[Federal Register Volume 72, Number 226 (Monday, November 26, 2007)]
[Proposed Rules]
[Pages 65916-65936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-22952]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-000]


Promotion of a More Efficient Capacity Release Market

November 15, 2007.
AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission is proposing 
revisions to its regulations governing interstate natural gas pipelines 
to reflect changes in the market for short-term transportation services 
on pipelines and to improve the efficiency of the Commission's capacity 
release mechanism. The Commission is proposing to permit market based 
pricing for short-term capacity releases and to facilitate asset 
management arrangements by relaxing the Commission's prohibition on 
tying and on its bidding requirements for certain capacity releases.

DATES: Comments are due January 10, 2008.

ADDRESSES: You may submit comments, identified by docket number by any 
of the following methods:
    Agency Web site: http://ferc.gov. Documents created electronically 
using word processing software should be filed in native applications 
or print-to-PDF format and not in a scanned format.
    Mail/Hand Delivery: Commenters unable to file comments 
electronically must mail or hand deliver an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Secretary of 
the Commission, 888 First Street, NE., Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Comment 
Procedures section of this document.

FOR FURTHER INFORMATION CONTACT: 
Robert McLean, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, 
[email protected], (202) 502-8156.
David Maranville, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
[email protected], (202) 502-6351.

SUPPLEMENTARY INFORMATION: 

Notice of Proposed Rulemaking

Table of Contents

 
                                                              Paragraph
                                                               numbers
 
I. Background..............................................           2.
  A. The Capacity Release Program..........................           2.
  B. Petitions and Industry Comments.......................          15.
II. Removal of Maximum Rate Ceiling for Short-Term Capacity          23.
 Release...................................................
  A. Policies Enhancing Competition........................          30.
  B. Data on Capacity Release Transactions.................          33.
  C. Available Pipeline Service Constrains Market Power              40.
   Abuses..................................................
  D. Monitoring............................................          42.
  E. Requests to Expand Market-Based Rate Authority........          43.
    1. Removal of Price Ceiling for Long-Term Releases.....          43.
    2. Removal of Price Ceiling for Pipeline Short-Term              46.
     Transactions..........................................
III. Asset Management Arrangements.........................          53.
  A. Background............................................          53.
  B. Discussion............................................          63.
    1. Tying...............................................          75.
    2. The Bidding Requirement.............................          83.
    3. Definition of AMAs..................................          91.
IV. State Mandated Retail Choice Programs..................          97.
V. Shipper Must-Have-Title Requirement.....................         106.
VI. Regulatory Requirements................................         111.
  A. Information Collection Statement......................         111.
  B. Environmental Analysis................................         114.
  C. Regulatory Flexibility Act............................         115.
  D. Comment Procedures....................................         117.
  E. Document Availability.................................         121.
 

    1. In this Notice of Proposed Rulemaking, the Commission proposes 
to revise its Part 284 regulations

[[Page 65917]]

concerning the release of firm capacity by shippers on interstate 
natural gas pipelines. First, the Commission proposes to remove, on a 
permanent basis, the rate ceiling on capacity release transactions of 
one year or less. Second, the Commission proposes to modify its 
regulations to facilitate the use of asset management arrangements 
(AMAs), under which a capacity holder releases some or all of its 
pipeline capacity to an asset manager who agrees to supply the gas 
needs of the capacity holder. Specifically, the Commission proposes to 
exempt capacity releases made as part of AMAs from the prohibition on 
tying and from the bidding requirements of section 284.8. These 
proposals are designed to enhance competition in the secondary capacity 
release market and increase shipper options for how they obtain gas 
supplies.

I. Background

A. The Capacity Release Program

    2. The Commission adopted its capacity release program as part of 
the restructuring of natural gas pipelines required by Order No. 
636.\1\ In Order No. 636, the Commission sought to foster two primary 
goals. The first goal was to ensure that all shippers have meaningful 
access to the pipeline transportation grid so that willing buyers and 
sellers can meet in a competitive, national market to transact the most 
efficient deals possible. The second goal was to ensure consumers have 
``access to an adequate supply of gas at a reasonable price.'' \2\
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    \1\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation and Regulation of Natural 
Gas Pipelines After Partial Wellhead Decontrol, Order No. 636, 57 FR 
13,267 (April 16, 1992), FERC Stats. and Regs., Regulations 
Preambles January 1991-June 1996 ] 30,939 (April 8, 1992); order on 
reh'g, Order No. 636-A, 57 FR 36,128 (August 12, 1002), FERC Stats. 
and Regs., Regulations Preambles January 1991-June 1996 ] 30,950 
(August 3, 1992); order on reh'g, Order No. 636-B, 57 FR 57,911 
(Dec. 8, 1992), 61 FERC ] 61,272 (1992); notice of denial of reh'g, 
62 FERC ] 61,007 (1993); aff'd in part, vacated and remanded in 
part, United Dist. Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); 
order on remand, Order No. 636-C, 78 FERC ] 61,186 (1997).
    \2\ Order No. 636 at 30,393 (citations omitted).
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    3. To accomplish these goals, the Commission sought to maximize the 
availability of unbundled firm transportation service to all 
participants in the gas commodity market. The linchpin of Order No. 636 
was the requirement that pipelines unbundle their transportation and 
storage services from their sales service, so that gas purchasers could 
obtain the same high quality firm transportation service whether they 
purchased from the pipeline or another gas seller. In order to create a 
transparent program for the reallocation of interstate pipeline 
capacity to complement the unbundled, open access environment created 
by Order No. 636, the Commission also adopted a comprehensive capacity 
release program to increase the availability of unbundled firm 
transportation capacity by permitting firm shippers to release their 
capacity to others when they were not using it.\3\
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    \3\ In brief, under the Commission's capacity release program, a 
firm shipper (releasing shipper) sells its capacity by returning its 
capacity to the pipeline for reassignment to the buyer (replacement 
shipper). The pipeline contracts with, and receives payment from, 
the replacement shipper and then issues a credit to the releasing 
shipper. The replacement shipper may pay less than the pipeline's 
maximum tariff rate, but not more. 18 CFR 284.8(e) (2007). The 
results of all releases are posted by the pipeline on its Internet 
Web site and made available through standardized, downloadable 
files.
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    4. The Commission reasoned that the capacity release program would 
promote efficient load management by the pipeline and its customers and 
would, therefore, result in the efficient use of firm pipeline capacity 
throughout the year. It further concluded that, ``because more buyers 
will be able to reach more sellers through firm transportation 
capacity, capacity reallocation comports with the goal of improving 
nondiscriminatory, open access transportation to maximize the benefits 
of the decontrol of natural gas at the wellhead and in the field.'' \4\
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    \4\ Order No. 636 at 30,418.
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    5. In Order No. 636, the Commission expressed concerns regarding 
its ability to ensure that firm shippers would reallocate their 
capacity in a non-discriminatory manner to those who placed the highest 
value on the capacity up to the maximum rate. The Commission noted that 
prior to Order No. 636, it authorized some pipelines to permit their 
shippers to ``broker'' their capacity to others. Under such capacity 
brokering, firm shippers were permitted to assign their capacity 
directly to a replacement shipper, without any requirement that the 
brokering shipper post the availability of its capacity or allocate it 
to the highest bidder.\5\ However, in Order No. 636, the Commission 
found ``there [were] too many potential assignors of capacity and too 
many different programs for the Commission to oversee capacity 
brokering.'' \6\
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    \5\ See Algonquin Gas Transmission Corp., 59 FERC ] 61,032 
(1992).
    \6\ Order No. 636 at 30,416.
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    6. The Commission sought to ensure that the efficiencies of the 
secondary market were not frustrated by unduly discriminatory access to 
the market.\7\ Therefore, the Commission replaced capacity brokering 
with the capacity release program designed to provide greater assurance 
that transfers of capacity from one shipper to another were transparent 
and not unduly discriminatory. This assurance took the form of several 
conditions that the Commission placed on the transfer of capacity under 
its new program.
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    \7\ Order No. 636-A at 30,554.
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    7. First, the Commission prohibited private transfers of capacity 
between shippers and, instead, required that all release transactions 
be conducted through the pipeline. Therefore, when a releasing shipper 
releases its capacity, the replacement shipper must enter into a 
contract directly with the pipeline, and the pipeline must post 
information regarding the contract, including any special 
conditions.\8\ In order to enforce the prohibition on private transfers 
of capacity, the Commission required that a shipper must have title to 
any gas that it ships on the pipeline.\9\
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    \8\ Order No. 636 emphasized:
    The main difference between capacity brokering as it now exists 
and the new capacity release program is that under capacity 
brokering, the brokering customer could enter into and execute its 
own deals without involving the pipeline. Under capacity releasing, 
all offers must be put on the pipeline's electronic bulletin board 
and contracting is done directly with the pipeline. Order No. 636 at 
30, 420 (emphasis in original).
    \9\ As the Commission subsequently explained in Order No. 637, 
``the capacity release rules were designed with [the shipper-must-
have-title] policy as their foundation,'' because, without this 
requirement, ``capacity holders could simply transport gas over the 
pipeline for another entity.'' Regulation of Short-Term Natural Gas 
Transportation Services and Regulation of Interstate Natural Gas 
Transportation Services, Order No. 637, FERC Stats. & Regs. ] 31,091 
at 31,300, clarified, Order No. 637-A, FERC Stats. & Regs. ] 31,099, 
reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd in 
part and remanded in part sub nom. Interstate Natural Gas Ass'n of 
America v. FERC, 285 F.3d 18 (D.C. Cir. 2002), order on remand, 101 
FERC ] 61,127 (2002), order on reh'g, 106 FERC ] 61,088 (2004), 
aff'd sub nom. American Gas Ass'n v. FERC, 428 F.3d 255 (D.C. Cir. 
2005). See section V below for a further explanation of the shipper-
must-have-title requirement.
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    8. Second, the Commission determined that the record of the 
proceeding that led to Order No. 636 did not reflect that the market 
for released capacity was competitive. The Commission reasoned that the 
extent of competition in the secondary market may not be sufficient to 
ensure that the rates for released capacity will be just and 
reasonable. Therefore, the Commission imposed a ceiling on the rate 
that the releasing shipper could charge for the released capacity.\10\ 
This ceiling was derived from the Commission's estimate of the maximum 
rates necessary for the pipeline to

[[Page 65918]]

recover its annual cost-of-service revenue requirement, which the 
Commission prorated over the period of each release.\11\
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    \10\ Order No. 636 at 30,418; Order No. 636-A at 30,560.f
    \11\ Order No. 637 at 31,270-71.
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    9. Third, the Commission required that capacity offered for release 
at less than the maximum rate must be posted for bidding, and the 
pipeline must allocate the capacity ``to the person offering the 
highest rate (not over the maximum rate).'' \12\ The Commission 
permitted the releasing shipper to choose a pre-arranged replacement 
shipper who can retain the capacity by matching the highest bid rate. 
The bidding requirement, however, does not apply to releases of 31 days 
or less or to any release at the maximum rate. But all releases, 
whether or not subject to bidding, must be posted.\13\
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    \12\ 18 CFR Sec. 284.8(e) (2007) provides in pertinent part that 
``[t]he pipeline must allocate released capacity to the person 
offering the highest rate (not over the maximum rate) and offering 
to meet any other terms or conditions of the release.''
    \13\ 18 CFR Sec.  284.8(h)(1) provides that a release of 
capacity for less than 31 days, or for any term at the maximum rate, 
need not comply with certain notification and bidding requirements, 
but that such release may not exceed the maximum rate. Notice of the 
release ``must be provided on the pipeline's electronic bulletin 
board as soon as possible, but not later than forty-eight hours, 
after the release transaction commences.''
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    10. Finally, the Commission prohibited tying the release of 
capacity to any extraneous conditions so that the releasing shippers 
could not attempt to add additional terms or conditions to the release 
of capacity. The Commission articulated the prohibition against the 
tying of capacity in Order No. 636-A, where it stated:

    The Commission reiterates that all terms and conditions for 
capacity release must be posted and non-discriminatory and must 
relate solely to the details of acquiring transportation on the 
interstate pipelines. Release of capacity cannot be tied to any 
other conditions. Moreover, the Commission will not tolerate deals 
undertaken to avoid the notice requirements of the regulations. 
Order No. 636-A at 30, 559 (emphasis in the original).

