[Federal Register Volume 70, Number 115 (Thursday, June 16, 2005)]
[Rules and Regulations]
[Pages 35011-35027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11658]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 157

[Docket No. RM05-1-001; Order No. 2005-A]


Regulations Governing the Conduct of Open Seasons for Alaska 
Natural Gas Transportation Projects

Issued June 1, 2005.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule; order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) 
generally reaffirms its determinations in Order No. 2005. Order No. 
2005 establishes requirements governing the conduct of open seasons for 
proposals to construct Alaska natural gas transportation projects, 
including procedures for allocation of capacity. Pursuant to the 
directive of section 103(e)(2) of the Alaska Natural Gas Pipeline Act, 
enacted on October 13, 2004, the regulations promulgated in Order No. 
2005 include the criteria for and timing of any open season, promote 
competition in the exploration, development, and production of Alaska 
natural gas, and for any open seasons for capacity exceeding the 
initial capacity, provide for the opportunity for the transportation of 
natural gas other than from the Prudhoe Bay and Point Thomson units.
    In this order, the Commission addresses the requests for rehearing 
and/or clarification of Order No. 2005. Here, we grant rehearing in 
part, deny rehearing in part, and provide clarification of Order No. 
2005. In specific, we: Clarify that the Commission may require design 
changes necessary to ensure that some portion of a proposed voluntary 
expansion will be allocated to new shippers or shippers seeking to 
transport gas from areas other than Prudhoe Bay or Point Thomson, 
provided such shippers are willing to sign qualifying long-term firm 
transportation agreements; codify the expanded criteria for evaluating 
late bids for capacity and the requirement that any late bid contain a 
good faith showing; in the case of the mandatory pre-review, codify 
that the plan to be filed by the Commission must contain the open 
season notice, and eliminates the 30-day prior notice requirement; 
discuss how the open season rules may apply to jurisdictional gas 
treatment plants; clarify that capacity bid for the open season is 
exempt from allocation only in a case where there is also presubscribed 
capacity, and that in the event there are more than one pre-
subscription agreement, bidders in the open season may not cherry-pick 
among the provisions of the several agreements; clarify the project 
applicant's obligation to establish a separate entity to conduct the 
open season; and further codify the requirements of the catchall 
provision regarding information to be included in an open season 
notice.

DATES: Effective Date: Revisions in this order on rehearing will become 
effective on June 16, 2005.

FOR FURTHER INFORMATION CONTACT: Whit Holden, Office of the General 
Counsel, (202) 502-8089, [email protected]; Richard Foley, Office 
of Energy Projects, (202) 502-8955, [email protected]; Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426.

SUPLEMENTARY INFORMATION:

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

Order on Rehearing and Clarification

    1. On February 9, 2005, the Federal Energy Regulatory Commission 
(Commission) issued a Final Rule, Order No. 2005,\1\ amending its 
regulations by adding Subpart B to Part 157 to establish requirements 
governing the conduct of open seasons for capacity on proposals to 
construct Alaska natural gas transportation projects. Order No. 2005 
fulfilled the Commission's responsibilities to issue open season 
regulations under section 103 of the Alaska Natural Gas Pipeline Act 
(ANGPA or the Act), enacted on October 13, 2004. Section 103(e)(1) of 
the Act directs the Commission, within 120 days from enactment of the 
Act, to promulgate regulations governing the conduct of open seasons 
for Alaska natural gas transportation projects, including procedures 
for allocation of capacity. As required by section 103(e)(2) of the 
Act, the regulations promulgated in Order No. 2005 (1) include the 
criteria for and timing of any open season, (2) promote competition in 
the exploration, development, and production of Alaska

[[Page 35012]]

natural gas, and (3) for any open seasons for capacity exceeding the 
initial capacity, provide for the opportunity for the transportation of 
natural gas other than from the Prudhoe Bay and Point Thomson units.
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    \1\ Regulations Governing the Conduct of Open Seasons for Alaska 
Natural Gas Transportation Projects, RM05-1-000, Order No. 2005, 
FERC Stats. and Regs. ] 31,174 (2005).
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    2. The Commission affirms here the legal and policy conclusions on 
which Order No. 2005 was based. As stated in Order No. 2005, the goal 
of the open season regulations is to design an open season process that 
provides non-discriminatory access to capacity on any Alaska natural 
gas transportation project and, at the same time, allows sufficient 
economic certainty to support the construction of the pipeline and 
thereby provide a stimulus for exploration, development, and production 
of Alaska natural gas. We find that Order No. 2005's open season rules 
as revised and clarified herein, satisfy that goal and, therefore, are 
in the public interest.

Background

    3. ANGPA mandates the expedited processing by the Commission of any 
application for an Alaska natural gas transportation project. To this 
end, as stated above, section 103(e)(1) of the Act specifically directs 
the Commission to prescribe the rules which shall apply to any open 
season held for the purpose of soliciting interest in, or making 
binding commitments to the acquisition of capacity on, any Alaska 
natural gas transportation project, including the criteria for 
allocating capacity among competing bidders. In this regard, Congress 
instructed the Commission to include in its regulations the criteria 
for, and timing of, any open season, and to design its open season 
regulations to promote competition in the exploration, development, and 
production of Alaska natural gas and, as to any open season for the 
voluntary expansion \2\ of the initial capacity of any Alaska natural 
gas transportation project, to specifically provide the opportunity for 
gas other than Prudhoe Bay and Point Thomson production to have access 
to the pipeline.
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    \2\ Excluded from the scope of the open season rules are 
expansions compelled by the Commission pursuant to section 105 of 
the Act. Section 105 authorizes the Commission to order these 
``involuntary'' expansions upon the request of one or more persons, 
and upon the satisfaction of certain statutory criteria.
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    4. In response to the Act's directive, on November 15, 2004, the 
Commission issued in Docket No. RM05-1-000 a Notice of Proposed 
Rulemaking (NOPR) in this proceeding containing the Commission's 
proposed Alaska natural gas transportation project open season 
regulations. Also, the Commission held a public technical conference in 
Anchorage, Alaska on December 3, 2004 to develop a record in this 
proceeding. The Commission received 25 comments in response to the 
NOPR.
    5. On February 9, 2005, the Commission issued Order No. 2005. The 
open season regulations contained in Order No. 2005 apply to any 
application for a certificate or other Commission authorization for an 
Alaska natural gas transportation project, whether filed pursuant to 
the NGA, the Alaska Natural Gas Transportation Act of 1976, or ANGPA, 
as well as to any voluntary applications for expansions of such a 
project.
    6. The Final Rule adopted the NOPR's proposed requirements that the 
applicant provide a 30-day prior public notice containing extensive 
information intended to allow all interested persons to decide whether 
to participate in the open season, followed by an actual open season 
period of at least 90 days. The regulations in the Final Rule also 
adopted the NOPR's approach of allowing prospective applicants to 
develop and state in detail the methodologies for determining the value 
of bids and for allocating capacity, subject to the requirement that 
all capacity be awarded without undue discrimination or preference of 
any kind. In addition, the Final Rule required that at least 90 days 
prior to providing the open season notice, the prospective applicant 
must file its open season plan with the Commission for approval, and 
that the Commission will act on the plan within 60 days of its filing.
    7. The Final Rule provided that prospective applicants must conduct 
or adopt a study of Alaska's in-state needs, and use the study results 
to design capacity needs for use within the state, and design in-state 
delivery points and in-state transportation rates as part of an open 
season. Moreover, bidding on in-state capacity must be conducted 
independent of out-of-state deliveries during a prospective applicant's 
open season.
    8. In order to further the Commission's goal of a non-
discriminatory open season, the Final Rule applied certain of the 
Standards of Conduct requirements of Order No. 2004, including the 
establishment of an independent, functionally-separate unit to conduct 
the open season. In addition, the open season notice must identify the 
prospective applicant's affiliates involved in the production of 
natural gas in the state of Alaska, and all information about the open 
season disclosed to any potential shippers must be made available to 
all potential shippers.
    9. The Final Rule permitted pre-subscription by anchor shippers, 
limited to initial capacity only, in order to facilitate the 
development of an Alaska pipeline project. However, to ensure that all 
other potential shippers have an equal opportunity to obtain access to 
capacity on the project in the open season, all pre-subscription 
agreements must be made public within ten days of their execution, and 
capacity on the proposed project must be offered to all prospective 
qualifying shippers under the same terms and conditions and at the same 
rates as the pre-subscription agreements. In addition, if capacity is 
oversubscribed in the open season and it is not feasible to redesign 
the proposed project to meet both the pre-subscription shippers' and 
the open season shippers' capacity needs, then capacity bid for in the 
open season will not be reduced, but all capacity subject to the terms 
and conditions of pre-subscription agreements will be allocated pro 
rata.
    10. In an effort to allow as many potential shippers as possible 
the opportunity to acquire capacity in the initial open season, the 
Final Rule required that the project sponsor must consider any 
qualifying bids tendered after the expiration of the open season, and 
reject them only if they cannot be accommodated due to economic, 
engineering, or operational constraints.
    11. The Final Rule stated that, within ten days after precedent 
agreements have been executed for capacity acquired in the open season, 
the prospective applicant shall make public the results of the open 
season, including the names of the prospective shippers, amount of 
capacity awarded, and the terms of the agreements. Within 20 days after 
precedent agreements have been executed, copies of all precedent 
agreements, as well as copies of any correspondence with bidders whose 
bids were not accepted, must be filed with the Commission.
    12. In another provision, the Final Rule stated that, as a part of 
the Commission's review of any application for an Alaska natural gas 
transportation project, it will consider the extent to which the 
proposed project has been designed to accommodate the needs of shippers 
who have made conforming bids during an open season, as well as the 
extent to which the project can accommodate low-cost expansion, and the 
Commission may require changes in the project's design necessary to 
promote competition and offer a reasonable opportunity for access to 
the project.
    13. Finally, to provide guidance to interested parties on the 
important

[[Page 35013]]

subject of expansion rate treatment, the Final Rule establishes a 
presumption in favor of rolled-in pricing for expansions up to the 
point that it would cause there to be a subsidy of expansion shippers 
by initial shippers.
    14. Requests for rehearing and/or clarification were filed jointly 
by BP Exploration (Alaska), Inc., ConocoPhillips Company and Exxon 
Mobile Corporation (the North Slope Producers), by Enbridge, Inc. 
(Enbridge), by ChevronTexaco Natural Gas, a division of Chevron U.S.A. 
Inc. (ChevronTexaco), and by the State of Alaska. In addition, Anadarko 
Petroleum Corporation (Anadarko) and the Legislative Budget and Audit 
Committee of the Alaska State Legislature (Alaska Legislators) filed 
responses to the rehearing requests.\3\
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    \3\ Under Rule 213 of the Commission's Rules of Practice and 
Procedure, answers to rehearing requests are not permitted. However, 
the Commission has discretion to waive this rule when it finds that 
the answers will help provide a complete record in the proceeding or 
allow a better understanding of the issues. This proceeding involves 
the establishment of open season rules for capacity on an Alaska 
natural gas transportation project, and is critical to the 
development of Alaska's vast natural gas resources to meet 
anticipated national demand for natural gas, thereby enhancing 
national security. The Commission finds that the answers will 
provide necessary information to provide a full and complete record, 
which will assist the Commission in addressing the issues on 
rehearing pertaining to the complex and unique circumstances 
surrounding the development of an Alaska natural gas transportation 
project. Therefore, Anadarko's and the State of Alaska's answers to 
the rehearing requests are accepted. See 18 CFR 385.213 (2004).
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Discussion

