[Federal Register Volume 69, Number 231 (Thursday, December 2, 2004)]
[Proposed Rules]
[Pages 70077-70082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26535]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / 
Proposed Rules  

[[Page 70077]]



DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Chapter I

[Docket Nos. RM05-2-000, RM97-7-000]


Policy for Selective Discounting by Natural Gas Pipelines

November 22, 2004.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of inquiry.

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

SUMMARY: The Federal Energy Regulatory Commission is seeking comments 
on its policy for selective discounting by natural gas pipelines. 
Specifically, the Commission is asking parties to submit comments and 
respond to specific inquiries regarding whether the Commission's 
practice of permitting pipelines to adjust their ratemaking throughput 
downward in rate cases to reflect discounts given by pipelines for 
competitive reasons is appropriate when the discount is given to meet 
competition from another natural gas pipeline.

DATES: Comments are due January 31, 2005.

ADDRESSES: Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. Commenters unable to 
file comments electronically must send an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Office of the 
Secretary, 888 First Street, NE., Washington, DC 20426. Refer to the 
Comment Procedures section of the preamble for additional information 
on how to file comments.

FOR FURTHER INFORMATION CONTACT: Ingrid M. Olson, Office of the General 
Counsel, 888 First Street, NE., Washington, DC 20426, (202) 502-8406.

SUPPLEMENTARY INFORMATION: 
    1. In this Notice of Inquiry, the Commission is seeking comments on 
its policy regarding selective discounting by natural gas pipeline 
companies. Specifically, the Commission is asking parties to submit 
comments and respond to the specific inquiries set forth below 
regarding whether the Commission's practice of permitting pipelines to 
adjust their ratemaking throughput downward in rate cases to reflect 
discounts given by pipelines for competitive reasons is appropriate 
when the discount is given to meet competition from another natural gas 
pipeline.

I. The Development of the Commission's Discount Policy

A. Order No. 436

    2. As part of Order No. 436, which commenced the transition to open 
access transportation, the Commission adopted regulations permitting 
pipelines to engage in selective discounting based on the varying 
demand elasticities of the pipeline's customers.\1\ Specifically, the 
Commission adopted regulations requiring pipelines to file maximum and 
minimum transportation rates for both firm and interruptible service 
and to charge rates to customers within the maximum and minimum 
range.\2\ Under these regulations, the pipeline is permitted to 
discount, on a nondiscriminatory basis, in order to meet competition. 
For example, if a fuel-switchable shipper were able to obtain an 
alternate fuel at a cost less than the cost of gas including the 
transportation rate, the Commission's policy permits the pipeline to 
discount its rate to compete with the alternate fuel, and thus obtain 
additional throughput that otherwise would be lost to the pipeline. In 
Order No. 436, the Commission explained that these selective discounts 
would benefit all customers, including customers that did not receive 
the discounts, because the discounts would allow the pipeline to 
maximize throughput and thus spread its fixed costs across more units 
of service. The Commission further stated that selective discounting 
would protect captive customers from rate increases that would 
otherwise ultimately occur if pipelines lost volumes through the 
inability to respond to competition.
---------------------------------------------------------------------------

    \1\ See Regulations of Natural Gas Pipelines After Partial 
Wellhead Decontrol, FERC Stats. & Regs., Regulations Preambles 
(1982-1985) ] 30,665 at 31,543-45 (1985).
    \2\ 18 CFR 284.10 (2004).
---------------------------------------------------------------------------

    3. In Associated Gas Distributors v. FERC (AGD I),\3\ the court 
upheld the regulations permitting selective discounting adopted in 
Order No. 436. The court found that, as a general matter, the 
Commission could permit pipelines to offer differing discounts 
depending upon the differing demand characteristics of their customers. 
The court agreed that such discounts could benefit captive customers by 
enabling pipelines to obtain demand elastic customers who would 
``mak[e] a contribution to fixed costs that otherwise would not be made 
at all.'' \4\ However, the court also stated, ``This is not to say, of 
course, that the Commission is free to uphold every price distinction 
based on different demand elasticities. It has long been contended that 
rate differentials based on competition between transporters with 
similar cost functions may end up forcing captive customers to bear 
disproportionate shares of fixed costs without any offsetting gain in 
efficiency.'' \5\ The court stated, however, that this contention is 
not self-evidently true, explaining ``if the demand of buyers with 
access to competing carriers is at all price elastic, the price 
reductions they enjoy will raise their demand close to the competitive 
level.'' \6\ In any event, the court concluded that the Commission 
could properly defer its ultimate resolution of these issues to another 
proceeding.
---------------------------------------------------------------------------