    11. Subsequent to the Commission's adoption of its capacity release 
program in Order No. 636, the Commission conducted two experimental 
programs to provide more flexibility in the capacity release market. In 
1996, the Commission sought to establish an experimental program 
inviting individual shipper and pipeline applications to remove price 
ceilings related to capacity release.\14\ The Commission recognized 
that significant benefits could be realized through removal of the 
price ceiling in a competitive secondary market. Removal of the ceiling 
permits more efficient capacity utilization by permitting prices to 
rise to market clearing levels and by permitting those who place the 
highest value on the capacity to obtain it.\15\
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    \14\ Secondary Market Transactions on Interstate Natural Gas 
Pipelines, Proposed Experimental Pilot Program to Relax the Price 
Cap for Secondary Market Transactions, 61 FR 41401 (Aug. 8, 1996), 
76 FERC ] 61,120, order on reh'g, 77 FERC ] 61,183 (1996).
    \15\ 77 FERC ] 61,183 (1996) at 61,699.
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    12. In 2000, in Order No. 637, the Commission conducted a broader 
experiment in which the Commission removed the rate ceiling for short-
term (less than one year) capacity release transactions for a two-year 
period ending September 30, 2002. In contrast to the experiment that it 
conducted in 1996, in the Order No. 637 experiment the Commission 
granted blanket authorization in order to permit all firm shippers on 
all open access pipelines to participate. The Commission stated that it 
undertook this experiment to improve shipper options and market 
efficiency during peak periods. The Commission reasoned that during 
peak periods, the maximum rate cap on capacity release transactions 
inhibits the creation of an effective transportation market by 
preventing capacity from going to those that value it the most and 
therefore the elimination of this rate ceiling would eliminate this 
inefficiency and enhance shipper options in the short-term 
marketplace.\16\
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    \16\ Order No. 637 at 31,263. The Commission also explained why 
it was lifting the price cap on an experimental basis, instead of 
permanently, stating:
    While the removal of the price cap is justified based on the 
record in this rulemaking, the Commission recognizes that this is a 
significant regulatory change that should be subject to ongoing 
review by the Commission and the industry. No matter how good the 
data suggesting that a regulatory change should be made, there is no 
substitute for reviewing the actual results of a regulatory action. 
The two year waiver will provide an opportunity for such a review 
after sufficient information is obtained to validly assess the 
results. Due to the variation between years in winter temperatures, 
the waiver will provide the Commission and the industry with two 
winter's worth of data with which to examine the effects of this 
policy change and determine whether changes or modifications may be 
needed prior to the expiration of the waiver. Order No. 637 at 
31,279.
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    13. Upon an examination of pricing data on basis differentials 
between points,\17\ the Commission found that the price ceiling on 
capacity release transactions limited the capacity options of short-
term shippers because firm capacity holders were able to avoid price 
ceilings on released capacity by substituting bundled sales 
transactions at market prices (where the market place value of 
transportation is an implicit component of the delivered price). As a 
consequence, the Commission determined that the price ceilings did not 
limit the prices paid by shippers in the short-term market as much as 
the ceilings limit transportation options for shippers. In short, the 
Commission found that the rate ceiling worked against the interests of 
short-term shippers, because with the rate ceilings in place, a shipper 
looking for short-term capacity on a peak day who was willing to offer 
a higher price in order to obtain it, could not legally do so; this 
reduced its options for procuring short-term transportation at the 
times that it needed it most.\18\ Throughout this experiment, the 
Commission retained the rate ceiling for firm and interruptible 
capacity available from the pipeline as well as long-term capacity 
release transactions.
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    \17\ Among other things, the data showed that the value of 
pipeline capacity, as shown by basis differentials, was generally 
less than the pipelines' maximum interruptible transportation rates, 
except during the coldest days of the year, and capacity release 
prices also averaged somewhat less than pipelines' maximum 
interruptible rates.
    \18\ Order No. 637 at 31,282.
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    14. On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit, in Interstate Natural Gas Association of 
America v. FERC,\19\ upheld the Commission's experimental price ceiling 
program for short-term capacity release transactions as set forth in 
Order No. 637.\20\ The court found that the Commission's ``light 
handed'' approach to the regulation of capacity release prices was, 
given the safeguards that the Commission had imposed, consistent with 
the criteria set forth in Farmers Union Cent. Exch. v. FERC.\21\ The 
court found that the Commission made a substantial record for the 
proposition that market rates would not materially exceed the ``zone of 
reasonableness'' required by Farmers Union. The court also found that 
the Commission's inference of competition in the capacity release 
market was well founded, that the price spikes shown in the 
Commission's data were consistent with competition and reflected 
scarcity of supply rather than monopoly power, and that outside of such 
price spikes, the rates were well below the estimated regulated 
price.\22\
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    \19\ 285 F.3d 18 (D.C. Cir. 2002) (INGAA).
    \20\ Specifically, the court found that: ``[g]iven the 
substantial showing that in this context competition has every 
reasonable prospect of preventing seriously monopolistic pricing, 
together with the non-cost advantages cited by the Commission and 
the experimental nature of this particular ``lighthanded'' 
regulation, we find the Commission's decision neither a violation of 
the NGA, nor arbitrary or capricious.'' INGAA at 35.
    \21\ 734 F.2d 1486 (D.C. Cir. 1984) (Farmers Union).
    \22\ Id. at 33.

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[[Page 65919]]

B. Petitions and Industry Comments

    15. In August 2006, Pacific Gas and Electric Co. (PG&E) and 
Southwest Gas Corp. (Southwest) filed a petition requesting the 
Commission to amend sections 284.8(e) and (h)(1) of its regulations to 
remove the maximum rate cap on capacity release transactions.\23\ They 
stated that removing the price ceiling would improve the efficiency of 
the capacity market by giving releasing shippers a greater incentive to 
release their capacity during periods of constraint. They asserted that 
this would allow shippers who value the capacity the most to obtain it, 
provide more accurate price signals concerning the value of capacity, 
and provide greater potential cost mitigation to holders of long-term 
firm capacity. They also pointed out that the Commission now permits 
pipelines to negotiate rates with individual customers using basis 
differentials (i.e., the difference between natural gas commodity 
prices at two trading points, such as a supply basin and a city gate 
delivery point) and such negotiated rates may exceed the pipeline's 
recourse maximum rate. PG&E and Southwest assert that releasing 
shippers must have greater pricing flexibility in order to compete with 
such negotiated rate deals offered by the pipelines.
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    \23\ Docket No. RM06-21-000. PG&E subsequently clarified that it 
only seeks removal of the price cap for capacity releases of less 
than a year.
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    16. In October 2006, a group of large natural gas marketers \24\ 
(Marketer Petitioners) requested clarification of the operation of the 
Commission's capacity release rules in the context of asset (or 
portfolio) management services.\25\ An AMA is an agreement under which 
a capacity holder releases, on a pre-arranged basis, all or some of its 
pipeline capacity, along with associated gas purchase contracts, to an 
asset or portfolio manager. The asset manager uses the capacity to 
satisfy the gas supply needs of the releasing shipper, and, when the 
capacity is not needed to serve the releasing shipper, the asset 
manager uses it to make gas sales or re-releases the capacity to third 
parties.
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    \24\ Coral Energy Resources, LP; ConocoPhillips Co.; Chevron 
USA, Inc.; Constellation Energy Commodities Group, Inc.; Tenaska 
Marketing Ventures; Merrill Lynch Commodities, Inc.; Nexen Marketing 
USA, Inc.; and UBS Energy LLC.
    \25\ The Marketer Petitioners originally filed their petition in 
Docket Nos. RM91-11-009 and RM98-10-013. However, the Commission has 
re-docketed the petition in Docket No. RM07-4-000.
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    17. The Marketer Petitioners state that Order No. 636 adopted the 
capacity release program as a means for shippers to transfer unneeded 
capacity to other entities who desired it. However, the Marketer 
Petitioners state, today many local distribution companies (LDCs) and 
others desire to release their capacity to a replacement shipper (asset 
manager) with greater market expertise, who will continue to use the 
capacity to provide gas supplies to the releasing shipper and will be 
better able to maximize the value of the released capacity when it is 
not needed to serve the releasing shipper. The Marketer Petitioners 
state that the Commission's current capacity release rules may 
interfere with marketers providing efficient asset management services. 
They also assert that they are not seeking to remove the capacity 
release rate cap, but acknowledge that if the Commission took such 
action, it would eliminate some of their problems.
    18. On January 3, 2007, the Commission issued a request for 
comments on the current operation of the Commission's capacity release 
program and whether changes in any of its capacity release policies 
would improve the efficiency of the natural gas market.\26\ The 
Commission's request for comments was in part in response to the 
petitions discussed above. In addition to the issues raised by the 
petitions, the Commission also included in its request for comments a 
series of questions asking whether the Commission should lift the price 
ceiling, remove its capacity release bidding requirements, modify its 
prohibition on tying arrangements, and/or remove the shipper-must-have-
title requirement.
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    \26\ Pacific Gas & Electric Co., 118 FERC ] 61,005 (2007).
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    19. In response to the price ceiling issues, commenting LDCs and 
pipelines both advocate lifting the ceiling, subject to different 
conditions. The LDCs favor lifting the ceiling only if it would still 
apply to the pipeline's direct sales of capacity because, among other 
things, the pipelines have negotiated rate authority that is not 
available to releasing shippers.\27\ The pipelines advocate the removal 
of the cap only if the Commission removes the cap from the entire 
capacity marketplace; otherwise, they argue, it will create a 
bifurcated market and an uneven playing field.
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    \27\ Under the negotiated rate program, a pipeline may charge 
rates different from those set forth in its open access tariff, as 
long as the shipper has recourse to taking service at the maximum 
tariff rate. See, Alternatives to Traditional Cost-of-Service 
Ratemaking for Natural Gas Pipelines, 74 FERC ] 61,076, reh'g 
denied, 75 FERC ] 61,024 (1996), petitions for review denied sub 
nom., Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (D.C. 
Cir. 1998). See also Natural Gas Pipelines Negotiated Rate Policies 
and Practices; Modification of Negotiated Rate Policy, 104 FERC ] 
61,134 (2003), order on reh'g and clarification, 114 FERC ] 61,042, 
dismissing reh'g and denying clarification, 114 FERC ] 61,304 
(2006).
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    20. Producers and industrial customers generally oppose lifting the 
price ceiling on a permanent basis, arguing that the Commission must 
first develop new data to support such action and that it cannot rely 
on the results of the Order No. 637 experiment that terminated five 
years ago. Certain producers, however, would countenance a new 
experiment conducted by the Commission to gather new data related to 
the lifting of the price ceiling. Additionally, certain marketers and 
the American Public Gas Association (APGA) argue that the Commission 
cannot remove the ceiling unless there is a finding of lack of market 
power.
    21. In response to the request for comments on whether the 
Commission should consider adjusting the capacity release regulations 
to foster AMAs, numerous commenters responded that AMAs are beneficial 
to the market place and that the Commission should do something to 
facilitate their use. A vast majority of the commenters assert that 
AMAs provide substantial benefits, including more load responsive use 
of gas supply, greater liquidity, increased use of transportation 
capacity, cost effective procurement vehicles for LDCs and other end 
users, and the enhancement of competition. They state that AMAs also 
relieve LDCs from management of their daily gas supply and capacity 
needs. Others comment that AMAs benefit all parties involved: The 
releasing shipper reduces its costs through use of its capacity 
entitlements to facilitate third party sales; the third parties benefit 
from receiving a bundled product at an acceptable price; and the asset 
manager receives whatever profits are not passed on to the releasing 
shipper.
    22. In particular, the Marketer Petitioners and other commenters 
request that the Commission clarify that the different payments made 
between parties in an AMA do not constitute prohibited above maximum 
rate transactions or below maximum rate transactions that thus require 
posting and bidding. They also request that the Commission revisit its 
prohibition on tying to allow the packaging of gas supply contracts and 
pipeline or storage capacity, or multiple segments of capacity, as part 
of an AMA. Certain commenters also suggest changes to the Commission's 
notice and bidding requirements for capacity releases. A number of LDCs 
and marketers request that the bidding requirement be eliminated 
altogether or that the regulations be revised to eliminate

[[Page 65920]]

bidding for capacity releases made to implement an AMA.

II. Removal of Maximum Rate Ceiling for Short-Term Capacity Release

    23. Based upon its review of the petitions, comments and available 
data, the Commission proposes to lift the price ceiling for short-term 
capacity release transactions of one year or less. The Commission's 
capacity release program has created a successful secondary market for 
capacity.\28\ Commenters from disparate segments of the natural gas 
industry agree that the capacity release program has been beneficial to 
the industry in creating a competitive secondary market for natural gas 
transportation.\29\
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    \28\ As the Commission observed in 2005, the ``capacity release 
program together with the Commission's policies on segmentation, and 
flexible point rights, has been successful in creating a robust 
secondary market where pipelines must compete on price.'' Policy for 
Selective Discounting by Natural Gas Pipelines, 111 FERC ] 61,309 at 
P 39-41) (2005), order on reh'g, 113 FERC ] 61,173 (2005).
    \29\ See e.g., PG&E and Southwest Gas Petition at 10 (``There is 
reason to believe that the secondary market is more competitive 
today than it was six years ago.''); Market Petitioners at 3 (``The 
Commission's capacity release program has proven to be a critical 
initiative in opening U.S. natural gas markets to competition.''); 
AGA Comments at 3 (``The Commission's regulations have permitted the 
development of an open and active secondary market for pipeline 
capacity that has provided significant benefits to natural gas 
consumers.''); INGAA Comments at 12 (``The current market for short-
term transportation capacity is large and highly competitive.''); 
and NGSA Comments at 2 (``The basic structure of the Commission's 
policies is still providing the benefits intended of transparent, 
nondiscriminatory, efficient allocation of capacity.'').
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    24. As the comments point out, shippers and potential shippers are 
looking for greater flexibility in the use of capacity. They seek to 
better integrate capacity with the underlying gas transactions, and are 
looking for more flexible methods of pricing capacity to better reflect 
the value of that capacity as revealed by the market price of gas at 
different trading points. Pipelines, for example, have been using their 
negotiated rate authority to sell their own capacity based on market-
derived basis differentials reflective of the difference in gas prices 
between two points. The Commission recently clarified that pipelines 
may use such basis differential pricing as a part of negotiated rate 
transactions even when those prices exceed maximum tariff rates.\30\ 
Under the Commission's regulations, releasing shippers also may enter 
into capacity release transactions based on basis differentials, but 
such releases cannot exceed the maximum rate.\31\ In their comments, 
releasing shippers request the ability to release at above the maximum 
rate so that they may offer potential buyers rates competitive with 
pipeline negotiated rate transactions.\32\
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    \30\ Natural Gas Pipelines Negotiated Rate Policies and 
Practices; Modification of Negotiated Rate Policy, 104 FERC ] 61,134 
(2003), order on reh'g and clarification, 114 FERC ] 61,042, 
dismissing reh'g and denying clarification, 114 FERC ] 61,304 
(2006).
    \31\ See Standards for Business Practices for Interstate Natural 
Gas Pipelines and for Public Utilities, Order No. 698, 72 FR 38757 
(July 16, 2007), FERC Stats. & Regs. ] 31,251 (June 25, 2007).
    \32\ See, e.g., PG&E and Southwest Gas Petition at 10-11.
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    25. As the Commission recognized in Order No. 637,\33\ the 
traditional cost-of-service price ceilings in pipeline tariffs, which 
are based on average yearly rates, are not well suited to the short-
term capacity release market.\34\ Removal of the price ceiling will 
enable releasing shippers to offer competitively-priced alternatives to 
the pipelines' negotiated rate offerings. Removal of the ceiling also 
permits more efficient utilization of capacity by permitting prices to 
rise to market clearing levels, thereby permitting those who place the 
highest value on the capacity to obtain it. Removal of the price 
ceiling also will provide potential customers with additional 
opportunities to acquire capacity. The price ceiling reduces the firm 
capacity holders' incentive to release capacity during times of 
scarcity, because they cannot obtain the market value of the capacity.
---------------------------------------------------------------------------