I. Mandating Pipeline Design

A. The Final Rule--Sec. Sec.  157.36 and 157.37
    15. Section 157.36 requires that any open season for expansion 
capacity of an Alaska natural gas transportation project must provide 
the opportunity for the transportation of gas other than Prudhoe Bay or 
Point Thomson production, and that the Commission, in considering any 
proposed voluntary expansion of an Alaska natural gas pipeline project, 
``may require design changes to ensure that all who are willing to sign 
long-term firm transportation contracts that some portion of the 
expansion capacity be allocated to new shippers or shippers seeking to 
transport natural gas from areas other than Prudhoe Bay and Point 
Thomson.'' Section 157.37 states that, in reviewing any application for 
an Alaska natural gas pipeline project, the Commission ``may require 
changes in the project design necess[ary] to promote competition and 
offer a reasonable opportunity for access to the project, taking into 
account the extent to which the proposed project design accommodates 
the open season's conforming bids as well as low-cost expansion.'' \4\ 
These provisions were included in the Final Rule in response to 
concerns of non-North Slope producers that they have access to capacity 
on an Alaska natural gas transportation project when their potential 
gas reserves are commercially developed.
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    \4\ ``Necessity'' in section 157.37 is revised to read 
``necessary.''
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B. Rehearing/Clarification Requests
    16. The North Slope Producers and ChevronTexaco object to the 
provisions contained in sections 157.36 and 157.37 to the extent that 
they authorize the Commission to require changes in the design of an 
Alaska natural gas transportation project. The North Slope Producers 
object to these provisions on a number of grounds. First, they contend 
that it is beyond the Commission's NGA authority to mandate changes in 
the design of a pipeline, either to provide additional capacity or to 
enhance future expandability. The North Slope Producers contend that, 
in either case, the result is a mandatory expansion of the project, 
which according to section 7(a) of the NGA, is outside the Commission's 
authority to require.\5\ The North Slope Producers maintain that this 
limitation on the Commission's authority is reflected in the 
Commission's regulations providing that open access pipelines are ``not 
required to provide any requested transportation service for which 
capacity is not available or that would require the construction or 
acquisition of any new facilities,'' \6\ and in judicial precedent.\7\ 
According to the North Slope Producers, the Commission has acted 
unreasonably in ``morphing'' ANGPA's vague and undefined open season 
requirements pertaining to competition in the exploration, development, 
and production of Alaska gas and sufficient opportunity for future 
access for the transportation of non-Prudhoe Bay/Point Thomson gas into 
factors to be considered by the Commission in its NGA section 7 review 
of certificate applications for Alaska natural gas transportation 
projects.
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    \5\ Section 7(a) of the NGA provides ``[t]hat the Commission 
shall have no authority to compel the enlargement of transportation 
facilities * * *'' 15 U.S.C. 717f(a).
    \6\ 18 CFR 284.7(f).
    \7\ The North Slope Producers cite Panhandle Eastern Pipe Line 
Co., 204 F.2d 675 (3rd Cir. 1953) in which the court stated that 
``[i]n light of section 7(a) we are compelled to conclude that 
Congress meant to leave the question whether to employ additional 
capital in the enlargement of its pipeline facilities to the 
unfettered judgment of the stockholders and directors of each 
natural gas company involved.'' 204 F.2d at 680.
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    17. Second, the North Slope Producers assert that ANGPA section 105 
further limits the Commission's authority to require an expansion of an 
Alaska natural gas transportation project sections. The North Slope 
Producers state that before an involuntary expansion can be ordered by 
the Commission, section 105 lists a number of statutory requirements 
that must be met which are designed to balance potential future 
shippers' interests with the need to protect the pipeline and existing 
shippers and to protect against uneconomic overbuilding. The North 
Slope Producers state that none of these statutory requirements are 
referenced in or satisfied by section 157.36 or 157.37.
    18. Third, the North Slope Producers argue that the Commission 
appears to mistakenly ``assume that a pipeline can, in all 
circumstances, be efficiently designed to accommodate all qualifying 
bids.'' The North Slope Producers assert that the most efficient and 
economic pipeline design might not be one which can accommodate 100 
percent of the capacity bid for in the open season. In fact, according 
to the North Slope Producers, it is possible that a pipeline designed 
to accommodate all the capacity bid in the open season ``could result 
in a design that is inefficient and/or negatively impacts future 
expansion design alternatives.''
    19. Fourth, the North Slope Producers maintain that to the extent 
that it authorizes a set-aside of capacity, section 157.36 violates the 
Order No. 636's goal of eliminating impediments to the transmission of 
proper pricing signals between producers and consumers, as well as the 
Commission's non-discrimination policies. The North Slope Producers 
point to the second sentence of section 157.36, which states:

``In considering a proposed voluntary expansion of an Alaska natural 
gas pipeline project, the Commission will consider the extent to 
which the expansion will be utilized by shippers other than those 
who are the initial shippers on the project, and in order to promote 
competition and open access on the project, may require design 
changes to ensure that all who are willing to sign long-term firm 
transportation contracts to some portion of the expansion capacity 
be allocated to new shippers or shippers seeking to transport 
natural gas from areas other than Prudhoe Bay and Point Thomson.'' 
(Emphasis added).

The North Slope Producers assert that if this ``indecipherable'' 
language is intended to set aside capacity for new

[[Page 35014]]

shippers or shippers of gas from areas other than Prudhoe Bay and Point 
Thomson, then the Commission is favoring one shipper's bid over another 
bid that otherwise meets all of the bid criteria. The North Slope 
Producers assert that ANGPA's section 103(e)(2)(C) requirement that 
open season regulations for voluntary expansions are to ``provide an 
opportunity for the transportation of gas other than Prudhoe Bay and 
Point Thomson gas'' does not support section 157.36's apparent set-
aside or preference. The North Slope Producers state that not only is 
such a preference inconsistent with the Commission's open access 
policies, it is patently discriminatory and anti-competitive and 
unlawful under the NGA. The North Slope Producers contend that 
allocating pipeline capacity in an open season to customers who value 
it most, i.e., through the use of the Commission-favored net present 
value capacity allocation methodology, ensures pipelines and shippers 
that capacity will be allocated in a non-discriminatory and 
economically efficient manner. The North Slope Producers also assert 
that development of multi-owner fields could be delayed or hampered if 
one group of shipper/owners had a competitive advantage over another 
shipper/owner group due to a capacity allocation advantage or 
preference.
    20. Finally, the North Slope Producers maintain that sections 
157.36 and 157.37 are contrary to the Commission's reliance on market 
forces, on which its existing policies are based. Specifically, the 
North Slope Producers claim that Order No. 2005 fails to reconcile 
Subparts 157.36 and 157.37 with current Commission policies in favor of 
``facilitate[ing] the unimpeded operation of market forces to stimulate 
the production of natural gas,''\8\ and against the subsidization of 
new services by existing shippers. The North Slope Producers state that 
it would be unreasonable to expect that the pipeline sponsors would 
simply assume the financial risk for significant amounts of 
uncontracted capacity on such an enormous project, yet Order No. 2005 
fails to address cost recovery issues associated with any mandated 
design changes that might be ordered.
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    \8\ Order No. 636, FERC Stats. and Regs. ] 30,939 at 30,393 
(1992), quoting S.Rep. No. 30 9, 101st Cong., 1st Sess. at p. 2 
(1989).
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    21. ChevronTexaco claims that the regulations promulgated in Order 
No. 2005 apply to open seasons for initial or voluntary expansion 
capacity; therefore, the idea of post-open season Commission-mandated 
design changes is inconsistent with and outside the scope of this 
rulemaking. Moreover, ChevronTexaco asserts that the design change 
provisions of sections 157.36 and 157.37 should be deleted from the 
open season regulations because the subject was not included in the 
Notice of Proposed Rulemaking. ChevronTexaco states that absent 
removing sections 157.36 and 157.37 from the open season regulations, 
the Commission should provide that it would not require project design 
changes if doing so would negatively impact the rates, terms or 
conditions of service for initial shippers or otherwise adversely 
affect pipeline operations of efficiency.
    22. In its response to the rehearing requests, Anadarko argues that 
ANGPA and the NGA provide the Commission with ample authority to 
require changes in the design of an initial or expanded Alaska natural 
gas transportation project necessary to meet the statutory objectives 
of promoting competition and provide a reasonable opportunity for 
access to all shippers who have made conforming bids during the open 
season. Anadarko states that clearly there is interplay between the NGA 
and ANGPA. Specifically, states Anadarko, section 7(e) of the NGA 
provides that a ``certificate shall be issued * * * if it is found that 
proposed service, sale, operation, construction * * * to the extent 
authorized by the certificate, is or will be required by the present or 
future public convenience and necessity.'' Anadarko states that the 
Commission considers many factors in making this public convenience and 
necessity finding, and, in the case of an Alaska natural gas 
transportation project, should consider the requirements of ANGPA.
    23. Anadarko asserts that the Commission often imposes conditions 
to its certificates requiring routing or design modifications in order 
to support a finding that a particular project is in the public 
convenience and necessity. In any event, sections 157.36 and 157.37 do 
not mandate an expansion, according to Anadarko, because the applicant 
may choose not to accept a certificate that requires that the project 
be redesigned. Anadarko states that the regulations merely put the 
applicant on notice that its proposed project design might be rejected 
as failing to meet the objectives of ANGPA, and consequently, not being 
required by the public convenience and necessity.
    24. In response to the North Slope Producers' charge that section 
157.36 provides for discriminatory reallocation of capacity contrary to 
existing Commission policy, Anadarko contends that the Commission is 
merely following the mandate of ANGPA section 103(e)(2)(C). Anadarko 
states that under section 103(e)(2)(C), the Commission's regulations 
must ensure that any open season for expansion capacity provides the 
opportunity for the transportation of natural gas other than from 
Prudhoe Bay/Point Thomson, and section 157.36 seeks to do just that.
    25. Anadarko also disputes the North Slope Producers' claim that 
parties were not adequately notified in the NOPR that pipeline design 
would be a subject of the rulemaking. Anadarko maintains that the 
regulations contained in sections 157.36 and 157.37 reasonably respond 
to many concerns expressed throughout the rulemaking process.\9\ 
Anadarko contends that under the Administrative Procedure Act (APA), 
the Commission was required in this informal rulemaking proceeding to 
provide either the terms or substance of the proposed rule or a 
description of the subjects and issues involved.\10\ Moreover, Anadarko 
points out that the courts have held that ``even if the final rule 
deviates from the proposed rule,'[s]o long as the final rule 
promulgated by the agency is a ``logical outgrowth'' of the proposed 
rule'' the purposes of the notice and comment have been adequately 
served.'' \11\ Anadarko states that Order No. 2005's pipeline design 
provisions were a ``logical outgrowth'' of the NOPR and the issues 
discussed therein, e.g., the major goals of ANGPA, concerns over 
potential discrimination, producer/sponsor preferences, the role of 
pre-subscriptions, and tensions between ANGPA's goals and the 
application of existing policies to an Alaska project.
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    \9\ Anadarko identifies comments addressing pipeline size both 
at the technical conference and written. See Anadarko's March 29, 
2005 response at 15-16.
    \10\ See 5 U.S.C.A. 553(b)(3).
    \11\ Appalachian Power Co. v. EPA, 135 F.3d 791, 804 n.22 (DC 
Cir. 1998).
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    26. Lastly, Anadarko contends that the Commission provided ample 
support for not following current Commission policies that favor 
reliance on market forces. Anadarko states that the rulemaking record 
in Order No. 2005 thoroughly discusses the conditions and circumstances 
in Alaska that are much different than those found in the lower 48 
states, requiring the appropriate regulatory action taken in sections 
157.36 and 157.37. In conclusion, Anadarko disagrees that 157.36 is 
``indecipherable'' as claimed by the North Slope Producers.
    27. The Alaska Legislators maintain that sections 157.36 and 157.37 
are well within the Commission's broad power

[[Page 35015]]

to attach to certificates any conditions that may be found to be 
required by the public convenience and necessity. They claim that the 
``forced expansion'' argument fails to acknowledge that ANGPA has 
injected into the public convenience and necessity standard of the NGA 
a new statutory standard, i.e., the promotion of competition in the 
exploration, development and production of Alaska natural gas with 
respect to Alaska natural gas transportation projects. Moreover, the 
Alaska legislators contend that the Commission's pipeline design 
concerns are required not only by the mandate of ANGPA, but also by the 
economic realities in Alaska, where virtually all of the proven 
reserves are held by the North Slope Producers. The Alaska legislators 
state that the Commission is simply announcing in sections 157.36 and 
157.37 that it may condition the approval of the certificate upon the 
applicant's making necessary design changes required to satisfy the 
public convenience and necessity standard, including the ``promote 
competition'' standard, which is uniquely applicable to an Alaska 
natural gas transportation project.
    28. Addressing the North Slope Producers' claim that section 157.36 
provides for an unduly discriminatory set aside of capacity for non-
North Slope shippers, the Alaska legislators agree with Anadarko that 
ANGPA mandates that in the case of an expansion of an Alaska natural 
gas transportation project, the Commission must provide an opportunity 
for the transportation of natural gas other than from Prudhoe Bay and 
Point Thomson units in its open season rules. Alaska legislators state 
that section 157.36 is consistent with that mandate.
    29. The Alaska legislators also defend the Commission's 
``proactive'' approach through which it fashioned the open season rules 
in recognition of the recognized differences between competitive forces 
in the lower 48 states and the lack of competition in Alaska. Given 
these differences, the Alaska legislators maintain that the Commission 
was right to depart from existing Commission policy. They assert that 
the fact that Congress required the Commission to promulgate the Alaska 
open season rules in place of the Commission's long-standing policy of 
evaluating open seasons on a case-by-case, after-the-fact basis, is an 
illustration of the need for a different approach based on the unique 
circumstances surrounding an Alaska pipeline. The Alaska Legislators 
conclude that, unlike the situation in the lower 48 states, there is no 
existing or foreseeable competitive environment in Alaska, where the 
North Slope Produces not only control all the known gas reserves, but 
also may become the sponsors of the Alaska pipeline. Therefore, the 
Commission was right to not rely on market forces in Alaska to ensure 
the development, routing, sizing and timing of an Alaska pipeline.
    30. Finally, the state of Alaska suggests that section 157.36 be 
expanded to better reflect its intent. According to the State of 
Alaska, section 157.36 should read:

