[Federal Register Volume 70, Number 2 (Tuesday, January 4, 2005)]
[Rules and Regulations]
[Pages 284-291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 358

[Docket Number RM01-10-003; Order No. 2004-C]


Standards of Conduct for Transmission Providers

Issued December 21, 2004.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule; order on rehearing of order no. 2004-B.

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

EFFECTIVE DATE: Revisions in this order on rehearing will be effective 
February 3, 2005.

[[Page 285]]


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

Order on Rehearing and Clarification

    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 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\ On August 2, 2004, the Commission issued Order No. 2004-
B, in which it addressed the requests for rehearing and/or 
clarification of Order No. 2004-A.\4\
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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 regulations, 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).
    \4\ 69 FR 48371 (Aug. 10, 2004), III FERC Stats. & Regs. ] 
31,166 (Aug. 2, 2004).
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    2. Seventeen petitioners requested rehearing or clarification of 
Order No. 2004-B. As discussed below, the Commission grants rehearing, 
in part, denies rehearing, in part, and provides additional 
clarification. Chief among the resolutions are: (1) Granting rehearing 
by allowing local distribution companies (LDCs) to participate in 
hedging related to on-system sales and still qualify for exemption from 
Energy Affiliate status; (2) denying rehearing regarding exemptions for 
electric local distribution companies; (3) clarifying the duties of 
Transmission Function Employees; (4) providing additional clarification 
and granting partial rehearing regarding information to be posted on 
the Internet or OASIS; (5) denying rehearing regarding the timing of 
the applicability of the Standards of Conduct to newly formed 
Transmission Providers; (6) and making miscellaneous corrections to the 
regulatory text.

A. Definition of an Energy Affiliate

Order No. 2004, et seq.
    3. The Standards of Conduct, as revised in Order Nos. 2004-A and 
2004-B, defines 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, unless it qualifies for the exemption in Sec.  
358.3(d)(6)(v).
    (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;
    (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.
    (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 section 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 minimis sales necessary to remaining in balance under 
applicable pipeline tariff requirements.
    (vi) A producer, gatherer, Hinshaw pipeline or an intrastate 
pipeline that makes incidental purchases or sales of de minimis 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).
i. Scope of the LDC Exemption
Order No. 2004-B
    4. In Order No. 2004-B, the Commission stated that an LDC would not 
be able to engage in financial or futures transactions or hedging 
without becoming an Energy Affiliate. The Commission expressed concern 
that the LDC's access to transmission information could be unduly 
preferential for the LDC when participating in such financial 
transactions. The Commission also stated that it is virtually 
impossible to distinguish between financial or futures transactions in 
a speculative market from those needed to support on-system sales.\5\
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    \5\ See Order No. 2004-B at P 18.
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Requests for Rehearing and/or Clarification and Commission Conclusions
    5. AGA seeks clarification that an LDC that does not make off-
system sales except for purposes of balancing may engage in any of the 
activities described in Sec. Sec.  358.3(d)(1), (2), (3), or (4), 
including hedging activities undertaken in conjunction with gas-
acquisition activities to support its retail sales, without becoming an 
Energy Affiliate. Specifically, AGA seeks clarification that an LDC 
that engages in off-system sales only for balancing can engage in 
certain types of specific ``hedging'' transactions such as gas storage, 
contracts for the future delivery of natural gas, futures contracts for 
natural gas, and financial instruments to stabilize or mitigate the 
volatility of gas prices, without becoming an energy affiliate.
    6. The Duke Pipelines, OkTex, National Fuel, the New York PSC, 
Southwest Gas, and the Utah PSC and the Wyoming PSC also request 
rehearing of the Commission's decision to exempt from Energy Affiliate 
status only those LDCs that do not participate in wholesale market 
transactions such as hedging, even when such wholesale market 
transactions are entered into by the LDC only for the purposes of 
supporting on-system sales.
    7. National Fuel, AGA and PSC New York argue that excluding LDCs 
that engage in hedging from the exemption

[[Page 286]]