    \33\ Order No. 637 at 31,271-75.
    \34\ While the Commission offered pipelines the opportunity to 
propose other types of rate designs, such as seasonal and term-
differentiated rates, only a very few pipelines have sought to make 
such rate design changes, although virtually all pipelines have 
taken advantage of negotiated rate authority.
---------------------------------------------------------------------------

    26. Further, the elimination of the price ceiling for short-term 
capacity releases will provide more accurate price signals concerning 
the market value of pipeline capacity. More accurate price signals will 
promote the efficient construction of new capacity by highlighting the 
location, frequency, and severity of transportation constraints. 
Correct capacity pricing information will also provide transparent 
market values that will better enable pipelines and their lenders to 
calculate the potential profitability and associated risk of additional 
construction designed to alleviate transportation constraints.
    27. Moreover, removing the price ceiling on short-term capacity 
releases should not harm, and may benefit, the ``primary intended 
beneficiaries of the NGA--the `captive' shippers.'' \35\ Those shippers 
typically have long-term firm contracts with the pipeline, and 
therefore will ``continue to receive whatever benefits the rate 
ceilings generally provide,'' while also ``reaping the benefits of 
[the] new rule, in the form of higher payments for their releases of 
surplus capacity.'' \36\
---------------------------------------------------------------------------

    \35\ INGAA at 33.
    \36\ Id.
---------------------------------------------------------------------------

    28. As the court stated in INGAA, the Commission may depart from 
cost of service ratemaking upon:

    A showing that * * * the goals and purposes of the statute will 
be accomplished `through the proposed changes.' To satisfy that 
standard, we demanded that the resulting rates be expected to fall 
within a `zone of reasonableness, where [they] are neither less than 
compensatory nor excessive.' [citation omitted]. While the expected 
rates' proximity to cost was a starting point for this inquiry into 
reasonableness, [citation omitted], we were quite explicit that 
`non-cost factors may legitimate a departure from a rigid cost-based 
approach,' [citation omitted]. Finally, we said that FERC must 
retain some general oversight over the system, to see if competition 
in fact drives rates into the zone of reasonableness `or to check 
rates if it does not.' \37\
---------------------------------------------------------------------------

    \37\ Id. at 31.

    29. Many of the changes effected in Order Nos. 636 and 637 have 
enhanced competition between releasing shippers as well as between 
releasing shippers and the pipeline. As discussed below, the data 
obtained by the Commission both during the Order No. 637 experiment and 
more recently confirms the finding made in Order No. 637 that short-
term release prices are reflective of market prices as revealed by 
basis differentials, rather than reflecting the exercise of market 
power. Moreover, shippers purchasing capacity will be adequately 
protected because the pipeline's firm and interruptible services will 
provide just and reasonable recourse rates limiting the ability of 
releasing shippers to exercise market power. Finally, the reporting 
requirements in Order No. 637 and the Commission's implementation of 
the Energy Policy Act of 2005, specifically with respect to market 
manipulation, provide the Commission with enhanced ability to monitor 
the market and detect and deter abuses.

A. Policies Enhancing Competition

    30. In Order No. 636 and, as expanded in Order No. 637, the 
Commission instituted a number of policy revisions designed to enhance 
competition and improve efficiency across the pipeline grid. These 
revisions provide shippers with enhanced market mechanisms that will 
help ensure a more competitive market and mitigate the potential for 
the exercise of market power.

[[Page 65921]]

    31. The Commission required pipelines to permit releasing shippers 
to use flexible point rights and to fully segment their pipeline 
capacity. Flexible point rights enable shippers to use any points 
within their capacity path on a secondary basis, which enables shippers 
to compete effectively on release transactions with other shippers. 
Segmentation further enhances the ability to compete because it enables 
the releasing shipper to retain the portion of the pipeline capacity it 
needs while releasing the unneeded portion. Effective segmentation will 
make more capacity available and enhance competition. As the Commission 
explained in Order No. 637:

    The combination of flexible point rights and segmentation 
increases the alternatives available to shippers looking for 
capacity. In the example,\38\ a shipper in Atlanta looking for 
capacity has multiple choices. It can purchase available capacity 
from the pipeline. It can obtain capacity from a shipper with firm 
delivery rights at Atlanta or from any shipper with delivery point 
rights downstream of Atlanta. The ability to segment capacity 
enhances options further. The shipper in New York does not have to 
forgo deliveries of gas to New York in order to release capacity to 
the shipper seeking to deliver gas in Atlanta. The New York shipper 
can both sell capacity to the shipper in Atlanta and retain the 
right to inject gas downstream of Atlanta to serve its New York 
market.\39\
---------------------------------------------------------------------------

    \38\ In the example used in Order No. 636, a shipper holding 
firm capacity from a primary receipt point in the Gulf of Mexico to 
primary delivery points in New York could release that capacity to a 
replacement shipper moving gas from the Gulf to Atlanta while the 
New York releasing shipper could inject gas downstream of Atlanta 
and use the remainder of the capacity to deliver the gas to New 
York.
    \39\ Order No. 637 at 31,300.

    32. In addition to enhancing competition through expansion of 
flexible point rights and segmentation, the Commission in Order No. 
637 also required pipelines to provide shippers with scheduling 
equal to that provided by the pipeline, so that replacement shippers 
can submit a nomination at the first available opportunity after 
consummation of the capacity release transaction. The change makes 
capacity release more competitive with pipeline services and 
increases competition between capacity releasers by enabling 
replacement shippers to schedule the use of capacity obtained 
through release transactions quickly rather than having to wait 
until the next day.

B. Data on Capacity Release Transactions

    33. The data accumulated by the Commission during the Order No. 637 
experiment, as well as review of more recent data, show that capacity 
release prices reflect competitive conditions in the industry. On May 
30, 2002, the Commission issued a notice of staff paper presenting data 
on capacity release transactions during the experimental period when 
the capacity release ceiling price was waived.\40\ The staff paper 
provided analysis of capacity release transactions on 34 pipelines 
during the 22-month period from March 2000 to December 2001.\41\
---------------------------------------------------------------------------

    \40\ On May 30, 2002, a Staff Paper was posted on the 
Commission's Web site presenting, and analyzing data on capacity 
release transactions relating to the experimental period when the 
rate ceiling on short-term released capacity was waived.
    \41\ Many of these release transactions would have occurred 
prior to completion of the pipeline's Order No. 637 compliance 
proceedings and the implementation of the changes to flexible point 
rights, segmentation and scheduling described above.
---------------------------------------------------------------------------

    34. In brief, the data gathered during the 33-month period show 
that without the price ceiling, prices exceeded the maximum rate only 
during short time periods and appear to be reflective of competitive 
conditions in the industry. The following table shows the distribution 
of above ceiling price releases among the pipelines studied.

                                    Table I.--Above Cap Releases by Pipeline
                         [Releases awarded between March 26, 2000 and December 31, 2001]
----------------------------------------------------------------------------------------------------------------
                                                  Releases above                     Releases
                                                     max rate       % of total    quantity above    % of total
                    Pipeline                        (Number of       releases        max rate         release
                                                   transactions)                    (MMBtu/day)      quantity
----------------------------------------------------------------------------------------------------------------
Algonquin.......................................               1             0.1          18,453             0.2
ANR Pipeline....................................               1             0.1          30,000             0.2
CIG.............................................              19             6.5         109,984             4.4
Dominion (CNGT).................................              21             1.0          65,789             0.7
Columbia Gas....................................             101             4.4         374,727             2.7
Columbia Gulf...................................  ..............
East Tennessee..................................  ..............
El Paso.........................................             135            13.3         631,683            12.5
Florida Gas.....................................              25             1.7          43,526             1.4
Great Lakes.....................................               3             1.3          15,000             0.6
Iroquois........................................  ..............
Kern River......................................               2             3.9          55,000             2.5
KMI (KNEnergy)..................................               3             1.0           1,409             0.0
Gulf South (Koch)...............................  ..............
Midwestern......................................               1             0.6          50,000             2.3
Mississippi River...............................  ..............
Mojave Pipeline Co..............................               1             2.6          40,000             4.7
Natural Gas Pipeline Co.........................              16             3.2         270,489             2.3
Reliant (Noram).................................  ..............
Northern Border.................................  ..............
Northern Natural................................              12             1.6          23,273             0.5
Northwest Pipeline..............................              24             1.8         139,850             4.1
Paiute Pipeline.................................  ..............
Panhandle Eastern...............................               1             0.4           1,000             0.1
Southern Natural................................               7             0.3          24,101             0.2
Tennessee Gas...................................              11             0.4          36,421             0.2
TETCO...........................................             122             3.8         645,856             3.3

[[Page 65922]]

 
Texas Gas.......................................               6             0.5         103,237             1.0
Trailblazer.....................................               3            25.0          15,000            10.0
Transco.........................................             183             3.3       1,540,885             4.1
Transwestern....................................              11             4.5          64,058             6.5
Trunkline.......................................  ..............
Williams........................................               4             0.4          16,500             0.3
Williston Basin.................................  ..............  ..............  ..............  ..............
                                                 ---------------------------------------------------------------
    Total.......................................             713             2.2       4,316,241             2.1
----------------------------------------------------------------------------------------------------------------

    35. These data show that during periods without capacity 
constraints, prices remained at or below the maximum rate. The staff 
paper does identify 713 releases above the ceiling price, representing 
an average total capacity release contract volume of 4.3 billion cubic 
feet (Bcf) per day. However, the staff paper reflects that these above-
ceiling price releases represented only a small portion of the total 
releases on these pipelines, comprising approximately two percent of 
total transactions on the pipelines studied for the entire period, and 
two percent of gas volumes. Further, above ceiling releases accounted 
for no more than six or seven percent of transactions during any given 
month of the period. As one would expect, the percentages of releases 
occurring above the ceiling increased during peak periods. However, 
average release rates were higher by only one cent per MMBtu per day or 
five and one-half percent higher than they would have been with the 
price ceiling in place. Of the 34 pipelines in the study, 10 reported 
no releases above the ceiling price, and 20 pipelines reported fewer 
than 25 above-ceiling price releases. The data gathered during this 22-
month period reflects the Commission's expectations and affirms the 
Commission's findings in the Order No. 637 proceeding. As the court 
stated in INGAA:

    The data represented in the graph [] do support the Commission's 
view that the capacity release market enjoys considerable 
competition. The brief spikes in moments of extreme exigency are 
completely consistent with competition, reflecting scarcity rather 
than monopoly. * * * [citation omitted] A surge in the price of 
candles during a power outage is no evidence of monopoly in the 
candle market.\42\
---------------------------------------------------------------------------

    \42\ INGAA at 32.

    36. Several commenters argue that the data gathered by the 
Commission is too stale to support the instant proposal to remove the 
price ceiling on short-term capacity releases. However, these 
commenters fail to produce any evidence to support specific concerns 
existing today that did not exist during the experimental period. 
Moreover, the Commission has gathered additional current data and has 
replicated the evidence presented in Order No. 637. The current data 
shows that the conditions that existed at the time of Order No. 637 and 
during the past experimental period continue in today's marketplace.
    37. Figure 1 illustrates the fluctuations in the market value of 
transportation service, as shown by the basis differentials between 
Louisiana and New York City. This graph compares the daily difference 
in gas prices between Louisiana and New York City to Transcontinental 
Gas Pipe Line Corporation's maximum interruptible transportation rate, 
including fuel retainage, during the 12 months ending July 31, 2007. 
This graph shows that for most of the year, the value of transportation 
service, as indicated by the basis differentials, is less than the 
maximum transportation rate. However, during brief, peak demand 
periods, the value of transportation service is measurably greater than 
the maximum transportation rate. For example, on February 5, 2007, the 
basis differential between Louisiana and New York City was in excess of 
$27.00 per MMBtu, while the maximum tariff rate plus the cost of fuel 
was approximately $1.08 per MMBtu.\43\
---------------------------------------------------------------------------

    \43\ In Order No. 637, the Commission presented similar data in 
figure 6 showing the implicit transportation value between South 
Louisiana and Chicago. Order No. 637 at 31,274.

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

[[Page 65923]]

[GRAPHIC] [TIFF OMITTED] TP26NO07.004

    38. Figures 2 and 3 below reflect that a similar pattern of 
transportation value is evident in other areas of the country. Focusing 
on fluctuations in the market value of transportation service as shown 
by basis differentials between Louisiana and Chicago and between the 
Permian Basin and the California border, respectively, these figures 
show that for most of the year, the value of transportation service is 
less than the maximum transportation rate of Natural Gas Pipeline 
Company of America and El Paso Natural Gas Company, respectively. 
However, similar to figure 1, these figures also reflect that during 
brief, peak-demand periods, the value of transportation service is 
measurably greater than the maximum transportation rate.