    \3\ 824 F.2d 981, 1010-12 (D.C. Cir. 1987).
    \4\ Id. at 1011.
    \5\ Id. at 1010-1012.
    \6\ Id. at 1012.
---------------------------------------------------------------------------

    4. The court also addressed an argument presented by some pipelines 
that the Commission's policy might lead to the pipelines under-
recovering their costs. The court set forth a numerical example showing 
that the pipeline could under-recover its costs, if, in the next rate 
case after a pipeline obtained throughput by giving discounts, the 
Commission nevertheless designed the pipeline's rates based on the full 
amount of the discounted throughput, without any adjustment. However, 
the court found no reason to fear that the Commission would employ this 
``dubious procedure,'' \7\ and accordingly rejected the pipelines' 
contention.
---------------------------------------------------------------------------

    \7\ Id.

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

[[Page 70078]]

B. The Discount Adjustment

    5. In the 1989 Rate Design Policy Statement,\8\ the Commission 
sought to adopt a rate design methodology that would prevent the 
subsidization of the discounts by nondiscounted customers and, at the 
same time, achieve the goal of Order No. 436 of maximizing throughput. 
Thus, the Commission held that if a pipeline grants a discount in order 
to meet competition, the pipeline is not required in its next rate case 
to design its rates based on the assumption that the discounted volumes 
would flow at the maximum rate, but may reduce the discounted volumes 
so that the pipeline will be able to recover its cost of service. The 
Commission explained that if a pipeline must assume that the previously 
discounted service will be priced at the maximum rate when it files a 
new rate case, there may be a disincentive to pipelines discounting 
their services in the future to capture marginal firm and interruptible 
business. The policy of permitting discount adjustments is consistent 
with the discussion of the court in AGD I suggesting that discount 
adjustments should be permitted.
---------------------------------------------------------------------------

    \8\ 47 FERC ] 61,295, reh'g granted, 48 FERC, ] 61,122 (1989).
---------------------------------------------------------------------------

    6. Since the Rate Design Policy Statement, the issue of adjusting 
rate design volumes to account for discounts has been litigated in a 
number of general section 4 rate cases.\9\ In these cases, the 
Commission has again explained that discounts benefit all customers, 
including captive customers who do not receive discounts, because the 
discounts allow the pipeline to maximize throughput and thus spread its 
fixed costs across more units of service. Therefore, in order to avoid 
a disincentive to discounting, the Commission has held that the 
pipeline need not design its rates in the next rate case on the 
assumption that the discounted volumes would flow at the maximum rate, 
and has permitted the pipelines to reduce the discounted volumes used 
to design its rates so that, assuming market conditions require it to 
continue giving the same level discounts when the new rates are in 
effect that it gave during the test period, the pipeline will be able 
to recover 100 percent of its cost of service.
---------------------------------------------------------------------------

    \9\ See, e.g., Southern Natural Gas Co., 65 FERC ] 61,347 at 
62,829-62,833 (1993), reh'g denied, 67 FERC ] 61,155 at 61,456-
61,460 (1994); Williston Basin Interstate Pipeline Co., 67 FERC ] 
61,137 at 61,377-61,282 (1994); Panhandle Eastern Pipe Line Co., 71 
FERC ] 61,228 at 61,866-61,871 (1995) (Opinion No. 395); Northwest 
Pipeline Corp., 71 FERC ] 61,253 at 62,007-61,009 (1995); Panhandle 
Eastern Pipe Line Co, 74 FERC ] 61,109 at 61,399-61,408 (1996) 
(Opinion No. 404); Williams Natural Gas Co, 77 FERC ] 61,277 at 
62,205-61,207 (1996), reh'g denied, 80 FERC ] 61,158 at 61,189-
61,190; Iroquois Gas Transmission System, L.P., 84 FERC ] 61,086 at 
61,478 (1998), reh'g denied, 86 FERC ] 61,261 (1999); Williston 
Basin Interstate Pipeline Co., 84 FERC ] 61,266 at 61,401-
61,402(1998); Northwest Pipeline Corp, 87 FERC ] 61,266 at 62,077 
(1999); and Trunkline Gas Co., 90 FERC ] 61,017 at 61,084-61,096 
(2000).
---------------------------------------------------------------------------

