[Federal Register Volume 73, Number 231 (Monday, December 1, 2008)]
[Rules and Regulations]
[Pages 72692-72714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28217]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-001; Order No. 712-A]


Promotion of a More Efficient Capacity Release Market

Issued November 21, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
issuing an order addressing the requests for clarification and/or 
rehearing of Order No. 712 [73 FR 37058, June 30, 2008]. Order No. 712 
revised Commission 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 program. The order permitted market 
based pricing for short term capacity releases and facilitated asset 
management arrangements (AMA) by relaxing the Commission's prohibition 
on tying and on its bidding requirements for certain capacity releases. 
The Commission further clarified in the order that its prohibition on 
tying does not apply to conditions associated with gas inventory held 
in storage for releases of firm storage capacity. Finally, the 
Commission waived its prohibition on tying and bidding requirements for 
capacity releases made as part of state-approved open access programs. 
This order generally denies rehearing and clarifies Order No. 712.

DATES: Effective Date: The amendments to the regulations will become 
effective 30 days after publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
    William Murrell, Office of Energy Market Regulation, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
[email protected], (202) 502-8703.
    Robert McLean, Office of 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:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. 
Kelly, Marc Spitzer, Philip D. Moeller, and John Wellinghoff.

                            Table of Contents
 
                                                               Paragraph
                                                                Numbers
 
I. Removal of the Price Ceiling for Released Capacity.......           3
    A. Background...........................................           3
    B. Price Ceiling Applicable to Pipeline Capacity........          13
        1. Rehearing Requests...............................          13

[[Page 72693]]

 
        2. Commission Determination.........................          16
            a. Competitive Market Findings..................          22
            b. Withholding Construction of Needed Pipeline            29
             Infrastructure.................................
            c. Pricing Flexibility..........................          38
            d. Bifurcated Markets...........................          50
            e. Proposed Alternatives........................          54
    C. Clarification Regarding Specific Issues..............          57
        1. Consecutive Releases.............................          57
            a. Clarification Requests.......................          57
            b. Commission Determination.....................          60
        2. Definition of Short-Term.........................          63
        3. Lump Sum Payments................................          65
II. Asset Management Arrangements...........................          68
    A. Background...........................................          68
    B. Definition of AMAs...................................          73
    C. Exemption from Bidding for AMAs......................          89
    D. Posting and Reporting Requirements...................         101
        1. Posting requirements.............................         102
        2. Index of Customers...............................         104
    E. Miscellaneous AMA Issues.............................         107
III. State Mandated Retail Unbundling.......................         115
IV. Tying of Storage Capacity and Inventory.................         128
V. Liquefied Natural Gas....................................         139
VI. Information Collection Statement........................         147
VII. Document Availability..................................         148
VIII. Effective Date and Congressional Notification.........         151
 

Order on Rehearing and Clarification

Order No. 712-A

(Issued November 21, 2008)

    1. On June 19, 2008, the Commission issued Order No. 712,\1\ a 
Final Rule that revised the Commission's Part 284 regulations 
concerning the release of firm capacity by shippers on interstate 
natural gas pipelines in order to enhance the efficiency and 
effectiveness of the secondary capacity release market. Specifically, 
the Final Rule made the following changes to the Commission's policies 
and regulations:
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    \1\ Promotion of a More Efficient Capacity Release Market, 73 FR 
37058 (June 30, 2008), FERC Statutes and Regulations ] 31,271 
(2008).
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     The rule lifted the maximum rate ceiling on secondary 
capacity releases of one year or less to enhance the efficiency of the 
market while continuing to regulate long term capacity releases of more 
than one year and pipeline rates and services.
     The rule modified the Commission's policies and 
regulations to facilitate the use of AMAs. The first modification is to 
exempt capacity releases that implement AMAs from the Commission's 
prohibition on tying capacity releases to any extraneous conditions. 
The second change is to exempt capacity releases made as part of an AMA 
from the bidding requirements set forth in section 284.8 of the 
Commission's regulations.
     The rule established a definition of AMAs that will 
qualify for the tying and bidding exemptions. The definition provides 
for both delivery and supply side AMAs and requires that an asset 
manager satisfy certain delivery and/or purchase obligations.
     The rule also revised the Commission's prohibition against 
tying to allow a releasing shipper to include conditions in a release 
of storage capacity regarding the sale and/or repurchase of gas in 
storage inventory, even outside the AMA context. Specifically, this 
exemption from tying is meant to allow a shipper that releases storage 
capacity to require a replacement shipper to take title to any gas in 
the released capacity at the time the release takes effect and/or to 
return the storage capacity to the releasing shipper at the end of the 
release with a specified amount of gas in storage.
     Finally, the rule modified the Commission's regulations to 
facilitate retail open access programs by exempting capacity releases 
made under state-approved programs from the Commission's capacity 
release bidding requirements.
    2. Three parties sought rehearing of Order No. 712.\2\ Six parties 
sought rehearing and/or clarification.\3\ Three parties filed for 
clarification only.\4\ The Marketer Petitioners requested clarification 
and reconsideration. As discussed below, the Commission largely denies 
rehearing but grants clarification in part and makes certain 
adjustments to the regulations regarding AMAs.
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    \2\ Those parties are Allegheny Energy Supply Company, LLC 
(Allegheny), Shell NA LNG LLC (Shell LNG) and Statoil Natural Gas 
LLC, Chevron USA Inc., and Constellation Energy Commodities Group, 
Inc. (collectively, LNG Petitioners).
    \3\ Those parties are the Interstate Natural Gas Association of 
America (INGAA), Iroquois Gas Transmission System, LP (Iroquois), 
the Natural Gas Supply Association and the Electric Power Supply 
Association (NGSA), Public Service Company of North Carolina, Inc., 
South Carolina Electric & Gas Company, and Scana Energy Marketing 
Inc. (collectively Scana), Spectra Energy Transmission LLC and 
Spectra Energy Partners (Spectra), Vector Pipeline LP (Vector) and 
Williston Basin Interstate Pipeline Company (Williston). INGAA filed 
a separate request for rehearing and a separate request for 
clarification.
    \4\ Those parties are the American Gas Association (AGA), BP 
Energy Company (BP) and Reliant Energy Inc. (Reliant).
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I. Removal of the Price Ceiling for Released Capacity

A. Background

    3. In Order No. 712, the Commission revised its regulations to 
remove the price ceiling on short term capacity releases. The 
Commission found that it had previously provided pipelines with the 
flexibility to enter into negotiated rate transactions that are 
permitted to exceed the maximum rate ceiling, as long as the shipper 
could avail itself of the pipeline's cost-of-service recourse rate. The 
Commission also found that

[[Page 72694]]

removing the price ceiling for short term releases would extend such 
pricing flexibility to releasing shippers, subject to the continued 
protection of the recourse rate for capacity purchased directly from 
the pipeline.
    4. The Commission noted the increased use of negotiated rate 
transactions by shippers and pipelines based on gas price differentials 
and found that such use demonstrated that buyers and sellers are 
attracted to the ability to calibrate the price of transportation to 
its value in the market. The Commission also found that the maximum 
rate ceiling as applied to capacity release transactions denied 
releasing and replacement shippers the same ability enjoyed by the 
pipelines to negotiate transactions that reflect the market value of 
capacity at all times. With the price ceiling in effect, releasing 
shippers were unable to effectively use price differentials as a 
measure of capacity value because they were denied the ability to 
recover the value of capacity during peak periods when that value 
exceeds the maximum rate cap.
    5. The Commission further found that because the existing capacity 
release price ceiling did not reflect short-term variations in the 
market value of the capacity, the price ceiling inhibits the efficient 
allocation of capacity and harms, rather than helps, the short-term 
shippers it is intended to protect. Removal of the price ceiling will 
permit short-term capacity release prices to rise to market clearing 
levels, thereby allocating capacity to those that value it the most 
while providing accurate price signals to the marketplace. The 
Commission also found that the price ceiling harmed captive customers 
holding long-term contracts on the pipeline, and that the price ceiling 
reduces the dissemination of accurate capacity pricing information.
    6. The Commission recognized that in removing the price ceiling 
from short term capacity releases it was departing from a cost-of-
service ratemaking methodology, but determined that given the benefits 
to be derived from removing the price ceiling, sufficient protections 
existed against the exercise of market power by releasing shippers.
    7. The Commission reviewed data collected over many years, which 
showed that as a general matter, the rates resulting from removal of 
the price cap for capacity release should be reasonably competitive. 
But the Commission did not rely solely on competition to ensure just 
and reasonable prices.\5\ The Commission found that the same recourse 
rate that protects against the potential exercise of market power in 
pipeline negotiated rate transactions would serve a similar function in 
protecting against the potential exercise of market power by releasing 
shippers. The Commission found that any attempt by a releasing shipper 
to withhold capacity in order to raise rates will be undermined because 
the pipeline will be required to sell that capacity as interruptible 
capacity to a shipper willing to pay the maximum rate.\6\
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    \5\ Specifically, the Commission also stated:
    [t]he Commission finds that the short-term capacity release 
market is generally competitive. Therefore competition, together 
with our continuing requirement that pipelines must sell short-term 
firm and interruptible services to any shipper offering the maximum 
rate, and the Commission's ongoing monitoring efforts will keep 
short-term capacity release rates within the ``zone of 
reasonableness'' required by INGAA and Farmers Union. Order No. 712 
at P 39.
    \6\ Order No. 712 at P48-49. In this respect, the Commission 
continued the same protection on which it relied in Order No. 637. 
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 31,282, 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) (Order No. 637).
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    8. The Commission also reasoned that the releasing shippers' 
ability to exercise market power in the short-term capacity release 
market is limited because short-term customers are not captive, even if 
only connected to one pipeline. Thus, the Commission found that short-
term shippers always have the option simply not to take service, if the 
price demanded is above competitive market levels.\7\
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    \7\ Order No. 712 at P 50.
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    9. In sum, the Commission found that its removal of the price 
ceiling on short-term capacity release transactions provides on balance 
advantages that ``offset whatever harm the occasional high rate might 
entail.'' \8\ The Commission found that removal of the price cap 
permits more efficient utilization of capacity by permitting prices for 
short-term capacity releases to rise to market clearing levels, thereby 
permitting those who place the highest value on the capacity to obtain 
it and that it will also provide potential customers with additional 
opportunities to acquire capacity. Finally, the Commission found that 
by providing more accurate price signals concerning the market value of 
pipeline capacity, removal of the price ceiling for short-term capacity 
releases promotes the efficient construction of new capacity by 
highlighting the location, frequency, and severity of transportation 
constraints.
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    \8\ Order No. 712 at P 51 (citing, Interstate Natural Gas 
Association of America, 285 F.3d 18, 33 (D.C. Cir. 2002) (INGAA)).
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    10. The Commission determined not to remove the price ceiling for 
pipeline short-term services, stating that by its action in removing 
the price ceiling from short-term capacity releases, the Commission 
intended to permit releasing shippers some of the same flexible pricing 
authority the Commission has already granted pipelines through the 
negotiated rate program.\9\ The Commission stated that the pipelines' 
request to lift the maximum rate on short-term releases would 
effectively negate the recourse rate protection against the use of 
market power that the Commission included in its negotiated rate 
program. The Commission also determined that the maximum rate ceiling 
on pipeline capacity acts as a recourse rate for both pipeline 
transactions and capacity release transactions and thereby protects 
both pipeline customers and replacement shippers on capacity release 
transactions.\10\
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    \9\ Order No. 712 at P 83. In fact, the Commission reasoned that 
pipelines already possess significant pricing discretion in that 
they may enter into negotiated rate transactions above the maximum 
rate or by establishing that they lack market power and requesting 
market based rate authority or by requesting seasonal rates for 
their systems. The Commission stated that its rule was designed 
solely to give releasing shippers some of the same flexibility 
enjoyed by the pipelines, subject to the same recourse rate 
protection. Order No. 712 at P 86.
    \10\ Order No. 712 at P 83.
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    11. The Commission also explained that pipelines differed from 
capacity releasers in that they are the principal holders of capacity 
and, therefore, the pipelines possess greater ability to exercise 
market power by withholding capacity and not constructing facilities 
than do releasing shippers.\11\
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    \11\ Order No. 712 at P 84-85.
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    12. No party sought rehearing of the Commission's determination to 
remove the price ceiling for capacity release transactions. The only 
major issue raised on rehearing is whether to remove the price ceiling 
from pipeline short-term services. A number of clarification and 
rehearing requests also were filed regarding specific issues related to 
the removal of the price ceiling for released capacity.

B. Price Ceiling Applicable to Pipeline Capacity

1. Rehearing Requests
    13. INGAA, Williston and Spectra filed requests for rehearing 
regarding the

[[Page 72695]]

Commission's decision to retain the price ceiling for short-term 
pipeline services, while removing the price ceiling on short-term 
capacity releases.\12\ They assert that the same data and rationale 
that supports removing the price ceiling from short-term capacity 
releases also supports the removal of the price ceiling for short-term 
pipeline capacity.\13\
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    \12\ These parties do not object to the removal of the price 
ceiling for capacity release transactions. See INGAA at 6. (``INGAA 
supports lifting the price cap on short-term released capacity * * 
*''), Spectra at 5 (``The Commission was correct to remove the price 
caps on short-term capacity release capacity'').
    \13\ INGAA at 1, Williston at 2, Spectra at 2.
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    14. They argue that the Commission acknowledged that short-term 
released capacity and short-term pipeline capacity compete in the same 
market, and maintain that the finding that the short-term market is 
``generally competitive,'' supports lifting the price ceiling for 
short-term pipeline capacity.
    15. They also maintain that the distinctions between released 
capacity and pipeline capacity set forth by Order No. 712 do not 
support retention of the price ceiling for pipeline capacity. They 
maintain that these distinctions are based on two incorrect premises: 
first, that interstate pipelines have market power in the relevant 
market; and second, that a capped rate for pipeline capacity is 
necessary as a safeguard against abuse in the released capacity and 
pipeline capacity markets. Therefore, they maintain that the Commission 
acted arbitrarily and capriciously in not treating short-term pipeline 
and released capacity similarly. Further, INGAA argues that the 
disparate treatment of released and pipeline capacity under Order No. 
712 cannot be excused by reference to flexible rate options and 
policies open to the pipelines because such options continue to leave 
rates capped or cannot be attained as a practical matter.
2. Commission Determination
    16. The Commission denies the requests for rehearing, and continues 
to find that maintenance of the maximum rate ceilings for pipeline 
short-term transactions is necessary to protect against the potential 
exercise of market power. As we explained in Order No. 712, the removal 
of the rate ceiling for short-term capacity release transactions is 
designed to extend to capacity release transactions the pricing 
flexibility already available to pipelines through negotiated rates 
without compromising the fundamental protection provided by the 
availability of recourse rate service. In the Alternative Rate Design 
Policy statement, we offered the pipelines the flexibility to exceed 
the price cap in one of two ways: Pipelines can either make a filing 
with appropriate information to establish the market is competitive or 
pipelines can negotiate rates as long as the shipper has the option of 
purchasing capacity at the recourse (maximum) tariff rate.\14\ In Order 
No. 712, we provide releasing shippers with flexibility similar to that 
enjoyed by the pipelines, while retaining the recourse rate as a 
protection for the buyer against the potential exercise of market power 
by both pipelines and releasing shippers.\15\
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    \14\ 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).
    \15\ The court in INGAA recognized the value of the recourse 
rate in protecting against the exercise of market power by both 
pipelines and releasing shippers:
    As to deliberate withholding of capacity, the Commission 
reasoned that this too was not within the power of capacity holders. 
If 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. 285 F.3d at 33.
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    17. While our examination of the capacity release record did 
indicate that capacity release prices seem to suggest a competitive 
market for released capacity as a general matter, we did not make a 
finding, as suggested in the rehearing requests, that the entire 
secondary market is competitive. We recognize that on some portions of 
the pipeline grid, little effective competition may exist.\16\ As we 
emphasized on several occasions in Order No. 712, precisely because we 
did not make such a competitive market finding, we are ``continuing to 
insist on the maintenance of the pipeline's recourse rate as protection 
against the exercise of market power.'' \17\ As we explained, on parts 
of the pipeline grid where all firm capacity may be held by only a few 
or one firm shipper, the availability of the recourse rate prevents 
those shippers from withholding their capacity in order to charge a 
price above competitive levels. If a releasing shipper seeks to charge 
more than the maximum rate for capacity, and the pipeline segment is 
not constrained, the replacement shipper would have the option of 
turning down the deal and purchasing the capacity from the pipeline at 
the cost-based just and reasonable interruptible or short-term firm 
rate.
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    \16\ Williston Basin Interstate Pipeline Co., 519 F.3d 497, 502 
(D.C. Cir. 2008) (where the pipeline's largest customer is its 
affiliate, the competitive capacity resale market is ``smaller than 
one would otherwise expect''); United Distribution Cos. v. FERC, 88 
F.3d 1105, 1156 (D.C. Cir. 1996) (``when the capacity available for 
sale on a particular pipeline is limited, holders of even relatively 
small capacity allotments can exercise market power'').
    \17\ Order No. 712 at P 61.
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    18. Moreover, as we also explained in Order No. 712, the 
implications of removing the price ceiling for pipeline capacity are 
more serious than for capacity release. Pipelines, due in part to their 
economies of scale, can exercise market power over pipeline capacity, 
particularly with respect to the construction of long-term 
capacity.\18\ As the Court of Appeals for the District of Columbia 
Circuit has stated:
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    \18\ Id. P 67, 85.