[[Page 65924]]

[GRAPHIC] [TIFF OMITTED] TP26NO07.005

[GRAPHIC] [TIFF OMITTED] TP26NO07.006


[[Page 65925]]


    39. The data in all three of the above figures reflect similar 
market conditions to the data that the Commission relied upon in 
lifting the price ceiling for short-term capacity releases in Order No. 
637, with the market value of capacity generally below the pipeline's 
maximum rate except for relatively brief price spikes.\44\ In affirming 
the Commission's actions, the court in INGAA found that the data 
presented by the Commission constituted a substantial basis for the 
conclusion that a considerable amount of competition existed in the 
capacity release market. Further, the INGAA court concluded that the 
price spikes reflected in the data were consistent with competition and 
that such spikes reflected scarcity rather than monopoly. \45\
---------------------------------------------------------------------------

    \44\ Order No. 637 at 31,273-75.
    \45\ INGAA at 32.
---------------------------------------------------------------------------

C. Available Pipeline Service Constrains Market Power Abuses

    40. The Commission envisions that under the instant proposal the 
pipeline's open access transportation maximum tariff rates (recourse 
rates) will serve as additional protection against possible abuses of 
market power by releasing shippers. The Commission requires pipelines 
to sell all their available capacity to shippers willing to pay the 
pipeline's maximum recourse rate.\46\ Under their negotiated rate 
authority, pipelines are free to negotiate individualized rates with 
particular shippers that may be above the maximum tariff rate, subject 
to several conditions including the availability of the maximum tariff 
rate as a recourse rate for potential firm shippers.\47\ As the 
Commission explained in its negotiated rate policy statement, ``[t]he 
availability of a recourse service would prevent pipelines from 
exercising market power by assuring that the customer can fall back to 
traditional cost-based service if the pipeline unilaterally demands 
excessive prices or withholds service.'' \48\
---------------------------------------------------------------------------

    \46\ Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2002), reh'g 
denied, 94 FERC ] 61,097 (2001), petitions for review denied sub 
nom., Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 (D.C. 
Cir. 2002).
    \47\ See, Alternatives to Traditional Cost-of-Service Ratemaking 
for Natural Gas Pipelines, 74 FERC ] 61,076, reh'g denied, 75 FERC ] 
61,024 (1996), petitions for review denied sub nom., Burlington 
Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (D.C. Cir. 1998). See 
also Natural Gas Pipelines Negotiated Rate Policies and Practices; 
Modification of Negotiated Rate Policy, 104 FERC ] 61,134 (2003), 
order on reh'g and clarification, 114 FERC ] 61,042, dismissing 
reh'g and denying clarification, 114 FERC ] 61,304 (2006).
    \48\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines, 74 FERC ] 61,076 at 61,240 (1996).
---------------------------------------------------------------------------

    41. The court in INGAA recognized the value of the pipeline's 
recourse rate protecting against possible abuses of market power by 
releasing shippers stating that,

    [i]f holders of firm capacity do not use or sell all of their 
entitlement, the pipelines are required to sell the idle capacity as 
interruptible service to any taker at no more than the maximum 
rate--which is still applicable to the pipelines.\49\
---------------------------------------------------------------------------

    \49\ INGAA at 32.

Removing the price ceiling for short-term capacity release transactions 
will enable releasing shippers to offer negotiated rate transactions 
similar to those offered by the pipelines. Moreover, the same pipeline 
open access service will protect against the possibility that a 
releasing shipper will attempt to exercise market power by withholding 
capacity. For example, should a releasing shipper attempt to charge a 
price above competitive levels, the potential purchaser could seek to 
negotiate a more acceptable rate with the pipeline. Even when the 
pipeline's firm service is not available, a cost based interruptible 
rate is always available as an alternative when a releasing shipper 
attempts to withhold capacity.

D. Monitoring

    42. Order No. 637 improved the Commission's and the industry's 
ability to monitor capacity release transactions by requiring daily 
posting of these transactions on pipeline Web sites.\50\ This has 
increased the information available to buyers while at the same time 
making it easier for the Commission to identify situations in which 
shippers are abusing their market power.\51\ Further, the Commission 
will entertain complaints and respond to specific allegations of market 
power on a case-by-case basis if necessary. Furthermore, the Commission 
will direct staff to monitor the capacity release program and, using 
all available information, issue a report on the general performance of 
the capacity release program, within six months after two years of 
experience under the new rules.
---------------------------------------------------------------------------

    \50\ 18 CFR 284.8 (2007).
    \51\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
---------------------------------------------------------------------------

E. Requests to Expand Market-Based Rate Authority

1. Removal of Price Ceiling for Long-Term Releases
    43. Several commenters request that the Commission remove the price 
ceiling on long-term capacity releases in addition to eliminating the 
price ceiling on short-term capacity releases. The Commission declines 
to make such an adjustment to its policies at this time for several 
reasons. As discussed above, by lifting the price ceiling for short-
term capacity releases, the Commission seeks to provide releasing 
shippers the flexibility to price their capacity in a manner consistent 
with the short-term price variations in transportation capacity market 
values. This action will ameliorate restrictions on the efficient 
allocation of capacity during the short-term periods when demand drives 
the value of transportation capacity above the current maximum rate.
    44. Limiting the removal of the release ceiling to short-term 
transactions will also serve as additional protection for potential 
replacement shippers. Such a limit will ensure that a replacement 
shipper cannot be locked into a transaction that is not protected by 
the maximum rate ceiling for more than one year. The expiration of such 
a short-term transaction would give the replacement shipper an 
opportunity to explore other options for satisfying its capacity needs. 
The replacement shipper could seek to negotiate a different price with 
its current releasing shipper or to obtain capacity from another 
releasing shipper or directly from the pipeline.\52\ Any transaction in 
which the parties want to continue the release past one year would have 
to be re-posted for bidding to ensure that the capacity is allocated to 
the highest valued use. This bidding process could provide an 
opportunity for re-determining the current market value of the 
capacity.
---------------------------------------------------------------------------

    \52\ Releasing and replacement shippers cannot simply roll over 
a short-term release transaction in order to extend the release 
beyond one year. The Commission's current regulations do not permit 
rollovers or extensions of capacity releases made at less than 
maximum rate or for less than 31 days without re-posting and bidding 
of that capacity. 18 CFR Section 284.8(h) (2007).
---------------------------------------------------------------------------

    45. Finally, because any such release of a year or less would have 
to be re-posted for bidding upon its expiration, the second release 
would be a new release separate from the first release, and thus such a 
second release of a year or less would also not be subject to the price 
ceiling. The Commission, however, requests comment on whether there 
should be any limit on the ability of releasing shippers to make 
multiple, consecutive short-term releases not subject to the price 
ceiling.
2. Removal of Price Ceiling for Pipeline Short-Term Transactions
    46. Pipelines request that the Commission remove the price ceiling 
for primary pipeline capacity whether firm

[[Page 65926]]

or interruptible. In sum, they argue that because the transportation of 
gas on pipelines has become sufficiently competitive, and because 
released capacity competes directly with primary short-term firm, 
interruptible transportation and storage services provided by 
interstate pipelines, the Commission should lift the rate ceiling on 
the entire short-term capacity market, not just on capacity releases. 
Further, they assert that because short-term firm and interruptible 
services compete directly with capacity release, the same market 
liquidity considerations that warrant lifting the ceiling on short-term 
releases support lifting the price ceiling in the primary market. The 
pipelines assert that the Commission should treat all holders of 
capacity equally, whether they are pipelines or releasing shippers.
    47. The pipelines also assert that removing the price ceiling only 
on short-term capacity releases would bifurcate the single marketplace 
for natural gas transportation services. They argue that if prices for 
some of the capacity in the marketplace remain subject to a price 
ceiling while the price ceiling is removed for other forms of capacity, 
then once the capped capacity has been fully utilized, prices for the 
uncapped capacity will be higher than they would have been without any 
price ceiling at all. They assert that in affirming the Commission's 
experiment in removing the price ceiling for short-term capacity 
releases, the court in INGAA recognized this economic cost and labeled 
it as a ``cost of gradualism.'' \53\
---------------------------------------------------------------------------

    \53\ INGAA at 36.
---------------------------------------------------------------------------

    48. The Commission is not proposing to remove the price ceiling for 
primary pipeline capacity. Pipelines already have significant ability 
to use market based pricing. Unlike capacity release transactions, 
pipelines, as discussed above, currently can enter into negotiated rate 
transactions above the maximum rate. Pipelines also may seek market 
based rates by making a filing with the Commission establishing that 
they lack market power in the markets they serve.\54\ In addition, 
pipelines have the ability to propose seasonal rates for their systems, 
and therefore, recover more of their annual revenue requirement in peak 
seasons.\55\
---------------------------------------------------------------------------

    \54\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996).
    \55\ See Order No. 637 at 31,574-31, 581.
---------------------------------------------------------------------------

    49. Moreover, the Commission is concerned about removing rate 
ceilings for all pipeline transactions without the showings required 
above in order to protect against the possible exercise of market 
power. First, as discussed above, the price ceilings on pipeline 
capacity serve as an effective recourse rate for both pipeline 
negotiated rate transactions and capacity release transactions to 
prevent pipelines and releasing shippers from withholding capacity.\56\ 
Second, pipeline capacity is not identical to release capacity, because 
ownership of the pipeline capacity is likely to be more concentrated 
than capacity held by shippers for release.\57\ Third, the Commission 
has found that it needs to regulate primary pipeline capacity to ensure 
that pipelines do not withhold capacity in the long-term by not 
constructing additional facilities. Because pipelines are in the best 
position to expand their own systems, cost-of-service rate ceilings 
help to ensure that pipelines have appropriate incentives to construct 
new facilities when needed. As the Commission found, ``the only way a 
pipeline [can] create scarcity to force shippers to accept longer term 
contracts would be to refuse to build additional capacity when demand 
requires it.'' \58\ As long as cost-of-service rate ceilings apply, 
however, ``pipelines [will] have a greater incentive to build new 
capacity to serve all the demand for their service, than to withhold 
capacity, since the only way the pipeline could increase current 
revenues and profits would be to invest in additional facilities to 
serve the increased demand.'' \59\ Similarly, as long as pipeline 
short-term services are subject to a cost of service rate, the 
pipelines will not limit their construction of new capacity to meet 
demand in order to create scarcity that increases short-term prices. 
Indeed, releases at above the maximum rate will indicate that pipeline 
capacity is constrained and demonstrate that constructing additional 
capacity could be profitable.
---------------------------------------------------------------------------

    \56\ In Order No. 890, the Commission retained price ceilings on 
transportation capacity for transmission owners to provide similar 
recourse rate protection. Preventing Undue Discrimination and 
Preference in Transmission Service, Order No. 890, 72 FR 12,266 
(March 15, 2007), 12366, FERC Stats. & Regs. ] 31,241 at P 808-09 
(2007).
    \57\ As the INGAA court stated:
    In fact the Commission's distinction is not unreasonable. 
Despite the absence of Herfindahl-Hirschman indices for non pipeline 
capacity holders, there seems every reason to suppose that their 
ownership of such capacity (in any given market) is not so 
concentrated as that of the pipelines themselves--the concentration 
that prompted Congress to impose rate regulation in the first place.
    INGAA at 23-24, citing, FPC v. Texaco, 417 U.S. 380, 398 n.8 
(1974).
    \58\ Regulation of Short-Term Natural Gas Transportation 
Services, 101 FERC ] 61,127, at P 12 (2002), aff'd, American Gas 
Ass'n v. FERC, 428 F.3d 255 (D.C. Cir. 2005). See also Tennessee Gas 
Pipeline Co., 91 FERC ] 61,053 (2000), reh'g denied, 94 FERC ] 
61,097 (2001), aff'd, 292 F.3d 831 (D.C. Cir. 2002).
    \59\ Id.
---------------------------------------------------------------------------

    50. The pipelines also maintain that not removing the price ceiling 
for their capacity that competes with released capacity will bifurcate 
the market, resulting in possibly higher prices for the uncapped 
release market. They argue that where a portion of the supply of a good 
or service is subject to price controls, and demand exceeds (the price-
controlled) supply at the fixed price, the market-clearing price in the 
uncontrolled segment will normally be higher than if no price controls 
were imposed on any of the supply. Purchasers placing a lower value on 
the good may nevertheless be able to purchase the price-controlled 
supply, thereby ``using up'' some of the aggregate supply that would 
otherwise be available to purchasers placing a higher value on the 
good. This alters the demand-supply ratio in the uncontrolled market, 
leading to a higher market clearing price in that market.
    51. Because of the nature of the pipeline short-term capacity, we 
do not think that retaining the cost of service recourse rates for that 
capacity will create such pricing distortions. The premise of the 
pipelines' argument is that continued price controls on the pipeline's 
sales of short-term capacity will enable shippers placing a lower value 
on the capacity to ``use up'' some of the supply, thereby reducing the 
amount of capacity available for purchase by shippers placing a higher 
value on the capacity. This premise is incorrect. Short-term pipeline 
capacity is sold as interruptible transportation; therefore, firm 
capacity held by shippers will have scheduling priority over the 
pipeline's interruptible capacity. In essence, pipeline interruptible 
service is derived from existing shippers' decision not to use or 
release their firm capacity or from unsold pipeline capacity. Thus, 
even if a shipper placing a relatively low value on the capacity has a 
higher position on the pipeline's queue for price-controlled 
interruptible transportation, it is not guaranteed that it can acquire 
(or ``use up'') that capacity, leading to the supposed higher market 
clearing price. A firm shipper could always release its unused firm 
capacity to a replacement shipper who places a higher value on that 
capacity, thereby displacing the lower-value interruptible shipper.\60\
---------------------------------------------------------------------------

    \60\ For example, assume the maximum rate is $1.00 and there are 
several shippers. One shipper is willing to pay up to $1.00 for 
capacity, while the other shippers are willing to pay much higher 
rates. Even if the shipper placing the lowest value on the capacity 
was the highest on the pipeline's interruptible queue, it would not 
be able to acquire capacity at the $1.00 rate, because the other 
shippers could acquire released capacity by bidding above the 
maximum rate, thereby preventing the allocation of any interruptible 
service.