    In considering a proposed voluntary expansion of an Alaska 
natural gas transportation project, the Commission will consider the 
extent to which the expansion will be utilized by shippers other 
than those who are the initial shippers on the project and, in order 
to promote competition and open access to the project, may require 
design changes to ensure that new shippers willing to sign long-term 
firm transportation contracts or shippers seeking to transport 
natural gas from areas other than Prudhoe Bay or Point Thomson who 
are willing to sign long-term contracts can have access to some 
portion of the expansion capacity.
C. Commission Response
    31. The North Slope Producers' assertion that the Commission has no 
authority under the NGA to require changes in the design of a proposed 
Alaska natural gas transportation project in connection with an 
application for authorization either to construct the project, or to 
expand the project is inconsistent with law and precedent. At the 
outset, we reject the notion that any design change that might be 
required under either section 157.36 or 157.37 would constitute a 
mandatory expansion of the project. First, in every case in which the 
section 7(a) limitation has been addressed, the facilities involved 
were existing facilities subject to existing certificate authorization. 
The reasoning behind this limitation is clear. Once a natural gas 
company accepts a certificate and in reliance thereof expends resources 
to construct the facilities authorized therein, the pipeline and its 
customers should have the right to rely on the authorizations contained 
in that certificate. It is quite another thing where the Commission 
tells a certificate applicant that unless it agrees to certain changes 
(including cost allocations and the design of initial service rates), 
its proposal will not be found to be in the public convenience and 
necessity. In such case, if the applicant does not want to change its 
proposed project design, it is not required to accept the certificate. 
Furthermore, because design changes under either 157.36 or 157.37 would 
not constitute a mandatory project expansion, the statutory 
requirements of ANGPA section 105 have no application.
    32. In considering an application for a certificate of public 
convenience and necessity under section 7 of the NGA, the Commission 
has the authority to consider all factors bearing on the public 
interest,\12\ and in particular, the Commission ``certainly has the 
right to consider a congressional expression of fundamental national 
policy as bearing upon the question whether a particular certificate is 
required by the public convenience and necessity.'' \13\ In the case of 
an Alaska natural gas transportation project, these factors would 
properly include the requirements of ANGPA, including the statutory 
objectives of promoting competition and provide a reasonable 
opportunity for access to all shippers who have made conforming bids 
during the open season.
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    \12\ See, e.g., FPC v. Transcontinental Gas Pipe Line 
Corporation, 365 U.S. 1, 81 S.Ct. 435 (1961); Office of Consumers' 
Counsel v. FERC, 655 F.2d 1132, 210 U.S. App. D.C. 315 (1980).
    \13\ City of Pittsburgh v. FPC, 237 F.2d 741 at 754 (D.C. Cir. 
1965).
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    33. The Commission has authority under NGA section 7(e) to attach 
to a certificate of public convenience and necessity any conditions it 
deems necessary to meet the public interest.\14\ The Commission has 
exercised this conditioning authority to require routing or design 
modifications in order to support a finding that a particular project 
is in the public convenience and necessity.\15\ Sections 157.36 and 
157.37 merely codify our existing authority and practice.
---------------------------------------------------------------------------

    \14\ See, e.g., FPC v. Hunt, 376 U.S. 515, 525-527, 84 S.Ct. 861 
(1964); Atlantic Refining Co. v. Public Service Commission of New 
York, 360 U.S. 378 (1959).
    \15\ See, e.g., Vector Pipeline, L.P., 87 FERC ] 61,225 at 
61,892-893 (1999); Maritimes & Northeast Pipelines, L.L.C., 80 FERC 
] 61,345 (1997); NE Hub Partners, L.P., 83 FERC ] 61,043 (1998); see 
also, Transcontinental Gas Pipe Line Corp v. FERC, 589 F.2d 186 (5th 
Cir.), cert. denied, 445 U.S. 915 (1979).
---------------------------------------------------------------------------

    34. The North Slope Producers' claim that sections 157.36 and 
157.37 are predicated on the Commission's erroneous assumption ``that a 
pipeline can, in all circumstances, be efficiently designed to 
accommodate all qualifying bids.'' This is inaccurate. We noted in 
Order No. 2005 that both the North Slope Producers and Enbridge 
maintained that an Alaska pipeline could be designed and built with 
sufficient capacity to accommodate the needs of every qualified 
shipper.\16\ Our expectation is that an Alaska natural gas 
transportation project will be designed and built, to the extent 
possible, to

[[Page 35016]]

accommodate all qualified shippers who are ready to sign firm 
transportation agreements. Nonetheless, in Order No. 2005 we certainly 
did not rule out the possibility that a project, with or without pre-
subscription agreements, might be oversubscribed.\17\ On this note, we 
should emphasize that in our review of any application for initial 
Alaska project or any expansion thereof, our consideration of the 
project design will be driven by our need to find that the proposal is 
in the public convenience and necessity. Any conditions we impose must 
be required by the public interest, and be based on substantial 
evidence.
---------------------------------------------------------------------------

    \16\ See, e.g., Order No. 2005 at P 29, 37, and 88.
    \17\ See id. at P 37; see also Sec.  157.34(c)(15).
---------------------------------------------------------------------------

    35. The North Slope Producers' claim that section 157.36 provides 
for an unduly discriminatory set-aside of capacity for non-North Slope 
shippers discounts, if not ignores, the Congressional mandate of ANGPA 
section 103(e)(2)(C) that requires our open season regulations to 
ensure that any open season for expansion capacity provides the 
opportunity for the transportation of natural gas other than from 
Prudhoe Bay/Point Thomson. Section 157.36 does so in a reasonable 
manner. In any event, our regulations do not require that an expansion 
proposal must, regardless of economic and technical considerations, 
provide transportation of gas other than Prudhoe Bay/Point Thomson 
volumes. The regulations simply require that an opportunity for such 
transportation be provided.
    36. As pointed out elsewhere in this order, and throughout Order 
No. 2005, a number of existing Commission policies predicated on 
competitive conditions in the lower 48 states are ill-suited for 
application in the case of an Alaska natural gas transportation 
project, particularly in view of ANGPA's directives. As we stated in 
Order No. 2005, a successful Alaska natural gas transportation project 
will have to overcome a variety of significant obstacles, including 
unique and complex competitive conditions. Those competitive 
conditions, we said, are intensified by the generally agreed-upon fact 
that there will be only one such Alaska pipeline for the foreseeable 
future.\18\ Against that backdrop, we affirm the conclusions of Order 
No. 2005, which serve as the underpinnings of the Final Rule's 
regulations, including the need in certain instances to accommodate 
existing Commission policy to the unique circumstances surrounding the 
exploration, production, development, and transportation to market of 
Alaska natural gas.
---------------------------------------------------------------------------

    \18\ The North Slope Producers, in their rehearing request, 
claim that it is too early to conclude that only one Alaska pipeline 
will ever be built. We find nothing in the record to support a 
contrary conclusion.
---------------------------------------------------------------------------

    37. Finally, while due process and the APA impose an obligation on 
agencies to provide adequate notice of issues to be considered,\19\ 
that obligation is satisfied in this informal rulemaking by providing 
either the terms or substance of the proposed rule or a description of 
the subjects and issues involved.\20\ Order No. 2005's pipeline design 
provisions were a logical outgrowth of the NOPR and the issues 
discussed therein, e.g., major goals of ANGPA, concerns over potential 
discrimination, producer/sponsor preferences, potential role of pre-
subscriptions, tensions between ANGPA's goals, and application of 
existing policies to the circumstances of an Alaska project. Indeed, 
the critical importance of properly sizing the pipeline was a recurring 
theme throughout this proceeding, and was raised by several parties at 
the technical conference, and in later comments and reply comments.\21\ 
Thus, Order No. 2005 does not unduly change the scope of this 
proceeding. In any event, the parties' ability to seek rehearing 
resolves any due process issues.
---------------------------------------------------------------------------

    \19\ Public Service Commission of the Commonwealth of Kentucky 
v. FERC, 397 F.3d 1004 (DC Cir. 2005), citing Williston Basin 
Interstate Pipeline Co. v. FERC, 165 F.3d 54 (DC Cir. 1999); see 5 
U.S.C. 554(b)(3).
    \20\ See 5 U.S.C. 553(b)(3).
    \21\ See n. 8, supra.
---------------------------------------------------------------------------

    38. Although the North Slope Producers describe section 157.36 to 
be ``indecipherable,'' their comments demonstrate that they understand 
its intent. Section 157.36 is intended to provide that the Commission 
may require design changes necessary to ensure that some portion of a 
proposed voluntary expansion will be allocated to new shippers or 
shippers seeking to transport gas from areas other than Prudhoe Bay or 
Point Thomson, provided such shippers are willing to sign qualifying 
long-term firm transportation agreements. To ensure clarity, we will 
revise section 157.36 to read as follows:

    ``In considering a proposed voluntary expansion of an Alaska 
natural gas transportation project, the Commission will consider the 
extent to which the expansion will be utilized by shippers other 
than those who are the initial shippers on the project and, in order 
to promote competition and open access to the project, may require 
design changes to ensure that some portion of the expansion capacity 
will be allocated to new shippers willing to sign qualifying long-
term firm transportation contracts, including shippers seeking to 
transport natural gas from areas other than Prudhoe Bay or Point 
Thomson.''


II. Presumption of Rolled-in Rates for Expansions

A. Final Rule--Sec.  157.39
    39. Section 157.39 states that ``[t]here shall be a rebuttable 
presumption that rates for any expansion of an Alaska natural gas 
transportation project shall be determined on a rolled-in basis.'' The 
Commission stated in Order No. 2005 that by providing for this 
presumption, the Commission is advising potential shippers, in advance 
of any initial Alaska natural gas transportation project open season, 
of its intention to harmonize the objective of rate predictability for 
initial shippers with the objective of reducing barriers to future 
exploration and production in designing rates for future expansions of 
any Alaska natural gas transportation project. The Commission concluded 
in Order No. 2005 that section 157.39 is consistent with ``our guiding 
principle that competition favors all of the Commission's customers, as 
well as with the objectives of the Act, to adopt rolled-in rate 
treatment up to the point that would cause there to be a subsidy of 
expansion shippers by initial shippers, if any subsidy were to be 
found.''
B. Rehearing/Clarification Requests
    40. The North Slope Producers, Enbridge, and ChevronTexaco assert 
that the presumption in favor of rolled-in rates for voluntary 
expansions established in section 157.39 creates uncertainty for 
shippers and project sponsors, and, therefore, section 157.39 should be 
eliminated from the regulations or substantially revised. The North 
Slope Producers and Enbridge claim that prospective initial shippers, 
fearing that in the future their rates may be increased to subsidize 
the cost of expansion facilities, will be less willing to make the 
long-term commitments necessary to support an Alaska project. This 
uncertainty, they predict, will discourage rather than advance the 
development of an Alaska pipeline or any voluntary expansion thereof--a 
result clearly inconsistent with ANGPA's primary goal. Moreover, the 
North Slope Producers and Enbridge suggest that mandatory expansions 
pursuant to ANGPA section 105 will become more attractive than 
voluntary expansions because of the explicit rate protection for 
existing shippers in section 105.

