commission to clarify the 
relationship between the ``crucial operating information exemption in 
Sec.  358.5(b) and the ``No Conduit Rule.'' Specifically Shell Offshore 
requests the Commission to clarify that, in the ``crucial operating 
information exemption,'' the ``No Conduit Rule'' applies only to the 
employees of the Transmission Provider and not to the employees of an 
Energy Affiliate. Shell Offshore argues that applying the ``No Conduit 
Rule'' to the crucial operating information exemption is unnecessary 
and unworkable because the information that is to be shared is the 
information necessary to operate and maintain the transmission system 
on a day-to-day basis and 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 non-
affiliated customers in the Energy marketplace. Shell Offshore argues 
that, since the crucial operating information will not give the Energy 
Affiliate an undue preference, there is no reason to make the 
communication of this information subject to the No Conduit Rule.
    114. The Commission's clarification of operating information makes 
clear that information necessary to operate a transmission system on a 
day-to-day basis may be shared with an Energy Affiliate. However, 
Energy Affiliate Employees who receive such transmission information 
are, by definition, employees engaged in the physical operations of the 
Energy Affiliate. These operational employees may not share with other 
Energy Affiliate employees (serve as a conduit of) the transmission 
information the operational employees receive.
    115. INGAA and Duke Energy request the Commission to clarify that 
the sharing of operational information under Sec.  358.5(b)(8) will not 
violate the functional separation requirement codified in Sec.  358.4. 
They are concerned that Sec.  358.4, without referencing Sec.  
358.5(b)(8), contains an exception that applies only ``in emergency 
circumstances affecting system reliability.'' Therefore, they seek 
clarification that the functional separation requirement of Sec.  358.4 
does not limit the sharing of operational information permissible under 
Sec.  358.5(b)(8).
    116. The Commission clarifies that sharing of information necessary 
to maintain the operations of the transmission system under Sec.  
358.5(b)(8) does not compromise the independent functioning required in 
Sec.  358.4.
iii. Transaction Specific Exemption and Scoping Meetings
Order Nos. 2004 and 2004-A
    117. In the Final Rule, the Commission codified a ``transaction 
specific exemption'' 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 the communication between 
the Transmission Provider and its Marketing or Energy Affiliates 
relates solely to the Marketing or Energy Affiliate's specific request 
for transmission service.
    118. Order No. 2004-A required that when a Transmission Provider 
and an Energy Affiliate participate in scoping meetings or discussions 
about capacity expansion or new development (scoping meetings), 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.\34\ Order No. 2004-A 
stated, further, that 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.
---------------------------------------------------------------------------

    \34\ These conditions are consistent with similar requirements 
provided in Order No. 2003-A.

---------------------------------------------------------------------------

[[Page 48384]]