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

[[Page 65927]]

    52. Moreover, even in the context of firm short-term pipeline 
capacity, the scenario posited by the pipelines would not result in 
higher market clearing prices as long as arbitrage exists. Any shipper 
with a higher queue position that acquires the pipeline capacity at the 
lower capped rate would have an incentive to resell that capacity to 
another shipper who places a higher value on the capacity, thus 
ensuring that the market clearing price will reflect all relevant 
demand.\61\
---------------------------------------------------------------------------

    \61\ The pipelines rely on an example in Order No. 637-B that 
was cited by the court in INGAA for the proposition that capping one 
part of the market will result in overall higher prices. But that 
example was in a very different context, a situation in which a 
releasing shipper in a retail access state provided released 
capacity at a preferential rate to one set of marketers that were 
obligated to serve retail load, while selling at an uncapped rate to 
other marketers. In the first place, this situation did not involve 
interruptible capacity. Moreover, unlike the case with pipeline 
capacity, the favored marketer could not arbitrage its lower price 
because it was committed to serving retail load.
---------------------------------------------------------------------------

III. Asset Management Arrangements

A. Background

    53. In general, AMAs are contractual relationships where a party 
agrees to manage gas supply and delivery arrangements, including 
transportation and storage capacity, for another party. Typically a 
shipper holding firm transportation and/or storage capacity on a 
pipeline or multiple pipelines temporarily releases all or a portion of 
that capacity along with associated gas production and gas purchase 
agreements to an asset manager (commonly a marketer). The asset manager 
uses that capacity to serve the gas supply requirements of the 
releasing shipper, and, when the capacity is not needed for that 
purpose, uses the capacity to make releases or bundled sales to third 
parties.
    54. While AMAs may be fashioned in a myriad of ways, there are 
several common components of these arrangements. First, the releasing 
shipper generally enters into a pre-arranged capacity release to an 
asset manager ostensibly at the maximum rate in order to avoid the 
bidding requirement. Second, the releasing shipper makes payments to 
the asset manager for the gas supply service performed by the asset 
manager for the releasing shipper. These payments may include the 
releasing shipper paying the asset manager: (1) The full cost of the 
released capacity (e.g., maximum rate) on the theory that the asset 
manager is using the released capacity to transport the releasing 
shipper's gas supplies, (2) a management fee for transportation-related 
tasks (e.g. nominations, scheduling, storage injections, etc.) 
associated with the asset manager's obligation to provide gas supplies 
to the releasing shipper, and (3) the asset manager's cost of 
purchasing gas supplies for the releasing shipper. Third, the asset 
manager generally shares with the releasing shipper the value it is 
able to obtain from the releasing shipper's capacity and supply 
contracts when those assets are not needed to supply the releasing 
shipper's gas needs. The asset manager obtains such value either by re-
releasing the capacity or by using it to make bundled sales to third 
parties. The asset manager may share that value by: (1) Paying a fixed 
``optimization'' fee to the releasing shipper, (2) sharing profits 
pursuant to an agreed-upon formula, or (3) making its gas sales to the 
releasing shipper at a lower price.
    55. In many instances the asset manager is chosen through a request 
for proposal (RFP) process. The RFP describes the details and terms and 
conditions of the proposed deal and seeks bids from service providers 
willing to provide the requested services. The methodology for choosing 
a winning bidder under an RFP often reflects many different factors, 
including price, creditworthiness, experience, reliability, and 
flexibility, and it is clear that price is not always the determining 
factor. Some RFP procedures are state mandated, and thus, in those 
situations, the LDC must get approval from the state for the final 
agreement.
    56. There are several ways in which the AMAs described above 
implicate the Commission's current regulations. The first relates to 
the Commission's prohibition against the ``tying'' of release capacity 
to any condition. As discussed above, the Commission instituted the 
prohibition against the tying of capacity in response to concerns that 
releasing shippers would attempt to add terms and conditions that would 
``tie the release of capacity to other compensation paid to the 
releasing shipper.'' \62\ A critical component of many AMAs is that the 
releasing shipper wants to be able to require the replacement shipper 
(asset manager) to satisfy the supply needs of the releasing shipper 
and take assignment of the releasing shipper's gas supply agreements as 
a condition of obtaining the released capacity.
---------------------------------------------------------------------------

    \62\ Order No. 636-A at 30,559.
---------------------------------------------------------------------------

    57. AMAs also have implications for the rate cap and bidding 
regulations. As noted, in an AMA, the releasing shipper typically 
enters into a prearranged deal to release all of its pipeline capacity 
at the maximum rate to the marketer. It is reasonable to surmise that 
the main reason for the maximum release rate is so the release will 
qualify for the exemption from bidding of all maximum rate prearranged 
capacity releases.\63\ By avoiding the requirement to post the release 
for bidding, the releasing shipper can ensure that the capacity will go 
to the asset manager whom the releasing shipper has determined will 
provide the most effective asset management services.
---------------------------------------------------------------------------

    \63\ 18 CFR 284.8 (c)-(e). The Commission stated in Order No. 
636-A that releasing shippers may include in their offers to release 
capacity reasonable and non-discriminatory terms and conditions to 
accommodate individual release situations, including provisions for 
evaluating bids. All such terms and conditions applicable to the 
release must be posted on the pipeline's electronic bulletin board 
and must be objectively stated, applicable to all potential bidders, 
and non-discriminatory. For example, the terms and conditions could 
not favor one set of buyers, such as end users of an LDC, or grant 
price preferences or credits to certain buyers. The pipeline's 
tariff also must require that all terms and conditions included in 
offers to release capacity be objectively stated, applicable to all 
potential bidders, and non-discriminatory. Order No. 636-A at 
30,557.
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    58. As described above, however, the releasing shipper may agree to 
rebate some or all of the demand charge to the marketer so that the 
marketer's actual cost of obtaining the capacity is something less than 
the maximum rate.\64\ The Commission has held that such rebates render 
the release to be at less than the maximum rate, thereby requiring that 
the prearranged release be posted for bidding.\65\
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    \64\ Typically, the releasing shipper first releases its 
upstream assets, including pipeline capacity, storage, and gas 
supply, to the asset manager at cost. During the remaining term of 
the deal the releasing shipper purchases delivered gas at the agreed 
upon rate, which is usually the transportation and storage costs 
plus the market price of gas, plus fees and less whatever sharing of 
efficiency gains the asset manager is able to achieve. Sometimes 
fees and shared efficiency gains are reflected in some agreed upon 
reduction in the price of delivered gas. (The details are subject to 
negotiation and vary tremendously.) Because the mechanics of 
capacity releases often require the releasing shipper to release 
pipeline capacity at the maximum rate, rather than a discounted rate 
that the releasing shipper may actually pay to the pipeline, some 
other consideration must be worked into the transaction to balance 
the difference between the discounted rate and the maximum rate at 
which the release is set.
    \65\ In Louis Dreyfus Energy Services, L.P., 114 FERC ] 61,246 
(2006), the Commission stated that:
    [t]he Commission has held that any consideration paid by the 
releasing shipper to a prearranged replacement shipper must be taken 
into account in determining whether the prearranged release is at 
the maximum rate. For instance, where the replacement shipper agrees 
to pay the pipeline the maximum rate for the released capacity, but 
the releasing shipper agrees to make a payment to the replacement 
shipper, the release must be treated as a release at less than the 
maximum rate to which the posting and bidding requirements of 
sections 284.8(c) through (e) apply. Id. at P 15, citing, Pacific 
Gas Transmission Co. and Southern California Edison Co., 82 FERC ] 
61,227 (1998).

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

[[Page 65928]]

    59. Moreover, as described above, some AMAs may require the asset 
manager (replacement shipper) to pay fees to the releasing shipper. The 
Commission has ruled that if the prearranged release is at the maximum 
rate, such additional payments violate the maximum rate ceiling on 
capacity releases.\66\
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    \66\ See Consumers Energy Co., 82 FERC ] 61,284, order 
approving, 84 FERC ] 61,240 (1998). See also Order No. 636-A at 
30,561, where the Commission stated that capacity cannot be ``resold 
at a rate including the pipeline marketing fee. The marketing fee is 
not part of the cost of transportation being released and the 
replacement shipper should not pay more than the maximum 
transportation rate for the capacity it is acquiring.''
---------------------------------------------------------------------------

    60. Many commenters consider the applications of the Commission's 
policies and regulations described above as obstacles to fashioning 
AMAs. They request clarification of, or revisions to, the current 
policies and regulations to allow releasing shippers to release a 
package of transportation or storage capacity and gas supply contracts 
to a willing party who will sell the gas to the releasing shipper and 
take assignment of the gas purchase contracts without running afoul of 
the prohibition against tying. Some commenters also request that the 
Commission clarify that packaging gas supply and pipeline capacity, or 
multiple segments of capacity, as part of an asset management 
arrangement, would not violate the Commission's prohibition against 
tying. Others suggest that the tying prohibition should be eliminated 
altogether or that bundling of pipeline capacity and gas commodity 
should be allowed as long as there is a legitimate business purpose.
    61. A large number of commenters advocate elimination of the 
bidding requirement discussed above, particularly in the AMA context. 
These parties argue that there is no need for posting and bidding of 
capacity release transactions and state that it is unduly burdensome, 
makes it difficult to respond quickly to market opportunities to 
release, and no longer makes sense in terms of the arrangements being 
made in today's AMAs. Others contend that the bidding requirement is 
redundant in instances where states require that asset managers be 
selected in an RFP process, which results in a chosen asset manager and 
one or more pre-arranged capacity release transactions. They argue that 
a further bidding requirement compromises the integrity and efficiency 
of the RFP process at the state level. Commenters also argue that there 
should be no bidding in the AMA context because those transactions are 
not suited to a single auction methodology.
    62. Below, we discuss the Commission's proposal to revise the 
Commission's capacity release policies to give releasing shippers 
greater flexibility to negotiate and implement efficient AMAs. The 
proposal has two main parts: (1) Modifications to the current 
prohibition against tying releases to other conditions; and, (2) 
modifications to current bidding requirements.

B. Discussion

    63. The Commission proposes revisions to its prohibition on tying 
of release capacity and to section 284.8 of its regulations in order to 
facilitate the use of AMAs. Specifically, as discussed below, the 
Commission proposes two revisions to its capacity release policy and 
regulations to facilitate the use of AMAs. First, the Commission 
proposes to exempt AMAs from the prohibition against tying in order to 
permit a releasing shipper to require that the replacement shipper 
agree to supply the releasing shipper's gas requirements and to require 
the replacement shipper to take assignment of the releasing shipper's 
various gas supply arrangements, in addition to the released capacity. 
Second, the Commission proposes to eliminate the current bidding 
requirement for AMAs only, such that all releases to an asset manager, 
made in order to implement an AMA between the releasing shipper and the 
asset manager, are exempt from bidding. This would exempt from bidding 
all such releases, including those of less than one year for which we 
are proposing to remove the price ceiling and those of a year or more 
that are at rates below the continuing maximum rate for long-term 
capacity releases. Both of the exemptions above would also be limited 
to pre-arranged releases.
    64. Gas markets in general, and the secondary release market in 
particular, have undergone significant development and change since the 
inception of the Commission's capacity release program. The Commission 
adopted the capacity release program in Order No. 636 ``so that 
shippers can reallocate unneeded firm capacity'' to those who do need 
it.\67\ The bidding requirement and the prohibition against tying the 
release to extraneous conditions were all part of the Commission's 
fundamental goal of ensuring that such unneeded capacity would be 
reallocated to the person who values it the most. The Commission found 
that such ``capacity reallocation will promote efficient load 
management by the pipeline and its customers and, therefore, efficient 
use of pipeline capacity on a firm basis throughout the year.'' \68\
---------------------------------------------------------------------------

    \67\ Order No. 636 at 30,418.
    \68\ Id.
---------------------------------------------------------------------------

    65. Thus, the Commission developed its capacity release policies 
and regulations based on the assumption that shippers would release 
their capacity only when they were not using the capacity to serve 
their own needs. For example, the Commission envisioned that LDCs with 
long-term contracts for firm transportation service up to the peak 
needs of their retail customers would, during off-peak periods, release 
that portion of capacity not needed to serve the lower off-peak demand 
of its retail customers. However, this basic assumption underlying the 
capacity release program does not hold true in the context of AMAs, a 
relatively recent development in the capacity release market that the 
Commission had not anticipated.
    66. In the AMA context, the releasing shipper is not releasing 
unneeded capacity, but capacity that is needed to serve its own supply 
function and will be so used during the term of the release. Releasing 
shippers in the AMA context are releasing capacity for the primary 
purpose of transferring the capacity to entities that they perceive 
have greater skill and expertise both in purchasing low cost gas 
supplies, and in maximizing the value of the capacity when it is not 
needed to meet the releasing shipper's gas supply needs. In short, AMAs 
entail the releasing shipper transferring its capacity to another 
entity which will perform the functions the Commission expected 
releasing shippers would do for themselves--purchase their own gas 
supplies and release capacity or make bundled sales when the releasing 
shipper does not need the capacity to satisfy its own needs. The goal 
of the changes proposed by the Commission herein is to make the 
capacity release program more efficient by bringing it in line with the 
realities of today's secondary gas markets.
    67. The Commission finds that AMAs provide significant benefits to 
many participants in the natural gas and electric marketplaces and to 
the secondary natural gas market itself. The

[[Page 65929]]

American Gas Association (AGA), for example, notes that AMAs are an 
important mechanism used by LDCs to enhance their participation in the 
secondary market, and states that the growth and development of AMAs 
may represent the largest change since the Commission's market review 
in the Order No. 637 proceeding.\69\ AMAs allow LDCs to increase the 
utilization of facilities and lower gas costs. They also provide the 
needed flexibility to customize arrangements to meet unique customer 
needs.\70\ One important benefit of AMAs is that they allow for the 
maximization of the value of capacity though the synergy of interstate 
capacity and natural gas as a commodity. As expressed by AGA:
---------------------------------------------------------------------------

    \69\ See Comments of AGA at 21.
    \70\ See e.g., Comments of New Jersey Natural Gas Company at 9.

    [AMAs] are widely utilized and provide considerable benefits, 
i.e. lower gas supply costs generated from offsets to pipeline 
capacity costs and gas supply arrangements more carefully tailored 
to the specific requirements of the market. These benefits are 
generated by assembling innovative arrangements in which the 
unbundled components--capacity, gas supply and other services--are 
combined in a manner such that the total value created by the 
arrangement exceeds the value of the individual parts.\71\
---------------------------------------------------------------------------

    \71\ AGA Comments at 14.