    Federal regulation of the natural gas industry is thus designed 
to curb pipelines' potential monopoly power over gas transportation. 
The enormous economies of scale involved in the construction of 
natural gas pipelines tend to make the transportation of gas a 
natural monopoly.\19\
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    \19\ United Distribution Cos. v. FERC, 88 F.3d 1105, 1122 (D.C. 
Cir. 1996).

    19. Unlike releasing shippers, pipelines have a greater ability to 
exercise market power because of their control over the expansion of 
the pipeline itself. If a pipeline could on its own or as part of an 
oligopolistic market structure exercise market power in the short-term 
market, it would have an incentive not to construct additional needed 
capacity (withhold new capacity) because of the excess revenues it can 
garner in the short-term market. As the Commission explained in Order 
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No. 637:

    Without rate regulation, pipelines would have the economic 
incentive to exercise market power by withholding capacity 
(including not building new capacity) in order to raise rates and 
earn greater revenue by creating scarcity. Because pipeline rates 
are regulated, however, there is little incentive for a pipeline to 
withhold capacity, because even if it creates scarcity, it cannot 
charge rates above those set by its cost-of-service. Since pipelines 
cannot increase revenues by withholding capacity, rate regulation 
has the added benefit of providing pipelines with a financial 
incentive to build new capacity when demand exists * * *. Thus, 
annual rate regulation protects against the pipeline's exercise of 
market power by limiting the incentive of a monopolist to withhold 
capacity in order to increase price as well as creates a positive 
incentive for a pipeline to add capacity when needed by the 
market.\20\
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    \20\ Order No. 637 at 31,270. See Tennessee Gas Pipeline Co., 91 
FERC ] 61,053, at 61,191 (2000) (``there is little reason for the 
pipeline to exercise market power by withholding new capacity 
because the maximum rates established by the Commission prevent it 
from charging rates above the just and reasonable rates based on its 
cost of service''), aff'd, Process Gas Consumers Group v. FERC, 292 
F.3d 831, 834 (D.C. Cir. 2002).

    20. Not only may there be segments of a pipeline or even an entire 
pipeline

[[Page 72696]]

that is not competitive, as discussed above, but as we found in Order 
No. 712,\21\ and as the pipelines have conceded, perfect arbitrage does 
not exist between the capacity release market and the market for 
pipeline capacity.\22\ As a result, the pipelines will have the ability 
to exercise market power, which will create the very incentive our 
regulation is designed to prevent: An incentive to not construct 
capacity when it is needed and would ordinarily be profitable.\23\ In 
balancing the risks and benefits of removing the price ceiling for 
pipeline capacity, we chose in Order No. 712 to err on the side of 
providing greater protection against the exercise of market power by 
both the pipelines and releasing shippers by retaining the recourse 
rate protection of regulated pipeline rates.
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    \21\ Order No. 712 at P 107.
    \22\ INGAA at 11. If perfect arbitrage did exist, no market for 
interruptible transportation would exist on fully subscribed 
pipelines because releasing shippers would capture the benefits of 
their unused capacity for themselves.
    \23\ C. McConnell, S. Brue, Microeconomics: Principles, 
Problems, and Policies, 211 (McGraw-Hill, 2004) (``by making it 
illegal to charge more than the [competitive price] per unit, the 
regulatory agency has removed the monopolist's incentive to restrict 
output to [the monopoly quantity] to obtain a higher price and 
greater profit'').
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    21. We find that the arguments raised by the pipelines on rehearing 
are the same arguments addressed in Order No. 712, and as discussed 
below, we do not find these arguments sufficient to change our 
determination to retain the price ceiling for short-term pipeline 
services.
a. Competitive Market Findings
    22. INGAA, Williston, and Spectra all argue that the Commission's 
finding that the capacity release market is ``generally competitive'' 
justifies removing the price ceiling for pipeline short-term services 
as well. They maintain that released capacity and pipeline capacity 
compete with each other and that by concluding that the presence of a 
``generally competitive'' market justified the removal of the rate 
ceiling for short-term release capacity the Commission also justified 
the removal of the price ceiling for short term pipeline capacity. 
These parties argue that because the data does not distinguish between 
released capacity and pipeline capacity there is no reason to treat one 
class of capacity differently from the other.\24\
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    \24\ See INGAA at 8, Spectra at 12 and Williston at 4 (``The 
Commission's findings that the short term capacity release market is 
workably competitive was not based on data that distinguishes 
between the types of sellers of capacity.'').
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    23. The Commission agrees that to a large extent released capacity 
and pipeline capacity compete against each other. But, as we discussed 
above, we did not make a finding that the entire secondary market is 
competitive. Rather, we found that the extent of competition in the 
market for capacity release in conjunction with the maintenance of the 
recourse rate for pipeline services was sufficient to remove the price 
ceiling for capacity release.\25\ As the Commission stated:
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    \25\ As the Commission stated:
    One of the principal reasons for removing the price ceiling on 
released capacity is the existence of the pipeline's service as 
recourse in the event market power is exercised. Order No. 712 at P 
101, citing, Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000), 
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).

    The Commission is not relying only on a competitive market to 
ensure just and reasonable rates. The pipeline's maximum rates for 
short-term firm and interruptible services serve as recourse rate 
protection for negotiated rate transactions, and will provide the 
same protection to replacement shippers by giving them access to a 
just and reasonable rate if the releasing shipper seeks to exercise 
market power.\26\
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    \26\ Order No. 712 at P 48. The reliance on the recourse rate as 
protection was repeated continuously throughout the order. Order No. 
712 at P 31, 39, 61, 101.

    24. Relying on our finding in Order No. 637, we explained that 
maintenance of the recourse rate is necessary in factual circumstances 
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in which even with capacity release, competition is limited:

    The Commission is continuing to protect against the possibility 
that, in an oligopolistic market structure, the pipe-line and firm 
shipper will have a mutual interest in withholding capacity to raise 
the price because the Commission is continuing cost based regulation 
of pipeline transportation transactions. The pipeline will be 
required to sell both short-term and long-term capacity at just and 
reasonable rates. In the short-term, a releasing shipper's attempt 
to withhold capacity in order to raise prices above maximum rates 
will be undermined because the pipeline will be required to sell 
that capacity as interruptible capacity to a shipper willing to pay 
the maximum rate. Shippers also have the option of purchasing long-
term firm capacity from the pipelines at just and reasonable 
rates.\27\
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    \27\ Order No. 637 at 31,282, aff'd, INGAA, at 32 (``[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'').

    25. In retaining the recourse rate as protection against the 
exercise of market power, we recognized that, on many parts of the 
pipeline grid, sufficient competition may not exist to discipline 
pricing.\28\ This can occur on laterals, at the extreme ends of certain 
pipeline systems where only one or a small number of firm capacity 
holders are present, or in some cases on an entire small pipeline. For 
example, on the Williston Basin pipeline as of 2000, 93 percent of the 
capacity of the pipeline was held by an affiliate of the pipeline.\29\ 
We did not, and cannot, make a finding that such a market is 
sufficiently competitive to remove the protection afforded by the 
recourse rate.\30\ As we explained in Order No. 712, the recourse rate 
in this situation will serve to protect the replacement shipper because 
if Williston's affiliate seeks to charge a price for released capacity 
above the just and reasonable maximum rate that is unjustified by 
competitive conditions, ``the replacement shipper has the option of 
turning down the deal and purchasing the capacity from the pipeline at 
the just and reasonable interruptible rate.'' \31\
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    \28\ Order No. 712 at P 61 (the recourse rate provides 
protection ``even on laterals or other parts of the pipeline grid 
where all firm capacity may be held by only a few or one firm 
shipper, those shippers cannot withhold their capacity in order to 
charge a price above competitive levels'').
    \29\ Williston Basin Interstate Pipeline Co., 115 FERC ] 61081, 
at P24 n.29 (2006), remanded on other grounds, Williston Basin 
Interstate Pipeline Co. v. FERC, 519 F.3d 497, 502 (DC Cir. 2008) 
(recognizing that where the pipeline's largest customer is its 
affiliate, the competitive capacity resale market is ``smaller than 
one would otherwise expect''). In the proceeding at issue in these 
opinions, Williston did not even agree to permit a small customer to 
convert to Part 284 service so that it would be able to release 
capacity in competition with Williston and its affiliate.
    \30\ Such competitive problems can occur on other pipelines as 
well. For example, in addition to the Williston pipeline, affiliates 
on Equitrans, L.P, National Fuel Gas Supply Corp., and Questar 
Pipeline have a very high proportion of transportation service (from 
50 percent-70 percent, and Tuscarora Gas Transmission Company has a 
non-affiliated shipper with 77 percent of its capacity. See Index of 
Customers, July 2008, FERC Form No. 549-B (http://www.ferc.gov/docs-filing/eforms/form-549b/data.asp). Considering the relevant 
information, we cannot make a finding that the secondary market is 
sufficiently competitive throughout the country that we can safely 
eliminate the recourse rate.
    \31\ Order No. 712 at P 61.
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    26. Pipelines that believe their markets are competitive can file 
for market based rates under our Alternative Rate Design Policy 
Statement to show that their markets are competitive. We did not 
undertake such an analysis in this rulemaking, however, and therefore 
cannot find that removing the price ceiling from pipeline short-term 
services, and hence eliminating the recourse rate protection, assures 
just and reasonable rates.
    27. Even on pipelines with secondary markets more competitive than 
Williston's, market power may exist on

[[Page 72697]]

particular portions of the pipelines. Moreover, in Order No. 712, the 
Commission pointed out that a variety of pipeline limitations on 
shippers' release rights can limit the effectiveness of competition and 
arbitrage between the pipelines and releasing shippers. Pipelines' 
ability to selectively discount \32\ can reduce the incentive of 
releasing shippers to compete with pipelines, as do negotiated rate 
agreements that contain provisions providing that the pipeline will 
share any revenues the shipper receives from a capacity release in 
excess of its discounted or negotiated rate.\33\ Pipelines have indeed 
recognized that these provisions help insulate them from 
competition.\34\ But the pipelines cannot legitimately argue that they 
should be able to limit themselves from competition on the one hand, 
and then seek to remove the recourse rate which serves to protect 
customers from the effects of such insulation. Retaining the recourse 
rate helps protect against the exercise of market power on such 
segments.\35\
---------------------------------------------------------------------------

    \32\ Selective discounting refers to the ability of pipelines to 
limit discounts to specific points so that those discounts cannot be 
arbitraged to alternate points at which the pipelines have less 
competition. In cases where pipelines use selective discounting, 
shippers can release at alternate points only if they pay the 
pipeline's maximum rate, thus eliminating or decreasing the profit 
the shipper can make on the release.
    \33\ See LSP Cottage Grove, L.P. v. Northern Natural Gas Co., 
111 FERC ] 61,108, at P 58-59 (2005).
    \34\ See Williston Basin Interstate Pipeline Co. v. FERC, 358 
F.3d 45, 50 (D.C. Cir. 2004).
    \35\ Order No. 712 at P 88.
---------------------------------------------------------------------------

    28. Williston, in its rehearing request, claims that the Commission 
failed to explain how pipelines' ability to selectively discount 
relates to the retention of the maximum rate for pipeline short-term 
services. The ability of pipelines to selectively discount demonstrates 
that they have market power and are able to prevent arbitrage.\36\ As 
we have explained above, limitations on the effectiveness of arbitrage 
could enable pipelines to exercise market power in some markets.\37\
---------------------------------------------------------------------------

    \36\ As the U.S. Court of Appeals recognized in a case brought 
by Williston itself:
    A pipeline is unlikely to be able to increase throughput by 
selective discounting, however, if capacity at secondary points can 
be transferred readily among shippers through resale at the 
discounted rate. Indeed, economic theory tells us price 
discrimination, of which selective discounting is a species, is 
least practical where arbitrage is possible--that is, where a low-
price buyer can resell to a high-price buyer.
    Williston Basin Interstate Pipeline Co. v. FERC, 358 F.3d 45, 50 
(D.C. Cir. 2004). See F.M. Scherer, Industrial Market Structure and 
Economic Performance, 253 (Rand McNally College Publishing Co. 1970) 
(in order to price discriminate ``the seller must have some control 
over price--some market power'').
    \37\ Selective discounting decreases competition even when price 
exceeds the maximum rate. For example, assume that on a pipeline 
with a maximum rate of $1.00, a shipper has a discounted rate of 
$.75, and it values the capacity at $1.10, perhaps because it would 
cost $1.10 to use storage or a peak shaving device to replace the 
gas lost through the capacity release. If the shipper were required 
to pay the additional $.25 to the pipeline under the Commission's 
selective discounting policy, the shipper would release its capacity 
only when the capacity price is $1.35 or greater. Without the 
selective discounting policy, the shipper would be willing to 
release whenever the capacity price is $1.10 or greater.
---------------------------------------------------------------------------

b. Withholding Construction of Needed Pipeline Infrastructure
    29. In Order No. 712, the Commission found that maintenance of the 
price ceiling on pipeline capacity was necessary to ensure that proper 
incentives to construct needed pipeline infrastructure were retained. 
On rehearing, the pipelines argue that because the pipeline capacity is 
identical to the released capacity, the Commission acted arbitrarily in 
lifting the capacity only on short-term released capacity and not on 
pipeline capacity. They argue that the Commission erred in asserting 
that they could exercise market power by withholding capacity, 
maintaining that capacity is either subscribed or not and that the 
Commission regulations require that all available capacity be sold.
    30. First, as discussed above, the Commission has a sound basis for 
not removing the recourse rate from pipeline services, because the 
recourse rate acts as a check against both the market power of 
releasing shippers and the pipelines themselves in situations in which 
insufficient competition exists. Second, as we found in Order No. 712, 
and discussed above, ownership of the pipeline is not identical to 
shippers that lease the use of such capacity.\38\
---------------------------------------------------------------------------

    \38\ Order No. 712 at P 84 (quoting, INGAA at 35).
---------------------------------------------------------------------------

    31. Unlike shippers that cannot control the total amount of 
capacity, pipelines, because they control their own systems, can affect 
the total quantum of capacity by determining whether to construct 
additional capacity. The fundamental precept of our cost-of-service 
regulation of pipelines is based on ensuring that pipelines do not 
withhold existing capacity or future capacity.\39\ The Commission 
prevents the withholding of future capacity by ensuring that pipelines 
do not have an economic incentive to refrain from constructing 
additional capacity when demand suggests that such capacity is needed 
and would be profitable. A pipeline that possesses market power and 
could charge supra-competitive prices in the short-term market will 
have an economic incentive not to build new capacity to relieve the 
scarcity permitting it to charge higher prices. As we stated in Order 
No. 712, as long as cost-of-service rate ceilings apply, pipelines will 
have a greater incentive to build new capacity to serve all the demand 
for their service than to withhold capacity, because the only way the 
pipeline could increase current revenues and profits would be to invest 
in additional facilities to serve the increased demand.\40\
---------------------------------------------------------------------------

    \39\ Order No. 637 at 31,270.
    \40\ Order No. 712 at P 85.
---------------------------------------------------------------------------

    32. The pipelines assert, without evidentiary support, that their 
construction decisions would not be influenced by prices in the short-
term market. INGAA, for example, contends that ``rather than driving up 
prices, withholding unsubscribed firm capacity only results in lost 
sales.'' \41\
---------------------------------------------------------------------------

    \41\ INGAA at 7 (citing, Comments of the Interstate Natural Gas 
Association of America, Docket No. RM08-1 (filed Jan. 25, 2008)).
---------------------------------------------------------------------------

    33. Basic economic theory holds that firms with market power, like 
pipelines, will construct less capacity than competitive firms because 
doing so results in higher prices and profits. A company with market 
power will produce less of a product or service, and at a higher price, 
than if the company were in a competitive market. Unlike a competitive 
firm that produces where marginal cost \42\ intersects demand,\43\ a 
firm with market power produces where the revenue from producing one 
additional unit of output (marginal revenue) \44\ is greater than the 
cost of producing that unit (marginal cost).\45\ With a typical 
downward sloping demand curve, the intersection of marginal cost and 
marginal revenue is at a smaller output and a higher price than would 
be produced by a competitive

[[Page 72698]]

outcome.\46\ As the following graph demonstrates, a firm with market 
power will produce at Point QM with a price at PM, although the 
competitive quantity would be at Point QC and price at Point PC.\47\
---------------------------------------------------------------------------