Requests for Rehearing and Clarification and Commission Conclusions
    119. AGA and INGAA argue that the requirement to post notice of and 
transcribe scoping meetings is an unjust, unreasonable and undue burden 
on the Energy Affiliate to its disadvantage vis-[agrave]-vis non-
affiliated customers. They argue that the requirement to notice and 
transcribe these meetings will chill a Transmission Provider's 
willingness to engage in any facility-related discussions with its 
Energy Affiliates although the Transmission Provider would have no such 
disincentive in regard to similar discussions with non-affiliated 
customers or potential customers. Others, such as ATC, BP, CenterPoint, 
Duke Energy, EEI, El Paso, Large Public Power Counsel, NiSource, 
Questar Pipeline and Southern make similar arguments that the advance 
notice and transcription safeguards for scoping meetings are burdensome 
and should be removed or clarified. They contend that the safeguards 
ignore the differences between electric utilities and natural gas 
pipelines such as the difference in the type of requests for 
information and the differences in the way energy projects are 
developed.
    120. BP illustrates these differences by pointing out that electric 
scoping meetings take place after a service request is submitted and 
the queue/priority has been established, while gas scoping meetings 
take place before a shipper requests transmission and before the 
pipeline's open season. BP also notes that electric scoping meetings 
are part of a structured interconnection process that requires the 
Transmission Provider to provide detailed transmission data after a 
request for transmission has been made. On the other hand, BP notes 
that, due to the cost of exploring for natural gas, a producer often 
will hold preliminary, informal discussions with a pipeline regarding 
the producer's plans to develop a region very early in a development 
project process. According to BP, these preliminary, informal 
discussions enable a pipeline to assess whether it is possible to build 
the infrastructure necessary to support a project. BP contends that a 
pipeline's open season provision, which allows all interested parties 
to seek capacity on the pipeline, is a current non-discriminatory 
safeguard that will protect other potential pipeline shippers. At a 
minimum, BP requests that discussions held prior to submission of a 
written request should not be subject to the rules regarding scoping 
meetings.
    121. The Commission is granting petitioners' requests for 
rehearing. The Standards of Conduct will not require Transmission 
Providers to post notice of or transcribe scoping meetings.\35\ The 
Commission is persuaded that the requirement to post notice of and 
transcribe scoping meetings could have a chilling effect on natural gas 
infrastructure development.
---------------------------------------------------------------------------

    \35\ This, however, does not exempt electric Transmission 
Providers from complying with the requirements of Order No. 2003.
---------------------------------------------------------------------------

iv. Information Sharing for Jointly-Owned Transmission Providers
    122. In Order No. 2004-A, the Commission explained that 
Transmission Providers may share information with affiliated 
Transmission Providers (an affiliated Transmission Provider is not 
considered an Energy Affiliate) and may share operating information 
consistent with Sec.  358.3(b)(8).
Requests for Rehearing/Clarification and Commission Conclusions
    123. On rehearing, Duke Energy and INGAA argue that the provisions 
referenced by the Commission in Order No. 2004-A do not address their 
concern, which is that the Standards of Conduct will preclude a 
jointly-owned pipeline from providing information to an owner that also 
may be an Energy Affiliate. According to Duke and INGAA, Order No. 
2004-A does not address circumstances where one or more of the owners 
of a pipeline happens to be an Energy Affiliate, but not a Transmission 
Provider. They request the Commission to clarify that a joint owner of 
a Transmission Provider can receive non-public transmission system 
information for corporate governance and investment management 
purposes, subject to the no-conduit rule, even if the joint owner is an 
Energy Affiliate as long as the employees receiving such information 
are not involved in ``energy affiliate'' activities listed in Sec.  
358.3(d) and are subject to the no-conduit rule.
    124. Duke and INGAA explain that, typically, joint owners of 
pipelines create management committees whose function is to oversee the 
operations of the pipeline. They assert that management committees that 
typically govern jointly-owned Transmission Providers are the 
functional equivalent of a company's board of directors and thus, an 
employee of an Energy Affiliate who serves on the management committee 
of a jointly-owned Transmission Provider is the functional equivalent 
of a non-operating officer or director shared by the Transmission 
Provider and its Energy Affiliate. According to them, the Standards of 
Conduct as clarified in Order No. 2004-A could be interpreted to 
prohibit communication of non-public transmission information necessary 
to manage and operate the jointly-owned pipeline asset.
    125. Duke and INGAA concede, however, that restrictions on how 
transmission information is provided to an Energy Affiliate owner are 
appropriate. They agree that no Energy Affiliate employee that is 
engaged in ``energy affiliate'' activities identified in Sec.  358.3(d) 
should receive the Transmission Provider's information, and that 
recipients of non-public transmission information should be subject to 
the no-conduit rule. They state that this approach of allowing such 
communications, subject to appropriate restrictions, is consistent with 
Sec.  358.4(a)(5), which permits Transmission Providers to share senior 
officers and directors who are not transmission function employees with 
Energy Affiliates and allows those senior officers and directors to 
receive non-public information (subject to a no-conduit rule) as long 
as they do not participate in the directing, organizing or executing 
transmission system operations or marketing functions.
    126. The Commission clarifies that employees of an Energy Affiliate 
owner of a jointly-owned Transmission Provider may receive non-public 
transmission information (subject to a no-conduit rule) that is 
necessary for corporate governance and investment management purposes 
as long as the employees who receive the transmission information do 
not engage in the activities listed in Sec.  358.3(d)(1), (2), (3), or 
(4).