    68. AMAs are also beneficial because they provide a mechanism for 
capacity holders to use third party experts to manage their gas supply 
arrangements, an opportunity the LDCs did not have prior to Order No. 
636. The time, expense and expertise involved with managing gas supply 
arrangements is considerable and thus many capacity holders, and LDCs 
in particular, have come to rely on more sophisticated marketers to 
take on their requirements.\72\ This results in benefits to the LDCs by 
allowing an entity with more expertise to manage their gas supply. The 
ability of LDCs to use AMAs as a means of relieving the burdens of 
administering their capacity or supply needs on a daily basis also 
works to the benefit of the entire market because that burden may at 
times result in LDCs not releasing unused capacity.\73\
---------------------------------------------------------------------------

    \72\ See, e.g., Comments of BG Energy Merchants, LLC at 3-4; 
APGA Comments at 2-3; Comments of BG Energy Merchants, LLC at 8; 
Comments of the Marketer Petitioners at 11; and Comments of FPL 
Energy LLC at 10.
    \73\ See Comments of Marketer Petitioners at 11.
---------------------------------------------------------------------------

    69. AMAs also provide LDCs and their customers a mechanism for 
offsetting their upstream transportation costs. AMAs often allow an LDC 
to reduce reservation costs that it normally passes on to its 
customers. They also foster market efficiency by allowing the releasing 
shipper to reduce its costs to the extent that its capacity is used to 
facilitate a third party sale that also benefits that third party (who 
gets a bundled product at a price acceptable to it).
    70. LDCs are not the only entities that benefit from AMAs. Many 
other large gas purchasers, including electric generators and 
industrial users may desire to enter into such arrangements.\74\ For 
example, AMAs increase the ability of wholesale electric generators to 
provide customer benefits through superior management of fuel supply 
risk, allow generators to focus their attention on the electric market, 
and eliminate administrative burdens relating to multiple suppliers, 
overheads, capital requirements and the risks associated with marketing 
excess gas and pipeline imbalances.\75\
---------------------------------------------------------------------------

    \74\ As noted by New Jersey Natural Gas Company (NJNG), ``in 
addition to LDCs, there are many other types of large natural gas 
purchasers, such as electric generation facilities and large gas 
process industrial users, who face the same challenges with managing 
and optimizing their natural gas portfolios. These customers, whose 
core business lies outside the natural gas industry--are also likely 
consumers of third party portfolio management services.'' NJNG 
Comments at 9, n. 9.
    \75\ EPSA Comments at 4-5.
---------------------------------------------------------------------------

    71. More importantly, AMAs provide broad benefits to the 
marketplace in general. They bring diversity to the mix of capacity 
holders and customers that are served through the capacity release 
program, thus enhancing liquidity and diversity for natural gas 
products and services. AMAs result in an overall increase in the use of 
interstate pipeline capacity, as well as facilitating the use of 
capacity by different types of customers in addition to LDCs.\76\ AMAs 
benefit the natural gas market by creating efficiencies as a result of 
more load responsive gas supply, and an increased utilization of 
transportation capacity.
---------------------------------------------------------------------------

    \76\ With regard to the advantages of diversity among shippers, 
the EPSA provides as an example the situation where an LDC looking 
to shed underutilized summer capacity may not have the capability to 
identify and contract with an electric generator that needs summer 
gas, whereas an asset manager would likely be much better equipped 
to handling the logistics and risks associated with such an off 
system sale by the LDC.
---------------------------------------------------------------------------

    72. AMAs further bring benefits to consumers, mostly through 
reductions in consumer costs. AMAs provide in general for lower gas 
supply costs, resulting in ultimate savings for end use customers. The 
overall market benefits described above also inure to consumers. These 
benefits have been recognized by state commissions and the National 
Regulatory Research Institute.\77\
---------------------------------------------------------------------------

    \77\ See Comments of BG Energy Merchants, LLC at 8-9.
---------------------------------------------------------------------------

    73. The Interstate Natural Gas Association of America (INGAA) 
agrees with the Marketer Petitioners and others that the Commission 
``should adapt its regulations to facilitate efficient and innovative 
marketing of capacity that have developed since Order No. 636,'' 
provided the Commission remains guided by the ``principle of full 
transparency of the terms of such capacity release arrangements.'' \78\
---------------------------------------------------------------------------

    \78\ INGAA Comments at 3.
---------------------------------------------------------------------------

    74. Based on this industry-wide support, the Commission believes 
that AMAs are in the public interest because they are beneficial to 
numerous market participants and the market in general. Accordingly, 
the Commission is proposing changes to its policies and regulations to 
facilitate the utilization and implementation of AMAs.
1. Tying
    75. As noted above, in Order No. 636-A, the Commission established 
a prohibition against the tying of capacity release to conditions 
unrelated to acquiring transportation capacity, where it stated that:

    [t]he Commission reiterates that all terms and conditions for 
capacity release must be posted and non-discriminatory and must 
relate solely to the details of acquiring transportation on the 
interstate pipelines. Release of capacity cannot be tied to any 
other conditions. Moreover, the Commission will not tolerate deals 
undertaken to avoid the notice requirements of the regulations. 
Order No. 636-A at 30, 559.

    76. The Commission established the prohibition against tying in 
response to commenters' concerns that releasing shippers would attempt 
to add terms and conditions that would ``tie the release of capacity to 
other compensation paid to the releasing shipper.'' The examples of 
illicit tying given by the commenters included an LDC requiring a 
potential replacement shipper to pay a certain price for local gas 
transportation service or a producer conditioning the release of 
capacity on the purchase of the producer's gas.\79\ Since then, the 
Commission has granted several waivers of the prohibition against 
tying,\80\ but only where an entity sought the waiver to exit the 
natural gas transportation business.\81\
---------------------------------------------------------------------------

    \79\ Order No. 636-A at 30,559.
    \80\ Tennessee Gas Pipeline Co., 113 FERC ] 61,106 (2005); 
Northwest Pipeline Corp. and Duke Energy Trading and Marketing, 109 
FERC ] 61,044 (2004).
    \81\ See Louis Dreyfus Energy Services, L.P., 114 FERC ] 61,246 
at 61,780 (2006), denying a waiver request.

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

[[Page 65930]]

    77. Some commenting parties claim that the Commission's recent 
orders waiving certain of its capacity release requirements in specific 
situations have increased uncertainty regarding the use of pre-arranged 
capacity release transactions to implement portfolio management 
services. They state that the language in these orders suggests that 
combining gas supply and pipeline capacity, or packaging multiple 
segments of capacity together, violates the prohibition against tying, 
absent a prior waiver of the Commission's capacity release rules.
    78. The Commission recognizes that the broad language in Order No. 
636-A setting forth the prohibition against tying, as well as the 
Commission's subsequent rulings in individual cases, have raised a 
concern that the types of transactions proponents of AMAs want to 
implement may run afoul of the current policy. For example, capacity 
releases made for the purpose of implementing an AMA generally include 
a condition that the asset manager taking the release will supply the 
gas requirements of the releasing shipper. The release may also require 
the asset manager to take assignment of the releasing shipper's gas 
supply contracts. However, such conditions could be considered to go 
beyond ``the details of acquiring transportation on the interstate 
pipelines,'' because these conditions relate to the purchase and sale 
of the gas commodity.
    79. The Commission thus proposes a partial exemption of AMAs from 
the prohibition against tying in order to permit a releasing shipper in 
a pre-arranged release to require that the replacement shipper (1) 
agree to supply the releasing shipper's gas requirements and (2) take 
assignment of the releasing shipper's gas supply contracts, as well as 
released transportation capacity on one or more pipelines \82\ and 
storage capacity with the gas currently in storage. This exemption 
would allow firm shippers to pre-arrange releases of capacity to an 
asset manager (replacement shipper) along with upstream assets and gas 
purchase agreements in a bundled transaction where the capacity being 
released will be used to meet that party's gas supply requirements. In 
addition, the proposed exemption would be limited to releases to an 
asset manager as part of establishing an AMA. Thus, the asset manager 
would be subject to the policy against tying when it makes subsequent 
re-releases to third parties during the term of the AMA. For purposes 
of this exemption and the proposed exemption from bidding discussed in 
the next section, a release transaction made in the context of 
implementing an AMA will be any pre-arranged capacity release that 
includes a condition that the releasing shipper may, on any day, call 
upon the replacement shipper to deliver a volume of gas equal to the 
daily contract demand of the released capacity. This proposed 
definition is discussed further below.
---------------------------------------------------------------------------

    \82\ Commission policy already permits a releasing shipper to 
require a replacement shipper to take a release of aggregated 
capacity contracts on one or more pipelines, at least in some 
circumstances. See Order No. 636-A at 30,558 and n. 144.
---------------------------------------------------------------------------

    80. As discussed above, AMAs provide recognizable benefits to 
market participants and the marketplace overall in terms of more load-
responsive use of gas supply, greater liquidity, increased utilization 
of transportation capacity and the overall efficiencies these 
arrangements bring to the marketplace. However, AMAs require that the 
releasing shipper be able to release both its capacity and its natural 
gas supply arrangements in a single package. The very purpose of the 
transaction is frustrated if the releasing shipper cannot combine the 
supply and capacity components of the deal. This tying is meant to 
ensure that the released capacity will continue to be used to support 
the releasing shipper's acquisition of needed gas supplies. Based on 
the fact that AMAs provide benefits to the market, and that tying of 
capacity and supply is necessary to implement beneficial AMAs, it seems 
reasonable to allow the tying conditions discussed above in the AMA 
context in order to foster and facilitate the use and implementation of 
such arrangements. The partial exemption of AMAs proposed here will 
foster maximization of the interstate pipeline grid and enhance 
competition.
    81. While the Commission is proposing changes to its prohibition 
against tying in order to facilitate AMAs, the Commission is not 
adopting the proposals of some commenters that the restriction against 
tying be eliminated altogether.\83\ The Commission's primary goal in 
establishing the capacity release program was to ensure that transfers 
of interstate pipeline capacity from one shipper to another are made in 
a not unduly discriminatory or preferential manner to the person 
placing the highest value on the pipeline capacity. If a shipper ties a 
release of unneeded capacity to matters that are unrelated to the 
details of acquiring that transportation capacity, the capacity may not 
go to the person who values it the most. The comments on this issue 
have not persuaded the Commission that, outside the AMA context, 
release conditions unrelated to the details of acquiring transportation 
service provide significant benefits to the natural gas market as a 
whole similar to those provided by AMAs. Therefore, when a shipper 
releases excess capacity that it does not need for the purpose for 
which it was originally acquired, the Commission's original concerns 
underlying the prohibition against tying still apply. The Commission 
continues to believe that such excess capacity should be allocated to 
the shipper who values it the most, regardless of whether the releasing 
shipper has some private business reason why it might prefer the 
replacement shipper to use its unneeded capacity in some particular 
manner. Thus, based on the distinguishing and mitigating factors of 
AMAs as related to the reasons underlying the prohibition against 
tying, the Commission is only proposing to modify its prohibition 
against tying with respect to pre-arranged releases to implement AMAs, 
and not all capacity releases.
---------------------------------------------------------------------------

    \83\ See e.g., Comments of Nstar at 7 (LDCs should be allowed to 
link capacity to whatever it wants to make an ``effective'' 
package); Comments of Direct Energy Services, LLC at 6 (Commission 
should permit market participants to offer whatever bundled 
transactions they perceive to be in their best interests).
---------------------------------------------------------------------------

    82. However, the Commission requests comment on whether it should 
clarify its prohibition concerning tying in one additional 
circumstance, which is not related to the AMA context. Some commenters 
assert that the Commission should facilitate the release of storage 
capacity by permitting a releasing shipper to (1) require a replacement 
shipper to take assignment of any gas that remains in the released 
storage capacity at the time the release takes effect and/or (2) 
require a replacement shipper to return the storage capacity to the 
releasing shipper at the end of the release with a specified amount of 
gas in storage.\84\ For example, some LDC commenters point out that 
they rely on having a certain level of gas in storage by the end of the 
off-peak summer injection season in order to be able to serve their 
customers during the peak winter season.\85\ Therefore, while they may 
desire to release storage capacity at times during the off-peak summer 
period, gas must be injected into the storage capacity at a rate that 
will permit the LDC to have its required amount of gas in storage by 
the end of the injection period. If an LDC could require the 
replacement shipper to return the storage capacity with the required 
amount of gas in storage at the

[[Page 65931]]

end of the release, it would be able to release more storage capacity 
than it can currently. The Commission requests comment on whether it 
should clarify its prohibition on tying to allow a releasing shipper to 
include conditions in a storage release concerning the sale and/or 
repurchase of gas in storage inventory.
---------------------------------------------------------------------------

    \84\ See e.g. Comments of AGA at 24.
    \85\ Id. See also Comments of Keyspan at 36.
---------------------------------------------------------------------------

2. The Bidding Requirement
    83. The Commission's current regulations require capacity release 
transactions to be posted for competitive bidding, unless the 
transactions are at the maximum rate or are for 31 days or less.\86\ 
The Commission's principal goal in requiring release transactions to be 
posted for bidding was to ensure that interstate transportation 
capacity would be allocated to those placing the highest value on 
obtaining that capacity and to prevent discriminatory allocation of 
interstate capacity at prices below the market price. The regulations 
also allow the releasing shipper to enter into a ``pre-arranged'' 
release with a designated replacement shipper before any posting for 
bidding.\87\ Prearranged releases are subject to the same bidding 
requirements as other releases; however, the prearranged replacement 
shipper will receive the capacity if it matches the highest bid 
submitted by any other bidder.\88\ In Order 636-A, the Commission 
rejected requests for a general exception to the bidding process for 
all pre-arranged deals.\89\
---------------------------------------------------------------------------

    \86\ 18 CFR Sec.  284.8(h).
    \87\ 18 CFR Sec.  284.8(b).
    \88\ 18 CFR Sec.  284.8(e).
    \89\ Order No. 636-A at 30, 555.
---------------------------------------------------------------------------