    7. In order to obtain such a discount adjustment in a rate case, 
the pipeline has the ultimate burden of showing that its discounts were 
required to meet competition. However, the Commission has distinguished 
between the burden of proof the pipeline must meet, depending upon 
whether a discount was given to a non-affiliate or an affiliate. In the 
case of discounts to non-affiliated shippers, the Commission has stated 
that it is a reasonable presumption that a pipeline will always seek 
the highest possible rate from such shippers, since it is in the 
pipeline's own economic interest to do so. Therefore, once the pipeline 
has explained generally that it gives discounts to non-affiliates to 
meet competition, parties opposing the discount adjustment have the 
burden of producing evidence that discounts to non-affiliates were not 
justified by competition. To the extent those parties raise reasonable 
questions concerning whether competition required the discounts given 
in particular non-affiliate transactions, then the burden shifts back 
to the pipeline to show that the questioned discounts were in fact 
required by competition.
    8. The Commission has disallowed discount adjustments with respect 
to some non-affiliated transactions involving discounts for long-term 
firm service. Thus, in Iroquois Gas Transmission System, L.P.\10\ and 
Trunkline Gas Co.,\11\ the Commission disallowed a discount adjustment 
with respect to discounts given to non-affiliates. In both cases, the 
discounts were given to long-term, firm customers. The Commission found 
that the parties opposing the discount adjustment had raised enough 
questions about the circumstances in which those long-term discounts 
were given to shift the burden back to the pipeline to justify the 
discount. The Commission then found that, when a pipeline gives a long-
term discount, the Commission would expect that the pipeline would make 
a thorough analysis whether competition required such a long-term 
discount, and in both these cases the pipeline had failed to present 
any evidence of such an analysis.
---------------------------------------------------------------------------

    \10\ 84 FERC ] 61,086 at 61,476-61,478 (1998), reh'g denied, 86 
FERC ] 61,261 (1999).
    \11\ 90 FERC ] 61,017 at 61,092-95 (2000).
---------------------------------------------------------------------------

    9. In contrast to its treatment of non-affiliate discounts, the 
Commission has consistently held that the pipeline has a heavy burden 
to show that competition required discounts to affiliates. Thus, in 
Panhandle Eastern Pipe Line Co,\12\ the Commission held that the 
pipeline had not met its burden to show that its discounts to its 
affiliates were required by competition. While the pipeline did show 
that it had granted some non-affiliates similar discounts, the 
Commission held that this was not sufficient. Rather, the Commission 
stated that the pipeline should have identified the specific 
competitive alternatives the affiliate had, which required giving the 
discount. In addition, in Williams Natural Gas Co.\13\ and Trunkline 
Gas Co.,\14\ the Commission also disallowed a discount adjustment in 
connection with a discount to an affiliate on similar grounds.
---------------------------------------------------------------------------

    \12\ 74 FERC ] 61,109 at 61,401-02 (1996).
    \13\ 77 FERC ] 61,277 at 62,206-61,207 (1996), reh'g denied, 80 
FERC ] 61,158 (1997).
    \14\ 90 FERC ] 61,017 at 61,096 (2000).
---------------------------------------------------------------------------