from Energy Affiliate status is inconsistent with the text of 
Sec. Sec.  358.3(d)(4) and (d)(6)(v).
    8. Several petitioners also argue that, contrary to the 
Commission's statements in Order No. 2004-B, it is possible to 
distinguish between hedging and speculative financial derivative 
transactions. National Fuel and AGA argue that the Commission's own 
accounting regulations currently provide methods for distinguishing 
between hedging and speculation, and request clarification that exempt 
LDCs may utilize gas derivatives in support of on-system sales when 
such transactions are properly classified either as ``normal purchases 
and sales scope exception'' per part 201, General Instruction 23(A), or 
as non-speculative derivatives as properly recorded in Balance Sheet 
Accounts 176 or 245 per part 201, General Instructions 23(D) and (E). 
National Fuel goes on to say that it and other New York LDCs are 
required by the New York PSC to comply with the Commission's Uniform 
System of Accounts and, as publicly traded companies, are also subject 
to the Financial Accounting Standards Board (FASB) Standard Nos. 133 
and 138 which impose accounting standards for the accounting of 
derivatives. National Fuel states that an LDC entering into a financial 
transaction to hedge price risk related to physical purchases for on-
system sales is required to concurrently designate and document the 
hedge, the hedged item and the specific risk being hedged, in order to 
take advantage of ``fair value'' or ``cash flow'' accounting. National 
Fuel argues that these requirements would provide an adequate 
accounting basis to allow hedging to be distinguished from speculation.
    9. Petitioners point out that the limitations on hedging for exempt 
LDCs are inconsistent with various existing and proposed local 
regulations or policies that require or encourage LDCs to reduce price 
volatility for their on-system customers by various methods including 
hedging. OkTex argues that the existence of locally approved and 
monitored gas cost stabilization programs demonstrates the lack of 
reasoned basis for the conclusion that it is impossible to distinguish 
between speculative and nonspeculative transactions.
    10. National Fuel argues that affiliated pipelines relying on the 
LDC exemption would have to limit their purchases to the spot market 
which might result in increased costs to ratepayers. It also argues 
that the Commission's concerns regarding improper access to 
transmission information by LDCs is misplaced in the context of 
transactions that support on-system sales. National Fuel argues that an 
LDC with information that could potentially be of benefit would have 
greater profit potential if it entered a speculative transaction, 
rather than if it entered into a hedge transaction to limit price risk 
for on-system sales customers. It also argues that the authorities 
having jurisdiction over LDCs retail sales require that any benefit 
derived from entering into such transactions must accrue to the retail 
ratepayer, with no benefits to the company's shareholders.
    11. Duke Pipelines and OkTex request clarification that hedging 
programs would not jeopardize an LDC's exemption so long as the 
programs are reviewed on a case-by-case basis by regulators and found 
to be non-speculative. Utah PSC and Wyoming PSC similarly argue that 
exempt LDCs should be allowed to implement price stabilization programs 
which utilize hedging so long as such programs are approved and 
monitored by state commissions and are for the exclusive benefit of 
retail customers.
    12. The Commission clarifies, as requested by National Fuel and 
others, that ``normal purchases and sales,'' as those terms are 
generally used for accounting purposes, are not considered to be 
financial, futures, or hedging transactions under the Standards of 
Conduct. Furthermore, the Commission grants rehearing and will allow 
exempt LDCs to participate in financial transactions necessary for 
price risk management solely for the benefit of on-system retail 
customers. Petitioners have raised persuasive arguments that hedging is 
an important and generally used tool needed to provide economical 
retail sales service under state regulatory mandates. Further, 
petitioners have convinced us that current accounting standards make 
clear distinctions between hedging and speculation so as to create an 
audit trail should the need arise to investigate allegations of 
affiliate abuse in this area.\6\ However, we wish to be clear that we 
intend to allow exempt LDCs to use hedging only to manage price risks 
attributable to serving their on-system, state-regulated bundled retail 
load. If an LDC engages in financial transactions on a speculative 
basis for stockholder profit rather than financial transactions to 
protect bundled retail ratepayers, the LDC will no longer be an exempt 
Energy Affiliate.
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    \6\ Should the Commission need to examine the books and records 
of a Transmission Provider's LDC to ensure compliance with the 
Standards of Conduct, those records should be made available upon 
the Commission's request. To the extent that records are found to be 
deficient, or not readily available, the affiliated Transmission 
Provider shall treat the subject LDC as an Energy Affiliate that is 
ineligible for exemption pursuant to Sec.  358.3(d)(6)(v).
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    13. Southwest Gas seeks clarification that an LDC exempt from 
Energy Affiliate status may engage in wholesale sales transactions so 
long as the transmission capacity acquired by the LDC occurs on 
unaffiliated interstate pipelines or on affiliated ``conduit'' 
pipelines that transport under part 157 certificates.
    14. The Commission is denying Southwest Gas's request for 
clarification. If an affiliated LDC participates in any wholesale 
transactions, the affiliated LDC does not qualify for the Energy 
Affiliate exemption under Sec.  358.3(d)(6)(v).\7\ As the Commission 
stated in Order No. 2004-A, the purpose is to place all wholesale 
market participants, affiliated and non-affiliated, on an equal 
footing. LDC affiliates engaging in wholesale sales transactions 
compete with non-affiliates for transmission.
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    \7\ The Commission notes that on September 20, 2004, in Docket 
No. TS04-222-000, the Commission granted Southwest Gas a partial 
waiver of the Standards of Conduct vis-[agrave]-vis its affiliated 
LDC. See Alcoa Power Generating Inc., 108 FERC ] 61,243 at P 202-203 
(Alcoa).
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ii. Treatment of Gas LDCs
Order No. 2004, et seq.
    15. Under Sec.  358.3(d)(6)(v), a Local Distribution Company must 
be regulated by a state to qualify for exemption from status as an 
Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
    16. Duke Pipelines request clarification that Canadian LDCs 
regulated at the provincial level and not engaged in off-system sales 
may also qualify for exemption under Sec.  358.3(d)(6)(v), consistent 
with the Commission's treatment of other foreign entities and state-
regulated LDCs.\8\ The Commission is granting the Duke Pipelines' 
request for clarification. The Commission will treat LDCs that are 
regulated by Canadian provincial authorities as if they are state-
regulated. As a result, if provincially-regulated Canadian LDCs meet 
the requirements of Sec.  358.3(d)(6)(v) they will not be treated as 
Energy Affiliates if they do not participate in U.S. commodity and 
transmission markets. However, as the