    \42\ Marginal cost is the added cost of producing one more unit.
    \43\ At this price, the firm recovers in price the added cost of 
producing one more unit. If the firm produced more units, the extra 
cost of producing those units would be less than the price paid for 
them.
    \44\ Marginal revenue is the extra revenue created by producing 
one more unit of output.
    \45\ As long as producing one more unit adds more to revenue 
than to cost, the firm with market power is better off (earns a 
profit) by producing that unit. Although producing one more unit 
would still be profitable even at a higher output (because the cost 
of producing that unit is less than the price) the firm with market 
power's overall revenue would decline because it has to charge 
everyone the lower price in order to add that unit. See A. Mas-
Colell, M.D. Whinston, J. Green, Microeconomic Theory, 385 (Oxford 
University Press US, 1995) (the reason the monopolist's output is 
below the competitive level is ``the monopolist's recognition that a 
reduction in the quantity it sells allows it to increase the price 
on its remaining sales'').
    \46\ Jean Tirole, The Theory of Industrial Organization, 66 (MIT 
Press, 1988) (''The monopoly sells at a price greater than the 
socially optimal price, which is its marginal cost'').
    \47\ Deadweight loss refers to the loss to society resulting 
from the firm with market power withholding the production of 
product that consumers value at more than the cost of production. 
Transfer payments refer to the extra income that the firm with 
market power earns as compared to what it would earn in a 
competitive market. It represents the amount of money transferred 
from consumers to the producer.
[GRAPHIC] [TIFF OMITTED] TR01DE08.000

    34. Although producing at the higher output (and lower price) of a 
competitive market would still be profitable even for the firm with 
market power, the firm with market power makes more money if it reduces 
output and increases price.\48\
---------------------------------------------------------------------------

    \48\ In a competitive market, if a firm tried to price at Point 
PM, other firms would enter the market at that price, which would 
have the effect of increasing output and reducing the price for all 
firms to Point PC. R. Posner, Economic Analysis of the Law 198 (2d 
ed. Little, Brown, and Company, 1977).
---------------------------------------------------------------------------

    35. While current Commission regulations do not permit pipelines to 
withhold already-constructed capacity,\49\ pipelines can withhold 
capacity by not constructing as much capacity as a competitive market 
would dictate. Even though long-term rates would still be capped under 
the pipelines' proposals, pipelines able to charge supra-competitive 
prices in the interruptible or short-term firm market would still have 
the same disincentive to build capacity to reach the competitive level, 
because such construction would result in less overall profit for the 
pipeline.\50\
---------------------------------------------------------------------------

    \49\ See Tennessee Gas Pipeline Co., 91 FERC ] 61,053, at 61,191 
(2000) (``there is little reason for the pipeline to exercise market 
power by withholding new capacity because the maximum rates 
established by the Commission prevent it from charging rates above 
the just and reasonable rates based on its cost of service''), 
aff'd, Process Gas Consumers Group v. FERC, 292 F.3d 831, 834 (D.C. 
Cir. 2002).
    \50\ For example, if a pipeline's affiliate holds the bulk of 
transportation capacity of a pipeline, the affiliate (if the 
recourse rate protection were removed) presumably has sufficient 
market power to raise short-term prices in a constrained market. The 
construction of additional capacity to relieve that scarcity could 
then result in a diminishment of the overall profitability of the 
company.
---------------------------------------------------------------------------

    36. INGAA argues that the Commission is acting inconsistently 
because the Commission found that lifting the price ceiling on released 
capacity gave an incentive to increase construction.\51\ But INGAA 
takes the quoted portion of Order No. 712 out of context. The 
Commission was pointing out that high capacity release prices would 
send pipelines a signal that capacity is scarce and additional capacity 
is needed to relieve the scarcity. This same principle does not apply 
to removing the price ceiling for pipeline capacity. As pointed out 
above, if pipelines with market power find that maintaining scarce 
pipeline capacity increases their profits, then they will have much 
less incentive to construct long-term capacity because such capacity 
could result in lower profitability. The extent to which the pipelines' 
incentives to construct will be reduced is dependent on the 
circumstances facing each pipeline. But because pipelines can still 
exercise market power (as discussed above), we cannot find sufficient 
justification for removing recourse rate protection based solely on the 
unsupported statements of pipelines that short-term rates will never be 
sufficient to reduce or eliminate the amount of long-term capacity they 
choose to construct.
---------------------------------------------------------------------------

    \51\ INGAA at 7 (citing, Order No. 712 at P 60).
---------------------------------------------------------------------------

    37. A recent example illustrates why the recourse rate is needed to 
ensure that pipelines retain the incentive to build needed pipeline 
infrastructure. After Order No. 712 became effective, capacity release 
prices exceeded maximum rates principally from the Rocky Mountains to 
the northwest and to the east. This was attributed to an excess supply 
of gas to be transported from the Rocky Mountains in relation to 
pipeline capacity.\52\ Such scarcity

[[Page 72699]]

should be a prime indicator to the pipelines of the need to expand 
capacity from the Rocky Mountains. Because shippers do not control 
expansion decisions, permitting the price to exceed the maximum rate 
helps to allocate scarce capacity efficiently to the highest valued 
user. However, if pipelines were able to capture the higher than 
maximum rate prices for such transactions, their incentives to expand 
would be blunted because any such expansion would reduce the scarcity 
revenues they would be receiving. The retention of the recourse rate 
for pipeline transactions ensures that pipelines have the proper 
incentive to build new capacity when capacity release prices show that 
construction of such capacity is needed and would be profitable.
---------------------------------------------------------------------------

    \52\ See G. Lander, Capacity Center Releases Post Order 712 
Capacity Trading Stats (September 2008) (contact CapacityCenter.com) 
as reported in Foster Natural Gas Report No. 2711 (September 12, 
2008) (describing report issued by CapacityCenter.com on post Order 
No. 712 capacity release transactions showing higher than maximum 
rate releases out of the Rocky Mountains); Letter from Wyoming 
Governor Dave Freudenthal to Wyoming Legislature's Joint Minerals, 
Business and Economic Development Interim Committee (August 21, 
2008) (indicating need for additional pipeline infrastructure), 
http://governor.wy.gov/press-releases/state-of-wyoming-should-not-enter-into-the-pipeline-business-governor-says.html.
---------------------------------------------------------------------------

c. Pricing Flexibility
    38. INGAA, Williston and Spectra all maintain that the Commission's 
action in removing the price ceiling from short term capacity releases 
has given releasing shippers more flexibility in pricing their capacity 
than the pipelines have in pricing their capacity under the 
Commission's programs.\53\
---------------------------------------------------------------------------

    \53\ See Spectra at 30 (pipelines will face a competitive 
disadvantage); INGAA at 10 (alternatives do not provide comparable 
rate flexibility) and Williston at 12 (Order No. 712 provides 
releasing shippers with significantly greater pricing flexibility 
than is available to pipelines).
---------------------------------------------------------------------------

    39. In particular, they assert that negotiated rates are not as 
flexible as capacity releases. Williston asserts that negotiated rates 
must be submitted as a tariff filing, which requires a period of 30 
days advance notice, before the rates can go into effect. Therefore, 
Williston argues that negotiated rate agreements are not useful in 
responding to a short-term price spike. Spectra argues that the 
requirement that the negotiated rate must be accompanied by a recourse 
rate alternative effectively means that pipelines are unable to sell 
short-term services above the maximum recourse rate. Spectra asserts 
that under either the net present value or first-come, first-served 
allocation methodologies, shippers have no reason to offer to pay more 
than the maximum rate for service even if the market would bear such a 
rate. Spectra maintains that as a result pipelines cannot recover their 
cost-of-service because they are required to discount capacity prices 
during off-peak periods, but cannot charge above maximum rates when 
such prices are justified, as shown in the following hypothetical graph 
included in Spectra's rehearing request.\54\
---------------------------------------------------------------------------

    \54\ Spectra at 17.
    [GRAPHIC] [TIFF OMITTED] TR01DE08.001
    
    40. We recognize that negotiated rates and the capacity release 
program are not identical. For example, the capacity release program 
still requires bidding for deals of greater than one month (except for 
AMA transactions), while pipelines can negotiate rates without any 
bidding delay. On the other hand, negotiated rates do have to be filed 
with the Commission as Williston points out.
    41. But we do not agree that the differences between these programs 
are as significant as the pipelines suggest. For example, contrary to 
Williston's argument, the Commission has waived the 30-day notice 
filing for negotiated rate deals, allowing such transactions to go into 
effect immediately:

    A pipeline may file the numbered tariff sheet implementing the 
negotiated rate at the time it intends the rate to go into effect. 
The Commission does not intend to suspend the effectiveness of the 
negotiated rate filings or impose a refund obligation for those 
rates. For these reasons, the Commission will readily grant requests 
to waive the 30 day notice requirement.\55\
---------------------------------------------------------------------------

    \55\ 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, at 61,241-42. 
(1996).

    42. Thus, negotiated rate transactions can occur as quickly as 
capacity release transactions. Moreover, there is no restriction on the 
use of negotiated rates even for short-term transactions.
    43. Spectra argues that shippers will not enter into negotiated 
rate contracts above the recourse rate. The principal use of negotiated 
rates is to enable pipelines and shippers to enter into transactions 
that reflect the value of capacity as measured by price indices. 
Indeed, one of the principal reasons for removing the rate ceiling on 
capacity releases is to extend similar flexibility to price releases on 
price indices even when such prices exceed the maximum rate.\56\ 
Spectra offers no reason why shippers would be any more reluctant to 
enter into negotiated rate contracts with the pipeline for short-terms 
using index

[[Page 72700]]

prices than they would be to enter into such contracts with releasing 
shippers.
---------------------------------------------------------------------------

    \56\ See Standards for Business Practices for Interstate Natural 
Gas Pipelines, 72 FR 38,757 (July 16, 2007), FERC Stats. & Regs. ] 
31,251 at P 51 (2007), (industry requesting ability to use price 
indices for released capacity).
---------------------------------------------------------------------------

    44. We also disagree with Spectra's contention that under the 
Commission's determination, the pipeline will be unable to recover its 
cost-of-service. The graph included by Spectra is a typical graph of 
demand on a pipeline, where capacity is more valuable during the winter 
heating season than during the off-peak summer season. But that does 
not mean that the pipeline will be unable to recover its cost-of-
service. As Spectra recognizes, shippers needing capacity in the winter 
cannot simply wait until they need capacity because capacity in the 
winter is scarce and under the pipeline's allocation requirements, 
shippers are unlikely to obtain the amount of capacity they need if 
they wait. Therefore, shippers like local distribution companies (LDCs) 
that need capacity for the winter typically will sign a long-term 
contract (or at least a full year's contract) at maximum rate to ensure 
that they will have the capacity they need during the peak winter 
season.
    45. Moreover, pipelines are not precluded from recovering their 
cost-of-service in any event. Under longstanding Commission policy,\57\ 
pipelines may adjust the volumes used to design their maximum recourse 
rates, so that they can recover their full cost-of-service, even though 
competition requires them to offer discounts including during off-peak 
periods. Also, as we pointed out in Order No. 712, pipelines have the 
option of applying for seasonal rates in such circumstances.
---------------------------------------------------------------------------

    \57\ See e.g. Southern Natural Gas Co., 65 FERC ] 61,347, at 
62,829-40 (1993), order on reh'g, 67 FERC ] 61,155, at 61,456 
(1994); Williston Basin Interstate Pipeline Company, 67 FERC ] 
61,137, at 61,377-383 (1994) (``Williston's ceiling rates will be 
designed to give it the opportunity to recover its new cost-of-
service if throughput is the same as during the base period despite 
the fact that it is reasonable to project a continuation of lower 
discounted rates for certain customers after the effective date of 
the subject rates.''); see also Williston Basin Interstate Pipeline 
Company, 107 FERC ] 61,164, at P 79-80 (2004).
---------------------------------------------------------------------------

    46. Spectra is correct that in limited circumstances (where a 
pipeline has unsubscribed capacity and suddenly demand for that 
capacity exceeds the available supply), the recourse rate will prevent 
the pipeline from allocating capacity to the shipper placing the 
highest value on the capacity. But that is the very nature of the 
protection afforded by recourse rates, and as discussed above, we 
cannot relax the recourse rate protection given that the entirety of 
the market has not been shown to be sufficiently competitive. As we 
explained in Order No. 712, we need to balance the risks of removing 
the price ceiling and the benefits from such removal, and we have 
decided that ensuring sufficient protection against market power must 
take precedence over potential losses in efficiency.\58\
---------------------------------------------------------------------------

    \58\ Order No. 712 at P 108. Depending on the costs of 
arbitrage, Spectra's example would not result in an inefficient 
allocation of capacity. As long as one shipper can release capacity 
to the other, the shipper placing the greatest value on the capacity 
would be able to obtain the capacity.
---------------------------------------------------------------------------

    47. Williston, Spectra, and INGAA also maintain that the other 
pricing flexibility the Commission mentioned in Order No. 712, filing 
for market-based rates and the use of seasonal rates, are not as 
flexible as removal of the price ceiling for capacity release. We did 
not maintain that these programs were identical. We simply pointed to 
them as potential flexibility that is available to the pipelines, and 
as discussed above, the use of seasonal rates may be a solution for 
situations in which demand differs significantly between seasons.
    48. The pipelines specifically argue that market-based rate filings 
for pipeline transportation are difficult to make and that the 
Commission utilizes stringent criteria in evaluating such filings. But 
we find that, precisely because pipelines have such enormous economies 
of scale and enjoy market power, the application of economically 
correct standards is appropriate in reviewing an application to remove 
rate regulation entirely.
    49. INGAA and Williston maintain that because the alternatives 
proposed by the Commission for pipelines are not as flexible as 
capacity release, the Commission's policy unjustifiably burdens and 
injures pipelines. Because the pipelines, even under their own 
proposals, would still be regulated under cost-of-service principles, 
any lack of flexibility would not result in losses to pipelines because 
cost-of-service ratemaking provides each pipeline with an opportunity 
to recover all of their reasonably incurred costs. If the Commission 
were to remove the recourse rate from the pipelines' short-term 
services, pipelines still would need to account for any extra revenues 
derived from short-term services as part of their overall cost-of-
service. Because, as discussed above, we have not found the short-term 
market to be fully competitive, and pipelines are able to recover their 
cost-of-service, we find that maintaining the recourse rate is 
necessary to ensure continued protection of customers and does not 
unduly harm pipelines.
d. Bifurcated Markets
    50. The pipelines again assert that the Commission has created a 
bifurcated market and that such a market will compromise allocative 
efficiency. INGAA asserts that because pipelines do not have market 
power there is no reason for the Commission to bifurcate the market to 
mitigate against pipeline market power and to rely on arbitrage, which 
the Commission admits is imperfect, to correct any market 
inefficiencies. Spectra argues that Order No. 712 regulates the short 
term capacity market on an asymmetric basis and that this will create a 
bifurcated market. It asserts that Order No. 712 regulated the short 
term capacity release market subject to light-handed, market-based 
regulation, but regulated pipeline participants in the same market 
continue under the more burdensome cost-of-service regime. Sempra also 
argues that the Commission's examples of arbitrage in Order No. 712 
apply only to interruptible service, but that pipelines may have firm 
service available and bifurcated markets can occur.
    51. As we explained in Order No. 712, we have attempted to reduce 
the costs of arbitrage so that we do not create a seriously bifurcated 
market. If arbitrage exists, then a bifurcated market will not be 
created regardless of whether the pipeline is selling interruptible or 
firm service. With respect to interruptible service, no shipper can 
rely on obtaining interruptible service at a lower than market price 
because it can lose the capacity to a replacement shipper obtaining a 
release, which has higher priority. Thus, if the market is constrained, 
those needing capacity will not be attempting to rely on their position 
in the interruptible queue but will be seeking firm released capacity. 
Similarly, bifurcated markets would not be created with respect to firm 
service because, as we discussed earlier, even if one shipper obtained 
capacity from the pipeline at a lower than market price, it could 
reallocate that capacity through the release market as long as 
arbitrage costs are not too high.
    52. But as we recognized in Order No. 712, arbitrage is not 
perfect, and so there may be situations in which a bifurcated market 
may occur. Indeed, the fact that arbitrage is not perfect may provide 
the pipelines with market power.
    53. Whatever amount of limited market bifurcation occurs, 
therefore, is a cost that must be incurred to maintain the protection 
against market power afforded by the recourse rate. INGAA provides no 
data supporting its contention that the markets are competitive, and, 
as discussed earlier, the Commission did not make such a finding, and 
in fact found that maintenance of the recourse rate is

[[Page 72701]]

necessary precisely because various parts of the interstate grid may 
not be competitive. No amount of arbitrage will ensure a competitive 
market if a single shipper controls a large portion of the pipeline 
capacity either on the pipeline as a whole or in any individual market.
e. Proposed Alternatives
    54. On rehearing Spectra offers two alternatives that it suggests 
will potentially mitigate any harm from removing the price ceiling from 
pipeline services.\59\ It argues that the Commission could allow 
pipelines to post capacity, at the pipeline's option, through the same 
process and requirements as short-term capacity releases. If the 
pipeline opted to post some of its capacity using this mechanism, the 
capacity would be awarded to the highest bidder, without a rate cap. 
Spectra argues that, if the Commission deems further safeguards 
necessary, it proposed in its initial comments that the Commission 
could remove the price cap on short-term firm services but retain it on 
short-term interruptible services. This approach, it asserts, would 
retain a recourse rate alternative for all firm customers.
---------------------------------------------------------------------------

    \59\ Williston, in a single sentence without providing details, 
seems also to endorse a bidding approach. Williston at 10.
---------------------------------------------------------------------------

    55. In the NOPR leading to Order No. 637, the Commission proposed 
an auction to provide recourse rate protection, similar to the one 
proposed by Spectra, in which pipelines would be able to participate by 
including their capacity along with that of released capacity. At that 
time most of the comments, including those of the pipelines, opposed 
such mandatory auctions, and the Commission did not adopt that 
proposal.\60\ The Commission, however, did indicate in Order No. 637 
that it would be open to a voluntary auction proposal from pipelines, 
such as the one suggested by Spectra, so long as such a proposal would 
protect against the exercise of market power by the pipeline:
---------------------------------------------------------------------------

    \60\ Regulation of Short-Term Natural Gas Transportation 
Services, Order No. 637, 65 FR 10,156 (Feb. 25, 2000), FERC Stats. & 
Regs. ] 31,091, at 31,279 (Feb. 9, 2000).