C. Order No. 636

    10. In Order No. 636, the Commission began to move away from the 
monopolistic selective discounting model to a competitive model, 
particularly for the secondary market. The institution of capacity 
release created competition between shippers and the pipeline with 
respect to unused capacity. Rather than having to rely on the timing 
and vagaries of the pipeline rate cases and the discount adjustment, 
shippers would be able to capture the revenue from their own unused 
capacity by releasing that capacity themselves. But at the same time, 
the competition engendered by capacity release forced the pipeline to 
compete with prices set in a more competitive market. The Commission 
recognized that the imposition of capacity release would significantly 
reduce both the pipelines' interruptible volume as well as the rates 
the pipeline could charge for interruptible service.\15\ Thus, even 
with respect to gas-on-gas competition in the secondary market, 
competition from capacity release will require pipelines to discount 
their interruptible and short-term firm capacity or suffer the 
potential loss of such sales to releasing shippers.
---------------------------------------------------------------------------

    \15\ Order No. 636-A, FERC Stats. & Regs. Regulations Preambles 
]30,950, at 30,562 (1992), reh'g granted, Order No. 636-B, 61 FERC 
]61,272, at 61,999 (1992) (capacity release ``may affect the rates 
charged for interruptible transportation since the competition from 
released capacity might require the pipelines to offer greater 
discounts for interruptible transportation than they had in the 
past'').

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

[[Page 70079]]

D. Gas-on-Gas Competition

    11. Since AGD I and the Rate Design Policy Statement, the issue of 
``gas-on-gas'' competition, i.e., where the competition for the 
business is between pipelines as opposed to competition between gas and 
other fuels, has been raised in several Commission proceedings. In 
these proceedings, certain parties have questioned the Commission's 
rationale for permitting selective discounting, i.e., that it benefits 
captive customers by allowing fixed costs to be spread over more units 
of service. These parties have contended that, while this may be true 
where a discount is given to obtain a customer who would otherwise use 
an alternative fuel and not ship gas at all, it is not true where 
discounts are given to meet competition from other gas pipelines. In 
the latter situation, these parties have argued, gas-on-gas competition 
permits a customer who must use gas, but has access to more than one 
pipeline, to obtain a discount. But, if the two pipelines were 
prohibited from giving discounts when competing with one another, the 
customer would have to pay the maximum rate to one of the pipelines in 
order to obtain the gas it needs. This would reduce any discount 
adjustment and thus lower the rates paid by the captive customers.
    12. In Southern Natural Gas Co.,\16\ the Commission rejected the 
argument made by one of Southern's customers, Mississippi Valley Gas 
Co., that no discount adjustment should be permitted with respect to 
gas-on-gas competition. The Commission stated, ``in light of the 
dynamic nature of the natural gas market, the Commission believes any 
effort to prohibit interstate gas pipelines from discounting to meet 
gas-on-gas competition would inevitably result in a loss of throughput 
to the detriment of all their customers.'' \17\ The Commission 
explained that the pipeline faced competition from intrastate pipelines 
not subject to the Commission's jurisdiction, so that the Commission 
could not prohibit gas-on-gas competition altogether. The Commission 
also stated that discounts given to meet gas-on-gas competition are not 
readily distinguishable from discounts given to meet competition from 
alternative fuels. For example, the Commission stated, discounts that 
on the surface appear to be given to meet gas-on-gas competition may 
also serve to reduce a customer's transportation costs sufficiently to 
minimize the incentives for many gas purchasers to make necessary 
investment to use alternate fuel. As a result, the Commission stated, 
given the difficulties in distinguishing between the two types of 
discounts, prohibiting the first type might discourage the pipeline 
from offering needed discounts to meet alternative fuel competition for 
fear that such discounts would be challenged as improper. Mississippi 
Valley sought review of these holdings, but the court found Mississippi 
Valley's appeal not ripe for review, because the severed proceeding was 
still ongoing.\18\ Subsequently, the case settled.
---------------------------------------------------------------------------

    \16\ 67 FERC ]61,155 (1994).
    \17\ Id. at 61,458.
    \18\ Mississippi Valley Gas Co. v. FERC, 68 F.3d 503 (D.C. Cir. 
1995).
---------------------------------------------------------------------------