[[Page 287]]

Commission stated in Order No. 2004-A, a Canadian Energy Affiliate that 
does business in the U.S. commodity and transmission markets should not 
be afforded undue preferences or services. See Order No. 2004-A at P 
97.
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    \8\ In Order No. 2004-A, the Commission determined that a 
foreign affiliated Transmission Provider, that is regulated by the 
state, province or national regulatory board of the foreign country 
in which its facilities are located will not be treated as an Energy 
Affiliate. See Order No. 2004-A at P 97.
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    17. Entergy seeks clarification that LDCs regulated by local 
governmental bodies which regulate the rates, terms and conditions for 
retail electric and natural gas service, may also qualify for the LDC 
exemption. Entergy states that an LDC regulated by the City of New 
Orleans, which regulates the rates, terms and conditions for retail 
electric and natural gas service in New Orleans, should also be exempt 
from status as an Energy Affiliate as if it were a state-regulated LDC. 
The Commission is denying Entergy's request for clarification. 
Entergy's request reflects a very limited, if not unique, circumstance. 
Entergy has not shown that other entities are subject to local rather 
than state regulation or that its regulatory situation warrants a 
generic exemption. The Commission will not create a generic exemption 
for LDCs subject to local regulation. Entergy, however, may file a 
request for an individual waiver based on its individual circumstances.
iii. Treatment of Electric LDCs or LDC Divisions
Order No. 2004-B
    18. In Order No. 2004-B, the Commission rejected requests to 
clarify that electric LDCs may qualify for the exemption from the 
definition of Energy Affiliate in Sec.  358.3(d)(6)(v). See Order No. 
2004-B at P 26.
Requests for Rehearing and/or Clarification and Commission Conclusions
    19. Entergy, National Grid, and EEI repeat their request for 
clarification that the LDC exemption from Energy Affiliate status apply 
to electric LDCs as well as gas LDCs, arguing that the Commission's 
previous denial of such clarification in Order 2004-B was based on an 
inaccurate understanding of the concerns raised. They argue that the 
Commission in Order No. 2004-B addressed the question of whether exempt 
electric LDCs could make de minimis off-system sales, while the 
petitioners were concerned with the broader question of whether 
electric LDCs were included in the LDC exemption from Energy Affiliate 
status. Petitioners argue that the first clause of the LDC exemption in 
Sec.  358.3(d)(6)(v) assumes that an LDC buys or sells gas, and thus 
could be inferred to mean that the exemption applies only to gas LDCs. 
Petitioners recommend establishing a separate exemption statement for 
electric and gas LDCs, and endorse EEI's proposed language. Under EEI's 
proposal, Sec.  358.3(d)(6)(v) would be clarified to refer only to gas, 
and a new section would be added to create an exemption from the Energy 
affiliate status as follows: ``A state-regulated electric local 
distribution company or division that 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 sales.'' National Grid 
argues that adoption of EEI's proposed regulatory language clarifying 
the exemptions for gas and electric LDCs in Sec.  358.3(d)(6) would 
ensure that employees who do not engage in Energy Affiliate activities, 
such as employees serving distribution functions, are not required to 
be treated as Energy Affiliate employees or separated from transmission 
system information.
    20. EEI states that the Commission may want to explain that the new 
regulatory language it has proposed for Sec.  358.3(d)(6) does not 
alter the treatment of bundled or unbundled retail sales as expressed 
in prior orders.
    21. National Grid also argues that the since Commission does not 
require the independent functioning of distribution division employees 
from transmission function employees when they are all part of the same 
company, it would be illogical to require independent functioning of an 
electric distribution division when the distribution function is 
contained in a corporate entity separated from the affiliated 
Transmission Provider.
    22. Calpine submitted an answer to Entergy and EEI's request for 
new regulatory language in Sec.  358.3(d)(6). Calpine argues that 
Entergy and EEI are repeating a request for a stand-alone exemption 
from the definition of Energy Affiliate for LDCs that the Commission 
already rejected as unnecessary in Order No. 2004-B. Calpine also 
argues that EEI's proposed text is too broad, and could be interpreted 
to permit retail sales function employees of an LDC to purchase 
capacity and power in wholesale energy markets, in competition with 
non-affiliates, without regard to the Standards of Conduct, so long as 
such transactions were deemed ``necessary to support on-system sales.''
    23. Entergy and EEI submitted an answer to Calpine's answer, in 
which they argue that Calpine has seriously misinterpreted what Entergy 
and EEI intended in their requests for clarification. The regulatory 
text EEI proposes, they argue, simply makes explicit the fact that 
electric LDCs that do not make off-system sales can qualify for the LDC 
exemption from Energy Affiliate status.
Commission Disposition
    24. We will deny petitioners' requests for rehearing and grant in 
part the requests for clarification of the exemption from the 
definition of Energy Affiliate. The Commission will not adopt 
petitioners' proposed language for an exemption for electric LDCs. The 
Commission clarifies that an electric distribution division or company 
that performs only distribution wires functions may be shared with the 
transmission function of a Transmission Provider (wires-to-wires 
services). But, if the distribution function includes retail sales 
functions, a retail sales function employee cannot engage in any 
wholesale sales, such as selling excess generation to a non-retail 
customer without triggering Energy Affiliate status. It is not 
appropriate for an entity that participates in the wholesale market to 
obtain an undue preference when competing with non-affiliates for 
transmission capacity. See Order No. 2004 at P 78.\9\
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    \9\ See also, Order No. 889-A, 81 FERC ] 61,253 at 62,174 (1997) 
(A * * * public utility has no choice pursuant to Order Nos. 888 and 
888-A but to separate its wholesale power marketing function 
(including power purchase transactions made by the marketing 
function on behalf of wholesale native load) from the transmission 
operations function. This means that those persons in the company 
that are involved in wholesale power purchases as well as wholesale 
sales cannot interact with the transmission personnel other than 
through the OASIS. Thus, to the extent they are making purchases on 
behalf of wholesale as well as bundled retail native load as part of 
a single purchase, they will have to abide by the separation of 
function requirement * * * [S]uch a purchase is not divisible. 
Additionally, it is conceivable that there could be a separate 
retail marketing function for native load and a separate wholesale 
marketing function for native load * * * [I]n such cases, it would 
clearly be inappropriate for the retail staff to share transmission 
information with the wholesale marketing staff.).
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    25. The effect of this ruling is not overly broad. Many electric 
distribution divisions or companies are not Energy Affiliates because 
they do not engage in nor are involved with the following activities in 
U.S. energy or transmission markets: transmission transactions; manage 
or control transmission capacity; buy, sell, trade, or administer 
electric energy; or engage in financial transactions relating to the 
sale or transmission of electric energy. As we have stated, electric 
distribution divisions or companies (unlike gas LDCs) do not make 
purchases or sales of electricity to remain in balance. Therefore, a 
separate electric distribution division or company exemption is 
unnecessary. However, the