[[Page 35017]]

    41. The North Slope Producers contend that section 157.39 is 
unjustifiably inconsistent with the Commission's current policy 
regarding rate treatment of expansions, which is to discourage 
uneconomic expansions and assure that expansions will not be subsidized 
by existing shippers. They assert that even if, as claimed by the 
Commission, only one pipeline will be built in Alaska, that distinction 
does not justify deviating from the Commission's current policy.
    42. The North Slope Producers charge that the Commission acted 
arbitrarily and capriciously in relying on ANGPA section 103(e) to 
justify its conclusion to provide for a presumption of rolled-in rates 
for expansions. Although the North Slope Producers concede that the 
Commission clearly has the authority under ANGPA and the NGA to approve 
rates for Alaska natural gas transportation projects, they claim that 
ANGPA section 103(e) has nothing to do with rate regulation. 
Furthermore, state the North Slope Producers, even if section 103 could 
be read to give the Commission authority to include rate regulations in 
its open season rules, the proper course would be to remove section 
157.39 from the open season rules and instead address rate policy 
issues only after the parties have the opportunity of developing a 
complete factual record. Failing this, the North Slope Producers state 
that the Commission should revise section 157.39 to provide that the 
Commission's current rate policies will apply to Alaska projects.
    43. Enbridge also argues that the Commission acted arbitrarily and 
capriciously by imposing a rebuttable rolled-in presumption, even where 
rolled-in pricing would increase existing shippers' rates. According to 
Enbridge, Order No. 2005 identifies two considerations, namely the 
Commission's disfavor of existing shippers subsidizing the rates of new 
shippers, and the Commission's reluctance to authorize an expansion 
rate that would have an unduly negative impact on the exploration and 
development of Alaska reserves. Enbridge contends that the presumption 
should be ``scaled back'' to apply only to cases where expansion rates 
are no higher than pre-existing rates. Enbridge points to the 
Commission's acknowledgement in Order No. 2005 that it ``cannot at this 
point, without a specific project proposal or the facts surrounding a 
proposed expansion before us, define exactly what will be required to 
overcome the presumption.'' Enbridge contends that the Commission's 
inability to explain how the presumption can be rebutted renders 
rolled-in pricing mandatory, leaving the question of whether a rolled-
in expansion rate that is higher than original rates is a subsidy to be 
resolved in a future NGA section 7 filing.
    44. ChevronTexaco stresses that because the text of Order No. 2005 
recognizes that ``without a specific project proposal or the facts 
surrounding a proposed expansion'' the Commission cannot determine what 
is needed to overcome the presumption favoring rolled-in rates, the 
Commission should defer any determination of rate treatment for 
expansions until a record can be developed after a specific proposal is 
made. According to ChevronTexaco, this inability to articulate when the 
presumption will be applied creates uncertainty that inhibits the 
development of any Alaska project.
    45. ChevronTexaco states that inconsistency between the text of 
order and the text of the regulations creates further uncertainty. 
ChevronTexaco states that while the regulations state that the 
presumption applies to ``any expansion,'' Order No. 2005's text, at 
paragraphs 124 and 125, suggests that rolled-in rates are appropriate 
only if there is no increase in rates for existing shippers. 
ChevronTexaco urges the Commission to clarify section 157.39 to state 
that no cross-subsidy is intended. Otherwise, the Commission should 
consider issuing, in lieu of a regulation, a policy statement which 
outlines the general direction that the Commission intends to take.
    46. The Alaska Legislators and Anadarko contend that rolled-in 
pricing is essential and justified. Anadarko asserts that the 
Commission clearly has the statutory authority to establish a 
presumption of rolled-in pricing for future expansions in the open 
season regulations. Both Anadarko and the Alaska Legislators contend 
that the significant differences identified in the record between an 
Alaskan pipeline project and a pipeline in the lower 48 states provide 
ample justification for departing from the current pricing policy. The 
Alaska Legislators contend that even if there were some factual reason 
for applying the current policy, that policy cannot be reconciled with 
the policy considerations stated in ANGPA. Both Anadarko and the Alaska 
Legislators state that incremental pricing of expansions cannot be 
reconciled with ANGPA's goals of promoting competition in the 
exploration, development, and production of Alaska natural gas, and 
providing for the transportation of natural gas other than from the 
Prudhoe Bay and Point Thomson units in any expansions of the Alaska 
pipeline facilities. The Alaska Legislators estimate that expanding a 
pipeline, through looping, to a capacity of 7 billion cubic feet (Bcf), 
would result in an expansion rate 50 percent higher than existing rates 
if incrementally priced. Anadarko predicts that incremental pricing of 
expansions of an Alaskan pipeline beyond 6 Bcf would cause the pipeline 
to be capped at 6 Bcf.
C. Commission Response
    47. ANGPA section 103(i) gives the Commission broad authority to 
establish ``such regulations as are necessary'' for the conduct of open 
seasons. In this regard, the Commission believes that it is appropriate 
to establish rate criteria that will assist potential shippers to make 
informed open season bids, and will promote competition, as required by 
ANGPA. As discussed in detail in Order No. 2005, these criteria include 
projected rates for in-state deliveries of gas, as well as a 
presumption for rolled-in rate treatment for future pipeline 
expansions.
    48. In adopting the presumption for rolled-in rate treatment, the 
Commission balanced rate predictability for initial shippers with the 
objective of reducing barriers to future exploration, development and 
production of Alaska natural gas. The Commission was concerned that the 
prospect of high incremental transportation rates might increase risks 
to Alaskan producers and serve as a disincentive to future exploration 
and development of potentially valuable natural gas resources. On the 
other hand, the Commission does not wish to discourage voluntary 
capacity expansions.
    49. The rolled-in rate presumption was not an abandonment of our 
current policy of not favoring rate subsidization by existing customers 
of capacity expansions as suggested in the requests for rehearing. The 
Commission did, however, suggest that because of the likelihood of a 
single Alaskan pipeline project, it would consider alternatives to our 
current policy on how to define or quantify subsidization by current 
customers. Current policy primarily considers whether the expansion 
project will result in a rate higher than the existing transportation 
rate for existing customers. An alternative consideration or definition 
of subsidization could be whether the expansion rate is no higher than 
the actual initial rate or of an initial rate without built-in 
subsidies. The Commission believed and continues to believe that the 
appropriate place to review this issue is in the context of a future 
NGA section 7 filing.

[[Page 35018]]

In such a proceeding, if the pipeline owners can show that the initial 
pipeline was sized appropriately, i.e., it was uneconomic or 
inefficient to build a larger capacity pipeline, the Commission would 
consider this in overcoming the rolled-in rate presumption.
    50. The text of Order No. 2005 referred to by ChevronTexaco does 
not simply state that rolled-in rates are appropriate only if there is 
no increase in rates for existing shippers; it suggests that a rolled-
in expansion rate that is higher than the original rate is not 
necessarily a subsidy. As noted above, we will determine whether a 
particular rate amounts to a subsidy when the issue is presented to us.
    51. Nothing in the requests for rehearing causes us to question our 
conclusion that a rebuttal presumption of rolled-in treatment for the 
expansion of an Alaska Project is a reasonable approach to the 
difficult issues we, and prospective pipeline proponents and shippers, 
may face on the future. We think that the signal we are sending is a 
positive one that will help spur natural gas exploration and 
development in Alaska. At the same time, we have not prejudged how we 
will resolve future proceedings, and all parties will have the 
opportunity to convince us of appropriate rate treatment if and when 
expansion proposals for an Alaska project are developed. We therefore 
will not change the rule on this matter.

III. Late Bids

A. The Final Rule--Sec.  157.34(d)(2)
    52. Order No. 2005 added a new provision in the Final Rule, section 
157.34(d)(2), that a project sponsor must consider any bids tendered 
after the expiration of the open season by qualified bidders, and may 
reject them only if they cannot be accommodated due to economic, 
engineering, or operational constraints, in which case the project 
sponsor must provide a detailed explanation for the rejection. The 
Commission explained that this requirement is designed to allow 
reasonable access to those shippers who may not be ready to participate 
during the established open season period, and at the same time provide 
the sponsor with flexibility in the timing of its open season.
B. Rehearing/Clarification Requests
    53. The North Slope Producers and Enbridge contend that it is 
important for the timely development of any project that the project 
sponsors be able to rely on an open season that has a definite term. 
They state that the open season results are needed to permit the 
project sponsor to gauge demand and in turn finalize pipeline design. 
They assert that the late bid provisions of section 157.34(d)(2) will 
result in unreasonable risks and costs to the project sponsor by 
creating a never-ending, open-ended open season in which the project 
sponsor will be required, for each and every late bid received, to 
divert resources and incur additional costs to evaluate whether bid can 
be accommodated. In addition, they state that there is tremendous 
potential for delay at each step of the development of the project, if 
the project sponsor must stop and make design changes at every stage to 
accommodate a late bid. Thus, they state, section 157.34(d)(2) would 
frustrate the Commission's stated goal of adopting open season 
regulations that ensure sufficient economic certainty to support the 
construction of a pipeline.
    54. The North Slope Producers add that financing cannot be secured 
until pipeline design and development costs are known and precedent 
agreements are in place. Consequently, they claim, the prospect of 
having to make changes to key project components to accommodate late 
bids jeopardizes the project sponsor's ability to obtain financing in a 
timely manner.
    55. Both Enbridge and the North Slope Producers also state that 
section 157.34(d)(2) fails to provide a clear standard under which the 
project sponsor must evaluate late bids. This failure, they claim, 
presents another risk of uncertainty and delay. Enbridge argues that, 
even if it is necessary to significantly re-design a project in order 
to satisfy a late bid, the regulation would require that such a bid be 
accepted if the re-designed project remains feasible from an 
``economic, engineering or operational'' perspective.
    56. The North Slope Producers state that another effect of the late 
bid provision is that potential shippers will be discouraged from 
participating in an open season if they can submit a late bid. They 
worry that this would diminish the open season's ability to accurately 
demonstrate the demand for pipeline capacity. Enbridge also claims 
that, absent a good faith requirement in connection with submitting 
late bids, section 157.34(d)(2) permits such gamesmanship. Enbridge 
states that at a minimum, section 157.34(d)(2) should put ``the burden 
on the bidder to demonstrate compelling circumstances that prevented 
participation in open season, and that the bid can be accommodated 
without changing system design, requiring capacity to be allocated away 
from other shippers, or otherwise adversely impacting the project's 
development and timing.'' In this regard, the State of Alaska maintains 
the Commission should include language in section 157.34(d)(2) that 
requires late bidders to provide adequate justification for their late 
bids.
    57. Additionally, the North Slope Producers assert that, to the 
extent a project sponsor would be required to expand the project to 
accommodate late bids, the Commission is in effect ordering an 
expansion of the pipeline. In such a case, section 157.34(d)(2) raises 
the same issues regarding forced expansions as are raised by sections 
157.36 and 157.37. The North Slope Producers contend that whereas the 
Commission may require an expansion under section 105, that section 
places the burden on the party seeking such expansion to establish that 
specific conditions are met, section 157.34(d)(2) appears to place the 
burden on the pipeline to justify why it cannot expand the project to 
accommodate a late bid.
    58. Enbridge states that in any event there is little or no reason 
for section 157.34(d)(2) ``given the other measures instituted by Order 
No. 2005 to protect the interests of late developing shippers.'' 
Specifically, Enbridge refers to the unprecedented level of information 
required in the open season notice on which bidders will be able to 
base their long-term capacity decisions, Order No. 2005's emphasis on 
requiring that the project's design demonstrate a capability for low-
cost expansion, and, finally, the mandatory expansion provisions of 
ANGPA 105. Enbridge contends that to the extent late bids can be 
accommodated without adversely impacting the project's development, it 
is in the project sponsor's economic interests to do so.
    59. ChevronTexaco requests that the Commission clarify that project 
sponsors will be required to consider late bids only if there is excess 
capacity after capacity is allocated to those open who bid in the open 
season. ChevronTexaco states that one of the major purposes of the open 
season is provide a level playing field for all participants, thereby 
eliminating the advantages of possessing superior or advance 
information. ChevronTexaco cannot understand the Commission's reasoning 
in giving special consideration to one specific parameter of a 
conforming bid, namely, the timing of the bid. According to 
ChevronTexaco, late bidders should not be allowed to put new burdens on 
the project or to adversely affect timely open season bidders.
    60. Anadarko states that section 157.34(d)(2) is a reasonable 
compromise