    An auction also may be a means by which a pipeline could sell 
some or all of its capacity without a price cap if the auction is 
designed in such a way as to protect against the pipeline's ability 
to withhold capacity and exercise market power.* * * [T]he pipelines 
must design the auction in ways to prevent the withholding of 
capacity and the exercise of market power. Capacity can be withheld 
by a pipeline in two primary ways: the pipeline can withhold 
capacity directly by not putting it into the auction; or it can 
indirectly withhold capacity through the use of a reserve price. In 
a proposal for auctions without a rate cap, all capacity available 
at the time of the auction would have to be included in the auction. 
The auction proposal also needs to address the appropriate 
limitations that should be placed on the level at which the pipeline 
can establish reserve prices, particularly whether different reserve 
prices should be established for peak and off-peak capacity.\61\
---------------------------------------------------------------------------

    \61\ Order No. 637, FERC Stats. & Regs. ] 31,091 at 31,295. The 
Commission's concern with reserve prices was to ensure that if a 
pipeline can benefit from competition by selling at above the 
maximum rate during peak periods, it also should be required to sell 
capacity at more competitive prices during off-peak periods. If 
pipelines were permitted to set the reserve price at the existing 
maximum rate during off-peak periods, they still would be able to 
exercise market power with respect to off-peak transactions, for 
example, by selectively discounting. Requiring the pipeline to set a 
lower reserve price during off-peak periods, therefore, would ensure 
more competitive pricing during all time periods.

    56. The Commission also included specific guidance addressing basic 
principles for constructing such an auction to ensure that it would be 
transparent, verifiable, and non-discriminatory.\62\ Despite the 
opportunity offered in Order No. 637, no pipeline has ever proposed to 
use an auction methodology to allocate capacity at prices exceeding the 
maximum recourse rate. Spectra does not claim that it proposed this 
auction proposal in its initial comments, and provides no details in 
its rehearing request about how it would structure such an auction to 
ensure that pipelines cannot exercise market power, ensure that 
sufficient arbitrage opportunities exist so that releasing shippers can 
compete equally, and ensure that the pipeline retains an incentive to 
construct long-term capacity when it is needed.\63\ Other parties have 
not had an opportunity to comment on the details of such a proposal, 
and we, therefore, do not have a sufficient record to rule on a generic 
basis on such a proposal in this rulemaking. But Spectra, and other 
pipelines, can still make such a proposal through an NGA section 4 
filing on an individual case-by-case basis, as indicated in Order No. 
637.
---------------------------------------------------------------------------

    \62\ See Order No. 637, FERC Stats. & Regs. ] 31,091 at 31,296.
    \63\ In its initial comment and its rehearing request, Spectra 
also offers no details about how its proposal to allow pipelines to 
sell short-term firm capacity without a rate ceiling would work. For 
example, it does not explain how short-term firm capacity is to be 
differentiated from long-term firm capacity because available 
capacity on a pipeline would be available for any time period. 
Spectra also fails to explain how bidding on short-term and long-
term capacity would be evaluated to ensure that the pipeline was not 
favoring a short-term bid over a long-term bid. Should Spectra 
choose to make a Natural Gas Act (NGA) section 4 filing with respect 
to its proposals, it would need to specify the details of its plan 
and how it would protect against market power.
---------------------------------------------------------------------------

C. Clarification Regarding Specific Issues

1. Consecutive Releases
a. Clarification Requests
    57. Allegheny, the Marketer Petitioners and Reliant all note that 
under the Commission's regulations, they would be permitted to post for 
bid at around the same time capacity to be released for multiple, 
consecutive short-term periods. Each of these parties requests that in 
order to provide clarity to the market, the Commission specifically 
clarify that such releases are permissible.
    58. Allegheny argues that the Commission erred by failing 
specifically to find that the offer by a capacity holder of 
simultaneous discrete sequential releases of its capacity, each for up 
to one year at prices above the pipeline's current maximum tariff 
rates, is consistent with Order No. 712. Allegheny asserts that such a 
clarification would allow a capacity holder to auction all of its 
capacity rights in one-year blocks, and to award the capacity to the 
replacement shippers offering the highest price for the capacity in 
future years without running afoul of the price cap. Each replacement 
shipper would lock into a contractual commitment for only one year. 
Allegheny asserts that each auction could produce a different price for 
the capacity, and thereby allow the market to reflect changing 
expectation about the congestion value of the capacity.
    59. The Marketer Petitioners also request clarification that it is 
permissible for a releasing shipper and a replacement shipper to engage 
in two (or more) consecutive short-term (one year or less) releases of 
the same capacity, at the same (or approximately the same) time, 
without subjecting the releases to the maximum rate cap.\64\ Reliant 
adds that permitting a firm shipper to post for bidding, at or near the 
same time, capacity for multiple successive short-term releases would 
work to achieve the Commission's goal of ensuring that capacity be 
allocated to those who value it most.
---------------------------------------------------------------------------

    \64\ Marketer Petitioners at 11. As an example, the Marketer 
Petitioners question whether, subject to applicable pipeline tariff 
provisions, a shipper may, on the same day, post for bidding without 
a maximum rate cap limitation (i) a release of a capacity package 
for the year 2009, (ii) a release of the same capacity package for 
the year 2010, and (iii) a release of the same capacity package for 
the year 2011.

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[[Page 72702]]

b. Commission Determination
    60. The Commission will deny the requests for clarification as 
discussed below. In the Commission's view, permitting a releasing 
shipper to simultaneously post for bid consecutive short-term contracts 
whose total term exceeds one year would be contrary to the Commission's 
decision to lift the price ceiling only for releases of one year or 
less. In Order No. 712, the Commission explained that it removed the 
price ceiling for short-term capacity releases in order to allow the 
prices of short-term capacity release transactions to reflect short-
term variations in the market value of that capacity. Specifically, the 
Commission stated that, ``[b]ecause the existing capacity release price 
ceiling does not reflect short-term variations in the market value of 
the capacity, the price ceiling inhibits the efficient allocation of 
capacity and harms, rather than helps, the short-term shippers it is 
intended to protect.'' \65\ Moreover, in Order No. 712, the Commission 
also considered whether to extend the removal of the price cap to long-
term releases, but reasoned that, ``the Commission's policy emphasis in 
this rule is on short-term transactions, because that is where there is 
a problem to be solved. No commenter has made a convincing argument 
that price ceilings on longer term transactions create significant 
allocative inefficiencies or market failures. Accordingly, the 
Commission concludes that the current record does not warrant removal 
of the price ceiling on long-term capacity releases.'' \66\
---------------------------------------------------------------------------

    \65\ Order No. 712 at P 34.
    \66\ Id. P 79.
---------------------------------------------------------------------------

    61. When a shipper seeks to release its capacity for a period of 
more than one year, albeit in separate blocks of a year or less, the 
release cannot be considered to be for the purpose of responding to 
short-term variations in the value of the capacity as contemplated by 
the Commission when it removed the price ceiling for short-term 
capacity. Further, if the Commission were to permit releasing shippers 
to simultaneously post for bidding consecutive short-term releases at 
market rates extending for more than a year, such action would result 
in granting de facto permission to permit long-term releases at market 
rates, contrary to the Commission's findings in Order No. 712.
    62. Therefore, the Commission will revise its regulations so that 
the lifting of the price cap for short-term releases will only apply to 
releases that take effect within one year of the date the pipeline is 
notified of the release. This will prevent shippers from releasing 
units of capacity in a manner designed to circumvent the price ceilings 
that the Commission has determined must remain in effect.
2. Definition of Short-Term
    63. Iroquois states that Order No. 712 defines a short-term release 
as a release of capacity for ``one year or less''; and defines a long-
term release as ``more than one year.'' \67\ Iroquois argues that this 
definition is different from the Commission's current definitions of 
short and long term as applied to the right of first refusal. Iroquois 
points out that in Order No. 636-A, the Commission determined that the 
regulation's right of first refusal applies to firm long-term contracts 
and that ``[a] long-term transportation service is one that is pursuant 
to a contract for a term of one year or more.'' \68\ Iroquois argues 
that modifying the determination of what is a short-term or long-term 
contract in the manner proposed by the Commission in Order No. 712 
could reduce customer rights. Iroquois seeks clarification that Order 
No. 712 did not modify the definition of ``short term'' and ``long 
term,'' so that a long-term contract will continue to be defined as a 
contract for a term that is one year or more and that the current 
definition of short term as being ``less than one year'' will remain in 
effect.
---------------------------------------------------------------------------

    \67\ Iroquois at 2 (citing, proposed section 284.8 (b) of the 
Commission's regulations and Order No. 712 at P 30).
    \68\ Iroquois at 3 (citing, Order No. 636-A, Pipeline Service 
Obligations and Revisions to Regulations Governing Self-Implementing 
Transportation; and Regulation of Natural Gas Pipelines After 
Partial Wellhead Decontrol, FERC Stats. & Regs. ] 30,950 at 30,627, 
order on reh'g, Order No. 636-B, 61 FERC ] 61,272 (1992), order on 
reh'g, 62 FERC ] 61,007 (1993), aff'd in part and remanded in part 
sub nom. United Distribution Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 
1996), order on remand, Order No. 636-C, 78 FERC ] 61,186 (1997).
---------------------------------------------------------------------------

    64. We chose to define a release exempt from the price ceiling as 
being one year or more to enable releasing shippers to enter into 
reasonable commercial contracts for a standard duration, rather than 
for atypical periods, such as 364 days. However, we clarify that this 
definition has no application beyond defining those capacity releases 
exempt from the price ceiling. Specifically, we have not changed the 
definition of those contracts that qualify for the right of first 
refusal, as raised by Iroquois.\69\ Shippers will continue to qualify 
for a right of first refusal by entering into contracts to purchase 
transportation or storage services directly from a pipeline of one year 
or more.\70\
---------------------------------------------------------------------------

    \69\ Order No. 712 did not modify 18 CFR 284.221 (d)(2), which 
continues to provide a right of first refusal ``if the individual 
transportation arrangement is for firm transportation under a 
contract with a term of one year or more'' and satisfies certain 
other requirements.
    \70\ The Commission chose to make the ROFR applicable to 
contracts of one year or more for the same reason we have chosen to 
apply the price cap exemption to contracts of one year or less: both 
definitions enable reasonable commercial contracts to qualify. We 
also clarify that capacity release contracts are not subject to a 
right of first refusal.
---------------------------------------------------------------------------

3. Lump Sum Payments
    65. Allegheny states that the Commission's regulations, rules and 
precedents do not clearly specify how to determine whether a permanent 
release of a discounted rate contract exceeds the maximum tariff rate 
when the replacement shipper makes a lump-sum payment to the releasing 
shipper of the present value difference between the maximum rate and 
the discounted rate. Allegheny argues that the Commission's regulations 
permit a capacity holder paying a discounted rate to release its 
capacity to a replacement shipper at the maximum rate and keep the 
difference, unless the service agreement with the pipeline specifically 
provides for a different arrangement.\71\ Allegheny points out that the 
Commission has granted waivers of the long-tem release price cap in the 
context of shippers seeking to exit the natural gas business but it did 
not rule on the question of whether the lump sum payment exceeded the 
price cap on capacity releases.\72\ Allegheny asserts that the 
Commission should resolve this uncertainty regarding the calculation of 
the maximum rate because it inhibits the negotiation of permanent 
capacity releases.
---------------------------------------------------------------------------

    \71\ Allegheny at 7 ((citing, Order No. 636-A at p. 30,557; 
Great Lakes Gas Transmission Limited Partnership, 64 FERC ] 61,017, 
at p. 61,170 (1993) (``As provided in Order No. 636-A, Great Lakes 
should clarify that a releasing shipper is credited with the total 
amount of the replacement shipper's reservation charge, even if it 
exceeds the reservation charge paid by the releasing shipper to 
Great Lakes.'')); Southern Natural Gas Co., 62 FERC ] 61,136, at p. 
61,960 (1993).
    \72\ Allegheny at 8 (citing, Wasatch Energy, LLC, 118 FERC ] 
61,173, at P 9 (2007); Duke Energy Marketing America, LLC, 114 FERC 
] 61,198, at P 13 (2006); Northwest Pipeline Corp., 109 FERC ] 
61,044, at P 30 (2004)).
---------------------------------------------------------------------------

    66. We find no need to provide clarification with respect to lump 
sum payments for permanent releases because under our regulations 
permanent releases cannot involve lump sum payments. Allegheny is 
correct that under our capacity release program, shippers holding 
discount contracts are permitted to release capacity at a rate up to 
the maximum rate under the contract. Under such releases, the releasing 
shipper remains liable for the full

[[Page 72703]]

amount of its reservation charges.\73\ But in such temporary releases 
no lump sum payment is made. Rather, because the releasing shipper is 
still obligated to the pipeline for its full reservation charge, the 
releasing shipper receives a credit or payment against its overall bill 
reflecting the replacement shipper's payment. Therefore, a shipper 
releasing capacity on a temporary basis pays its full reservation 
charge to the pipeline and receives a payment representing the rate 
paid by the replacement shipper.
---------------------------------------------------------------------------

    \73\ 18 CFR 284.8(f) (``unless otherwise agreed by the pipeline, 
the contract of the shipper releasing capacity will remain in full 
force and effect'').
---------------------------------------------------------------------------

    67. Permanent releases, however, are different, because under a 
permanent release, the releasing shipper releases its capacity for the 
entire remaining term of its contract and the pipeline and shipper 
agree to terminate the releasing shipper's contract, so that the 
releasing shipper no longer has any liability to the pipeline to pay 
for the capacity.\74\ Under a permanent release, therefore, the 
releasing shipper receives no payment or credit (whether lump sum or 
otherwise); its contract simply is terminated.\75\
---------------------------------------------------------------------------

    \74\ El Paso Natural Gas Co., 61 FERC ] 61,333, at 62,311-12 
(1992); Rockies Express Pipeline LLC, 121 FERC ] 61, 130 (2007) 
(Rockies Express) (citing, Pacific Gas Transmission Co., 76 FERC ] 
61,246, at 62,270 (1996), reh'g denied, 82 FERC ] 61,289, at 62,135 
(1998) (stating that the Commission's general policy is that there 
are no credits to the releasing shipper after a permanent release, 
but approving a settlement provision allowing a particular shipper 
such credits for permanent releases in the unique circumstances of 
that case)).
    \75\ The cases cited by Allegheny on reverse auctions are 
inapposite because these were special requests for waivers for firms 
that were exiting the gas business, and the Commission made clear 
that the releasing shipper could not profit from the transaction by 
receiving more than the maximum rate for the capacity. Duke Energy 
Marketing America, LLC, 114 FERC ] 61,198, at P 29 (2006). Allegheny 
can apply for waivers if it can similarly justify its request based 
on exigent circumstances.
---------------------------------------------------------------------------

II. Asset Management Arrangements

A. Background

    68. In Order No. 712, the Commission revised its capacity release 
regulations and policies in order to facilitate the use of AMAs. Based 
on the industry-wide support for the use of AMAs, the Commission found 
that AMAs are in the public interest because they are beneficial to 
numerous market participants and to the market in general. The 
Commission therefore made two basic changes in order to eliminate 
obstacles to the utilization and implementation of AMAs. First, we 
exempted capacity releases meant to implement AMAs from the prohibition 
on tying capacity releases to extraneous conditions. Second, the 
Commission amended its section 284.8 regulations to exempt capacity 
releases meant to implement AMAs from competitive bidding.
    69. In Order No. 712, the Commission noted that AMAs are a 
relatively recent development in the natural gas market, which the 
Commission did not anticipate when it adopted the capacity release 
program in Order No. 636. The intended purpose of the capacity release 
program under Order No. 636 was to permit shippers to ``reallocate 
unneeded firm capacity'' to those who do need it.\76\ The bidding 
requirements of section 284.8 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.''\77\ The 
Commission thus developed its capacity release policies and regulations 
based on the assumption that shippers would handle their own gas 
purchase and transportation arrangements and release their capacity 
only when they were not using the capacity to serve their own needs.
---------------------------------------------------------------------------

    \76\ Order No. 636, Pipeline Service Obligations and Revisions 
to Regulations Governing Self-Implementing Transportation; and 
Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, FERC Stats. & Regs. ] 30,939 at p. 30,418.
    \77\ Id.
---------------------------------------------------------------------------

    70. Based on industry comments, however, it became clear that this 
basic assumption underlying the capacity release program does not hold 
true in the context of AMAs. As the Commission found in Order No. 712, 
a distinguishing factor between standard capacity releases and AMAs is 
that in the AMA context, the releasing shipper is not releasing 
unneeded capacity but capacity that it needs to serve its own supply 
function. 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 a 
third party expert who will perform the functions the Commission 
expected releasing shippers would do for themselves--purchasing their 
own gas supplies and releasing capacity or making bundled sales when 
the releasing shipper does not need the capacity to satisfy its own 
needs. The goal of the changes adopted by the Commission in Order No. 
712 was to make the capacity release program more efficient by bringing 
it in line with these developments in today's secondary gas markets.
    71. In Order No. 712 the Commission agreed with the industry-wide 
view that AMAs provide significant benefits to a variety of 
participants in the natural gas and electric marketplaces and to the 
secondary natural gas market itself. One of the most important aspects 
of AMAs is that they provide broad benefits to the marketplace in 
general. By permitting capacity holders to use third party experts to 
manage their gas supply arrangements and their pipeline capacity, AMAs 
can lower gas supply costs for releasing shippers and provide for more 
efficient use of the pipeline grid. AMAs also 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. 
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. AMAs also 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.\78\
---------------------------------------------------------------------------

    \78\ The Commission noted in Order No. 712 that these benefits 
have been recognized by state commissions and the National 
Regulatory Research Institute. Order No. 712 at P 126 and n. 122.
---------------------------------------------------------------------------

    72. As noted above, in light of these substantial benefits provided 
by AMAs, the Commission in Order No. 712 modified its capacity release 
regulations and policies to exempt pre-arranged capacity releases meant 
to implement AMAs from the prohibition against tying and from the 
bidding requirements of section 284.8 of the Commission's regulations. 
The decision to modify the Commission's policies and regulations to 
facilitate the use of AMAs is widely supported and not challenged by 
those parties filing for clarification or rehearing or Order No. 712. 
In general, those parties seek minor modifications to the Commission's 
method for implementing AMAs or seek to expand

[[Page 72704]]

the flexibility and/or authority granted to parties desiring to enter 
into AMAs.