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Commission will consider case-specific requests for exemption.\10\
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    \10\ We note that National Grid has requested a case-specific 
exemption in Docket No. TS04-46-000, which will be addressed 
separately by the Commission.
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B. Definition of a Transmission Function Employee

Order No. 2004, et seq.
    26. Section 358.3(j) defines a Transmission Function Employee as an 
employee, contractor, consultant or agent of a Transmission Provider 
who conducts transmission system operations or reliability functions, 
including, but not limited to, those who are engaged in day-to-day 
duties and responsibilities for planning, directing, organizing or 
carrying out transmission-related operations. Order No. 2004-A 
clarified, and Order No. 2004-B reiterated, that the Commission looks 
at the actual duties and responsibilities of employees in determining 
whether individuals are Transmission Function Employees.\11\
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    \11\ See Order No. 2004-A at P 131 and Order No. 2004-B at P 53.
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Requests for Rehearing and/or Clarification and Commission Conclusions
    27. EEI and AGA seek additional clarification of the term 
Transmission Function Employee following the Commission's issuance of 
Alcoa Power Generating, Inc., 108 FERC ] 61,243 (2004).\12\ Petitioners 
are concerned that Commission's wording of Alcoa could be read to 
suggest that all transmission rate design and transmission tariff 
administration duties are deemed transmission functions. EEI and AGA 
seek clarification with regard to the applicability of the designation 
of Transmission Function Employee to rate design and transmission 
tariff administration employees. With regard to rate design employees, 
EEI and AGA request clarification that, to the extent that employees 
who do not engage in other Transmission Functions, may engage in 
traditional accounting and regulatory cost-of-service support 
activities for designing transmission rates without becoming 
Transmission Function Employees. EEI and AGA claim that for many of 
their members, rate design duties are not assigned to a dedicated 
staff, but rather spread over a large number of employees with other 
shared roles.
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    \12\ In Alcoa, the Commission addressed several requests for 
exemption from the Standards of Conduct.
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    28. With regard to tariff administration employees, EEI and AGA 
request clarification that the Commission did not intend to make a 
blanket determination that all such employees were Transmission 
Function Employees, but rather that the status of each such employee 
should be determined by his or her job description. EEI and AGA urge 
the Commission to clarify that an employee who performs billing or 
administrative support should not be deemed a Transmission Function 
Employee even if the employee is located in the ``tariff 
administration'' department. EEI and AGA claim that these employees are 
``back-office support employees'' and do not offer transmission 
service, execute service agreements, negotiate terms or service or 
approve service, and should qualify for the support exemption under 
Sec.  358.4(a)(4).\13\
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    \13\ Under 18 CFR 358.4(a)(4), Transmission Providers are 
permitted to share support employees and field and maintenance 
employees with their Marketing and Energy Affiliates.
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    29. With respect to rate-design employees, petitioners offer few 
details about the specific duties of employees who engage in accounting 
and regulatory cost-of-service support roles. Rate design is an 
integral element of the transmission function. As discussed in the 
Alcoa order, activities such as designing rates, administering tariffs 
(which establish rates for services as well as the terms and conditions 
of service for the transmission of electricity or transportation of 
natural gas, including operating conditions), and calculating gas cost 
adjustment charges are transmission functions that involve the planning 
and carrying-out of transmission-related operations. See Alcoa at P 
169. Petitioners urge the Commission to consider Ameren Services Co., 
in which the Commission permitted the sharing of rate design functions 
and found that none of the rate design individuals described by a 
particular company directed, organized or executed transmission/
reliability or wholesale merchant functions.\14\ Petitioners urge the 
Commission to continue to review these issues on a case-by-case basis 