G. Discounts

Order Nos. 2004 and 2004-A
    127. 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 Order No. 2004-A, the Commission 
clarified that the time the offer is contractually binding means the 
time that both parties are bound to the contract.
Requests for Rehearing and/or Clarification and Commission Conclusions
    128. El Paso, INGAA and Texas Gas seek additional clarification 
regarding the posting of discounts. Petitioners ask

[[Page 48385]]

the Commission to modify Sec.  358.5(d) to apply only to discounts to 
Marketing and Energy Affiliates (and not all discounts) and to make the 
timing of discount posting consistent with the requirements of Order 
No. 637. Texas Gas queries whether the Commission intended to apply the 
discount requirements to all discounts (affiliated and non-affiliated) 
or only to affiliated discounts, with non-affiliated discounts 
continuing to be reported under Order No. 637's discount posting 
requirements at Sec.  284.13(b) of the Commission's regulations.
    129. The requests for clarification are denied. Under the former 
gas Standards of Conduct, Transmission Providers were required to post 
only discounts to affiliates. See former Sec.  161.3(h) of the 
Commission's regulations. However, under the former electric Standards 
of Conduct, Transmission Providers were required to post discounts to 
all transmission customers. See former Sec. Sec.  37.6(c)(3) and(d)(2) 
of the Commission's regulations. Under Order No. 2004 and 2004-A, the 
Commission adopted the broader posting requirements of the electric 
Standards of Conduct and required that Transmission Providers post all 
discounts to improve communication of discount information and improve 
transparency.
    130. Some petitioners from the gas industry argue that this will 
result in duplicative posting of discount information because rates are 
also posted in the Transactional Reports required under Sec.  284.13(b) 
of the Commission's regulations. The Transactional Reports and the 
Discount Posting information serve different purposes, however. The 
discount information is easily accessible and quickly identifies which 
transactions are discounted so that shippers can quickly assess whether 
they are similarly situated and entitled to a ``comparable discount.'' 
However, the Transactional Data posts information concerning all 
transmission transactions and identifies current rates, but do not 
specifically flag discounts. Many times, Transmission Providers do not 
execute or revise long-term interruptible transmission agreements and 
these discounts have not been posted. Therefore, the Discount Posting 
information better alerts non-affiliated shippers to possible undue 
discrimination.
    131. Section 358.5(d) requires that a discount posting include, 
among other things, the quantity of power or gas scheduled to be moved. 
INGAA urges the Commission to revise the requirement to post the 
quantity of gas scheduled to be moved, and instead to require the 
Transmission Provider to post the firm maximum daily contract quantity 
or, for interruptible transportation, the gas entitled under one's 
contract. The Commission denies INGAA's request to use the contract 
quantity or the quantity of gas the shipper is entitled to transport 
because the quantity of gas the shipper is entitled to transport may be 
significantly different than the amount of gas that the discount was 
based on.