B. Definition of AMAs

    73. In Order No. 712 the Commission established a definition of 
AMAs that was intended to strike a balance between facilitating 
flexible and innovative AMAs and drawing a clear line between AMAs and 
standard capacity releases. The definition established in Order No. 712 
is as follows:

    Any pre-arranged release that contains a condition that the 
releasing shipper may, on any day during a minimum period of five 
months out of each twelve-month period of the release, call upon the 
replacement shipper to (i) deliver to the releasing shipper a volume 
of gas up to one-hundred percent of the daily contract demand of the 
released transportation capacity or (ii) purchase a volume of gas up 
to the daily contract demand of the released transportation 
capacity. If the capacity release is for a period of less than one 
year, the asset manager's delivery or purchase obligation described 
in the previous sentence must apply for the lesser of five months or 
the term of the release. If the capacity release is a release of 
storage capacity, the asset manager's delivery or purchase 
obligation need only be one-hundred percent of the daily contract 
demand under the release for storage withdrawals or injections, as 
applicable.

    74. The Commission imposed a delivery and/or purchase obligation on 
the replacement shipper in order to distinguish between bona fide AMAs 
that would qualify for the exemptions provided to AMAs and standard 
capacity releases. Thus, as shown, the definition of AMA requires that 
to qualify a pre-arranged release must contain a condition that ``the 
releasing shipper may, on any day during a minimum period of five 
months out of each twelve month period of the release, call upon the 
replacement shipper to (i) deliver to the releasing shipper a volume of 
gas up to one-hundred percent of the daily contract demand of the 
released transportation capacity or (ii) purchase a volume of gas up to 
the daily contract demand of the released transportation capacity.'' 
\79\ The Commission also explained that, by requiring that the asset 
manager's delivery or purchase obligation in AMAs with terms less than 
a year apply for the lesser of five months or the term of the release, 
the definition effectively required that the delivery/purchase 
obligation for any AMA between five months and a year would be for five 
months of the release, and that the delivery/purchase obligation would 
apply to the entire term of any AMA of less than five months.
---------------------------------------------------------------------------

    \79\ Order No. 712 at P 153.
---------------------------------------------------------------------------

    75. The Commission reasoned that the definition of AMA established 
in Order No. 712 would further its goal of delineating AMAs from 
standard capacity releases by placing a significant delivery/purchase 
obligation, applicable during at least five months out of each 12 month 
period of the release, on the asset manager. The Commission further 
explained that under the definition the releasing shipper will have the 
right to call upon the asset manager to deliver the full contract 
volume on every day of the five month minimum, though it need not 
actually do so. Thus the definition also furthers the Commission's goal 
of defining AMAs in such a way that they will be flexible enough to 
allow diverse parties to enter into AMAs and for those parties to be 
able to maximize the value of pipeline capacity within the context of 
an AMA. The definition only requires a delivery obligation on behalf of 
the replacement shipper for a portion of each twelve month period, thus 
giving the asset manager additional assurance it can utilize the 
capacity during non-peak periods. The definition adopted in Order No. 
712 also allows for releasing shippers to only release a portion of 
their capacity, places no limitations on the asset manager that would 
require it to use the released capacity to make its deliveries to the 
releasing shipper, and does not limit the type of party that can enter 
into an AMA.
    76. Numerous parties seek clarification and reconsideration of 
several aspects of the definition. First, Marketer Petitioners assert 
that the ``five-month'' delivery/purchase obligation is ``out of 
proportion'' in the context of releases of less than a year because it 
would require an asset manager to have a delivery purchase obligation 
almost every day during an AMA with a six month term. Marketer 
Petitioners claim such an obligation would substantially reduce the 
incentives for asset managers and may create market inefficiencies.\80\ 
They also note that it is unclear what the delivery purchase obligation 
would be for a 13-month term under Order No. 712. The NGSA agrees with 
the Marketer Petitioners that the five month delivery/purchase 
obligation is too stringent. Both parties thus request that the 
Commission adopt a ``five-twelfths'' rule for the delivery/purchase 
obligation for capacity releases to implement AMAs, whereby the 
obligation of the asset manager would be revised to five-twelfths of 
the days in the term of the AMA, regardless of the term of the 
agreement. Those parties also request that the Commission clarify that 
the five-month obligation does not require that the months (or days) be 
consecutive.\81\
---------------------------------------------------------------------------

    \80\ Marketer Petitioners at 4.
    \81\ Marketer Petitioners at 4, NGSA at 6.
---------------------------------------------------------------------------

    77. The Commission will not adopt an outright ``five-twelfths'' 
rule to replace the five month delivery purchase obligation for AMAs. 
The Commission established the exemptions for AMAs as opposed to 
standard capacity releases on the premise that the capacity released to 
implement an AMA was not excess capacity of the releasing shipper but 
capacity that the releasing shipper needed to serve its own needs.\82\ 
In Order No. 712, the Commission determined that a delivery/purchase 
obligation of at least five months out of each twelve month period of 
the release would appropriately distinguish bona fide AMAs from 
standard capacity releases. The Commission arrived at the five month 
minimum requirement based on the fact that, at least in cold weather 
markets, the period of peak use is generally regarded as being the five 
months from November through March. Thus, a five-month delivery/
purchase obligation in a twelve month release would roughly correspond 
to a releasing shipper's need to call upon the capacity to serve its 
peak requirements, while giving the asset manager assurance it can 
utilize the capacity during non-peak periods.
---------------------------------------------------------------------------

    \82\ See e.g. Order No. 712 at P 121 (stating that the 
distinguishing factor between a bona fide AMA and a standard 
capacity release ``is that in the AMA context, the releasing shipper 
is not releasing unneeded capacity, but capacity that it needs to 
serve its own supply function.'')
---------------------------------------------------------------------------

    78. However, AMAs may also be for a term of less than a year. In 
these circumstances, the release is less likely to encompass any 
seasonal variations in the releasing shipper's need for the capacity to 
be used on its behalf. Therefore, the shorter the term of the release, 
the less reason there is to exempt some portion of the release term 
from the AMA delivery/purchase obligation. Thus, the Commission 
concludes that, in order to assure that releases of less than a year 
are part of a bona fide AMA in which the capacity will be used on 
behalf of the releasing shipper, the asset manager's delivery/purchase 
obligation should be increasingly stringent the shorter the term of the 
release. The AMA definition adopted by Order No. 712 accomplishes this 
by requiring that the asset manager's delivery/purchase obligation 
apply to the entire term of any AMA of less than five months and apply 
to at least five months of any release of

[[Page 72705]]

between five and twelve months. Accordingly, the Commission will retain 
the current minimum five month obligation for AMAs of one year or less.
    79. The Commission recognizes, however, that the asset manager's 
obligation under the ``five month'' rule may be unclear for a release 
that is more than one year and not an exact number of years, for 
example a 13-month term, as pointed out by the Marketer Petitioners. 
Thus, the Commission is revising the definition of AMA established in 
Order No. 712 to provide that the delivery/purchase obligation for a 
release of more than one year will be five months (or 155 days) of each 
12 month period of the release and five-twelfths of the days of any 
additional period of the release not equal to 12 months.\83\ The 
delivery/purchase obligation for a 13 month AMA therefore, would be a 
minimum of five months out of the first 12 month period and five-
twelfths of the thirteenth month of the agreement. The concerns 
discussed above about the need for a more stringent purchase/delivery 
obligation in short term releases of less than a year do not apply to 
releases with terms of more than a year, because such releases will 
encompass any seasonal variations in the releasing shipper's need for 
the capacity to be used for its own purposes. The Commission 
accordingly concludes that the revised definition will balance its 
goals of ensuring that there is a significant obligation on the asset 
manager to distinguish AMAs from standard capacity releases while also 
allowing sufficient flexibility for parties to negotiate beneficial 
AMAs.
---------------------------------------------------------------------------

    \83\ The Commission is making conforming changes to section 
284.8 of its regulations.
---------------------------------------------------------------------------

    80. Parties also seek clarification that the five month delivery 
purchase obligation, or a daily obligation if accepted by the 
Commission, does not require the obligation to be for a single 
consecutive period. Marketer Petitioners for example, request that the 
Commission clarify that the ``delivery/purchase obligation of section 
284.8(h)(3) does not require the months to be consecutive'' and would 
be satisfied by the use of any five months.\84\ The NGSA contends that 
the Commission should clarify that the five month obligation need not 
be on consecutive days but can be ``satisfied by an AMA that imposes a 
delivery obligation on nonconsecutive days as long as those 
nonconsecutive days amount to a total of five twelfths of the term of 
the AMA.'' \85\
---------------------------------------------------------------------------

    \84\ Marketer Petitioners at 5.
    \85\ NGSA at 5.
---------------------------------------------------------------------------

    81. The Commission grants clarification that the delivery purchase 
obligation for an AMA need not be for a single consecutive period. The 
Commission did not intend by the definition established in Order No. 
712, and the definition as written does not require, that the 
obligation must be for five consecutive months. To provide flexibility 
in fashioning AMAs the Commission is aware that parties may want to 
divide the delivery/purchase obligation in a manner that corresponds to 
whatever variations exist in the releasing shipper's need to use the 
capacity over the course of a year. Thus, under the revised rule 
established in this order, the minimum delivery/purchase obligation may 
be satisfied by use of any combination of months and/or days during the 
term of the release that equals the requisite obligation for that 
release. In this regard, the parties need not use calendar months for 
purposes of complying with the requirement that the delivery/purchase 
obligation equal at least five months out of each twelve month period 
of the release. The parties may spread the obligation over days, rather 
than months, so long as the total obligation equals five months, 
treating 31 days as equal to one month.
    82. The AGA, Marketer Petitioners and Scana request that the 
Commission provide clarification and consistency in the regulatory 
language to describe the delivery/purchase obligation in the 
transportation capacity and storage injection and withdrawal context. 
They note that Order No. 712 adopted a standard for the replacement 
shipper in an AMA to deliver and/or purchase ``up to one-hundred 
percent of the daily contract demand of the released transportation 
capacity'' but that the standard for releases of storage capacity is 
for ``one-hundred percent of the daily contract demand under the 
release for storage injection and withdrawals.'' The parties contend 
that the same ``up to'' language should apply to releases of both 
storage and transportation capacity meant to implement an AMA and that 
the Commission did not intend in Order No. 712 to impose different 
obligations on asset managers depending on type of capacity released.
    83. The Commission agrees. The Commission intended in Order No. 712 
to establish the same obligation on releasers of transportation and 
storage capacity, i.e., that they need to be obligated to deliver and/
or purchase up to 100 percent of the daily contract demand of the 
applicable agreement. The Commission is therefore revising section 
284.8 of its regulations accordingly.
    84. The AGA, the Marketer Petitioners and Scana state that often 
pipeline tariffs contain ratchet provisions that limit the ability of a 
storage customer to make injections and withdrawals from storage at 
maximum contract levels. Consequently, the maximum amount of gas a 
storage customer may be able to withdraw may fluctuate. These parties 
seek clarification that the delivery/purchase obligation under a 
storage AMA incorporates or is intended to reflect any limitations on 
the customers' injection or withdrawal rights contained in the service 
provider's tariff.
    85. The Commission grants the requested clarification. The 
Commission's goal in Order No. 712 was to facilitate efficient and 
beneficial AMAs. This goal would not be advanced by disqualifying an 
AMA because of an operational limit imposed by the service provider's 
tariff on a customer's injection or withdrawal rights. All AMA 
agreements are subject to the tariff provisions of the service 
provider. Storage ratchet provisions limit the customer's contractual 
right to demand service. The delivery/purchase obligation under a 
storage AMA was intended to reflect such limits on the customer's 
contract demand and thus is satisfied if the releasing shipper has the 
right to call upon the asset manager to deliver or purchase gas 
consistent with the withdrawal or injection rights available under the 
tariff to the asset manager at the time the releasing shipper requires 
performance.
    86. Scana requests clarification that in a situation where parties 
include released capacity on both an upstream and downstream pipeline 
in an AMA, the delivery obligation only applies to the capacity 
released on the downstream pipeline that directly connects to the 
releasing shipper's delivery point.\86\ Scana contends that when a 
shipper acquires capacity on several interconnected pipelines to create 
a seamless transportation path from a supply access point to the 
shipper's delivery point, the capacity released on each pipeline will 
not be the same because the shipper typically needs more capacity on 
the upstream pipeline in order to account for additional fuel 
retention. Scana points to an example in the Commission's November 15, 
2007 Notice of Proposed Rulemaking, showing that an asset manger's 
delivery obligation is not cumulative where an AMA involves separate 
releases, as support for its request that the Commission clarify that 
the delivery obligation for a multi-pipeline AMA need only be satisfied 
on

[[Page 72706]]

the downstream pipeline connected to the delivery point.\87\
---------------------------------------------------------------------------

    \86\ Scana at 5.
    \87\ Scana at 5 and n. 5 (citing Promotion of a More Efficient 
Capacity Release Market, Notice of Proposed Rulemaking, 72 FR 65,916 
(November 27, 2007), FERC Stats. & Reg. ] 32.625 at P 9 and n. 92 
(2007)).
---------------------------------------------------------------------------

    87. The Commission denies Scana's request. Scana states that in an 
AMA where capacity is released on an upstream and a downstream 
pipeline, the amount of capacity released will be greater on the 
upstream pipeline. It provides no reasons, however, as to why the 
delivery/purchase obligation under such an AMA should be limited to the 
furthermost downstream pipeline that is connected to the delivery 
point. As discussed previously, the purpose of the minimum delivery/
purchase obligation is to ensure that each release to an asset manager 
is part of a bona fide AMA, i.e., that the capacity included in the 
release is not simply unneeded capacity, but is capacity which the 
releasing shipper has a continuing need to use for its own business 
purposes. However, if the delivery/purchase obligation in Scana's 
example did not apply to the full amount of the upstream released 
capacity, the releasing shipper could include in the upstream capacity 
release capacity that it does not need for its own legitimate business 
purposes during the term of the release. It is the Commission's 
position that the asset manager's delivery/purchase obligation must 
apply to the full contract demand under each capacity release in the 
transportation chain. Thus, while Scana is correct that the delivery/
purchase obligation is not cumulative of the capacity in a released 
chain of contracts that constitute a single capacity path, there is 
still a delivery/purchase obligation up to the contract demand of each 
specific contract.
    88. Scana and BP also seek clarification that where both storage 
capacity and transportation capacity are combined in an AMA that the 
storage and transportation obligations are not cumulative. As with 
upstream and downstream transportation capacity on several pipelines, 
the delivery obligation of the AMA is not cumulative of the storage 
capacity and the transportation capacity used to transport the gas to 
or from storage, but to qualify for the exemptions the asset manager 
must meet the necessary obligation under each separate agreement.