rather than make a blanket determination that all rate design employees 
are Transmission Function Employees.
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    \14\ 87 FERC ] 61,145 at 61,598 (1999).
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    30. The Commission grants the requested clarification, and 
reiterates our prior commitment to consider the actual duties and 
responsibilities of employees in determining whether they are 
Transmission Function Employees. However, to provide additional 
guidance to Transmission Providers, we also clarify that there are 
certain rate design functions that will be considered Transmission 
Functions because rates are an integral part of transmission service.
    31. With regard to tariff administration employees, the Commission 
clarifies that it did not make a blanket determination that all tariff 
administration employees are automatically deemed Transmission Function 
Employees. As previously stated, the Commission will look at the actual 
duties and responsibilities of employees in determining whether they 
are Transmission Function Employees. However, an employee that is 
involved in certain tariff-related activities, such as determining 
whether discretion may be granted under the tariff or applying tariff 
provisions, is a Transmission Function Employee.

C. Independent Functioning--Treatment of Electricity Provider of Last 
Resort Service (POLR)

Order No. 2004-B
    32. Order 2004-A explained, in response to a request for 
clarification from Cinergy, that the Commission was not prepared to 
adopt a proposed rule change and amendment to the definition of 
``marketing, sales or brokering'' to accord POLR service the same 
treatment, on a generic basis, as the Commission had accorded bundled 
retail sales, but that it would entertain case-by-case requests for 
exemption of a POLR service based on the relevant facts and 
circumstances.\15\
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    \15\ Order No. 2004-A at P 127.
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Requests for Rehearing and/or Clarification and Commission Conclusions
    33. Cinergy is concerned that Order Nos. 2000, 2000-A and 2000-B 
could be interpreted to classify the retail account representatives of 
its affiliates, Cincinnati Gas & Electric Company (CG&E) and Union 
Light, Heat & Power Company (ULH&P), as sales and marketing employees 
or Energy Affiliate employees subject to the independent functioning 
and information sharing restrictions, even though CG&E provides only 
POLR gas and electric services in Ohio, and ULH&P provides only bundled 
gas and electric services in greater Cincinnati's Northern Kentucky 
communities (where competitive retail gas and electric markets have not 
been adopted).
    34. Cinergy requests that the Commission find that the activities 
of the account representatives do not fall within the definition of 
sales and marketing employees at Sec.  358.3(e). But, if they should be 
classified as sales and

[[Page 289]]

marketing employees or Energy Affiliate employees, Cinergy requests an 
exemption from the independent functioning and information sharing 
restrictions for their account representatives because, Cinergy argues, 
in their limited roles, they cannot cause any harmful effects to the 
retail or wholesale competitive marketplace.
    35. As the Commission explained in Order No. 2004-A, the question 
of the status of shared employees in the context of a state retail 
access program or as a provider of last resort is best decided on a 
case-specific basis. To the extent Cinergy seeks clarification of that 
policy, Cinergy's request is denied. Further, we are not prepared to 
grant any of Cinergy's requests at this time. While Cinergy has 
committed to ensuring that the account representatives will not act as 
conduits for passing transmission system information to its sales and 
marketing personnel or to any Energy Affiliate, Cinergy also seeks an 
exemption for these employees from the information sharing and 
independent functioning requirements. This request for exemption 
appears to be inconsistent with its no-conduit commitment. We need more 
explanation as to how the no-conduit commitment will work in practice 
in combination with the apparent need for an information sharing and 
independent functioning exemption if the Commission were to classify 
the retail account representatives as sales and marketing employees or 
Energy Affiliate employees.
    36. Accordingly, we direct the Secretary to redocket Cinergy's 
request in the next available TS Docket, and we direct Cinergy to 
explain its implementation of the no-conduit rule in the context of its 
account representatives. The Commission will process this filing 
subsequently as a request for waiver or exemption specific to Cinergy's 
unique circumstances.