[[Page 35019]]

balancing concerns that the open season could be held prematurely with 
a project sponsor's desire to control open season timing. Anadarko also 
states that it is possible to accommodate all qualified bidders up to 
the time the pipeline design is finalized.
C. Commission Response
    61. Under the Commission's open access policy and rules, all 
operating interstate pipelines have an obligation to receive and 
respond to new requests for service, even if no capacity is available. 
All operating pipelines have provisions in their FERC tariffs governing 
the procedures that the pipeline will use in evaluating requests for 
service. Absent an expansion,\22\ capacity could still be made 
available to a prospective shipper via capacity release or the capacity 
turnback provisions of an interstate pipeline's FERC tariff. During the 
several years between the time that the open season ends and an Alaskan 
pipeline goes into service, there will be no tariff with provisions 
like those described above in effect for that pipeline. Without the 
late bidder provisions of section 157.34(d), late-developing 
prospective shippers would have no formal way of seeking capacity on 
the pipeline after the open season ends. As revised herein, the 
Commission believes that the late bidder provision is a fair and 
necessary addition to the open season process for an Alaska natural gas 
transportation project.
---------------------------------------------------------------------------

    \22\ Interstate pipelines, other than an Alaska pipeline, cannot 
be required to expand their systems, but pipelines are required to 
respond to those who request service, even when none is available.
---------------------------------------------------------------------------

    62. The project sponsor's obligation under section 157.34(d)(2) is 
not ``unbounded'' or ``open-ended,'' as North Slope Producers contend. 
We added this requirement in recognition of the possibility that an 
appreciable amount of time might pass between the close of the open 
season and the project sponsor's finalizing the details of the proposed 
pipeline design and associated development costs, given the size and 
scope of an Alaska natural gas pipeline project. During that time, it 
is possible that producers of Alaska natural gas who were not in a 
position to commit to long-term capacity commitments during the open 
season, might then be in a position to request capacity consistent with 
the open season notice (except, of course, that the bid is tendered out 
of time). We felt it proper to require the project sponsor to consider 
such a request. At the same time, we appreciated that at some point in 
time, either before or after the proposed pipeline design is finalized, 
the project sponsor might not be able to accommodate reasonably a late 
request. For that reason, we provided that late requests could be 
rejected on the basis of ``economic, engineering or operational 
constraints.'' This is far from an unbounded, open-ended obligation. 
Indeed, as noted above, Enbridge points out that to the extent that 
late bids can be accommodated without adversely impacting the project's 
development, it is in the project sponsor's economic interest to do so. 
We see no harm in requiring that result.
    63. We will however, revise the requirements of section 
157.34(d)(2) in response to the complaints that the ``economic, 
engineering or operational constraints'' standard for rejecting late 
bids is too vague. Specifically, we are clarifying the criteria for 
rejecting late bids in section 157.34(d)(2) to be ``economic, 
engineering, design, capacity or operational constraints, or 
accommodating the request would otherwise adversely impact the timely 
development of the project.'' \23\ Additionally, we are adding a 
provision to the section which will enable the project sponsor, at the 
appropriate time in the development of its project and subject to 
Commission approval, to determine, based on the above criteria, that no 
further bids can be accepted. We will also revise section 157.34(d)(2) 
to provide that any bid tendered after the expiration of an open season 
must contain a good faith showing, including a statement of the 
circumstances which prevented the bidder from tendering a timely bid, 
and how those circumstances have changed. This requirement is 
consistent with the underlying premise of section 157.34(d)(2) in the 
Final Rule, and should serve to protect against ``gamesmanship.'' With 
these revisions and clarifications, we believe that the late bid 
provision will permit late-developing shippers to obtain capacity after 
the expiration of the open season, while also providing the prospective 
applicant the assurance that it will be able to design and develop its 
project according to its own schedule.
---------------------------------------------------------------------------

    \23\ We are retaining the requirement that the prospective 
applicant must provide a detailed explanation for its rejection, at 
least until such time as it has determined, subject to Commission 
approval, that no further late bids can be accepted. We find that, 
based on the prospective applicant's position, it is easier for it 
to evaluate why a late bid cannot be accepted, than it is for a 
later bidder to explain why its bid can be accommodated.
---------------------------------------------------------------------------

IV. Mandatory Pre-Approval

A. The Final Rule--Sec.  157.38
    64. Section 157.38 requires that, at least 90 days prior to 
providing its notice of open season, an applicant must file, for 
Commission approval, a detailed plan for conducting the open season in 
conformance with the regulations. The Commission will establish a date 
by which comments on the request for approval are due, and the 
Commission, unless it directs otherwise, will act on the request within 
60 days of its filing. The Commission concluded in Order No. 2005 that 
this requirement would allow for the resolution of disputes or 
dissatisfaction with an open season at the earliest possible time, 
thereby reducing the risk of having to require a second remedial open 
season because the first one did not conform to the regulations.
B. Rehearing/Clarification Requests
    65. The North Slope Producers and Enbridge urge the Commission to 
eliminate the mandatory pre-review process set out in section 157.38, 
calculating that with the addition of this mandatory review, the open 
season process will take at least 210 days, instead of the 120-day open 
season period proposed in the NOPR and established in section 157.34. 
They state that this additional 90 days does not include further delays 
that could result from disputes arising during the pre-review process, 
including the need to consider requests for rehearing of any orders 
pre-approving an open season or the Commission's inability to adhere to 
its 90-day window. The result, they claim, is that the open season 
process will be delayed, not expedited. Enbridge states that the 210-
day period is longer than the 180-day open season period which the 
Commission rejected as inconsistent with Congress' sense of urgency, as 
well as the Commission's conclusion in Order No. 2005 that ``timing is 
of the essence.''
    66. The North Slope Producers maintain that the Commission's 
justification for this requirement is that a successful open season is 
more likely to occur if issues are identified and resolved at the 
earliest time. The North Slope Producers disagree, claiming that, 
instead of reducing the chance of post-bid disputes, this layer of 
review will provide those who would gain commercial leverage by 
delaying the open season process ``with an additional bite at the 
apple, first by objecting to the bid package, then by objecting to the 
results of the open season.''
    67. Both the North Slope Producers and Enbridge contend that the

[[Page 35020]]

mandatory pre-review process is unnecessary and duplicative of other 
protections provided in Order No. 2005, including the transparency and 
specificity of the open season information, the 30-day prior notice 
requirement, the prohibition against undue discrimination or preference 
in rates, terms or conditions of service, and the imposition of Order 
No. 2004 standards of conduct. They contend that the effects of any 
delay of the open season can be profound, due to narrow, seasonal 
windows for environmental studies and preliminary field work, which 
cannot take place until the open season has been held. These risks, 
they claim, far outweigh any utility of a mandatory pre-review. In 
conclusion, the North Slope Producers contend that any pre-review of 
the open season notice should be voluntary, shortened, and that the 
Commission decision on the sufficiency should be deemed a pre-
decisional, non-reviewable determination, similar to the Commission's 
action in rejecting a deficient certificate application under section 
157.8 of the Commission's regulations.
    68. Anadarko defends the mandatory pre-review requirement as 
striking an ``appropriate balance between granting project sponsors 
flexibility in designing open seasons and providing regulatory 
supervision to potential bidders by requiring project sponsors to file 
and obtain approval of the open season plan.'' Anadarko and the Alaska 
Legislators state that pre-approval will reduce any risk of having to 
hold a second open season to correct one done improperly. Anadarko 
states that this will, as the Commission believes, promote rather than 
hinder a timely and successful open season. The Alaska Legislators 
agree with this assessment, contending that adding 90 days to the front 
end of the open season process, even with the prospect of a rehearing, 
is better than having an open season called back by an order on 
rehearing or on appeal from the results of an open season, and then 
having to hold another open season. Moreover, they state that once the 
open season is approved, parties may rely on those terms being 
controlling throughout the bidding and contracting process.
C. Commission Response
    69. The North Slope Producers and Enbridge correctly state that, by 
virtue of the mandatory pre-approval established in section 157.38, the 
minimum duration of the whole open season process would be 210 days. 
However, the concept of a mandatory pre-approval and the attendant 
additional time that such review will add is not inconsistent with our 
concern that ``time is of the essence'' that caused us to reject a 180-
day open season period, and instead provide for a 120-day open 
season.\24\ Our focus in establishing this 120-day period was to arrive 
at a time period such that all prospective bidders reasonably could 
review the open season information and evaluate whether to make multi-
year capacity commitments, thereby leveling the playing field.
---------------------------------------------------------------------------

    \24\ The 120 days consists of the 30-day prior notice period 
(section 157.34(a)), followed by a 90-day open season (section 
157.34(d)(1)).
---------------------------------------------------------------------------

    70. When discussing the duration of the whole ``open season 
process,'' we must consider the potential for delays due to disputes 
arising during the open season. In this regard, we found in Order No. 
2005 that pre-approval of open season procedures would ``allow issues 
to be identified and resolved at the earliest possible time and, 
ideally, reduce the possibility of dissatisfaction with open seasons, 
as well as the risk that the Commission will have to require that 
deficient open seasons be conducted again.'' \25\ The North Slope 
Producers' and Enbridge's disagreement with this assessment is based on 
arguments that the transparency and specificity of the information 
required in the open season and other protections provided in the open 
season rules render pre-approval unnecessary, and that the pre-approval 
process itself invites delay.
---------------------------------------------------------------------------

    \25\ Order No. 2005 at P 109.
---------------------------------------------------------------------------

    71. We are not as optimistic as the North Slope Producers and 
Enbridge that there is little likelihood that disputes might arise over 
the conduct of an open season and its conformance with the open season 
rules. While the transparency and specificity of the open season rules 
might lead to a clearer identification of any issues in dispute, they 
do not change the fact that in any open season there will be a universe 
of potential bidders with starkly different, competing needs and 
interests, and the potential for dispute is real. We continue to 
believe that getting it right the first time is the best approach.
    72. Nonetheless, in revisiting the requirement for mandatory pre-
approval as a result of these rehearing requests, we find that it is 
appropriate to make some changes. First, we are revising section 157.38 
to make clear that the plan to be filed by a prospective applicant 
shall include the information required in a notice of open season under 
section 157.34. Second, we are eliminating the 30-day prior notice 
requirement in section 157.34(a). Since the public will have actual 
notice of a prospective applicant proposed open season notice at least 
90 days prior to the open season, there is no reason to provide for an 
additional prior notice period. By this change, we are reducing the 
210-day period to 180 days. It also is our conclusion that, given the 
fact that participants in an open season will have the opportunity to 
object to the conduct of the open season after a certificate 
application is filed, as is our current practice, as well as the 
ability to seek rehearing and obtain appellate review of any Commission 
certificate orders, orders approving open season procedures will be 
interlocutory and not subject to rehearing.

V. In-State Study

A. The Final Rule--Sec.  157.34(b)
    73. In response to concerns expressed by Alaska entities and in 
recognition of Congress's mandate that Alaska in-state needs be given 
due consideration, the Final Rule added in section 157.34(b) a 
requirement not contained in the proposed regulations that the open 
season information include an assessment of Alaska's in-state needs and 
prospective points of delivery within the State of Alaska, based to the 
extent possible on any available study performed or otherwise approved 
by an appropriate Alaska governmental entity.
B. Rehearing/Clarification Requests
    74. While the North Slope Producers find reasonable a requirement 
that a study of in-state needs be completed prior to any open season, 
they object to section 157.34(b)'s requirement that the contents of the 
open season notice rely on an in-state study, if practicable. They 
assert that ANGPA does not require a pipeline sponsor's study to 
``include or consist'' of a state-sanctioned study. The North Slope 
Producers contend that this requirement invites disputes as to whether 
it is ``practicable'' to include a state study, or whether 
``appropriate'' state officials were involved. Consequently, the North 
Slope Producers request that the Commission revise section 157.34(b) to 
require that a project sponsor consult with the State regarding the 
study for in-state needs.
    75. The Alaska Legislators state that the Commission has avoided 
the problem of ``dueling studies'' by deferring the study to the State 
of Alaska. In this regard, the Alaska legislators advise the Commission 
that the State of Alaska has undertaken to designate an appropriate 
agency to conduct or sanction the required study, and the Alaska House 
of Representatives has passed a resolution urging the

[[Page 35021]]

Administration to conduct, approve, or sanction the required study 
prior to the effective date of the opens season rules.
C. Commission Response
    76. Section 157.34(b) does not mandate the use of a particular 
study but rather is premised on the common-sense notion that 
information provided by the State of Alaska likely will be valuable to 
potential shippers. We trust that the State and prospective pipeline 
applicants can agree on the manner in which such information can be 
provided. If questions arise as to the extent to which it is possible 
to include a state study, we will resolve them. Our regulations offer 
several options that the prospective applicant and the State of Alaska 
could take to ensure the adequate involvement of the State. 
Accordingly, we will not revise section 157.34(b).