C. Exemption From Bidding for AMAs

    89. In Order No. 712, the Commission exempted pre-arranged releases 
to implement AMAs from the bidding requirements of section 284.8 of its 
regulations. The Commission concluded that, in the AMA context, the 
bidding requirement creates an unwarranted obstacle to the efficient 
management of pipeline capacity and supply assets. The Commission noted 
that 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. 
The Commission determined that 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. 
Moreover, AMAs at their core entail a bundling of commodity sales with 
capacity release. As a result, it is difficult to have meaningful 
bidding on the released capacity as a stand-alone component of the 
arrangement because the values of the commodity and capacity components 
of the arrangement are not easily separated. The Commission thus 
concluded that the benefits of facilitating AMAs outweigh any 
disadvantages in exempting such releases from bidding.
    90. The final rule provided that the exemption from bidding will 
apply to all releases to asset managers made for the purpose of 
implementing an AMA, regardless of the term of the AMA and whether the 
release is subject to the price ceiling. The rule also provided that 
the exemption from bidding for AMAs applies to all releases to an asset 
manager, including those made for the purpose of extending a short-term 
AMA. The Commission determined that the rationale for exempting 
releases to an asset manager from bidding applies equally to releases 
made for the purpose of extending a short-term AMA as to any other 
release to an asset manager. In all such releases, the identity of the 
asset manager is critical to the releasing shipper, because the 
releasing shipper will be relying on the asset manager to obtain its 
gas supplies. The Commission concluded that as with any other release 
to an asset manager, requiring releases made for the purpose of 
extending a short-term AMA to be posted for bidding could interfere 
with the negotiation of beneficial AMAs by potentially preventing such 
releases to be made to the releasing shipper's chosen asset manager. 
The final rule also extended the blanket exemption from bidding granted 
to AMAs to capacity releases made to a marketer participating in a 
state approved retail access program.
    91. No party requests rehearing of the Commission's decision to 
exempt all releases to asset managers or marketers participating in 
retail unbundling programs from bidding. However, several parties filed 
requests for rehearing/clarification of the revised regulations the 
Commission adopted in order to implement that decision. Under Order No. 
712, section 284.8(h)(1) exempts from the notification and bidding 
requirements in paragraphs 284.8(c) through (e): ``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, a release to an asset manager as defined in (h)(3) 
of this section, or a release to a marketer participating in a state-
regulated retail access program as defined in (h)(4) of this section.'' 
Section (h)(2) provides that ``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) though (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.''
    92. The AGA, INGAA and Spectra request that the Commission clarify 
that the prohibition contained in section 284.8(h)(2) of the 
regulations against rollovers and re-releases without bidding to the 
same party within 28 days does not apply to AMAs or to releases 
pursuant to state mandated retail access programs.\88\ They contend 
that while the rule generally exempts releases to implement AMAs and 
releases for retail choice marketers from bidding under section 
284.8(h)(1), it is unclear whether the prohibition on rollovers in 
section 284.8(h)(2) applies to such releases that are for a term of 31 
days or less. AGA notes that AMAs or retail choice releases may in many 
instances be for 31 days or less, and that

[[Page 72707]]

to require competitive bidding to extend such releases would frustrate 
the final rule's goal of fostering such arrangements.
---------------------------------------------------------------------------

    \88\ AGA at 6, INGAA request for clarification at 1.
---------------------------------------------------------------------------

    93. The Commission clarifies that the prohibition in section 
284.8(h)(2) on rolling over a 31 day or less release to the same 
replacement shipper without bidding does not apply to AMAs or to 
releases pursuant to a state approved retail access program.\89\ As 
stated in the rule, the regulatory language of section 284.8(h)(2) was 
designed so that the prohibition on extending exempt releases without 
bidding only applied to the first category of releases exempted from 
bidding by section 284.8(h)(1), namely releases of 31 days or less. The 
Commission intended by this language that releases pursuant to the 
other categories in section 284.8(h)(1), i.e., releases for more than a 
year at maximum rate, releases to implement AMAs and releases to 
marketers participating in state retail access programs, would not be 
subject to the prohibition on extensions without bidding. The 
Commission's goal in the rule was to facilitate AMAs and state 
unbundling programs that would give retail end-users a greater choice 
of suppliers by generally exempting certain releases from its bidding 
requirements. The Commission did not intend to require bidding to 
extend such releases that are for 31 days or less. Accordingly the 
Commission clarifies that AMAs and releases pursuant to state approved 
retail access programs are not subject to the section 284.8(h)(2) 
prohibitions on extending releases without bidding.
---------------------------------------------------------------------------

    \89\ Indeed the Commission expressed this intention for AMAs in 
the rule itself, when it stated that the exemption from bidding for 
AMAs applies to all releases to an asset manager, ``including those 
made for the purpose of extending a short-term AMA.'' Order No. 712 
at P 135.
---------------------------------------------------------------------------

    94. The Commission is also revising the regulatory text of sections 
284.8(h)(1) and (2) so as to more clearly limit the section 284.8(h)(2) 
prohibition on rollovers, extensions and re-releases to the same 
shipper without bidding to release transactions that were exempt from 
bidding solely by virtue of the fact they were for a term of 31 days or 
less. As revised, section 284.8(h)(1) separately sets forth each 
category of release that qualifies for an exemption from bidding as 
follows:

    (h)(1) The following releases need not comply with the bidding 
requirements of paragraphs (c) through (e) of this section:
    (i) A release of capacity to an asset manager as defined in 
paragraph (h)(4) of this section;
    (ii) A release of capacity to a marketer participating in a 
state-regulated retail access program as defined in paragraph (h)(5) 
of this section;
    (iii) A release for more than one year at the maximum tariff 
rate; and
    (iv) A release for any period of 31 days or less.

    As revised, the section 284.8(h)(2) prohibition on re-releases to 
the same shipper without bidding will only apply: ``When a release of 
capacity is exempt from bidding under paragraph (h)(1)(iv) of this 
section.'' (i.e. is for 31 days or less).
    95. Several parties also seek two clarifications with regard to 
section 284.8(h)(2) as it applies to releases of 31 days or less that 
do not qualify for the AMA or retail unbundling exemptions from 
bidding.\90\ Their concerns focus on the language in section 
284.8(h)(2) prohibiting re-releases ``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.'' First, BP seeks 
clarification that this language does not prevent a releasing shipper 
from releasing the same capacity to the same replacement shipper for 
another consecutive period of 31 days or less if the releasing shipper 
subjects that capacity to the Commission's posting and bidding 
requirements.
---------------------------------------------------------------------------

    \90\ See e.g., INGAA clarification request at 2, Spectra at 37, 
NGSA and EPSA at 10, and BP at 8.
---------------------------------------------------------------------------

    96. The Commission grants this clarification. Order No. 712 did not 
change the language of section 284.8(h)(2) concerning the prohibition 
on re-releases to the same replacement shipper, which was originally 
adopted in Order No. 636-A. By its terms, that prohibition only applies 
to re-releases ``under this paragraph,'' namely to re-releases pursuant 
to the exemption from bidding for 31-day or less releases contained in 
paragraph (h) of section 284.8. Therefore, the prohibition on re-
releases to the same replacement shipper does not apply to re-releases 
made pursuant to the notice and bidding requirements in paragraphs (c) 
through (e) of section 284.8. As Order No. 636-B explained, the purpose 
of the prohibition on re-releases to the same shipper until 28 days 
after the first release was ``to protect the integrity and allocative 
efficiency of the capacity release mechanism by preventing parties from 
avoiding the bidding requirement by extending short-term releases.'' 
\91\ That purpose is satisfied so long as the re-release to the same 
replacement shipper is subject to bidding.
---------------------------------------------------------------------------

    \91\ Order No. 636-B, 61 FERC ] 61,272 at 61,995.
---------------------------------------------------------------------------

    97. Second, INGAA, Spectra, Williston, NGSA and EPSA note that 
Order No. 712 retained the existing language of section 284.8(h)(2) 
that limits the 28-day prohibition on re-releases to the same shipper 
without bidding to re-releases ``at less than the maximum tariff 
rate.'' Those seeking clarification assert that the retention of this 
language is potentially inconsistent with the Commission's decision to 
remove the price ceiling on short term capacity releases of a year or 
less. They state that the language limiting the 28-day prohibition on 
rolling over releases of 31 days or less without bidding to re-releases 
``at less than the maximum tariff rate'' could be read to permit re-
releases to the same replacement shipper without bidding for periods of 
a year or less if the release rate is at or higher than the pipeline's 
maximum recourse rate. Therefore, they seek clarification that all re-
releases for a period of a year or less, which are no longer subject to 
a maximum ceiling rate, must be subject to bidding, regardless of the 
release rate. INGAA and Spectra also seek clarification that the ``at 
less than maximum tariff rate'' language now applies only in the 
context of re-releases for more than one year to which the maximum rate 
ceiling still applies.
    98. The Commission grants clarification. Because Order No. 712 
removed the maximum rate ceiling for all releases of one year or less, 
all such releases must be subject to bidding, unless they qualify for 
exemptions from bidding for: (1) Releases of 31 days or less, (2) 
releases to asset managers, or (3) releases to marketers participating 
in a state regulated retail access program. The exemption from bidding 
for releases at the maximum tariff rate is only applicable to releases 
of more than a year, because only those releases are subject to a 
maximum tariff rate. Therefore, a capacity release that was not subject 
to bidding pursuant to the exemption for releases of 31 days or less 
may not be rolled over to the same replacement shipper without bidding 
until 28 days after the end of the first release period, unless the re-
release is for more than a year at the maximum rate and thus qualifies 
for the exemption from bidding for maximum rate releases.
    99. Consistent with the revisions to section 284.8(h)(1) set forth 
above, and the various clarifications discussed above, the Commission 
has determined to modify section 284.8(h)(2) so as to more clearly 
state its intent. As revised, section 284.8(h)(2) reads as follows:

    (h)(2) When a release of capacity is exempt from bidding under 
paragraph (h)(1)(iv) of this section, a firm shipper may not roll 
over, extend or in any way continue the release to the same 
replacement shipper using the 31

[[Page 72708]]

days or less bidding exemption until 28 days after the first release 
period has ended. The 28-day hiatus does not apply to any re-release 
to the same replacement shipper that is posted for bidding or that 
qualifies for any of the other exemptions from bidding in paragraph 
(h)(1).

    100. This revised language ensures that a release of 31 days or 
less, which was exempt from bidding solely pursuant to the exemption 
for short term transactions, may not be rolled over to the same 
replacement shipper until at least 28 days after the first release 
period has ended, unless (1) the releasing shipper posts the new 
release for bidding or (2) the new release qualifies for one of the 
three other exemptions from bidding. In order to qualify for the 
maximum rate exemption from bidding, the re-release must be for a term 
of more than a year. The releasing shipper could release the capacity 
to another shipper under the bidding exemption for releases of 31 days 
or less, as stated in Order No. 636-B.\92\
---------------------------------------------------------------------------

    \92\ Order No. 636-B, 61 FERC at 61,995.
---------------------------------------------------------------------------

D. Posting and Reporting Requirements

    101. In Order No. 712, the Commission revised its regulations to 
include new posting requirements for capacity releases to implement 
AMAs. Specifically, the Commission determined that any posting under 
section 284.13(b) that relates to a release to implement an AMA should 
include (1) the fact that the release is to an asset manager and (2) 
the delivery or purchase obligation of the AMA, in addition to the 
information required to be posted for all capacity releases. The 
Commission reasoned that the requirement of an asset manager to deliver 
or purchase gas to fulfill the releasing shipper's supply or marketing 
obligations is the cornerstone for differentiating AMAs from standard 
capacity releases. In order to ensure that capacity releases posited as 
AMAs eligible for the exemptions from tying and bidding are bona fide 
AMAs, the Commission must have a means to monitor this critical 
component of the arrangement. Accordingly the Commission revised 
section 284.13(b)(1) of its regulations to add a new subsection (x) 
specifying that a posting of any capacity release meant to implement an 
AMA must specify the volumetric level of the replacement shipper's 
delivery or purchase obligation and the time periods during which that 
obligation is in effect. The Commission also added new subsection (xi) 
requiring that a release to a marketer participating in a state 
regulated retail access program must be so identified in the posting. 
The Commission noted that existing regulations required parties to 
identify asset managers and agents in the index of customers. The 
Commission further stated that parties are not required to include 
commercially sensitive aspects of AMAs. Certain parties seek rehearing 
and/or clarification of these parts of Order No. 712.
1. Posting Requirements
    102. Marketer Petitioners request reconsideration concerning the 
information required to be posted in connection with a release of 
capacity associated with an AMA under Order No. 712.\93\ Marketer 
Petitioners submit that the specific days/months during which an AMA 
manager's delivery/purchase obligation is in effect should not have to 
be posted in the release. Instead, they assert that the fact the 
release is associated with an AMA, the identity of the asset manager, 
and the fact that the asset manager's delivery/purchase obligation is 
for the requisite quantity and time period should be adequate to 
demonstrate that the release is associated with a bona fide AMA. 
Marketer Petitioners argue that posting the specifics of the delivery/
purchase obligation may result in disclosure of competitive and 
commercially sensitive information that will reduce the flexibility of 
parties in structuring AMAs.
---------------------------------------------------------------------------

    \93\ Marketer Petitioners at 8-9.
---------------------------------------------------------------------------

    103. The Commission denies the reconsideration request. As noted 
above, the Commission in Order No. 712 found that the delivery/purchase 
obligation is the foundation for differentiating AMAs from standard 
capacity releases, and that the Commission needed a way to accurately 
monitor this component of an AMA. Thus the Commission revised its 
regulations to include the specifics of what it deemed necessary to 
execute this monitoring function. Marketer Petitioners assert that it 
is adequate to include the fact that the manager's delivery/purchase 
obligation is for the requisite quantity and time period to demonstrate 
the validity of the AMA, but they do not state how those facts can be 
discerned without information regarding the volumetric level of the 
obligation and the time periods that it will be in effect. Further, 
Marketer Petitioners claim that posting of specific dates will 
potentially result in disclosure of commercially sensitive information 
but provide no details as to how such information is commercially 
sensitive. The Commission finds that it is important for determining 
the validity of bona fide AMAs that it and the public can see and 
review the details of how the release qualifies as an AMA under the 
definition. The Marketer Petitioners' request is thus denied.
2. Index of Customers
    104. Several parties seek clarification that the Commission did not 
intend to amend its regulations pertaining to the Index of 
Customers.\94\ They note that in Order No. 712 the Commission revised 
certain of its regulations concerning the posting and reporting 
requirements for AMAs under the new rule. In that discussion the 
Commission stated that ``sections 284.13(c)(2)(viii) and (ix) require 
that the pipeline's index of customers 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.'' 
\95\ The parties point out that the actual language in the referenced 
regulation relating to affiliate relationships requires the reporting 
on the index of customers of any ``affiliate relationship between the 
pipeline and a shipper's asset manager or agent.'' 18 CFR 
284.139(c)(2)(ix) (emphasis added). They seek clarification that the 
discussion in the preamble is not intended to modify the language of 
section 284.13(c)(2)(ix) concerning the Index of Customers.
---------------------------------------------------------------------------

    \94\ See, INGAA at 3, Iroquois at 7, Spectra at 38, Williston at 
18.
    \95\ Order No. 712 at P 172.
---------------------------------------------------------------------------

    105. The Commission clarifies that the discussion in Order No. 712 
inadvertently misstated the regulation and that the Commission did not 
intend to change the language or impact of section 284.13(c)(2)(ix), 
nor as the parties note, did the Commission make any revisions to that 
section in Order No. 712. Therefore, pipelines will not be required to 
state in their Index of Customers whether there is an affiliate 
relationship between the releasing shipper and its asset manager. 
However, the Commission notes that existing section 284.13(b)(ix) 
requires that the pipeline's posting of capacity release transactions 
include a statement ``whether there is an affiliate relationship 
between * * * the releasing and replacement shipper.'' Therefore, the 
pipeline's transactional reports will indicate whether the releasing 
shipper and any asset manager to which it releases capacity are 
affiliated. The Commission also notes that section 284.13(c)(2)(viii) 
does require that the index of customers include the name of any agent 
or asset

[[Page 72709]]

manager managing a shipper's transportation service.\96\
---------------------------------------------------------------------------

    \96\ Spectra also requests clarification that the Commission's 
statement in P 136 of Order No. 712, stating that the existing 
requirements referenced in section 284.13(c)(2)(viii) (Index of 
Customers) of the regulations still apply with regard to identifying 
asset managers, which was followed by a statement that the 
Commission was adding a requirement to post the asset manager's 
delivery obligation to the releasing shipper, did not intend to add 
any requirements to the index of customers. The Commission so 
clarifies. The Commission clearly stated in that paragraph that the 
new reporting requirements were ``in addition'' to the existing 
requirements under the index of customers.
---------------------------------------------------------------------------

    106. INGAA seeks clarification that the posting requirements for 
capacity releases under AMAs apply only to capacity releases initiated 
and reported to the pipeline after the effective date of Order No. 712. 
The Commission so clarifies. Nothing in Order No. 712 indicates that 
any provision would take effect retroactively. Further, no capacity 
releases to implement AMAs under Order No. 712 are valid until the 
effective date of the rule. Accordingly, pipelines need only report 
capacity releases that are meant to implement AMAs under Order No. 712 
after the effective date of the rule.