D. Information To Be Posted on the Internet or OASIS

i. Discretionary Waivers
Order No. 2004, et seq.
    37. In Order No. 2004, the Commission stated that a Transmission 
Provider must maintain a written log, available for Commission audit, 
detailing the circumstances and manner in which it exercised its 
discretion under any terms of its tariff. The Commission further 
required that the Transmission Provider post the information in this 
log on the OASIS or Internet Web site within 24 hours of when the 
Transmission Provider exercises its discretion under any terms of the 
tariff. See Sec.  358.5(c)(4) of the Commission's regulations.
Requests for Rehearing and/or Clarification and Commission Conclusions
    38. INGAA seeks clarification that when discretion is exercised 
under a Transmission Provider's tariff, the details contained in the 
written log must be posted online on the following business day, as 
opposed to within 24 hours, consistent with Sec.  385.2007. INGAA 
argues, for example, that if the act of discretion occurs on a Friday 
afternoon, the Transmission Provider could post the information on 
Monday. INGAA submits that requiring the posting within 24 hours would 
require Transmission Providers to hire additional staff to be available 
on non-business days to review and post discretionary waivers that is 
not justified since shippers and potential shippers would not likely be 
reviewing the postings on non-business days.
    39. The Commission denies INGAA's request. Under INGAA's scenario, 
the Transmission Provider could wait until 5 p.m. on Monday to post the 
information concerning its act of discretion that took place on Friday. 
This is insufficient notice. If a Transmission Provider exercises 
discretion by waiving a nomination/scheduling deadline or gas quality 
provision, and the Transmission Provider posts the information on the 
next business day rather than within 24 hours, the shipper or potential 
shipper may not learn of the discretionary act until it is too late to 
benefit from the posting. Gas control centers operate 24 hours a day, 
seven days a week and daily changes occur, even on the weekends and 
holidays. The goal of the requirement is to ensure that if a 
Transmission Provider exercises discretion, all shippers or potential 
shippers have timely access to information concerning that discretion 
so that, if appropriate, they can, on a non-discriminatory basis, 
obtain comparable service.
ii. Discounts
Order No. 2004, et seq.
    40. Under Sec.  358.5(d), any offer of a discount for any 
transmission service made by the Transmission Provider must be posted 
on the OASIS or Internet Web site contemporaneously with the time that 
the offer is contractually binding. One of the elements of the discount 
posting includes the requirement to identify the quantity of power or 
gas scheduled to be moved.\16\ Following Order No. 2004-A, INGAA 
requested clarification and urges the Commission to require the posting 
of the firm maximum daily contract quantity or, for interruptible 
transportation, the quantity of gas to which the shipper is entitled, 
instead of requiring the quantity ``scheduled.'' INGAA explained that 
while the parties agree on the quantity of the shipper's entitlement at 
the time they enter into the contract, they typically do not know what 
quantities will actually be nominated and scheduled until later when 
service begins under the contract. The Commission denied INGAA's 
request in Order No. 2004-B. See Order No. 2004-B at P 131.
---------------------------------------------------------------------------

    \16\ Using the quantity of gas scheduled to be moved as an 
element of the discount posting requirement is consistent with the 
former gas standards of conduct at former 18 CFR 161.3(h)(2).
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    41. INGAA repeats its request for clarification that Internet 
postings of transmission service provided at a discount should refer to 
the quantity of gas that the shipper is entitled to take under the 
contract, rather than the quantity of gas that is actually scheduled. 
INGAA argues that the Commission, in denying its previous request for 
clarification of Order No. 2004-A, misunderstood the problem INGAA was 
identifying, which is that the quantities that the contracts reference 
are the maximum quantities that the contracts permit to be scheduled, 
and that the actual amounts scheduled may be less than the contract 
amount. INGAA argues that the requested clarification that Transmission 
Providers must post the contract quantities on the Internet instead of 
the scheduled quantities will ``provide other shippers with timely, 
pertinent discount contract quantity information to determine whether 
they are entitled to ``comparable discount'' as similarly situated 
shippers.''
    42. The Commission recognizes that the Transmission Provider may 
not know, at the time the offer is contractually binding, the actual 
quantity that will later be ``scheduled.'' However, the Commission 
disagrees with INGAA's claim that the discount contract applies to the 
maximum quantity that the shipper is entitled to nominate and have 
scheduled at that discounted rate. Discount procedures vary 
significantly among pipelines and for different types of service on the 
same pipeline. Contrary to INGAA's assertion,