    13. The issue was also raised by the Illinois Municipal Gas Agency 
(IMGA) in a petition for rulemaking in Docket No. RM97-7-000. In its 
petition, IMGA alleged that the impact of the Commission's practice of 
adjusting ratemaking throughput downward to reflect discounts given by 
pipelines for competitive reasons causes rates to captive customers to 
be higher than they would be if the Commission did not adjust 
throughput for gas-on-gas competitive discounts and causes captive 
customers to subsidize customers receiving the discounts. IMGA asked 
the Commission to adopt a rule of general applicability that the 
pipelines' maximum rates will be based on estimates of the pipelines' 
total throughput without regard to discounts given for gas-on-gas 
competition with other jurisdictional pipelines.
    14. Parties also raised this issue in Order No. 637, and again 
argued that a discount adjustment is not appropriate in a subsequent 
rate case for discounts given to meet gas-on-gas competition. When the 
Commission declined to address the issue in Order No. 637, IMGA raised 
the issue on appeal. In INGAA v. FERC, 285 F.3d 18, 43-44 (D.C. Cir. 
2002), the court concluded that the Commission did not err in deciding 
not to address this issue as part of its Order No. 637 rulemaking. 
However, the court did indicate that the Commission should not delay 
resolution of the issue indefinitely.

II. Discussion

    15. The Commission seeks comments on its policy of permitting 
selective discounting and how that policy affects the pipeline's 
captive customers, i.e., those customers that do not receive discounts. 
In particular, the Commission is interested in exploring the effects of 
the policy of permitting a discount adjustment in a rate case for all 
selective discounts, including those given to meet gas-on-gas 
competition as well as on the specific questions set forth below:
    (1) Effect of the Current Policy on Captive Customers. As explained 
above, the purpose of the Commission's policy is to allow pipelines to 
discount to meet competition so as to obtain greater throughput over 
which to spread fixed costs. The policy is based on the view that the 
increased throughput obtained through discounting will benefit captive 
customers and lower their rates in the next rate case. The Commission 
requests comments on the following issues related to how its current 
policy has worked in practice.
    (a) Has the Commission's current discount policy helped captive 
customers by enabling pipelines to obtain increased throughput over 
which to spread fixed costs, or hurt captive customers by causing 
tariff rates to increase with no net increase in throughput?
    (b) In several cases, the Commission has rejected pipelines' 
requests for discount adjustments given in connection with long-term 
firm contracts on the ground that the pipeline had not shown that 
competition required such discounts.\19\ Have the discount adjustments 
approved in pipeline rate cases been based primarily on discounts given 
for interruptible and short-term firm transportation? Provide examples 
of any pipeline rate cases where discounts in long-term firm 
transportation contributed significantly to any allowed discount 
adjustment in the overall volumes used to design the pipeline's rates.
---------------------------------------------------------------------------

    \19\ Iroquois Gas Transmission System, 84 FERC ]61,086 at 
61,476-61,478 (1998); Trunkline Gas Company, 90 FERC ]61,017 at 
61,092-61,095 (2000).
---------------------------------------------------------------------------

    (c) The Commission has also rejected pipelines' requests for 
discount adjustments for discounts given to affiliates where the 
pipeline failed to show that the discount was given to meet 
competition. Provide examples of any pipeline rate cases where 
discounts given to affiliates contributed significantly to any allowed 
discount adjustment.
    (d) Has the heavy burden that the Commission has placed on 
pipelines to justify discounts to affiliates been sufficient to assure 
that discounts to affiliates are in fact given to meet competition? The 
Standards of Conduct for Transmission Providers provide that a pipeline 
must post on its website any offer of discount and must include the 
name of the customer involved in the discount and whether that customer 
is