VI. In-State Rates

A. The Final Rule--Sec.  157.34(c)(8)
    77. In addition to the requirement that in-state gas needs be 
addressed in the open season, the Commission also required, in section 
157.34(c)(8), that, based on in-state needs and the delivery points 
identified in the study, open season information includes a proposed 
in-state transportation rate, based on the costs of providing that 
service.
B. Rehearing/Clarification Requests
    78. The North Slope Producers ask the Commission to clarify that 
estimating rates for in-state service does not create a requirement to 
offer such a service at that rate (or at all) if the open season does 
not yield firm commitments for in-State deliveries. They assert that 
the ultimate indicator of any market for in-state service is the 
willingness of shippers to make firm commitments to purchase capacity 
for in-state use during the open season, not a study. They also request 
that the Commission clarify that the estimated in-state service rates 
are merely illustrative and subject to adjustment.
    79. Enbridge requests that the Commission make clear that the 
``estimated transportation rate'' referred to in section 157.34(c)(8) 
is one based on project sponsor's estimated costs to make in-state 
deliveries, not upon any rates assumed by the study. Additionally, 
Enbridge states that the Commission clarify that bids for in-state 
service should be subjected to the same requirements for 
creditworthiness, collateral and execution of binding contractual 
commitments as apply to any other open season bidder.
    80. The State of Alaska asks the Commission to clearly state that 
the in-state rates are to be distance-sensitive in order to ensure that 
the cost of in-state service is calculated properly.
C. Commission Response
    81. During the open season process, qualified bidders must 
successfully bid upon and arrange to consummate service agreements for 
transportation service. Projected rates for in-state deliveries must be 
based on estimates of costs for providing service to the in-state 
delivery points. While prospective applicants will estimate rates 
during an open season, the Commission's review of proposed rates will 
be guided by section 284.10(c)(3) of our regulations, which states in 
part that ``[a]ny rate filed for service * * * must reasonably reflect 
any material variation in the cost of providing the service due to * * 
* the distance over which the transportation is provided.''
    82. All shippers on any new interstate pipeline have a right to pay 
only the initial rate on file as approved in the NGA section 7 
certificate of public convenience and necessity. Those initial rates, 
approved under section 7 as part of the certificate, would be paid 
unless changed under section 4 or 5 of the NGA after appropriate 
regulatory proceedings and upon the Commission's order. However, under 
the Commission's negotiated rate policy,\26\ pipelines and shippers are 
free to make an agreement to ``dispense with cost-of-service 
regulation'' and agree to any mutually agreeable rate. A recourse rate 
found in the pipeline's tariff would be available for those shippers 
preferring traditional cost-of-service rates. Thus, if an in-state 
service is successfully bid upon, filed for and approved, an in-state 
cost-of-service recourse rate would be set in an Alaskan pipeline's 
tariff, but in-state shippers would also be free to seek a negotiated 
in-state rate with an Alaskan pipeline. Negotiated rates can be used to 
lock in transportation costs and pipeline revenues to the mutual 
benefit of both the shippers and the pipeline, without the risks of 
later changes to rates and revenues under the NGA.
---------------------------------------------------------------------------

    \26\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines, Docket No. RM95-6-000, Regulation of 
Negotiated Transportation Services of Natural Gas Pipelines, Docket 
No. RM96-7-000, 74 FERC ] 61,076, (Jan. 31, 1996).
---------------------------------------------------------------------------

    83. If there are no successful bids for in-state service, the 
prospective applicant would nonetheless have to include the in-state 
service as part of its proposed initial tariff. An opportunity to have 
in-state service might arise if the pipeline voluntarily accepts a 
request for it at a later time, or if the Commission acts under section 
103(h) of ANGPA and section 5 of the NGA to require the pipeline to 
make such in-state deliveries. The actual in-state rate for in-state 
service would be an issue for such future proceedings. Based on the 
foregoing, we see no need to further clarify the regulations.

VII. Tying Arrangements

A. The Final Rule--Sec. Sec.  157.34(c)(6), 157.34(c)(10), and 
157.35(a)
    84. The Commission addressed the matter of tying access to pipeline 
capacity on an Alaska project to ancillary services in two sections of 
the Final Rule. First, section 157.34(c)(6) requires that the open 
season notice must contain an unbundled transportation rate. Second, 
section 157.34 (c)(10) prohibits a prospective applicant from requiring 
prospective shippers to process or treat their gas at any designated 
facility. We explained elsewhere in Order No. 2005 ``that [we] can 
address any other discriminatory conduct in connection with gas quality 
requirements or other ancillary services through the provisions of 
section 157.35 in conjunction with existing Commission policies and 
procedures.'' Relevant to this explanation, section 157.35(a) provides 
that ``[a]ll binding open seasons shall be conducted without undue 
discrimination or preference in the rates, terms, or conditions of 
service and all capacity awarded as a result of any open season shall 
be awarded without undue discrimination or preference of any kind.''
B. Rehearing/Clarification Requests
    85. The State of Alaska states that the Commission should more 
explicitly explain the prohibition against tying arrangements, and 
explain how the open season rules will apply to gas treatment plants. 
The State believes that the open season rules should do more than 
require an applicant to use an unbundled transportation rate, prohibit 
tying of capacity on the pipeline to the use of a designated plant or 
facility, and merely refer to the existing regulations and policies 
prohibiting undue discrimination or preference. Rather, Alaska states 
that the open season rules should make clear that any tying 
arrangements will be subject to an exacting inquiry by the Commission 
and will require a compelling justification, and even offers 
recommended language to this end.
    86. Alaska also states that since ANGPA includes gas treatment 
plants in its definition of an Alaska natural gas

[[Page 35022]]

transportation project,\27\ treatment plants should be subject to the 
open season regulations. Alaska points out that the effect of the 
unbundling requirement of section 157.34(c)(6) is to exclude gas 
treatment plants from the requirements of the open season. As a 
possible solution, Alaska suggests that the open season rules be 
clarified to provide that the applicant must separately offer gas 
treatment plant capacity and pipeline capacity in the open season 
notice, and give bidders an opportunity to bid on either or both, as 
they choose. ChevronTexaco contends that because gas treatment plants 
are jurisdictional facilities,\28\ Order No. 2005's approach of 
deferring consideration of any discriminatory conduct as to necessary 
such ancillary facilities and services to a later day does not satisfy 
the requirements of the ANGPA. Chevron Texaco maintains that it is 
particularly important that access to treatment facilities be subject 
to the same open season, non-discriminatory requirement as the pipeline 
because pipeline capacity without access to gas treatment facilities 
that maybe a part of the pipeline system is meaningless.
---------------------------------------------------------------------------

    \27\ ANGPA Section 102(2) defines the term `Alaska natural gas 
transportation project' as ``any natural gas pipeline system that 
carries Alaska natural gas to the border between Alaska and Canada 
(including related facilities subject to the jurisdiction of the 
Commission) * * *''
    \28\ See Venice Gathering Co., 97 FERC ] 61,045 at 61,255 (2001) 
(Treatment of gas to enhance its safe and efficient transportation 
is subject to Commission jurisdiction).
---------------------------------------------------------------------------

C. Commission Response
    87. The Commission did not intend to preclude the inclusion of 
jurisdictional natural gas conditioning facilities from the open 
season. If, pursuant to ANGPA section 103, a project sponsor intends to 
file an application under section 7 of the NGA for authorization of a 
project that includes a jurisdictional natural gas conditioning 
service, we will review the open season plan and notice to ensure that 
such service is offered in its open season notice, subject to the same 
requirements as apply to transportation service. However, the 
prospective applicant must offer a separate rate for the gas treatment 
service and separate rate for the transportation service. Furthermore, 
the prospective applicant can neither require bidders to bid on both 
services, nor evaluate the bids based on whether bidders requested one 
or both services. Moreover, while the prospective applicant can require 
specific natural gas quality specifications such as would be met by 
using the conditioning services offered, it cannot reject an otherwise 
qualified bidder that states that it will deliver to the pipeline 
facilities gas that meets the stated quality specifications.
    88. On the other hand, if a prospective applicant is proposing to 
apply to revise the Alaska Natural Gas Transportation System (ANGTS) 
application now held in abeyance, then a conditioning service will have 
to be included as a part of the open season but again, with all 
services offered priced separately. Specifically, in 1981, President 
Reagan submitted a Waiver of Law to Congress for the purpose of 
clearing away certain government-imposed obstacles to the private 
financing of the ANGTS. The Commission implemented that portion of the 
Presidential waiver that required the Commission to include within the 
ANGTS the gas conditioning plant at Prudhoe Bay.\29\
---------------------------------------------------------------------------

    \29\ See Alaskan Northwest Natural Gas Transportation Co., 18 
FERC ] 61,002 (1982).
---------------------------------------------------------------------------

VIII. Pre-Subscribed Capacity

A. The Final Rule--Sec. Sec.  157.33(b) and 157.34(c)(15)
    89. Under section 157.33(b), pre-subscription agreements for 
initial capacity on a proposed Alaska natural gas transportation 
project are permitted, provided that capacity is offered to all open 
season prospective bidders at the same rates and on the same terms and 
conditions as contained in the pre-subscription agreements. In 
addition, if there is more than one pre-subscription agreement, open 
season prospective bidders are given the option of selecting the rates, 
terms and conditions contained in any one of the several agreements. 
However, section 157.34(c)(15) states that ``[i]f capacity is 
oversubscribed and the prospective applicant does not redesign the 
project to accommodate all capacity requests, only capacity that has 
been acquired through pre-subscription shall be subject to allocation 
on a pro rata basis; no capacity acquired through the open season shall 
be allocated.''
B. Rehearing/Clarification Requests
    90. The North Slope Producers assert that the provision in section 
157.34(c)(15) subjecting only presubscribed capacity to pro rata 
allocation, will dissuade any shippers from signing up for the 
presubscribed capacity, thereby ``wholly negating'' the recognized 
benefits of allowing pre-subscription agreements to facilitate the 
development of an Alaska natural gas transportation project. They 
predict that prospective shippers would rather wait for the open season 
than risk proration. The North Slope Producers maintain that this 
selective proration unduly discriminates against those shippers who are 
willing to make early commitments for firm capacity in order to support 
the project, in violation of the NGA and Commission policy. They add 
that since section 157.33(b) allows all open season participants to 
enjoy the same benefits as contained in the pre-subscription 
agreements, such discrimination is particularly unjustified. The North 
Slope Producers add that this is another example where the Commission 
is attempting to compel the project sponsor to make design changes in 
order to accommodate all bids.
    91. The North Slope Producers also state that the final clause of 
section 157.34(c)(15) is not consistent with the Commission's presumed 
intent not to foreclose proration among open season bidders where there 
is no presubscribed capacity. They suggest that the final clause of 
that provision, which states ``no capacity acquired through the open 
season shall be allocated,'' should be clarified.
    92. In addition to agreeing that proration renders pre-subscription 
an unattractive option for prospective shippers, Enbridge adds that the 
additional requirement that the terms and conditions of any pre-
subscription agreements be made public prior to the open season notice 
renders pre-subscription even less desirable because it put anchors 
shippers at a competitive disadvantage to open season bidders who would 
have prior knowledge of the pre-subscription bids. At the same time, 
Enbridge concedes that it would be highly unlikely that project would 
not be re-designed to accommodate capacity of all qualified bids at the 
incipient, open season stage.
    93. Enbridge raises again the claim that the ``numerous and 
overlapping protections'' of Order No. 2005, in particular the level of 
information provided in open season notice and measures provided to 
ensure against discrimination, are sufficient to ensure a fair, open 
and non-discriminatory open season process. Enbridge also states that 
the Commission should clarify that open season shippers who in the open 
season elect to select the terms and conditions of a pre-subscription 
agreement may not ``cherry-pick'' terms and conditions from several 
agreements but must accept any one agreement in its entirety.
    94. The State of Alaska seeks clarification that, in the case of 
capacity allocation on an oversubscribed pipeline that cannot 
reasonably be redesigned, both presubscribed capacity and capacity 
later acquired on the same rates, terms and conditions will be