H. Separate Books and Records

Order Nos. 2004 and 2004-A
    132. Section 358.3(b)(1) requires a Transmission Provider to 
maintain separate books and records from those of its Marketing and 
Energy Affiliates.
Requests for Rehearing and Clarification and Commission Conclusions
    133. National Grid and Entergy note that in Order No. 2004-A, the 
Commission clarified that an affiliate includes a division that 
operates as a functional unit. See Sec.  358.3(b)(1). Although National 
Grid is supportive of the Commission's change, it seeks clarification 
whether a Transmission Provider with company divisions must also 
maintain separate books, records and financial reports for the 
divisions. National Grid notes that in Sec.  358.4(d), the Commission 
stated that internal business units and divisions should be treated as 
Energy Affiliates. National Grid argues that requiring every business 
unit within a corporation to maintain separate reports, books and 
records would be the accounting equivalent of corporate restructuring 
and would impose a significant burden.
    134. The Commission grants the request for clarification. In the 
former gas Standards of Conduct in Part 161, the Commission did not 
require divisions to comply with the requirement of maintaining 
separate books and records. A Transmission Provider with a company 
division that operates as a functional unit is not required to maintain 
separate books and records to comply with the Standards of Conduct.\36\
---------------------------------------------------------------------------

    \36\ However, this does not mean that Transmission Providers are 
authorized to change their accounting practices to maintain joint 
books and records. To the extent Transmission Providers are required 
to keep separate books and records for other purposes, this rule 
does not modify those requirements.
---------------------------------------------------------------------------

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

Order on Rehearing
    135. In Order No. 2004-A, the Commission stated that new 
Transmission Providers should take appropriate steps to comply with the 
Standards of Conduct as soon as practicable and clarified that the 
Standards of Conduct apply to all Transmission Providers, including 
those which have not yet begun operations.
Requests for Rehearing and Clarification and Commission Conclusions
    136. Entrega and INGAA argue that the Commission has no 
jurisdiction to impose the Standards of Conduct on new pipelines that 
are not yet natural gas companies. They argue that a new interstate 
pipeline project should not become subject to the Standards of Conduct 
until it is granted and accepts a certificate of public convenience and 
becomes subject to the Commission's Natural Gas Act jurisdiction. INGAA 
argues that as a matter of policy, the Commission should not add to the 
regulatory burdens of developing new infrastructure.
    137. The Commission grants clarification. A new pipeline will have 
a reasonable time (30 days) after it accepts its certificate or 
otherwise becomes subject to the Commission's jurisdiction (whichever 
comes first) to come into compliance with the Standards of Conduct.\37\ 
Most pipeline development is undertaken by existing natural gas 
companies and the Standards of Conduct would apply to the parent 
company in full. Claims of affiliate preference or abuse can also be 
addressed in a new pipeline's certificate proceeding.
---------------------------------------------------------------------------

    \37\ When applying Order No. 497, the Commission gave pipelines 
30 days from the date of the first transportation transaction with a 
marketing affiliate to comply with the Standards of Conduct. See 
e.g., Garden Banks Pipeline, LLC, 99 FERC ] 61,066 (1999); 
TransColorado Gas Transmission Company, 78 FERC ] 61,249 (1997); 
Nautilus Pipeline Company, LLC, 88 FERC ] 61,088 (1999).
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IV. Document Availability

    138. 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.
    139. 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,

[[Page 48386]]

type the docket number excluding the last three digits of this document 
in the docket number field.
    140. 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

    141. This revisions in this order on rehearing will be effective 
September 9, 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 revises 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
1. In Sec.  358.3:
0
(a) paragraph (d)(5) is revised,
0
(b) paragraph (d)(6)(iv) is revised,
0
(c) in paragraph (d)(6)(v), the terms ``on-system customers'' and ``on-
system customer sales'' are removed and the words ``on-system sales'' 
are added in their place, and
0
(d) paragraph (d)(6)(vi) is added, to read as follows:


Sec.  358.3  Definitions.