[[Page 290]]

the maximum daily contract amount does not always reflect the volume on 
which the discount was based. For example, under umbrella-type 
interruptible transportation agreements, short-term discounts are often 
negotiated for less than the MDQ identified in the IT transportation 
agreement, and posting the MDQ would provide misleading information 
about the discount.
    43. The goal of the discount requirement is to post pertinent 
information so a similarly situated shipper can determine if it is 
entitled to a comparable discount. There may be instances in which the 
MDQ is the appropriate information to post vis-[agrave]-vis volume, but 
there are also instances in which the amount scheduled more accurately 
reflects the information used by the Transmission Provider as a basis 
for granting a discount. With that in mind, the Commission clarifies 
that the volume reported for the discount postings should be the volume 
identified in the discount request or relied upon as part of the 
consideration upon which a specific discount is granted. A Transmission 
Provider must identify whether it is posting the volumetric information 
based on the MDQ or scheduled volume. The Commission will modify the 
following portion of the regulatory text at Sec.  358.5(d) by deleting 
the phrase ``the quantity of power or gas scheduled to be moved,'' and 
replacing it with the phrase ``the quantity of power or gas upon which 
the discount is based.''

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

Order No. 2004-B
    44. In Order No. 2004-B, the Commission established that a new 
pipeline will have a reasonable time (30 days) after it accepts its 
certificate of public convenience or otherwise becomes subject to the 
Commission's jurisdiction (whichever comes first) to come into 
compliance with the Standards of Conduct.\17\
---------------------------------------------------------------------------

    \17\ Order No. 2004-B at P 137.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    45. Tractebel and AES seek clarification that companies which have 
obtained certificates allowing them to construct pipelines, but which 
have not yet begun transporting natural gas for others, are not yet 
natural gas companies, and therefore the Standards of Conduct do not 
apply to them. Tractebel points to section 2(6) of the Natural Gas Act 
and the Commission's interpretation of that section in Millennium 
Pipeline Co., 100 FERC ] 61,277 at P 121 and 124, where the Commission 
found that Millennium Pipeline Co. had not completed construction of 
its pipeline and therefore was not yet a natural gas company. Tractebel 
further argues that a pre-operational pipeline is not a Transmission 
Provider as that term is defined in Sec.  358.3(2) because it has not 
yet begun providing transportation service. Similarly, AES requests 
clarification that it need not comply with the separation of functions 
requirement until it has ``transmission function employees,'' as 
defined in Sec.  358.3(j), and until it commences ``transmission,'' as 
defined in Sec.  358.3(f). AES also requests clarification that in the 
pre-service stage of development, it need not comply with the posting, 
training or separation of function requirements contained in Standards 
of Conduct. Tractebel and AES both point to the Commission's statement 
in Order No. 2004-A at P 237 that ``some aspects of the Standards of 
Conduct may have no meaningful applicability until the company has been 
staffed and begins to perform transmission functions, such as 
soliciting business, or negotiating contracts.''
    46. As noted by Petitioners, the Commission previously stated that 
some of the Standards of Conduct requirements may not apply until the 
Transmission Provider has been staffed and begins to perform 
transmission functions. However, when a Transmission Provider begins 
soliciting business or negotiating, it is engaging in transmission 
functions and is subject to the Standards of Conduct requirements. The 
Commission's goal is to ensure that the newly formed pipeline will 
provide non-discriminatory treatment and limit its ability to unduly 
favor its Marketing or Energy Affiliates. If the Commission defers 
applying the Standards of Conduct, a newly formed pipeline might share 
employees or information with its Marketing or Energy Affiliates giving 
those affiliates the ability to obtain preferential service or 
treatment.

F. Exemptions

Order No. 2004, et seq.
    47. In Order No. 2004, the Commission established that Transmission 
Providers that did not previously obtain an exemption may request an 
exemption under Sec.  358.1(d) from all or some of the requirements of 
Part 358.\18\
---------------------------------------------------------------------------

    \18\ See Order No. 2004 at P 28.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification and Commission Conclusions
    48. NGSA seeks clarification that Sec. Sec.  358.5(c) and (d) 
generally should not be waived absent extraordinary circumstances 
justifying such a waiver.\19\ NGSA argues that these provisions are 
generally applicable standards of conduct that prevent unduly 
discriminatory behavior, and that waiver of such provisions for gas 
Transmission Providers that do not have Energy Affiliates inadvertently 
eliminates important protections that should apply to all pipeline 
operations regardless of whether any Energy Affiliate relationships 
exist. Specifically, NGSA argues that the complete exemption from the 
Standards of Conduct granted to Texas Gas Transmission Company (Texas 
Gas) may lead to the unduly discriminatory treatment of shippers on 
Texas Gas's system, and that Texas Gas should only be granted a waiver 
from those Standards of Conduct that apply specifically to affiliate 
relationships.\20\
---------------------------------------------------------------------------