    84. As noted, the Commission has received a number of comments 
suggesting that it eliminate the requirement for competitive bidding 
for capacity releases, especially in the AMA context. LDCs in 
particular comment that bidding is unduly burdensome and often results 
in time consuming procedures that have little practical benefit. They 
maintain that bidding adds uncertainty to the process because it 
creates a risk for the replacement shipper that it will be unable to 
acquire capacity at the price it expected, and thus bidding can prevent 
parties from negotiating mutually beneficial transactions. Others 
comment that the delay caused by bidding makes it difficult to respond 
to market opportunities to release, and thus bidding no longer makes 
sense in today's marketplace. Some claim that given the development of 
the natural gas market and the natural economic incentive to release at 
the highest price, the competitive bidding requirement is no longer 
necessary to achieve allocative efficiency.
    85. Commenters assert that the inefficiencies of the bidding 
process pose substantial obstacles to successful releases to implement 
AMAs. Bidding and matching often prevent timely closing of AMA 
transactions involving aggregation of capacity and supply or 
aggregation of capacity on multiple pipelines. This can result in 
preventing willing buyers and sellers attempting to reach agreements 
that are in their respective best interests from consummating deals. 
Commenters also note that AMAs usually involve complex contractual 
structures with a variety of valued pieces. These deals are often 
negotiated at arms' length, and thus, requiring that they be made 
subject to bidding creates a risk that one aspect of the deal could be 
lost thus dooming the entire transaction. Because AMAs often involve 
extensive negotiations that lead to pre-arranged deals, the releasing 
party wants to be sure that the replacement shipper with whom it struck 
the deal is the one to get it, on the terms discussed during 
negotiations. Again, a bidding requirement puts that goal at risk.
    86. Proponents of eliminating bidding for AMAs also point out that 
when an entity wishes to use a asset manager in the interest of 
efficient use of gas supply and pipeline capacity assets, it is often 
required by state regulation to select the asset manager though a 
competitive RFP process. This process allows entities that are 
interested in managing the assets to submit a bid to do so, subject to 
the terms and conditions of the RFP. This process results in a chosen 
asset manager for one or more pre-arranged capacity releases. The 
commenters state that, if this same pre-arranged deal is subject to a 
further bidding process under the Commission's regulations, then that 
second process is redundant, and compromises the integrity and 
efficiency of the state mandated competitive process that has already 
been completed.
    87. The Commission proposes to exempt pre-arranged releases to 
implement AMAs from the bidding requirements of section 284.8 of its 
regulations, such that pre-arranged releases made to asset managers in 
order to implement AMAs will not be subject to competitive bidding.\90\ 
In light of its experience with capacity releases and the comments 
discussed above, the Commission has reconsidered the need for bidding 
in the AMA context. It appears that at least in the AMA context, the 
bidding requirement creates an unwarranted obstacle to the efficient 
management of pipeline capacity and supply assets.
---------------------------------------------------------------------------

    \90\ For the purposes of this exemption the Commission will use 
the same definition as discussed in the tying section above, and 
explained more fully below, for identifying releases eligible for 
the exemption.
---------------------------------------------------------------------------

    88. All capacity releases made to implement AMAs are pre-arranged 
because it is important that a releasing shipper be able to use the 
asset manager of its choice to effectuate the components of the 
agreement. Unlike a normal capacity release where the releasing shipper 
is often shedding excess capacity and has no intention of an ongoing 
relationship with the replacement shipper, in the AMA context the 
identity of the replacement shipper is often critical because it will 
manage the releasing shipper's portfolio for some time into the future. 
During the process of choosing an asset manager (often an RFP process), 
the releasing shipper considers a number of factors, including 
experience in managing capacity and gas sales, experience with a 
particular pipeline or area of the country, flexibility, 
creditworthiness and price. Because the asset manager will manage the 
releasing shipper's gas supply operations on an ongoing basis, it is 
critical that the releasing shipper be able to release the capacity to 
its chosen asset manager. Requiring releases made in order to implement 
an AMA to be posted for bidding would thus interfere with the 
negotiation of beneficial AMAs, by potentially preventing the releasing 
shipper from releasing the capacity to its chosen asset manager. The 
Commission concludes that the benefits of facilitating AMAs outweigh 
any disadvantages in exempting such releases from bidding.
    89. While the Commission is proposing to exempt AMAs from the 
capacity release bidding requirements, AMAs will remain subject to all 
existing posting and reporting requirements. Pipelines will still be 
obligated to provide notice of the release pursuant to 18 CFR 284.8(d). 
The details of the release transaction must also be posted on the 
pipeline's Internet Web site under 18 CFR 284.13(b), including any 
special terms and conditions applicable to the capacity release 
transaction. Moreover, the pipeline's index of customers must include 
the name of any agent or asset manager managing a shipper's 
transportation service and whether that agent or asset manager is an 
affiliate of the releasing shipper.\91\ Therefore, the Commission's 
goals of disclosure and transparency will still be met.
---------------------------------------------------------------------------

    \91\ 18 CFR 284.13(c)(2)(viii) and 284.13(c)(2)(ix).

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[[Page 65932]]

    90. The Commission is not proposing at this time to modify its 
existing bidding requirements with respect to capacity releases made 
outside the AMA context (including releases the asset manager makes to 
third parties). As discussed, the Commission originally adopted the 
bidding requirements in order to ensure that releases are made in a 
non-discriminatory manner to the person placing the highest value on 
the capacity. The comments received by the Commission show broad 
support from all segments of the industry for modifying the bidding 
requirements in order to facilitate AMAs, which most commenters believe 
provide significant benefits to the natural gas market. However, the 
comments do not reflect a similar level of support for removing the 
bidding requirements altogether. In addition, there has been no showing 
that non-AMA prearranged releases provide benefits of the type we have 
found justify exempting AMA releases from bidding. Moreover, in the 
typical non-AMA pre-arranged release, price is the primary factor, and 
therefore the releasing shipper should generally be indifferent as to 
the identity of the replacement shipper so long as it receives the 
highest possible price for its release. Therefore, the Commission does 
not presently have information showing that, outside the AMA context, 
the existing bidding requirements hinder beneficial developments in the 
market or no longer serve their original purpose.
3. Definition of AMAs
    91. In light of the proposed exemptions for AMAs discussed above, 
the Commission proposes to define a capacity release that is made as 
part of an AMA, and thus would qualify for the exemptions, to be: Any 
pre-arranged release that contains a condition that the releasing 
shipper may, on any day, call upon the replacement shipper to deliver 
to the releasing shipper a volume of gas equal to the daily contract 
demand of the released transportation capacity.\92\ If the capacity 
release is a release of storage capacity, the asset manager's delivery 
obligation need only equal the daily contract demand under the release 
for storage withdrawals.
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    \92\ It is the Commission's intention that with regard to an AMA 
involving several separate releases to the asset manager, the 
delivery obligation would be applied separately to each release, not 
on cumulative basis to the whole AMA. For example if an LDC has 
capacity of 100,000 Dth on both upstream Pipeline A and downstream 
Pipeline B, the asset manager could comply with the proposed 
delivery condition by shipping the same 100,000 Dth over both 
Pipeline A and Pipeline B.
---------------------------------------------------------------------------

    92. In developing a definition of AMA releases, the Commission 
seeks to balance two concerns. First, because the Commission is 
proposing that the exemptions from bidding and the prohibition against 
tying apply only in the context of AMAs, the Commission seeks a 
definition of the eligible releases that is limited to those releases 
that are made as part of a bona fide AMA. On the other hand, because 
the purpose of the proposed exemption is to facilitate AMAs, the 
Commission wants to avoid a definition that is so narrow it would limit 
the types of AMAs which shippers and asset managers may negotiate and 
thus discourage efficient and innovative arrangements.
    93. The proposed definition focuses on what the Commission 
understands to be the fundamental purpose of AMAs: That the asset 
manager will use the released capacity to deliver gas supplies to the 
releasing shipper. The Commission believes that the requirement that 
the replacement shipper contractually commit itself to deliver to the 
releasing shipper, on any day, gas supplies equal to the daily contract 
demand of the released capacity should achieve the goal of exempting 
only AMA transactions from bidding and the prohibition against tying. 
Further, because all AMAs are done as pre-arranged deals, the proposed 
definition requires that the release be pre-arranged. The Commission 
requests comment on whether other conditions should be imposed on the 
eligible releases in order to ensure that the proposed exemptions are 
limited to AMAs.
    94. The Commission also believes that the proposed definition is 
sufficiently flexible that it should not interfere with the development 
of efficient and beneficial AMAs. The Commission recognizes that a 
shipper may desire to enter into an AMA for the purpose of obtaining 
only a portion of its required gas supplies. Or it may desire to enter 
into multiple AMAs with different asset managers. The proposed 
definition does not prevent such arrangements, since it contains no 
requirement that the releasing shipper obtain any particular percentage 
of its gas supplies pursuant to a particular AMA. The only requirement 
is that the asset manager commits itself to providing gas supplies up 
to the contract demand of the released contract. In addition, while the 
Commission expects that the released capacity will be used by the asset 
manager to ship gas supplies to the releasing shipper, the proposed 
definition does not require that the asset manager make all its 
deliveries to the releasing shipper over the released capacity.
    95. The Commission also is not proposing to limit the types of 
entities that can use AMAs and take advantage of the exemptions from 
bidding and the prohibition against tying, provided the criteria stated 
above are met. The Commission recognizes that electric generators and 
industrial end-users may make use of AMAs, and thus the exemption is 
not limited to LDCs utilizing AMAs.
    96. Finally, the Marketer Petitioners, in their original request 
for clarification, suggested that gas sellers may desire to use AMAs. 
However, as proposed, the definition of AMA does not include such 
arrangements, unless the replacement shipper has an obligation to re-
sell to the releasing shipper equivalent quantities of natural gas. The 
Commission requests comments on whether it should expand the definition 
of AMAs eligible for the partial exemptions from the prohibition on 
tying and bidding to include gas marketing AMAs. Commenters should also 
address the question of how the Commission would distinguish a gas 
marketing AMA eligible for such an exemption from other release 
transactions.

IV. State Mandated Retail Choice Programs

    97. Section 284.8(h)(1) of the Commission's current capacity 
release regulations exempt prearranged releases of more than 31 days 
from bidding only if they are at the ``maximum tariff rate applicable 
to the release.'' States with retail open access gas programs (in which 
customers can buy gas from marketers rather than LDCs) have relied on 
this ``safe harbor'' exemption from bidding in structuring their 
programs. Specifically, a key component of most such programs is a 
provision for the LDC to make periodic releases, at the maximum rate, 
of its interstate pipeline capacity to the marketers participating in 
the program. The marketers then use the released capacity to transport 
the gas supplies that they sell to their retail customers. The 
exemption from bidding ensures that the LDC's capacity is transferred 
only to the marketers participating in the state retail unbundling 
program and is not obtained by non-participating third parties.
    98. However, the Commission's proposal to lift the price ceiling 
for releases of one year or less would have the effect of eliminating 
the bidding exemption for releases with terms of between 31 days and 
one year. That is because there would no longer be a maximum tariff 
rate applicable to such

[[Page 65933]]

releases. Moreover, in this NOPR, the Commission is proposing an 
additional exemption from bidding only for releases made in the context 
of an AMA, and releases made as part of a retail unbundling program 
would not qualify for that exemption as it is currently proposed. As a 
result, absent some additional modification of the regulations 
concerning bidding, LDCs would have to post for bidding all releases of 
between 31 days and one year that are made as part of a state retail 
unbundling program. This would mean that the marketers participating in 
the program could only obtain the capacity if they matched any third 
party bid for the capacity.
    99. In Order Nos. 637-A and 637-B,\93\ the Commission denied the 
request by LDCs for a blanket exemption from bidding of all capacity 
releases made as part of state retail unbundling program. The 
Commission explained that, with the price ceiling removed, posting and 
bidding was necessary to protect against undue discrimination and 
ensure that the capacity is properly allocated to the shipper placing 
the greatest value on the capacity. The Commission nevertheless sought 
to accommodate the state retail access programs by providing that, if 
an LDC considered an exemption from bidding essential to further a 
state retail unbundling program, the LDC, together with its state 
regulatory agency, could request a waiver of the bidding regulation to 
allow the LDC to consummate pre-arranged capacity release deals at the 
maximum rate. However, the Commission stated that, if the LDC made such 
a request, it had to be prepared to have all its capacity release 
transactions, including those not made as part of the state retail 
unbundling program, subject to the maximum rate.
---------------------------------------------------------------------------

    \93\ Order No. 637-A at 31,569; Order No. 637-B, 92 FERC at 
61,163.
---------------------------------------------------------------------------

    100. On appeal of Order No. 637, the court in INGAA affirmed the 
Commission's refusal to grant a blanket waiver of the bidding 
requirement for releases made as part of a state retail unbundling 
program. The court stated that, absent a showing that the retail 
unbundling programs are structured as largely to moot the Commission's 
concern about discrimination, the Commission's caution in granting a 
blanket waiver was reasonable. However, the court remanded the issue of 
the reasonableness of the condition that an LDC seeking a waiver must 
agree to subject all its releases to the maximum rate. The court stated 
that the requirement of state regulatory endorsement of the requested 
waiver seemed to give the Commission an avenue to verify the 
discrimination risk. The Commission did not address this issue in its 
order on remand, because the price ceiling had been re-imposed by the 
time of the remand order, thus rendering the issue moot.
    101. Several commenters in the instant proceeding again assert 
that, if the Commission removes the price ceiling on capacity release, 
the Commission should exempt all capacity releases to retail choice 
providers, that is, releases that are part of a state approved 
unbundling program, from the Commission's bidding requirements. AGA and 
several individual member LDCs, for example, contend that the 
Commission recognized the value of retail choice programs to the 
development of a competitive natural gas market by providing a waiver 
procedure for such releases in Order No. 637-A. AGA argues that the 
Commission should now take the next step to allow an LDC to release 
capacity to a retail choice provider at the rate paid by the LDC 
without bidding and without the need to seek a waiver from the 
Commission, particularly if the Commission removes the price ceiling on 
capacity release.\94\ It reasons that releases to retail choice 
providers are not releases of excess capacity but of capacity needed to 
better serve their core markets or to comply with state requirements. 
The capacity is still being used for the purpose it was purchased and 
the intention is to allow the LDC's retail customers to obtain the 
benefit of the LDCs firm pipeline entitlements and rates. AGA and other 
LDC commenters assert that requiring the LDCs to seek a waiver, as the 
Commission did in Order No. 637, adds a cumbersome layer of regulation.
---------------------------------------------------------------------------