[[Page 70080]]

an affiliate of the pipeline; the posting must also include the rate 
offered, the maximum rate, the time period for which the discount would 
apply, the quantity of gas scheduled to be moved, the delivery points 
and any conditions or requirements applicable to the discount. 18 CFR 
358.5(d) (2004). Have these requirements been sufficient to assure that 
discounts are offered in a non-discriminatory manner?
    (e) IMGA has asserted that 75 percent of discounts are given to 
meet competition from other interstate pipelines. We request comment 
from IMGA and others as to the basis for this determination and whether 
this is a reliable estimate. Further, has the level of discounts given 
to meet gas-on-gas competition varied significantly from pipeline to 
pipeline? Has the practice of giving discounts to meet gas-on-gas 
competition been widespread through the industry or has it generally 
been limited to only a small portion of interstate pipelines?
    (f) Please provide specific examples of rate cases where a 
significant portion of the discounts underlying the discount adjustment 
was given to meet gas-on-gas competition.
    (g) Provide examples of rate cases where the Commission's current 
policy concerning selective discounts has helped captive customers and 
has resulted in lower rates for those customers.
    (h) Pipelines are no longer required to file periodic rate cases 
and many pipelines have not filed a rate case for a number of years. 
How has the Commission's policy affected captive customers in the 
absence of a section 4 rate case filing?
    (2) Elimination of the Discount Adjustment for Discounts to Meet 
Gas-on-Gas Competition. As discussed above, the issue of ``gas-on-gas'' 
competition has been raised in several Commission proceedings and it 
has been argued that the rationale behind the discount policy does not 
apply when discounts are given to demand inelastic customers to meet 
competition from other gas pipelines. The Commission requests comments 
on the following issues concerning the impact of a change in current 
Commission policy to eliminate the discount adjustment for gas-on-gas 
competition and how the Commission would implement and monitor this 
change in policy.
    (a) What problems would there be in implementing a policy of not 
allowing a discount adjustment for gas-on-gas competition and in 
determining whether a shipper would buy transportation if a discount 
were not given? Would it be possible to distinguish between discounts 
to meet gas-on-gas competition and discounts given for other reasons, 
and if so how? As the Commission pointed out in the Southern case, 
discounts given to meet gas-on-gas competition are not readily 
distinguishable from discounts given to meet competition from 
alternative fuels. For example, discounts that on the surface appear to 
be given to meet gas-on-gas competition may also serve to reduce a 
customer's transportation costs sufficiently to minimize the incentives 
for many gas purchasers to make the necessary investment to use 
alternate fuel.
    (b) Are customers to whom pipelines have given discounts to meet 
gas-on-gas competition sufficiently demand inelastic that they would 
have taken the same level of service without the discount? For example, 
if an electric generator were negotiating with two pipelines for a 
discount, it is not necessarily the case that the generator is demand 
inelastic and would buy transportation if neither pipeline granted it a 
discount. Given the demand elasticity of the electric market, the 
electric generator might not build the generator at all if the discount 
were not given and the potential additional gas and transportation 
volumes would be lost. If customers currently receiving discounts due 
to gas-on-gas competition are predominantly demand elastic, would 
eliminating the throughput adjustments for such discounts actually hurt 
the captive customers?
    (c) How would elimination of a discount adjustment for discounts 
given to meet gas-on-gas competition affect the ability of pipelines 
with higher maximum rates to compete with pipelines with lower maximum 
rates, and would it penalize the captive customers on the higher rate 
pipelines by making it more difficult for those pipelines to obtain 
additional customers over which to spread their fixed costs?
    (d) Competition between the pipeline's sale of its capacity and its 
firm shippers' capacity release may be viewed as gas-on-gas 
competition. How would the effect of competition from capacity release 
be factored into a determination of whether the discount adjustment 
should be permitted? Should the Commission permit a discount adjustment 
for discounts given in competition with capacity release, regardless of 
the approach it takes generally with respect to discounts given to meet 
gas-on-gas competition?
    (e) As a result of capacity release, the value of transportation 
between two points is related to the commodity price differential 
between those two points, for example the difference in the price of 
gas in the production basin and at the city gate. This basis 
differential can be a limit on the rate the pipeline can charge. How 
would elimination of the discount adjustment for gas-on-gas competition 
affect the pipeline's revenues if they were discouraged from giving the 
discounts necessary to reduce their rates to the basis differential?
    (f) To what extent is gas commodity market competition between 
different producing regions dependent on pipeline's discounting? One of 
the Commission's goals in Order No. 636 was to promote competition 
between different producing regions and to permit customers to access 
different producing regions. If the Commission prohibited an adjustment 
for discounts given to meet gas-on-gas competition, would this 
adversely affect the pipeline's ability to bring its rates down to the 
basis differential level? Would this have an adverse impact on 
producers, markets, and customers?
    (g) As the Commission explained in the Southern decision discussed 
above, an inability to discount to meet competition from intrastate 
pipelines would lead to a loss of throughput by the interstate 
pipeline. Should interstate pipelines be permitted to have an 
adjustment for discounts given to meet competition from intrastate 
pipelines?
    (h) Would a prohibition against discount adjustments for discounts 
given to meet gas-on-gas competition discourage pipeline expansions 
into areas to compete with existing service in that area?
    (3) Alternative Policy Choices. The Commission is requesting 
comments on what alternative changes in the Commission's discount 
adjustment policy could be considered to minimize any adverse effects 
on captive customers.
    (a) Should the Commission eliminate the presumption that discounts 
given to non-affiliates are given to meet competition and require the 
pipelines to justify all discounts and show that the discounts are not 
given simply to meet gas-on-gas competition? Should it eliminate the 
presumption only for long-term sales of pipeline capacity?
    (b) Should the Commission adopt procedures in addition to those set 
forth in the Standards of Conduct for Transmission Providers, 18 CFR 
358.5(d) (2004), to assure that any discounts given to affiliates are 
made available to non-affiliates in a non-discriminatory manner?
    (c) Are the incentives for giving discounts to affiliates 
sufficiently different from the incentive to give discounts to non-
affiliates that the