E. Miscellaneous AMA Issues

    107. The NGSA requests that the Commission clarify that on days 
when the releasing shipper has a right to call upon the asset manager 
to deliver or purchase gas under an AMA, the parties may specify a 
nomination deadline no earlier than the 8 a.m. on the weekday morning 
before gas flows, after which the asset manager may release any 
capacity not wanted by the releasing shipper without recall in order to 
maximize the value of the capacity.\97\ The NGSA asserts that as 
written, Order No. 712 requires the asset manager to provide the 
releasing shipper an absolute call on the full contract volume of the 
released capacity on every day of the five month minimum period. 
According to the NGSA, a strict reading of the shipper's right would 
require an asset manager to re-release the capacity subject to recall 
during each day of the delivery/purchase obligation period, thereby 
limiting the value of the capacity and the AMA.
---------------------------------------------------------------------------

    \97\ NGSA at 6.
---------------------------------------------------------------------------

    108. The NGSA submits that one way to address this issue is for the 
Commission to allow the parties to an AMA to agree to a specific 
nomination deadline after which the asset manager would be free to 
market the capacity without any recall rights. NGSA asserts that 
nomination deadlines are regular features of AMAs and may be fixed at 
various times depending on the needs of the parties and pipeline 
specifications, and that 8 a.m. on the weekday before gas flows is a 
commonly used deadline. Under such a scenario, the releasing shipper 
may call upon the replacement shipper for the full contract volume 
until the nomination deadline. In the event that the releasing shipper 
knows the day before, however, that it does not need all or some 
portion of the capacity at the nomination deadline, the asset manager 
would be free to release the unwanted capacity without any recall 
rights, thus maximizing the value of the capacity to the mutual benefit 
of both the releasing shipper and the asset manager.
    109. The Commission grants NGSA's clarification request to allow 
the parties to an AMA to specify a deadline in their AMA agreement 
after which the asset manager may re-release the capacity without 
attaching a recall provision. This deadline may be no earlier than 8 
a.m. on the weekday before gas flows. As noted by NGSA, allowing the 
parties to establish a deadline after which the releasing shipper can 
no longer exercise its recall right is consistent with the Commission's 
goal of maximizing the value of capacity released pursuant to an AMA. 
The Commission finds limiting the ability to determine a deadline to no 
earlier than 8 a.m. on the weekday prior to gas flow is reasonable as a 
means of providing this flexibility while ensuring that parties do not 
utilize the deadline as a means of essentially vitiating the delivery 
purchase obligation of the AMA.\98\
---------------------------------------------------------------------------

    \98\ The Commission notes that 8 a.m. on the day before gas 
flows is consistent with the current North American Energy Standards 
Board (NAESB) standard for notification by the releasing shipper of 
a recall of capacity. See NAESB Standard 5.3.44.
---------------------------------------------------------------------------

    110. BP requests clarification that a releasing shipper may include 
more capacity in its AMA than it has previously used to supply its 
natural gas needs.\99\ BP notes that in Order No. 712 the Commission 
supported the delivery/purchase obligation for AMAs by referring to the 
fact that an asset manager should be able to reasonably forecast a 
releasing shipper's needs based on historical usage. BP contends that 
because in nearly all cases shippers acquire capacity for use as a 
mechanism for gas supply, a releasing shipper should be able to include 
its portfolio of assets making up an AMA transportation capacity that 
it owns, not only that capacity historically used to meet past peak day 
demands or to transport supply. It asserts that entities on both the 
supply and demand side typically purchase and hold capacity in excess 
of its historic gas needs.
---------------------------------------------------------------------------

    \99\ BP at 3.
---------------------------------------------------------------------------

    111. The Commission grants the requested clarification. In 
referring to an asset manager's ability to make reasonable judgments 
about the releasing shipper's demand or supply requirements the 
Commission did not in any way limit the capacity that could be included 
in an AMA to that reflected by historical usage. A releasing shipper 
may include more capacity in an AMA than it has previously used to meet 
its needs, provided that the releasing shipper owns that capacity and 
that the delivery/purchase obligation in the AMA applies to all the 
capacity included in the AMA.
    112. Marketer Petitioners seek clarification that a release of AMA 
capacity by an asset manager to another asset manager is eligible for 
the exemptions under section 284.8(h)(3) of the regulations.\100\ They 
point out that different asset managers have expertise in different 
markets, and thus may desire to work cooperatively with other asset 
managers to maximize the value of the capacity. One way for this to 
occur is for one asset manager to re-release capacity received from the 
original releasing shipper to a second asset manager.
---------------------------------------------------------------------------

    \100\ Marketer Petitioners at 12.
---------------------------------------------------------------------------

    113. The Commission clarifies that an asset manager may release 
capacity it obtained as part of an AMA to another asset manager. 
Provided each release is made to implement an AMA and satisfies the 
delivery/purchase obligation and other criteria in the definition of 
AMA, such releases would qualify for the exemptions granted by Order 
No. 712 to AMAs.
    114. BP seeks clarification that any entity holding interstate 
transportation capacity may enter into an AMA as a releasing shipper, 
including wholesale marketers. BP cites to Order No. 712 and the 
Commission's statement that the definition adopted in the rule was 
meant to be flexible enough so that it ``does not limit the type of 
party that can enter into an AMA.'' The Commission grants 
clarification. As BP itself points out, the definition was meant to be 
flexible enough so as to not limit the type of entities that could take 
advantage of AMAs so long as the criteria in the definition are 
satisfied.

III. State Mandated Retail Unbundling

    115. In Order No. 712, the Commission determined that capacity 
releases by LDCs to implement state approved retail access programs 
should be granted the same blanket exemptions from the prohibition 
against tying and the bidding requirements as capacity releases made in 
the AMA context. The

[[Page 72710]]

Commission found that state retail unbundling programs that give retail 
end-users a greater choice of suppliers from whom to purchase their gas 
provide benefits similar to AMAs. Accordingly, the Commission clarified 
in Order No. 712 that the prohibition against tying does not apply to 
releases by an LDC to a marketer that agrees to sell gas to the LDC's 
retail customers under a state approved retail access program. The 
Commission also amended section 284.8(h) in order to provide an 
exemption from bidding for such releases. Under Order No. 712, in order 
to qualify for the exemption, the capacity release must be used by the 
replacement shipper to provide the gas supply requirement of retail 
consumers pursuant to a retail access program approved by the state 
agency with jurisdiction over the LDC that provides delivery service to 
such retail consumers. The Commission also stated that the exemption 
does not apply to re-releases made by marketers participating in the 
retail access program.
    116. The AGA seeks clarification that consecutive short-term 
releases to a marketer participating in a state-regulated retail access 
program will not be considered a long-term release subject to the 
maximum rate ceiling.\101\ The AGA states that pursuant to the state 
approved programs local distribution companies typically release 
capacity to the same retail marketers on a monthly or other regular 
basis. AGA contends that consecutive short term releases to a retail 
marketer under a state approved program are different than long-term 
transactions because a retail marketer is generally only eligible to 
contract for released capacity to the extent of its market share and 
the short term releases often vary with each separate transaction based 
on changes to the marketer's share of the retail market or the source 
of the released capacity.
---------------------------------------------------------------------------

    \101\ AGA at 9.
---------------------------------------------------------------------------

    117. The Commission grants clarification. In the circumstances 
described by AGA, consecutive short-term releases to the same marketer 
are appropriately treated as separate short-term releases not subject 
to the maximum rate ceiling. Marketers taking these releases have no 
continuing right to any particular capacity from one release to the 
next. Rather, the amount of capacity released to each marketer is 
dependent upon their continuing participation in the retail access 
program and varies with their market share. There is nothing in the 
Commission's current regulations or the revisions in this order that 
would lead the Commission to deem such a series of short term releases 
under a state program to be a single long-term release.
    118. Marketer Petitioners request that the Commission clarify that 
a marketer participating in a state approved retail access program can 
re-release its capacity to an asset manager that will fulfill the 
marketer's obligations under the state approved program.\102\ The 
Commission grants clarification. The statement in Order No. 712 that 
the exemptions afforded to marketers participating in state approved 
retail access programs did not apply to re-releases made by such 
marketers was referring to a re-release that was a standard capacity 
release, not a re-release to an asset manager. As clarified above, an 
asset manager may re-release to a second asset manager and if the 
release satisfies the criteria of the AMA definition, the exemptions 
will apply. Likewise, a marketer participating in a state regulated 
retail access program may re-release to an asset manager and the second 
release will qualify for the exemptions afforded AMAs as long as it 
meets the necessary requirements.
---------------------------------------------------------------------------

    \102\ Id. See also BP at 8-9.
---------------------------------------------------------------------------

    119. BP seeks clarification that a marketer participating in a 
retail unbundling program can use its released capacity to serve 
customers who are not subject to the retail access program during 
periods when the capacity is not needed to serve retail access 
customers. BP contends that such use of excess capacity would 
facilitate the efficient use of capacity and put retail access 
providers in a position comparable to that of asset managers.
    120. The Commission grants clarification. In establishing the 
exemptions for AMAs the Commission found in part that AMAs were 
beneficial because they would encourage maximum use of capacity during 
periods when it was not needed by the releasing shipper. Similarly, 
alternative use of capacity by a marketer participating in a retail 
access program during periods when that capacity is not needed to serve 
the retail access customers' needs promotes the efficient use of 
capacity.
    121. BP also seeks clarification that a wholesale supplier who 
obtains capacity directly from an LDC as part of an unbundling program 
but who is not a marketer under the program nevertheless qualifies for 
the tying and bidding exemptions.\103\ As the Commission understands 
this request by BP, it seeks the exemptions afforded to retail access 
marketers for a release of capacity to a wholesale supplier, who will 
in turn sell gas to the retail access marketer. In other words, BP 
seeks the exemption for an entity that is one-step removed from the 
situation under which Order No. 712 grants exemptions from tying and 
bidding.
---------------------------------------------------------------------------

    \103\ BP at 9.
---------------------------------------------------------------------------

    122. The Commission declines to grant BP's request in this generic 
rulemaking proceeding. As noted, BP requests the Commission to approve 
a specific deal structure that does not meet the criteria under which 
the rule generally grants exemptions. BP is free to file separately on 
a case-by-case basis for approval of individual arrangements that it 
believes may merit a waiver of the Commission's bidding and tying 
strictures.
    123. Lake Apopka Natural Gas District, Florida (Lake Apopka) filed 
a late request for clarification, or reconsideration, requesting the 
Commission clarify that the blanket exemptions from tying and bidding 
granted for releases made as part of a state approved retail access 
program apply equally to self-regulated municipals. Lake Apopka states 
that it is a special district created by the state of Florida and 
authorized to transport and distribute natural gas to its member 
municipalities and to other municipalities. Lake Apopka states that its 
rates and terms of service are not subject to regulation by the Florida 
Public Service Commission. Lake Apopka currently does not have a retail 
access program and provided no information in its pleading as to the 
way in which such a program would be structured and whether it would 
have protections comparable to state governmental review.
    124. The Commission denies Lake Apopka's request. As noted, the 
Commission's bidding requirements and its prohibition against tying are 
meant to ensure a transparent, liquid, and non-discriminatory wholesale 
energy market. In cases where retail access programs have been reviewed 
and approved by state regulators, there is a sound basis to believe 
that retail access and wholesale access programs are working toward 
common goals of promoting customer choice and competition, subject to 
state supervision and oversight. State regulators can review a proposed 
program and establish essential conditions to ensure that a local 
utility monopoly does not create a retail access program that transfers 
its market power to an unregulated affiliate at the expense of local 
retail ratepayers and nearby wholesale market competitors.
    125. From the information provided, it appears that these 
protections are lacking in the situation described by

[[Page 72711]]

Lake Apopka. The Commission's determination in Order No. 712 was not 
intended to apply to such wholly unregulated entities and the 
Commission declines to revise its regulations to grant a blanket 
exemption in this rulemaking proceeding. The Commission is open to 
considering waiver requests on this issue on a case-by-case basis if 
presented to us in a fully justified proposal.
    126. Vector Pipeline LP (Vector) filed a request for clarification 
or in the alternative rehearing asking that the Commission clarify that 
Canadian provincial retail unbundling programs will be treated the same 
as state unbundling programs under Order No. 712. Vector notes that 
Order No. 712's exemption from bidding for state-regulated open access 
programs defines a state retail unbundling program as one ``approved by 
the state agency with jurisdiction over the local distribution company 
that provides delivery service to such retail customers.'' \104\ Vector 
states that it does not oppose the exemption but contends that the 
Commission should clarify that it also applies to programs authorized 
by a province in Canada. Vector states that it has firm shippers on its 
system that have participated in a retail unbundling program authorized 
by the Province of Ontario and that the Commission has previously 
treated such Canadian programs identical to state retail unbundling 
programs.\105\
---------------------------------------------------------------------------

    \104\ Vector at 1.
    \105\ Id. (citing, Union Gas Ltd., 93 FERC ]61,074 (2000)).
---------------------------------------------------------------------------

    127. The Commission grants clarification. As noted by Vector, 
during the period when the price cap on short-term releases was removed 
pursuant to Order No. 637, the Commission granted Union Gas, a firm 
shipper on Vector's system, a waiver of the Commission's posting and 
bidding requirements to further its efforts to participate in a 
provincial retail unbundling program similar to waivers the Commission 
issued for domestic LDCs to participate in state approved retail 
unbundling programs during the same period. The Commission finds that 
its rationale in equating Canadian provincial retail unbundling 
programs with state approved retail access programs for the purposes of 
Order No. 637 applies equally to Order No. 712's bidding exemption for 
such programs. Accordingly, the Commission clarifies that Canadian 
provincial retail unbundling programs will be treated the same as state 
unbundling programs for purposes of the bidding exemption for state-
regulated retail unbundling programs under Order No. 712.

IV. Tying of Storage Capacity and Inventory

    128. In Order No. 712, the Commission granted an exception to its 
prohibition on tying to allow a releasing shipper to include conditions 
in a release concerning the sale and/or repurchase of gas in storage 
inventory outside the AMA context. The Commission reasoned that in the 
storage context, storage capacity is inextricably attached to the gas 
in storage, and that by allowing releasing shippers to condition the 
release of storage capacity on the sale and or repurchase of gas in 
storage inventory and on there being a certain amount of gas left in 
storage at the end of the release, the Commission would enhance the 
efficient use of storage capacity while at the same time ensuring that 
the releasing shipper would have gas in storage for the winter.
    129. The AGA requests clarification that the exemption from the 
tying prohibition applies to other terms and conditions related to the 
purchase and sale of storage gas in inventory.\106\ It argues that such 
an exemption is akin to the clarification for AMAs that the tying 
exemption applies to all other agreements necessary to implement the 
agreement.\107\ AGA notes as an example that credit requirements may be 
necessary to address the risks associated with transferring substantial 
amounts of commodities, particularly storage gas. AGA states that given 
the large quantities of gas in storage sought to be transferred and the 
high commodity prices in today's marketplace, a bidder that is 
creditworthy for purposes of pipeline transportation service may not be 
sufficiently creditworthy to provide security for commodity transfers. 
AGA suggests that the current creditworthy provisions contained in 
pipeline tariffs only cover the risks associated with failure of 
shipper to pay for capacity and are likely inadequate to address 
commodity transfer risks.
---------------------------------------------------------------------------

    \106\ The Commission in Order No. 712 clarified that if an AMA 
meets the essential elements of the definition of AMAs, then the 
tying exemption applies to all other agreements necessary to 
implement the AMA. Order No. 712 at P 171.
    \107\ AGA at 9.
---------------------------------------------------------------------------

    130. The Commission agrees that in the situation where a release of 
pipeline capacity is tied to storage inventory, existing pipeline 
creditworthy provisions may not be adequate to cover the risks 
associated with the transfer of large amounts of storage gas. As the 
AGA points out, given the relatively high prices of commodities in 
today's natural gas marketplace, a bidder that is creditworthy relative 
to the risks associated with pipeline services may not be creditworthy 
in terms of being able to secure large quantities of storage gas. The 
Commission has recognized elsewhere the difference between the 
potential values of pipeline services as opposed to the value of the 
commodity.\108\ Accordingly, the Commission clarifies that with regard 
to a storage release that includes a condition regarding the sale and/
or repurchase of gas outside the AMA context as authorized by Order No. 
712, the parties may negotiate further terms and conditions related to 
the commodity portion of the transaction, and such agreements shall not 
be subject to the prohibition against tying of extraneous conditions.
---------------------------------------------------------------------------

    \108\ See e.g., Gulf South Pipeline Co., LP, 103 FERC ]61,129, 
at 61,422 (2003).
---------------------------------------------------------------------------