    \94\ See AGA Comments at 47.
---------------------------------------------------------------------------

    102. Because the state programs generally allow choice providers to 
step into the shoes of the LDC, commenters suggest that there is little 
chance for undue discrimination or exercise of market power. Moreover, 
in order for retail customers to benefit from the discounted or 
negotiated rates that the LDC may have been able to obtain from the 
pipeline, the LDC needs to be able to release it to the retail choice 
provider at that rate. According to the AGA, if a shipper obtained 
capacity in the primary market under conditions that do not support the 
pipeline's maximum rate, the Commission's goal of maximizing allocative 
efficiency is hampered by requiring LDCs to sell at maximum rate to 
retail choice providers.
    103. The Commission proposes to address the issue of bidding on 
releases of a year or less by LDCs participating in a state retail 
unbundling program in a manner consistent with its actions in Order No. 
637, that is, the Commission will permit such LDCs to request a waiver 
of the bidding regulation to allow the LDC to consummate short-term 
pre-arranged capacity release deals necessary to implement retail 
access at the maximum rate without bidding. Allowing this limited 
waiver of the bidding requirement for capacity releases made as part of 
a state unbundling program would enable retail access programs to 
continue to operate with the same exemption from bidding which they now 
have. Adopting the more cautious approach of case-by-case waivers, 
rather than granting a blanket waiver, is reasonable in light of the 
court's finding that even with state unbundling programs the potential 
for discrimination still exists.
    104. As part of this proposal, however, the Commission will not 
require that an LDC seeking such a waiver agree to subject all of its 
short-term capacity releases to the applicable maximum rate. Any of an 
LDC's capacity releases that are outside of its state-approved retail 
choice program (and not made as part of an AMA as discussed in the 
previous section) will remain subject to bidding, which should provide 
adequate protection against discrimination. Further, it is reasonable 
to allow different treatment of releases made to an approved retail 
choice provider, because the capacity released for that purpose will 
continue to be used to serve the LDC's customers for whom the capacity 
was originally contracted to serve. The Commission's proposal here 
would also remedy the court's concern in INGAA with the requirement 
that LDCs seeking waivers agree to subject all of their releases to the 
maximum rate.
    105. While the Commission is not proposing a blanket exemption from 
bidding for releases made by LDCs under state retail choice programs, 
the Commission requests comment on whether such releases should be 
treated as similar to releases made as part of an AMA and thus accorded 
the same full exemption from bidding. As with releases in the AMA 
context, LDC releases in the retail unbundling context are not releases 
of excess capacity to the open market but of capacity needed to serve 
the original customers for whom the LDC purchased the capacity. In the 
state unbundling context, the LDC must release and allocate capacity to 
a marketer that an end use customer may choose as its supplier. Thus, 
the

[[Page 65934]]

capacity may be treated as still being used for the purpose it was 
purchased and as it was originally intended. However, the Commission 
seeks comment on whether such releases should be exempt from the 
bidding requirement. Should the Commission find that such releases 
provide similar benefits to the market as releases which are made as 
part of establishing an AMA? Do such releases entail a greater 
potential for undue discrimination than releases made as part of 
establishing an AMA?

V. Shipper-Must-Have-Title Requirement

    106. The Commission will retain its shipper-must-have-title 
requirement. While the shipper-must-have-title requirement had its 
original roots in individual pipeline proceedings to implement Order 
No. 436 non-discriminatory open-access transportation, it has become 
the foundation for the Commission's capacity release program.\95\ The 
purpose of the shipper-must-have-title requirement is to require that 
all transfers of capacity from one shipper to another take place 
through the capacity release program. Without the shipper-must-have-
title requirement, ``capacity holders could simply transport gas over 
the pipeline for another entity,'' \96\ without complying with any of 
the requirements of the capacity release program. Thus, the capacity 
holder could charge the other entity any rate it desired for this 
service, and the capacity holder would not need to post the arrangement 
with the other entity for bidding to permit others to obtain the 
service at a higher rate.
---------------------------------------------------------------------------

    \95\ As the Commission explained in Order No. 637-A, ``the 
capacity release rules were designed with [the shipper-must-have-
title] policy as their foundation,'' because without this 
requirement ``capacity holders could simply transport gas over the 
pipeline for another entity.'' Order No. 637 at 31,300.
    \96\ Order No. 637 at 31,300.
---------------------------------------------------------------------------

    107. By contrast, under the shipper-must-have-title requirement, an 
assignment of capacity from one shipper to another may only be 
accomplished through the capacity release program. As discussed above, 
under the capacity release program, any release must comply with any 
applicable price ceiling and bidding requirements. In addition, the 
replacement shipper must contract with the pipeline, and section 
284.8(d) of the Commission's regulations requires the pipeline to post 
information regarding the replacement shipper's contract, including any 
special terms and conditions. This provides transparency in the 
secondary market by enabling the Commission and all interested parties 
to monitor the capacity release market.
    108. The shipper-must-have-title requirement remains an important 
transparency tool given the proposals discussed above and the 
Commission's decision to maintain the price ceiling for long-term 
capacity releases and to require bidding for capacity releases outside 
the context of AMAs. If the Commission were to eliminate the shipper-
must-have-title requirement, shippers could easily evade the continuing 
requirements of the capacity release program in the manner discussed 
above. In essence, participation in the capacity release program would 
become voluntary and shippers desiring to make long-term releases at 
more than the maximum rate or to make prearranged non-maximum rate 
deals without bidding could simply make private arrangements outside of 
the capacity release program.
    109. The shipper-must-have-title requirement ensures transparency 
in the capacity market. Because replacement shippers must in all 
instances enter into contracts with the pipeline, the Commission can 
ensure transparency by requiring the pipelines to report the essential 
terms of the replacement shippers' contracts. Without the rule, the 
Commission would have to develop separate reporting requirements for 
shippers who make private arrangements to ship gas for other entities. 
It is more efficient for the Commission and the marketplace to monitor 
and enforce the reporting requirements on the one hundred or so 
interstate pipelines rather than to enforce them on thousands of 
shippers.
    110. Finally, in the Commission's opinion, the shipper-must-have-
title requirement does not cause undue administrative burdens. Through 
the Commission's adoption of the North American Energy Standards 
Board's (NAESB) standards, all pipelines must provide a title transfer 
tracking service at no charge as part of their nomination process, so 
that any title transfers required by the shipper-must-have-title 
requirement are easily accomplished.\97\
---------------------------------------------------------------------------

    \97\ In this context the shipper-must-have-title requirement 
accomplishes on the gas side much the same purpose as ``e-tagging'' 
title transfers on the electric side.
---------------------------------------------------------------------------

VI. Regulatory Requirements

A. Information Collection Statement

    111. Office of Management and Budget (OMB) regulations require OMB 
to approve certain information collection requirements imposed by 
agency rule.\98\ Comments are solicited on the Commission's need for 
this information, whether the information will have practical utility, 
the accuracy of provided burden estimates, ways to enhance the quality, 
utility and clarity of the information to be collected, and any 
suggested methods for minimizing respondents' burden, including the use 
of automated information techniques.
---------------------------------------------------------------------------

    \98\ 5 CFR 1320.11.
---------------------------------------------------------------------------

    Title: FERC-549B, Gas Pipeline Rates: Capacity Information.
    Action: Proposed Information Collection.
    OMB Control No.: 1902-0169B.
    112. The applicant shall not be penalized for failure to respond to 
this collection of information unless the collection of information 
displays a valid OMB control number.
    Respondents: Business or other for profit.
    Frequency of Responses: On occasion.
    Necessity of Information: The proposed rule would permit market 
based pricing for short-term capacity releases and facilitate AMAs by 
relaxing the Commission's prohibition on tying and its bidding 
requirements for certain capacity releases. As noted earlier in the 
NOPR, elimination of the price ceiling for short-term capacity releases 
will provide more accurate price signals concerning the market value of 
pipeline capacity. Further, implementation of AMAs will make the 
capacity release program more efficient as releasing shippers can 
transfer their capacity to entities with greater expertise both in 
purchasing low cost gas supplies, and in maximizing the value of the 
capacity when it is not needed to meet the releasing shipper's gas 
supply needs. Such arrangements free up the time, expense and expertise 
involved with managing gas supply arrangements and serve as a means of 
relieving the burdens of administering their capacity or supply needs.
    113. Although the Commission is taking the steps to enhance 
competition in the secondary capacity release market and increase 
shipper options, it is not modifying its existing reporting 
requirements in section 284.13 of its regulations. The current burden 
estimates for FERC-549B will be unaffected by this rule and for that 
reason, the Commission will send a copy of this proposed rule to OMB 
for informational purposes only.

B. Environmental Analysis

    114. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a

[[Page 65935]]

significant adverse effect on the human environment.\99\ The Commission 
has categorically excluded certain actions from these requirements as 
not having a significant effect on the human environment.\100\ The 
actions proposed to be taken here fall within categorical exclusions in 
the Commission's regulations for rules that are corrective, clarifying 
or procedural, for information gathering, analysis, and dissemination, 
and for sales, exchange, and transportation of natural gas that 
requires no construction of facilities.\101\ Therefore an environmental 
review is unnecessary and has not been prepared in this rulemaking.
---------------------------------------------------------------------------

    \99\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulation Preambles 1986-1990 ] 30,783 (1987).
    \100\ 18 CFR 380.4 (2007).
    \101\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5) and 380.4(a)(27) 
(2007).
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    115. The Regulatory Flexibility Act of 1980 (RFA) \102\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small entities. 
The Commission is not required to make such an analysis if proposed 
regulations would not have such an effect.\103\ Under the industry 
standards used for purposes of the RFA, a natural gas pipeline company 
qualifies as ``a small entity'' if it has annual revenues of $6.5 
million or less. Most companies regulated by the Commission do not fall 
within the RFA's definition of a small entity.\104\
---------------------------------------------------------------------------

    \102\ 5 U.S.C. 601-612.
    \103\ 5 U.S.C. 605(b)(2000).
    \104\ 5 U.S.C. 601(3), citing to Section 3 of the Small Business 
Act, 15 U.S.C. 623 (2000). Section 3 defines a ``small-business 
concern'' as a business which is independently owned and operated 
and which is not dominant in its field of operation.
---------------------------------------------------------------------------

    116. The procedural modifications proposed herein should have no 
significant negative impact on those entities, be they large or small, 
subject to the Commission's regulatory jurisdiction under the NGA. As 
previously noted in the NOPR, removal of the price ceiling will enable 
releasing shippers to offer competitively-priced alternatives to the 
pipelines' negotiated rate offerings. A small entity that participates 
in the market will no longer be constrained by a ceiling price for its 
unused capacity. Further, removal of the ceiling also permits more 
efficient utilization of capacity by permitting prices to rise to 
market clearing levels, allowing those entities that place the highest 
value on the capacity to obtain it. Accordingly, the Commission 
certifies that this notice's proposed regulations, if promulgated, will 
not have a significant economic impact on a substantial number of small 
entities.

D. Comment Procedures

    117. The Commission invites interested persons to submit comments 
on the matters and issues proposed in this notice to be adopted, 
including any related matters or alternative proposals that commenters 
may wish to discuss. Comments are due 45 days from publication in the 
Federal Register. Comments must refer to Docket No. RM08-1-000, and 
must include the commenter's name, the organization they represent, if 
applicable, and their address in their comments.
    118. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    119. Commenters that are not able to file comments electronically 
must send an original and 14 copies of their comments to: Federal 
Energy Regulatory Commission, Secretary of the Commission, 888 First 
Street, NE., Washington, DC 20426.
    120. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

E. Document Availability

    121. 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.
    122. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    123. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC Online Support at 202-502-
6652 (toll free at 1-866-208-3676) or e-mail at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202)502-8659. E-mail the Public Reference Room at 
[email protected].

List of Subjects in 18 CFR Part 284

    Incorporation by reference, Natural gas, Reporting and 
recordkeeping requirements.

    By direction of the Commission.

Nathaniel J. Davis, Sr.,
Deputy Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
part 284, Chapter I, Title 18, Code of Federal Regulations, to read as 
follows:

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES

    1. The authority citation for part 284 continues to read as 
follows:

    Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352; 
43 U.S.C. 1331-1356.

    2. Amend Sec.  284.8 as follows:
    a. In paragraph (e), remove the words ``(not over the maximum 
rate)''.
    b. Remove paragraph (i).
    c. Add two sentences to the end of paragraph (b) and revise 
paragraph (h) to read as follows.


Sec.  284.8  Release of firm capacity on interstate pipelines.

* * * * *
    (b) * * * The rate charged the replacement shipper for a release of 
capacity for more than one year may not exceed the applicable maximum 
rate. No rate limitation applies to the release of capacity for a 
period of one year or less.
* * * * *
    (h)(1) A release of capacity by a firm shipper to a replacement 
shipper for any period of 31 days or less, a release of capacity for 
more than one year at the maximum tariff rate, or a release to an asset 
manager as defined in paragraph (h)(3) of this section need not comply 
with the notification and bidding requirements of paragraphs (c) 
through (e) of this section. Notice of a firm release under this 
paragraph must be provided on the pipeline's electronic bulletin board 
as soon as possible, but not later than forty-eight hours, after the 
release transaction commences.

[[Page 65936]]

    (2) When a release of capacity for 31 days or less is exempt from 
bidding requirements under paragraph (h)(1) of this section, a firm 
shipper may not roll-over, extend, or in any way continue the release 
without complying with the requirements of paragraphs (c) through (e) 
of this section, and may not re-release to the same replacement shipper 
under this paragraph at less than the maximum tariff rate until 28 days 
after the first release period has ended.
    (3) A release to an asset manager exempt from bidding requirements 
under paragraph (h)(1) of this section is any prearranged capacity 
release that contains a condition that the releasing shipper may, on 
any day, call upon the replacement shipper to deliver to the releasing 
shipper a volume of gas equal to the daily contract demand of the 
released transportation capacity or the daily contract demand for 
storage withdrawals.

[FR Doc. E7-22952 Filed 11-23-07; 8:45 am]
BILLING CODE 6717-01-P