[[Page 70081]]

Commission should prohibit all affiliate discounts?

III. Procedure for Comments

    16. The Commission invites interested persons to submit comments, 
and other information on the matters, issues and specific questions 
identified in this notice. Comments are due 60 days from the date of 
publication in the Federal Register. Comments must refer to Docket No. 
RM05-2-000, and must include the commentor's name, the organization 
they represent, if applicable, and their address. The Commission will 
consider all the comments in Docket No. RM05-2-000 and will terminate 
the proceeding in Docket No. RM97-7-000 because the issues included in 
Docket No. RM05-2-000 include all the issues raised in the Docket No. 
RM97-7-000 proceeding.
    17. To facilitate the Commission's review of the comments, 
commentors are requested to provide an executive summary of their 
position. Commentors are requested to identify each specific question 
posed by the Notice of Inquiry that their discussion addresses and to 
use appropriate headings. Additional issues the commentors wish to 
raise should be identified separately. The commentors should double 
space their comments.
    18. Comments may be filed on paper or electronically via the 
eFiling link on the Commission's Web site at http://www.ferc.gov. The 
Commission accepts most standard word processing formats and commentors 
may attach additional files with supporting information in certain 
other file formats. Commentors filing electronically do not need to 
make a paper filing. Commentors that are not able to file comments 
electronically must send an original and 14 copies of their comments 
to: Federal Energy Regulatory Commission, Office of the Secretary, 888 
First Street, NE., Washington, DC 20426.
    19. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commentors are not required to 
serve copies of their comments on other commentors.

IV. Document Availability

    20. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through 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.
    21. From the Commission's home page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number (excluding the last three digits) in the docket number field.
    22. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours. For assistance, please contact 
the Commission's Online Support at 1-866-208-3676 (toll free) or 202-
502-6652 (e-mail at [email protected] or the Public Reference 
Room at 202-502-8371, TTY 202-502-8659 (e-mail at 
[email protected]).