    131. BP seeks clarification on several aspects of the storage tying 
exception. First, BP seeks clarification that the Commission's 
statement that it would allow the releasing shipper to require the 
replacement shipper to take title to the gas in storage does not 
require that the replacement shipper actually pay the releasing shipper 
for gas in storage in situations where the replacement shipper will 
return the capacity to the releasing shipper with an equivalent amount 
of gas in storage. According to BP parties may make arrangements where 
the payment of consideration is deferred until no later than when the 
storage capacity is returned to the releasing shipper.
    132. The Commission grants clarification. Order No. 712 is intended 
to permit parties flexibility in structuring storage release 
arrangements. It is reasonable that these arrangements may at times 
involve in-kind transfers of gas in lieu of monetary payments.
    133. BP also requests clarification that when the Commission stated 
that it was providing an exception from the tying prohibition to allow 
a releasing shipper to include conditions in a release concerning the 
sale and/or repurchase of gas in storage inventory even outside the AMA 
context, that it did not mean to limit the allowed ties to the examples 
provided, i.e., transfer of title to gas in storage and return of a 
specified amount of gas. BP asserts that those are only two of the 
potential ties between storage capacity and inventory and that other 
extraneous conditions exist that contain the same inextricable link 
between storage capacity and gas in storage, such as a call option on 
gas in storage.\109\ BP

[[Page 72712]]

asserts that the Commission should allow ties other than those 
specified in the rule.
---------------------------------------------------------------------------

    \109\ BP at 7 and n.14.
---------------------------------------------------------------------------

    134. The Commission acknowledges that there may be different means 
by which parties may effectuate a transfer of title to the gas in 
storage, or that parties may desire, as BP suggests, to allow for an 
option for the releasing shipper to require the replacement shipper to 
sell the gas in storage back to the releasing shipper if it needs to 
use the storage gas. The Commission thus clarifies that parties may 
utilize different methods to transfer the title to the gas and may 
include such a method as a condition in a combined storage capacity and 
inventory release. The Commission's clarification, however, is limited 
to ties related to the gas in storage. If parties desire to condition 
storage releases on non-commodity related items, then such parties 
should file separately with the Commission for approval of those 
transactions.
    135. BP also seeks clarification for the following three scenarios 
regarding how storage releases that include conditions concerning 
storage inventory should be posted for bidding:

    (i) if no pre-arranged replacement shipper exists but the 
releasing shipper has established a purchase price for the gas, the 
posting for the capacity must include the purchase price and all 
bids will be based on an equivalent purchase price so that the 
winning replacement shipper will be decided solely upon the 
competing bids for the capacity itself;
    (ii) if a pre-arranged shipper exists, the posting will include 
the purchase price for the gas offered by the pre-arranged shipper, 
and any competing bids must be based on an equivalent purchase price 
so that the winning replacement shipper will be decided solely upon 
the competing bids for the capacity itself; or
    (iii) if no purchase price has been established by the releasing 
shipper and/or offered by a pre-arranged shipper, the posting will 
indicate that the winning bid will be based solely upon the offers 
made on the capacity itself, along with a condition subsequent 
providing that the parties will mutually agree on a purchase price 
for the gas after the award.

    136. BP states that in situation (iii), if the parties are unable 
to mutually agree upon a price, the award will be voided and the 
capacity may be re-posted by the releasing shipper.\110\
---------------------------------------------------------------------------

    \110\ BP at 5-6.
---------------------------------------------------------------------------

    137. BP asserts that if the condition on the replacement shipper is 
the purchase of remaining gas in storage, then the consideration to be 
paid for the capacity and the price of the gas both become economic 
factors for the transaction. BP states that the intent of its request 
for clarification of the examples is to make the capacity the only 
economic factor to be evaluated for purposes of competitive bidding.
    138. The Commission agrees with BP that the only factor that should 
be considered for competitive bidding purposes in the context where 
storage capacity is tied to storage inventory is the capacity. This is 
because the bidding requirements in the Commission's regulations only 
apply to capacity releases and must result in a rate that the 
replacement shipper will pay to the pipeline for services using the 
released capacity. With regard to how releases with conditions 
concerning storage inventory may be posted, Commission policy allows 
releasing shippers to include in capacity release postings reasonable 
and non-discriminatory terms and conditions, provided that all such 
terms and conditions are posted on the pipeline's EBB, are objectively 
stated, are applicable to all potential bidders, and relate solely to 
the details of acquiring capacity on interstate pipelines.\111\ BP's 
first two suggestions for posting scenarios appear consistent with 
these requirements. The third, however, could be problematic in light 
of the fact that the commodity price would not be posted or objectively 
stated.
---------------------------------------------------------------------------

    \111\ Order No. 636-B at 61,996 (citing Order No. 636-A at 
30,557).
---------------------------------------------------------------------------

V. Liquefied Natural Gas

    139. In Order No. 712, the Commission rejected a request that 
parties be allowed to link throughput agreements and/or sales of gas at 
the outlet of an NGA Section 3 liquefied natural gas (LNG) terminal 
with a prearranged capacity release on an interstate pipeline connected 
to the terminal, akin to the exemption for AMAs that allows the tying 
of released capacity to gas sales agreements. Several parties \112\ had 
argued that LNG importers often hold firm capacity on interstate 
pipelines adjacent to the terminals to ensure that re-gasified LNG can 
exit the terminal efficiently and be transported to the markets on the 
interstate pipeline grid. The requesting parties suggested that the 
Commission should recognize and permit the natural link between an LNG 
terminal throughput agreement and an agreement to release downstream 
pipeline capacity and clarify that such a tie is permissible.
---------------------------------------------------------------------------

    \112\ Statoil and Shell LNG.
---------------------------------------------------------------------------

    140. The Commission declined to grant the LNG importers' request in 
Order No. 712. The Commission noted that Order No. 712 permitted the 
use of supply side AMAs and that LNG importers holding firm capacity on 
interstate pipelines connected to an LNG terminal were free to use a 
supply AMA. The Commission also found that the requesters had not 
provided adequate detail on the types of transactions for which they 
were requesting the exemptions to explain why a further exemption 
beyond that provided for supply AMAs is required for LNG facilities, 
and that it was unclear from their comments how far downstream they 
sought to have the exemption apply. The Commission also found that the 
record was insufficient to evaluate the possible benefits of the 
requested exemption or the effect on open access competition that such 
an exemption might have. The Commission stated that it was open to 
considering waiver requests on the issue on a case-by-case basis if 
presented to it in a fully justified proposal.
    141. Several parties seek rehearing of the Commission's decision. 
The LNG Petitioners argue that the Commission erred in declining to 
grant the requested clarification that it would be a permissible tie 
for permit holders of capacity at an LNG terminal to link throughput 
agreements and/or sales of gas at the outlet of an LNG terminal with a 
pre-arranged capacity release on an interstate pipeline directly 
connected to the LNG terminal, or alternatively to provide an exemption 
for such transactions.\113\ They also contend that the Commission erred 
by not granting an exemption from bidding for capacity releases 
included in such transaction. They assert the Commission erred further 
by concluding that LNG and pipeline capacity holders could instead use 
supply side AMAs, and that it was unreasonable for the Commission to 
grant tying and bidding exemptions for releases to implement AMAs and 
retail state unbundling programs but not for LNG capacity holders. 
Shell LNG makes similar arguments and the NGSA states that the 
exemption should be granted.
---------------------------------------------------------------------------

    \113\ In earlier comments the LNG Petitioners had requested only 
an exemption from the prohibition against tying. In their rehearing 
request, they now also seek an exemption from bidding because Order 
No. 712 removed the rate ceiling for short term releases. LNG 
Petitioners at 7, n. 20.
---------------------------------------------------------------------------

    142. The LNG Petitioners state that they have contracts with the 
owners of U.S. LNG terminals to use the capacity of those terminals to 
receive, store and regasify LNG. The LNG Petitioners also hold 
transportation capacity on open access interstate pipelines directly 
connected to the LNG terminal. Some of the terminals provide open 
access service pursuant to part 284 of the Commission's regulations. 
Other terminals are not open access, as

[[Page 72713]]

permitted by the Commission's Hackberry policy.\114\
---------------------------------------------------------------------------

    \114\ Hackberry LNG Terminal, L.L.C., 101 FERC ] 61,294 (2002) 
(Hackberry).
---------------------------------------------------------------------------

    143. The LNG Petitioners explain that they have been unable to 
enter into long-term contracts to purchase enough LNG from LNG 
suppliers, so that the LNG Petitioners can use their terminal and 
pipeline capacity for their own LNG. However, they assert that some LNG 
suppliers, including state-owned gas and oil companies and European and 
Asian utilities with significant natural gas reserves, are willing to 
negotiate arrangements under which the LNG Petitioners would, in 
essence, release both their terminal and interstate pipeline capacity 
to the LNG suppliers. The LNG suppliers would then use that capacity to 
import their own LNG into the United States, and they or their 
marketing affiliates would resell the regasified LNG in the downstream 
U.S. natural gas market. The LNG suppliers' use of the capacity would 
be sporadic, because it would depend on whether spot market gas prices 
and demand in competing markets justifies importing a particular LNG 
cargo into the U.S. The LNG Petitioners do not state what the term of 
these arrangements is likely to be, but it would appear that at least 
some of these arrangements would be for terms of between 31 days and 
one year, and thus would not qualify for the exemptions from bidding 
for either short term releases of 31 days or less or the exemption for 
maximum rate releases of more than a year.\115\
---------------------------------------------------------------------------

    \115\ The removal of the price cap for all releases of one year 
or less means that all releases of more than 31 days and less than a 
year must be posted for bidding, unless they are made as part of an 
AMA or retail access program.
---------------------------------------------------------------------------

    144. The LNG Petitioners and others contend that the above 
described transactions generally cannot be structured as supply side 
AMAs. They state that the traditional AMA model, where the releasing 
shipper is releasing capacity to an expert that will help to manage 
capacity that the releasing shipper still needs to serve its own supply 
function, does not fit their situation. In the context of the tying and 
bidding exemptions requested for LNG the terminal capacity holder is 
not seeking to have a third party manage or market that capacity. 
Rather, the capacity holder is attempting to demonstrate to the LNG 
supplier firm takeaway capacity from the LNG terminal so that the 
supplier will not strand its gas in the terminal. Therefore, they 
assert that the Commission's amendment of its regulations to permit 
supply side AMAs is not an adequate substitute for the exemptions they 
seek.
    145. The Commission clarifies that with respect to LNG terminals 
providing open access service, where both the LNG terminal and the 
directly connected interstate pipeline are facilities subject to the 
Commission's Part 284 open access regulations, a holder of capacity in 
the LNG terminal has the right to release both its terminal capacity 
and its capacity on the downstream pipeline pursuant to the 
Commission's capacity release program. As the Commission stated in 
Order No. 712, existing Commission policy permits releasing shippers to 
tie releases of upstream and downstream capacity, and requires the 
replacement shipper to take a release of the aggregated contracts on 
both pipelines.\116\ Thus, existing policy permits the holder of 
capacity in an open access LNG terminal to require a replacement 
shipper to take a release of both its terminal capacity and its 
pipeline capacity. In addition, even if the releases were not made as 
part of an AMA, the tied releases would be exempt from bidding if they 
qualified for either of the standard bidding exemptions of section 
284.8(h) for releases of 31 days or less or prearranged releases to an 
LNG supplier for more than a year at the maximum rate. However, if the 
release were for a term of between 31 days and a year, the LNG capacity 
holder would have to post for third party bids any prearranged tied 
release with an LNG supplier. That is necessary to ensure that the tied 
release is made to the person placing the highest value on the subject 
capacity.
---------------------------------------------------------------------------

    \116\ Order No. 712 at P 127 n.123 (citing, Order No. 636-A at 
30,558 and n. 144).
---------------------------------------------------------------------------

    146. The Commission denies rehearing, however, with respect to non-
open access LNG terminals. Such terminals are not subject to the 
Commission's open access policy, and any releases or assignments of 
terminal capacity would not be made pursuant to the Commission's 
capacity release program. Thus, there is no Commission process to 
ensure that a release of terminal capacity would be non-discriminatory 
and transparent. As noted by the LNG Petitioners, transfers of terminal 
capacity may be accomplished in a myriad of ways depending on the 
specifics of the agreements between the terminal owners and the 
capacity holders, including through a buy/sell arrangement. Thus, the 
Commission continues to lack sufficient knowledge about how the 
arrangements for use of a non-open access terminal may be structured to 
permit a generic decision in this rulemaking proceeding. Nor do we have 
a sufficient record at this time to evaluate the possible benefits of 
such an exemption or the effect on open access competition that such an 
exemption may have. Accordingly, the Commission does not find it 
reasonable to grant the requested blanket exemptions from tying and 
bidding in this rulemaking proceeding in the context of a non-open 
access LNG terminal. As stated in Order No. 712, the Commission is open 
to considering waiver requests for such transactions on a case-by-case 
basis if presented to it in a fully justified proposal.

VI. Information Collection Statement

    147. Order No. 712 contains information collection requirements for 
which the Commission obtained approval from the Office of Management 
and Budget (OMB). The OMB Control Number for this collection of 
information is 1902-0169. This order generally denies requests for 
rehearing and clarifies certain provisions of Order No. 712. This order 
does not make substantive modifications to the Commission's information 
collection requirements and, accordingly, OMB approval for this order 
is not necessary. However, the Commission will send a copy of this 
order to OMB for informational purposes.

VII. Document Availability

    148. 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.
    149. 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.
    150. User assistance is available for eLibrary and the FERC's 
website during normal business hours from FERC Online Support at 202-
502-6652 (toll free at 1-866-208-3676) or email 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].

[[Page 72714]]

VIII. Effective Date and Congressional Notification

    151. These regulations will become effective December 31, 2008.

List of Subjects in 18 CFR Part 284

    Continental shelf, Natural gas, and Reporting and recordkeeping 
requirements.

    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.

0
In consideration of the foregoing, the Commission amends Part 284, 
Chapter I, Title 18, Code of Federal Regulations, as follows:

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

0
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.

0
2. Amend Sec.  284.8 as follows:
0
a. Paragraphs (b) and (h) are revised to read as follows:


Sec.  284.8  Release of firm capacity on interstate pipelines.

* * * * *
    (b)(1) Firm shippers must be permitted to release their capacity, 
in whole or in part, on a permanent or short-term basis, without 
restriction on the terms or conditions of the release. A firm shipper 
may arrange for a replacement shipper to obtain its released capacity 
from the pipeline. A replacement shipper is any shipper that obtains 
released capacity.
    (2) The rate charged the replacement shipper for a release of 
capacity may not exceed the applicable maximum rate, except that no 
rate limitation applies to the release of capacity for a period of one 
year or less if the release is to take effect on or before one year 
from the date on which the pipeline is notified of the release. 
Payments or other consideration exchanged between the releasing and 
replacement shippers in a release to an asset manager as defined in 
paragraph (h)(3) of this section are not subject to the maximum rate.
* * * * *
    (h)(1) The following releases need not comply with the bidding 
requirements of paragraphs (c) through (e) of this section:
    (i) A release of capacity to an asset manager as defined in 
paragraph (h)(4) of this section;
    (ii) A release of capacity to a marketer participating in a state-
regulated retail access program as defined in paragraph (h)(5) of this 
section;
    (iii) A release for more than one year at the maximum tariff rate; 
and
    (iv) A release for any period of 31 days or less.
    (v) If a release is exempt from bidding under paragraph (h)(1) of 
this section, notice of the release must be provided on the pipeline's 
Internet Web site as soon as possible, but not later than the first 
nomination, after the release transaction commences.
    (2) When a release of capacity is exempt from bidding under 
paragraph (h)(1)(iv) of this section, a firm shipper may not roll over, 
extend or in any way continue the release to the same replacement 
shipper using the 31 days or less bidding exemption until 28 days after 
the first release period has ended. The 28-day hiatus does not apply to 
any re-release to the same replacement shipper that is posted for 
bidding or that qualifies for any of the other exemptions from bidding 
in paragraph (h)(1) of this section.
    (3) A release to an asset manager exempt from bidding requirements 
under paragraph (h)(1)(i) of this section is any pre-arranged release 
that contains a condition that the releasing shipper may call upon the 
replacement shipper to deliver to, or purchase from, the releasing 
shipper a volume of gas up to 100 percent of the daily contract demand 
of the released transportation or storage capacity, as provided in 
paragraphs (h)(3)(i) through (h)(3)(iii) of this paragraph.
    (i) If the capacity release is for a period of one year or less, 
the asset manager's delivery or purchase obligation must apply on any 
day during a minimum period of the lesser of five months (or 155 days) 
or the term of the release.
    (ii) If the capacity release is for a period of more than one year, 
the asset manager's delivery or purchase obligation must apply on any 
day during a minimum period of five months (or 155 days) of each 
twelve-month period of the release, and on five-twelfths of the days of 
any additional period of the release not equal to twelve months.
    (iii) If the capacity release is a release of storage capacity, the 
asset manager's delivery or purchase obligation need only be up to 100 
percent of the daily contract demand under the release for storage 
withdrawals or injections, as applicable.
    (4) A release to a marketer participating in a state-regulated 
retail access program exempt from bidding requirements under paragraph 
(h)(1)(ii) of this section is any prearranged capacity release that 
will be utilized by the replacement shipper to provide the gas supply 
requirement of retail consumers pursuant to a retail access program 
approved by the state agency with jurisdiction over the local 
distribution company that provides delivery service to such retail 
consumers.

[FR Doc. E8-28217 Filed 11-28-08; 8:45 am]
BILLING CODE 6717-01-P