* * * * *
    (d) * * *
    (5) An LDC division of an electric public utility Transmission 
Provider shall be considered the functional equivalent of an Energy 
Affiliate, unless it qualifies for the exemption in Sec.  
358.3(d)(6)(v).
    (6) * * *
    (iv) An affiliate that purchases natural gas or energy solely for 
its own consumption. ``Solely for its own consumption'' does not 
include the purchase of natural gas or energy for the subsequent 
generation of electricity.
* * * * *
    (vi) A producer, gatherer, Hinshaw pipeline or an intrastate 
pipeline that makes incidental purchases or sales of de minimus volumes 
of natural gas to remain in balance under applicable pipeline tariff 
requirements and otherwise does not engage in the activities described 
in Sec. Sec.  358.3(d)(1), (2), (3) or (4).
* * * * *

0
2. In Sec.  358.4:
0
(a) in paragraph (a)(5), the word ``shared'' is inserted between the 
words ``its'' and ``senior'' in the second sentence, and
0
(b) in paragraphs (e)(2) and (e)(3), the words ``September 1, 2004'' 
are removed and the words ``September 22, 2004'' are inserted in their 
place.
0
(c) paragraph (e)(5) is revised to read as follows:


Sec.  358.4  Independent functioning.

    (e) Written procedures.
* * * * *
    (5) Transmission Providers shall train officers and directors as 
well as employees with access to transmission information or 
information concerning gas or electric purchases, sales or marketing 
functions. The Transmission Provider shall require each employee to 
sign a document or certify electronically signifying that s/he has 
participated in the training.
* * * * *

Appendix A

    This Appendix A will not be published in the Code of Federal 
Regulations.

List of Petitioners Requesting Rehearing or Clarification or 
Submitting Comments

Allegheny Energy, Inc. (Allegheny)
American Electric Power Service Corp. (AEP)
American Gas Association (AGA)
American Public Gas Association (APGA)
American Transmission Company, LLC
BP America Production and BP Energy Company (BP)
CenterPoint Energy Gas Transmission Company (CenterPoint)
Cinergy Services, Inc. (Cinergy)
Duke Energy Corporation (Duke Energy)
Edison Electric Institute (EEI)
El Paso Corporation (El Paso)
Enbridge Offshore Pipelines (Enbridge)
Entergy Services, Inc. (Entergy)
Entrega Gas Pipeline Inc. (Entrega)
Gulf South Pipeline, Company, L.P. (Gulf South)
Interstate Natural Gas Association of America (INGAA)
Kinder Morgan Interstate Pipelines (Kinder Morgan Pipelines)
Large Public Power Counsel (LPPC)
National Association of State Utility Consumer Advocates (NASUCA)
National Fuel Gas Distribution Corporation (National Fuel--
Distribution)
National Grid USA (National Grid)
National Rural Electric Cooperative Association (NRECA)
Natural Gas Supply Association (NGSA)
NiSource, Inc. (NiSource)
Questar Pipeline Co. (Questar Pipeline)
Questar Gas Co. (Questar-Gas)
Saltville Gas Storage Co., LLC (Saltville)
Sempra Energy (Sempra)
Shell Gas Transmission, LLC (Shell Gas)
Shell Offshore, Inc. (Shell Offshore)
Southern Company Services, Inc. (Southern)
Texas Gas Transmission Co. (Texas Gas)
Westar Energy, Inc. (Westar)
Williston Basin Interstate Pipeline Company (Williston Basin)
XCEL Energy Services, Inc. (Xcel)

    Nora Mead 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.
    Nora Mead Brownell.
    Kelliher, Commissioner, dissenting in part.
    For the reasons set forth in my dissent in part on the Order on 
Rehearing, Order No. 2004-A, Standards of Conduct for Transmission 
Providers, I believe the Standards of Conduct rule is fundamentally 
flawed. That flaw is the lack of record evidence supporting 
expanding the scope of the rule beyond Marketing Affiliates.
    Accepting nonetheless that new Standards of Conduct are being 
adopted, I would further limit application of the rule. With respect 
to this order, I agree with the clarifications provided by the 
Commission, which may make the Standards of Conduct rule more 
workable.

Joseph T. Kelliher,
Commissioner.

[FR Doc. 04-18091 Filed 8-9-04; 8:45 am]
BILLING CODE 6717-01-P