    By direction of the Commission. Commissioner Brownell concurring 
with a separate statement attached.
Linda Mitry,
Deputy Secretary.
    Brownell, Commissioner, concurring: This NOI seeks comment on 
all potential issues that could be raised about the Commission's 
discounting program: (a) Whether discounting should be allowed; (b) 
Whether a discount adjustment should be allowed for discounts; (c) 
If discounting adjustments are allowed, what types of discounts 
warrant a discount adjustment; (d) The adequacy of the posting and 
reporting requirements; and (e) What is the interplay between 
discounting and the absence of a section 4 rate case filing 
requirement. I am concerned that we are again creating market 
uncertainty with the specter of regulatory intervention, on a 
generic basis, in a discounting program that works well, promotes 
competition, provides regulatory safeguards and ultimately benefits 
gas consumers.
    The impetus for this NOI is the Illinois Municipal Gas Agency's 
(IMGA) petition requesting that the Commission develop a rule of 
general applicability that a pipeline's maximum rates can not 
reflect a discount adjustment for discounts given for gas-on-gas 
competition with other jurisdictional pipelines. IMGA does not 
challenge discounting for alternative fuel competition; discounts to 
compete with intrastate pipelines; the posting and reporting 
requirements; or the relevancy of the lack of a section 4 rate case 
filing. IMGA deserves an answer, but given the legal precedent, 
actual experience and our regulatory actions over nearly twenty 
years, I would have hoped that we could have limited our inquiry to 
the specific issue raised by IMGA.
    In Associated Gas Distributors v. FERC (AGD I), \20\ the court 
upheld the regulations permitting selective discounting and 
indicated that a discount adjustment in setting maximum rates would 
be appropriate to prevent a pipeline from underrecovering its costs. 
However, in order to obtain a discount adjustment, the pipeline must 
file a rate case and must show that the discount was necessary to 
meet competition. The issue of adjusting rate design volumes to 
account for discounts has been litigated in a number of cases. Based 
on the particular facts of the case, the Commission has both allowed 
and disallowed discount adjustments. I see nothing broken in this 
general process. Moreover, even with regard to the specific issues 
of discounting adjustments for gas-on-gas competition, while I am 
open to seeing the comments we receive, I also recognize that the 
Commission has already opined on this issue. In Southern Natural Gas 
Co., \21\ the Commission addressed the issue of a discount 
adjustment for gas-on-gas competition. The Commission stated, ``in 
light of the dynamic nature of the natural gas market, the 
Commission believes any effort to prohibit interstate gas pipelines 
from discounting to meet gas-on-gas competition would inevitably 
result in a loss of throughput to the detriment of all their 
customers.'' \22\ The Commission explained that a pipeline faces 
competition from intrastate pipelines, so all gas-on-gas competition 
could not be prohibited. Moreover, the Commission stated that the 
distinction between gas-on-gas discounts and discounts for 
alternative fuel competition is not so simplistic. For example, the 
Commission noted that a gas-on-gas discount could reduce a 
customer's transportation costs enough that it is uneconomic to 
invest in alternative fuel capability.
---------------------------------------------------------------------------

    \20\ 824 F.2d 981, 1010-1012 (D.C. Cir. 1987).
    \21\ 67 FERC ]61,155 (1994).
    \22\ 67 FERC at 61,458.
---------------------------------------------------------------------------

    Why are the Commission's findings in Southern Natural Gas 
Company not still applicable? I can also see other situations where 
the purpose of the discount is not readily apparent. For example, 
how should one categorize a discount to a generator negotiating to 
locate a generating plant on one of two pipelines, who is unwilling 
to take service on either pipeline unless it receives a discount 
rate? Or discounts to a new gas customer with the choice between two 
pipelines? I am also concerned that gas-on-gas discounting is a 
necessary by-product of our capacity release program. How do you 
have a robust secondary market with competition between the pipeline 
services and released capacity without gas-to-gas discounts? I hope 
that when commenters respond to the NOI, they will consider these 
questions as well.
    Finally, the expansive nature of the NOI seems to me to be a 
search for a problem. I would contrast our action here with our 
inaction in the Policy Statement on Electric Creditworthiness that 
we also issue today. As I state in my dissent in that proceeding, we 
are faced with a very real problem of lack of transparency and 
potential undue discrimination. Yet, the best we can do is issue a 
guidance order that requires little if anything to remedy the 
problem.


[[Page 70082]]


    For these reasons, I respectfully concur.
Nora Mead Brownell,
Commissioner.
[FR Doc. 04-26535 Filed 12-1-04; 8:45 am]
BILLING CODE 6717-01-P