    \19\ Sections 358.5(c) and (d) contain provisions requiring the 
Transmission Provider to implement tariffs on a non-discriminatory 
manner and to post discounts.
    \20\ On September 20, 2004, in Docket No. TS04-253-000, the 
Commission determined that Texas Gas Transmission Company (Texas 
Gas) was not subject to Order No. 2004 because Texas Gas does not 
have any Marketing or Energy Affiliates. See Alcoa at P 108. NGSA's 
petition was filed in the instant docket, as well as in the TS04-253 
docket, with a request for an untimely intervention, which Texas Gas 
opposed.
---------------------------------------------------------------------------

    49. In response, Texas Gas argues that the Commission's finding is 
consistent with the Commission's policy under the former Part 161 
Standards of Conduct in which a Transmission Provider was not subject 
to the Standards of Conduct if it had no Marketing Affiliates.\21\ 
Moreover, Texas Gas argues that it is still bound to provide service 
that is not unduly discriminatory under the requirements of sections 4 
and 5 of the Natural Gas Act (NGA). The Commission denies NGSA's 
request. As Texas Gas states, the Commission's determination was 
limited to a single Transmission Provider with unique circumstances. If 
Texas Gas obtains a Marketing or Energy Affiliate, it must comply with 
the Standards of Conduct requirements of Order No. 2004 within 30 days 
of obtaining or creating a Marketing or Energy Affiliate. Finally, as 
noted above, Texas Gas is bound by the provisions of sections 4 and 5 
of the

[[Page 291]]

NGA to provide non-discriminatory service and the non-discriminatory 
provisions of the Standards of Conduct regarding the implementation of 
tariffs should serve as a guideline for Texas Gas's behavior in 
complying with sections 4 and 5 of the NGA.
---------------------------------------------------------------------------

    \21\ See Discovery Gas Transmission LLC, 103 FERC ] 61,301 at 
62,170 (2003).
---------------------------------------------------------------------------

G. Miscellaneous Corrections

    50. The Commission is also making some miscellaneous corrections to 
typographical errors in the regulatory text. Specifically, Entergy has 
pointed out that Sec.  358.4(b)(3)(vi) contains a reference to Sec.  
37.3 which Entergy believes should be Sec.  37.6. The Commission 
agrees, and Sec.  358.4(b)(3)(vi) is being corrected to reference Sec.  
37.6. Also, Sec.  358.3(d)(6)(vi) is revised to remove ``producer'' and 
replace it with ``processor'' to reflect the Commission's intent of 
this provision as described in paragraph 30 of Order No. 2004-B.

    By the Commission.
Linda Mitry,
Deputy Secretary.

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

PART 358--STANDARDS OF CONDUCT

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

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


Sec.  358.3  [Amended]

0
2. In Sec.  358.3(d)(6)(vi) the word ``producer'' is removed and the 
word ``processor'' is inserted in its place.


Sec.  358.4  [Amended]

0
3. In Sec.  358.4(b)(3)(vi) the word ``Sec.  37.3'' is removed and the 
word `` Sec.  37.6'' is inserted in its place.


Sec.  358.5  [Amended]

0
4. In Sec.  358.5(d), the words ``the quantity of power or gas 
scheduled to be moved'' are removed and the words ``the quantity of 
power or gas upon which the discount is based,'' are inserted in their 
place.

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

Appendix A

    List of Petitioners Requesting Rehearing or Clarification or 
submitting Comments
American Gas Association (AGA)
AES Ocean Express LLC (AES)
Algonquin Gas Transmission, LLC; jointly with East Tennessee Natural 
Gas, LLC; Egan Hub Storage, LLC; Gulfstream Natural Gas System, 
L.L.C.; Maritimes & Northeast Pipeline, L.L.C.; and Texas Eastern 
Transmission, LP (collectively, Duke Pipelines)
Calpine Corporation (Calpine)
Cinergy Services, Inc. (Cinergy)
Edison Electric Institute (EEI)
Entergy Services, Inc. (Entergy)
Interstate Natural Gas Association of America (INGAA)
National Fuel Gas Supply Corporation jointly with National Fuel Gas 
Distribution Corporation (collectively, National Fuel)
National Grid USA (National Grid)
Natural Gas Supply Association (NGSA)
OkTex Pipeline Company (OkTex)
Public Service Commission of the State of New York (PSC New York)
Southwest Gas Corporation (Southwest Gas)
Tractebel Calypso Pipeline, LLC (Tractebel)
Utah Public Service Commission (Utah PSC)
Wyoming Public Service Commission (Wyoming PSC)

[FR Doc. 05-16 Filed 1-3-05; 8:45 am]
BILLING CODE 6717-01-P