[[Page 35023]]

subject to allocation, for the reason that the final words of section 
157.34(c)(15) stating that ``no capacity acquired through the open 
season shall be allocated,'' suggests otherwise.
    95. ChevronTexaco maintains that the Commission failed to consider 
and provide for the various circumstances that could trigger the pro-
rationing of pre-subscribed capacity. ChevronTexaco states that bidders 
in the open season could outbid pre-subscribing shippers on the basis 
of any of the qualifying conditions: For instance, an open season 
bidder might outbid pre-subscribing shippers whose agreements are at 
less than maximum rates, or whose agreements are of shorter terms. 
ChevronTexaco is concerned that pre-subscribing shippers might lose 
their capacity to open season bidders who outbid them because they know 
the salient terms of the pre-subscription agreements. Therefore, 
ChevronTexaco submits that the Commission should expand the requirement 
of pro-rationing by establishing that all bids eligible to be allocated 
capacity in an open season where pre-subscribing shippers will be 
prorated should be treated as having equal value to the pre-
subscription precedent agreement for purposes of pro-rationing. In this 
way, later qualifying bidders would be prevented from outbidding pre-
subscribing shippers.
    96. In response to the claims on rehearing that the capacity 
allocation provisions of section 157.34(c)(15) are counterproductive 
because they will deter potential anchor shippers from entering into 
pre-subscription agreements, Anadarko contends that the Commission's 
finding that the North Slope Producers' unique position of control over 
pipeline design amply justifies putting the consequences of any 
decision not to redesign pipeline to accommodate all bidders on them. 
Anadarko also questions the importance placed on pre-subscription 
agreements in connection with an Alaska pipeline project. According to 
Anadarko, the only justification for a pre-subscription agreement is to 
facilitate financing and to provide the project sponsor with assurances 
that it has the commitments to justify development and construction 
expenses. However, states Anadarko, there is little doubt that any 
Alaska natural gas transportation project will be fully committed, even 
without pre-subscription agreements.
    97. The Alaska Legislators support the pre-subscription rules of 
Order No. 2005, claiming that the rules make sense given the unique 
nature and circumstances of an Alaska natural gas transportation 
project and the need to balance concerns ``that pre-subscription is 
essential to finance the pipeline with concerns of those who feared 
that such arrangements would favor affiliates of the pipeline or 
otherwise undermine the objectives of conducting public open seasons 
for capacity.''
C. Commission Response
    98. Although we allowed pre-subscription agreements in the belief 
that they could have utility in facilitating the development of an 
Alaska natural gas transportation project, we cannot quantify how 
beneficial such arrangements are. Our paramount consideration in 
allowing pre-subscription was that it should not impact in any way the 
capacity obtained through the open season process. For this reason, we 
provided that any capacity acquired by reason of agreements entered 
into prior to the open season would have to yield to capacity bid for 
in the open season in the case of oversubscription We believe our 
reasons for this selective proration, as stated in Order No. 2005 and 
reaffirmed here, are sound.
    99. The argument that anchor shippers will be dissuaded from 
entering into pre-subscription agreements if they risk losing capacity 
as a result of open season bidding, and that the ``recognized 
benefits'' of pre-subscription will be lost, is unpersuasive. The North 
Slope producers and other potential project sponsors have developed a 
plethora of information in recent years regarding the viability of an 
Alaska project. They are fully capable of deciding whether they wish to 
execute pre-subscription agreements. If they do not, capacity will be 
allocated in an open season. There has been no showing that an Alaska 
project cannot be financed, as are many major projects, based on 
commitments made in an open season. While we have concluded that the 
public interest permits pre-subscription, under the conditions 
established by the rule, we do not find that the public interest 
requires pre-subscription. It does require competition and open-access. 
We leave it to potential project sponsors and shippers whether pre-
subscription makes sense to them.
    100. We will, however, clarify section 157.34(c)(15) in two 
respects, first to eliminate confusion over the last sentence of that 
section which concludes ``no capacity acquired through the open season 
shall be allocated,'' and second to make clear that in the event there 
is more than one pre-subscription agreement, bidders in the open season 
may not cherry-pick among the provisions of the several agreements. The 
North Slope Producers contend that the last clause of section 
157.34(c)(15) might be read to provide that proration is foreclosed 
among open season bidders even where there is no presubscribed 
capacity. We will clarify the language of the rule to avoid such a 
misreading. Capacity bid for in the open season is exempt from 
allocation only in a case where there is also presubscribed capacity, 
as explained in the text of Order No. 2005. The State of Alaska reads 
that clause to suggest that capacity acquired by bidders in the open 
season who elect to acquire their capacity on the same rates, terms and 
conditions as contained in a pre-subscription agreement will not be 
subject to pro rata allocation along with the pre-subscription 
shippers. Such an interpretation also misreads the intent of section 
157.34(c)(15), and we will clarify the language of the rule 
accordingly. Finally, we will clarify section 157.33 to make clear that 
open season bidders may not cherry pick among the provisions of several 
precedent agreements, as was our intent in the Final Rule.

IX. Other Issues

    101. The North Slope Producers request that the open season rules 
be clarified in certain respects. First, they request that the 
Commission clarify the open season regulations by replacing references 
to ``prospective points of delivery within the State of Alaska'' or 
``delivery points'' in several subsections of the regulation with the 
term ``tie-in points.'' \30\ The North Slope Producers assert that the 
term ``delivery point'' implies an obligation that the pipeline will be 
finally designed to deliver gas all the way to in-State markets and 
that ANGPA does not contemplate or impose such an obligation.
---------------------------------------------------------------------------

    \30\ These sections include Sec.  157.34(b) and 157.34(c)(1), 
(2), (3), (6), (8), and (16).
---------------------------------------------------------------------------

    102. The Commission understands the terms ``prospective points of 
delivery within the State of Alaska'' or ``delivery points'' to mean 
those points on the interstate Alaskan pipeline where custody of the 
gas would be transferred to the facilities of an intrastate pipeline, 
local distribution company, or end-user whose facilities are not 
otherwise under the Commission's jurisdiction, assuming that shippers 
on an Alaska pipeline requested such deliveries. The term ``tie-in 
points'' as used only once in ANGPA is used in reference to the study 
of in-state needs in section 103(g) and as a familiar natural gas 
industry phrase is not as familiar to the Commission as

[[Page 35024]]

the terms ``points of delivery'' or ``delivery points.'' \31\
---------------------------------------------------------------------------

    \31\ Although tie-in point is used in some Commission documents, 
the most common use is to identify the point where a pipeline's loop 
ties back into the mainline.
---------------------------------------------------------------------------

    103. As part of the open season, the prospective applicant is in 
fact obligated to offer to deliver gas at least at certain prospective 
in-state delivery points identified in the study of in-state needs. 
However, the open season notice's initial design of the pipeline need 
only match the prospective applicant's open season business proposal to 
deliver at least the amount of gas identified in the study of in-state 
needs at those prospective in-state delivery points. Bidders may seek 
alternative delivery points (such as ones closer to their market) as 
part of their bids, and as part of the open season the prospective 
applicant may consider building additional facilities to such alternate 
points, but has no obligation to do so as long as it treats similar 
requests the same. As discussed above, if the open season ends without 
any successful bids for in-state deliveries, then there is a continuing 
obligation for the prospective applicant to leave provision for such 
in-state service available in its tariff, but it would not have to 
voluntarily propose such service as part of its initial application. 
Also, as used in section 157.34, the term ``delivery point(s)'' also 
refers to the location at the border between Alaska and Canada where 
presumably prospective bidders will seek to have their volumes 
delivered. It would be much more confusing if the regulations were 
revised to refer to ``tie-in points'' for points inside Alaska and 
``delivery points'' for locations at the border between Alaska and 
Canada. Therefore, we will not clarify the rules as requested by the 
North Slope Producers in this regard.
    104. Second, the North Slope Producers state that the ``catch-all'' 
language in section 157.34(c)(18) was not scaled back enough from the 
language proposed in the NOPR. Specifically, they state that as 
written, the final regulation requires a pipeline applicant to provide 
all bidders, not only with information the applicant has provided to 
any bidder, but also with information ``in the hands of'' any bidder. 
The North Slope Producers claim that the applicant cannot know what 
information identified in section 157.34(c)(18) is ``in the hands of a 
potential shipper.'' Moreover, they contend that while the text of 
Order No. 2005 does not discuss the intent of this subsection, the 
Commission's press release and the Commission staff's PowerPoint 
presentation at the February 9, 2005 Commission Open Meeting 
presentation refer to information that the applicant has in some way 
made available to a potential shipper, and the regulations should be 
clarified to be consistent with this intent. The North Slope Producers 
add that, read literally, this language would call for protected 
information. Enbridge, on the other hand, claims that section 
15734(c)(18) should be eliminated as unnecessary due to the 
transparency assured by the rest of the numbered subsections of section 
157.34(c).
    105. Anadarko objects to this requested clarification, pointing out 
that the North Slope Producers are likely already to possess relevant 
project-related information as a result of discussions with other 
possible project sponsors, and if the North Slope Producers becomes the 
project sponsor, this information is already in their hands and was not 
made available to them by an applicant.
    106. The ``catchall'' provision addresses the difficult issue of 
separation of functions between a prospective applicant and its 
affiliates who produce, sell or market Alaska gas, and as such are 
potential bidders for capacity on an Alaska natural gas transportation 
project. It has been targeted as a problem since it appeared in the 
NOPR and it was discussed extensively in the Final Rule.\32\ The North 
Slope Producers have undertaken millions of dollars of due diligence 
``homework'' on the design, cost, operation and feasibility of an 
Alaska pipeline. If they are not affiliated with the prospective 
applicant for an Alaska pipeline, then all that knowledge and 
information is theirs and, presumably, would give them an informational 
advantage in the open season bidding. However, if the North Slope 
Producers are affiliated with the prospective applicant, then the 
Commission and other potential bidders must be assured that any 
relevant information about the design, cost, operation and feasibility 
of an Alaska pipeline that the North Slope Producers transfers to an 
affiliated prospective applicant is available to everyone. The 
Commission desires to make this very important part of the Final Rule 
as clear as possible. Thus, we will revise section 157.34(c)(18) to 
read as follows:
---------------------------------------------------------------------------

    \32\ See Order No. 2005 at P 72-83.

    All information that the prospective applicant has in its 
possession pertaining to the proposed service to be offered, 
projected pipeline capacity and design, proposed tariff provisions, 
and cost projections, or that the prospective applicant has made 
available to, or obtained from, any potential shipper, including any 
affiliates of the project sponsor and any shippers with pre-
subscribed capacity, prior to the issuance of the public notice of 
---------------------------------------------------------------------------
open season;

The Commission understands that the scope of this information is 
extensive. Therefore, we will not require that the contents of the open 
season notice to be published by the prospective applicant must contain 
copies of all the documents which would be covered under section 
157.34(c)(18), but that the notice identify a ``public reading room'' 
where such information is available, for copying at the reader's 
expense. Further, as the North Slope Producers point out, dealing with 
potential ``protected information'' will have to be addressed as it is 
in any commercial situation. The Commission expects that all parties 
will cooperate in dealing with ``protected information,'' but as in all 
matters pertaining to the open season process, the Commission and its 
staff stand ready to assist in resolving any disputes.
    107. Third, the North Slope Producers request that the Commission 
clarify the requirement in section 157.35(c) that the project applicant 
``create or designate a unit or division to conduct the open season 
that must function independent of the other divisions of the project 
applicant as well as the applicant's Marketing and Energy affiliates.'' 
They claim that they intend to create a separate entity to be the 
project sponsor and to conduct the open season, and that this section 
would require them to establish yet another separate entity to conduct 
the opens season, and that section 157.35(c) should be revised to 
reflect that this is sufficient. Specifically, the North Slope 
Producers propose to delete from the regulations the language requiring 
that a project applicant must designate a separate unit or division to 
conduct the open season. Anadarko claims that this requested 
clarification would largely nullify the purpose of section 157.35(c).
    108. The Commission denies the North Slope Producers' proposed 
change to section 157.35(c). However, the Commission will amend the 
section to take into account situations in which a project applicant is 
an entity that has been separately created for the purpose of 
conducting an open season. In such cases, the separate entity would 
comply with the provisions of section 157.35(c) if that project 
applicant functioned and operated independently from the project 
applicant's Marketing and Energy Affiliates, as well as the other 
divisions of the project applicant. The purpose of section 157.35(c) is 
to ensure that the project applicant conducting the open season is 
independent of, and does not

[[Page 35025]]

favor, its affiliates. If the project applicant was created to comply 
with section 157.35(c) and does, in fact, comply with the regulation, 
the project applicant is not required to create a further subdivision 
to achieve compliance.
    109. The North Slope Producers identify several other non-
substantive clarifications to the regulatory language that should be 
made to avoid confusion.\33\ These corrections will be made.
---------------------------------------------------------------------------

    \33\ These include typographical errors in section 157.35(d) 
(references to sections 258.4(a)(1) and (3) should be to sections 
358.4(a)(1) and (3)), Order No. 2005, P 74 (should cite to 
Sec. Sec.  358.5(d) and 358.4(e)(3) rather than Sec. Sec.  358.4(d) 
and 358.(b)(e)(3)); section 157.34(c)(9) (``proscribed'' should be 
changed to ``prescribed''); and section 157.33(b) (``terms, rates, 
terms and conditions'' should be changed to ``duration, rates, terms 
and conditions''). The North Slope Producers also suggest that the 
term ``rate amounts'' in section 157.34(c)(9) should be changed to 
``rates'' as the latter term is more commonly used in the industry.
---------------------------------------------------------------------------

    110. Enbridge argues that since the open season regulations require 
that the project design criteria include a requirement that the project 
be capable of ``low-cost expansion,'' \34\ the Commission should 
explain that the threshold for satisfying the low-cost expansion'' 
standard is any expansion that does not increase rates to initial 
shippers. However, as Enbridge recognizes, any certificate application 
for an Alaska natural gas transportation project might provide detail 
regarding several expansion scenarios depending on and in response to 
the results of the open season. The project design review that the 
Commission will undertake focuses on the proposed project's ability to 
accommodate the capacity bid for in the open season, as well as the 
extent to which the project can accommodate ``low-cost'' expansion. All 
expansions will involve cost. Obviously, as recognized by virtually all 
stakeholders, capacity that can be gained by compression alone would 
typically be the lowest-cost expansion. At the other end of the 
spectrum would be a pipeline that has no compression-only expansion 
potential, necessitating the need for looping in the first instance. 
The operative word in connection with any ``low-cost'' standard in 
section 157.37, is the extent of the design's expandability, and that 
standard is not tied to the cost impact of a given expansion. 
Consequently we will not clarify section 157.37 as requested by 
Enbridge.
---------------------------------------------------------------------------

    \34\ See, e.g., Order No. 2005 at P 82; section 157.37.
---------------------------------------------------------------------------

    111. ChevronTexaco claims that the Final Rule contains a conflict 
about how the contract term might be used by the prospective applicant 
in establishing its methodologies for the evaluation of bids and the 
allocation of capacity due to oversubscription, should that be 
necessary. It states that this confusion is caused because contract 
term is not mentioned in section 157.34(c)(14) regarding evaluation of 
bids, but is mentioned in section 157.34(c)(15) regarding allocation of 
capacity due to oversubscription. ChevronTexaco also complains that the 
Commission's stated intention to rely on after the fact enforcement of 
issues that might be caused by unusual contract terms, rather than set 
a cap on contract term for the purpose of bidding and allocation review 
methodologies, does not satisfy ANGPA's mandate that the Commission's 
open season rules are fully prescriptive. ChevronTexaco requests that 
the Commission clarify the open season regulations to require that open 
season notices to include a cap on the contract term for capacity bids.
    112. First, our intention to rely on after-the-fact enforcement of 
open season issues that might be caused by unusual contract terms, or 
by any other aspect of the open season process that is not specifically 
enumerated in the open season regulations, completely satisfies the 
intent of Congress as stated in ANGPA. Moreover, as explained in Order 
No. 2005, it is consistent with our existing policy. However, we do 
agree that the discrepancy in language between section 157.34(c)(14) 
and section 157.34(c)(15) should be clarified to provide consistency 
between the methodologies for the evaluation of bids and the allocation 
of capacity due to oversubscription. To be consistent and avoid 
confusion, we will delete the phrase ``including price and contract 
term'' from section 157.34(c)(15). Furthermore, we will look carefully 
at this issue in our review of any open season plan and notice under 
section 157.38.
    113. ChevronTexaco claims that the only way to assure that an open 
season was conducted fairly and in accordance with the open season 
rules is by making the precedent agreements publicly available. 
Therefore, ChevronTexaco objects to the provision in section 
157.34(d)(4) which provides that all precedent agreements and 
correspondence with bidders who were not allocated capacity must be 
filed with the Commission, but that they may be filed under a request 
for confidential treatment pursuant to section 388.112 of the 
Commission's regulations. ChevronTexaco claims that since precedent 
agreements will become agreements that will appear in a pro forma 
tariff or an effective tariff, there is little chance that the 
information in the precedent agreements should be confidential for any 
prolonged period of time, or that any of the information would fall 
under a Freedom of Information Act exemption. ChevronTexaco states that 
the precedent agreements could be filed in a public and non-public 
version in the event parts of the agreements do contain protected 
information.
    114. We deny ChevronTexaco's request. Under section 388.112 of the 
Commission's regulations, any person submitting a document to the 
Commission may request privileged treatment by claiming that some or 
all other information is exempt from the Freedom of Information Act's 
disclosure requirements. We are nor conferring any special confidential 
status to the agreements. The party requesting privileged treatment 
must support that claim. It may be, as ChevronTexaco claims, that 
precedent agreements are not likely to be exempt from disclosure. 
Neither section 157.35(d)(4) nor section 388.112 predetermines whether 
privileged treatment will be granted.

Document Availability

    115. 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 FERC's Home Page (http://www.ferc.gov) and in FERC'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.
    116. From FERC's Home Page on the Internet, this information is 
available in the Federal Energy Regulatory Records Information System 
(FERRIS). The full text of this document is available on FERRIS in PDF 
and Microsoft Word format for viewing, printing, and/or downloading. To 
access this document in FERRIS, type the docket number excluding the 
last three digits of this document in the docket number field.
    117. User assistance is available for FERRIS and the FERC's Web 
site during normal business hours from our Help line at (202) 502-8222 
or the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-Mail the Public Reference Room at 
[email protected].

Effective Date

    118. These regulations are effective as of the date of publication 
in the Federal Register.

[[Page 35026]]

List of Subjects in 18 CFR Part 157

    Administrative practice and procedure; Natural gas; Reporting and 
recordkeeping requirements.

    By the Commission.
Linda Mitry,
Deputy Secretary.

0
In consideration of the foregoing, the Commission amends Part 157, 
Chapter I, Title 18, Code of Federal Regulations, as follows.

PART 157--APPLICATIONS FOR CERTIFICTES OF PUBLIC CONVENIENCE AND 
NECESSITY AND FOR ORDERS PERMITTING AND APPROVING ABANDONMENT UNDER 
SECTION 7 OF THE NATURAL GAS ACT

0
1. The authority citation for Part 157 is revised to read as follows:

    Authority: 15 U.S.C. 717-717w.

Subpart B--Open Seasons for Alaska Natural Gas Transportion 
Projects

0
2. In Sec.  157.33, paragraph (b) is revised to read as follows:


Sec.  157.33  Requirement for open seasons.

    (a) * * *
    (b) Initial capacity on a proposed Alaska natural gas 
transportation project may be acquired prior to an open season through 
pre-subscription agreements, provided that in any open season as 
required in paragraph (a) of this section, capacity is offered to all 
prospective bidders at the same rates and on the same terms and 
conditions as contained in the pre-subscription agreements. All pre-
subscription agreements shall be made public by posting on Internet 
websites and press releases within ten days of their execution. In the 
event there is more than one such agreement, all prospective bidders 
shall be allowed the option of selecting among the several agreements 
all of the rates, terms and conditions contained in any one such 
agreement.

0
3. In Sec.  157.34, paragraphs (a), (c)(9), (c)(15) and (c)(18), and 
(d)(2) are revised to read as follows:


Sec.  157.34  Notice of open season.

    (a) Notice. A prospective applicant must provide reasonable public 
notice of an open season through methods including postings on Internet 
Web sites, press releases, direct mail solicitations, and other 
advertising. In addition, a prospective applicant must provide actual 
notice of an open season to the State of Alaska and to the Federal 
Coordinator for Alaska Natural Gas Transportation Projects.
* * * * *
    (c) * * *
    (9) Negotiated rate and other rate options under consideration, 
including any rates and terms of any precedent agreements with 
prospective anchor shippers that have been negotiated or agreed to 
outside of the open season process prescribed in this section;
* * * * *
    (15) The methodology by which capacity will be awarded, in the case 
of over-subscription, clearly stating all terms that will be 
considered, except that if any capacity is acquired through pre-
subscription agreements as provided in Sec.  157.33(b) and the 
prospective applicant does not redesign the project to accommodate all 
capacity requests, only that capacity that was acquired through pre-
subscription or was bid in the open season on the same rates, terms, 
and conditions as any one of the pre-subscription agreements shall be 
allocated on a pro rata basis and no other capacity acquired through 
the open season shall be allocated.
* * * * *
    (18) All information that the prospective applicant has in its 
possession pertaining to the proposed service to be offered, projected 
pipeline capacity and design, proposed tariff provisions, and cost 
projections, or that the prospective applicant has made available to, 
or obtained from, any potential shipper, including any affiliates of 
the project sponsor and any shippers with pre-subscribed capacity, 
prior to the issuance of the public notice of open season;
* * * * *
    (d) * * *
    (2) A prospective applicant must consider any bids tendered after 
the expiration of the open season by qualifying bidders and may reject 
them only if they cannot be accommodated due to economic, engineering, 
design, capacity or operational constraints, or accommodating the 
request would otherwise adversely impact the timely development of the 
project, and a detailed explanation must accompany the rejection. Any 
bids tendered after the expiration of the open season must contain a 
good faith showing, including a statement of the circumstances which 
prevented the late bidder from tendering a timely bid and how those 
circumstances have changed. If a prospective applicant determines at 
any time that, based on the criteria stated in this paragraph, no 
further late bids for capacity can be accommodated, it may request 
Commission approval to summarily reject any further requests.
* * * * *

0
4. In Sec.  157.35, paragraph (c) is revised to read as follows and 
paragraph (d), the word ``258.4(a)(1)'' is removed and the word 
``358.4(a)(1)'' is inserted in its place.


Sec.  157.35  Undue discrimination or preference.

    (a) * * *
    (b) * * *
    (c) Each prospective applicant conducting an open season under this 
subpart must function independent of the other divisions of the 
prospective applicant as well as the prospective applicant's Marketing 
and Energy affiliates as those terms are defined in Sec.  358.3(d) and 
(k) of the Commission's regulations. In instances in which the 
prospective applicant is not an entity created specifically to conduct 
an open season under this subpart, the prospective applicant must 
create or designate a unit or division to conduct the open season that 
must function independent of the other divisions of the project 
applicant as well as the project applicant's Marketing and Energy 
affiliates as those terms are defined in Sec.  358.3(d) and (k) of the 
Commission's regulations.
* * * * *

0
5. Section 157.36 is revised to read as follows:


Sec.  157.36  Open seasons for expansions.

    Any open season for capacity exceeding the initial capacity of an 
Alaska natural gas transportation project must provide the opportunity 
for the transportation of gas other than Prudhoe Bay or Point Thomson 
production. In considering a proposed voluntary expansion of an Alaska 
natural gas pipeline project, the Commission will consider the extent 
to which the expansion will be utilized by shippers other than those 
who are the initial shippers on the project and, in order to promote 
competition and open access to the project, may require design changes 
to ensure that some portion of the expansion capacity be allocated to 
new shippers willing to sign long-term firm transportation contracts, 
including shippers seeking to transport natural gas from areas other 
than Prudhoe Bay and Point Thomson.

0
6. Section 157.38 is revised to read as follows:


Sec.  157.38  Pre-approval procedures.

    No later than 90 days prior to providing the notice of open season 
required by Sec.  157.34(a), a prospective

[[Page 35027]]

applicant must file, for Commission approval, a detailed plan for 
conducting an open season in conformance with this subpart. The 
prospective applicant's plan shall include the proposed notice of open 
season. Upon receipt of a request for such a determination, the 
Secretary of the Commission shall issue a notice of the request, which 
will then be published in the Federal Register. The notice shall 
establish a date on which comments from interested persons are due and 
a date, which shall be within 60 days of receipt of the prospective 
applicant's request unless otherwise directed by the Commission, by 
which the Commission will act on the proposed plan.

[FR Doc. 05-11658 Filed 6-15-05; 8:45 am]
BILLING CODE 6717-01-P