[Federal Register Volume 89, Number 62 (Friday, March 29, 2024)]
[Proposed Rules]
[Pages 22097-22101]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06562]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM22-17-000]


Petition for Rulemaking To Update Commission Regulations 
Regarding Allocation of Interstate Pipeline Capacity

AGENCY: Federal Energy Regulatory Commission.

ACTION: Petition for rulemaking.

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SUMMARY: In this Petition for rulemaking, the Federal Energy Regulatory 
Commission (Commission) seeks additional information concerning the 
practices of interstate natural gas pipelines related to the packaging 
of non-contiguous and/or operationally unrelated segments of capacity 
in a

[[Page 22098]]

single auction or open season and the aggregation of bids across those 
segments to determine the highest value bid for the purpose of 
allocating capacity, as well as comment on whether the Commission 
should continue to allow such practices.

DATES: Comments are due June 27, 2024, and reply comments are due July 
29, 2024.

ADDRESSES: Comments, identified by docket number, may be filed in the 
following ways. Electronic filing through http://www.ferc.gov, is 
preferred.
     Electronic Filing: Documents must be filed in acceptable 
native applications and print-to-PDF, but not in scanned or picture 
format.
     For those unable to file electronically, comments may be 
filed by USPS mail or by hand (including courier) delivery.
    [cir] Mail via U.S. Postal Service Only: Addressed to: Federal 
Energy Regulatory Commission, Secretary of the Commission, 888 First 
Street NE, Washington, DC 20426.
    [cir] Hand (including courier) Delivery: Deliver to: Federal Energy 
Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.
    The Comment Procedures Section of this document contains more 
detailed filing procedures.

FOR FURTHER INFORMATION CONTACT: 

Catherine Liow (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE, 
Washington, DC 20426, 202-502-6459
David Faerberg (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE, Washington, 
DC 20426, 202-502-8275

SUPPLEMENTARY INFORMATION: 
    1. In this Petition for rulemaking, the Commission seeks 
information concerning the practices of interstate natural gas 
pipelines related to the packaging of non-contiguous and/or 
operationally unrelated segments of capacity in a single auction or 
open season and the aggregation of bids across those segments to 
determine the highest value bid for the purpose of awarding capacity, 
as well as comment on whether the Commission should continue to allow 
such practices. Specifically, the Commission seeks comment on: (1) 
additional information and data on interstate natural gas pipeline 
posting practices related to the packaging of non-contiguous and/or 
operationally unrelated segments of capacity in a single auction or 
open season; (2) relevant information that bears on whether the 
Commission should reconsider its policy; and (3) what regulatory, 
economic, or policy goals would or would not be achieved by modifying 
the current policy.

I. Background

    2. Pursuant to the Commission's regulations, a pipeline must post 
available firm capacity on its website as it becomes available.\1\ The 
pipeline may sell that capacity in several non-discriminatory ways, 
such as through a first-come, first-served or auction method. Prior to 
pipelines proposing tariff provisions detailing how they would evaluate 
bids for capacity, most pipelines simply allocated capacity on a first-
come, first-served basis. Pursuant to this approach, ``[t]he first 
shipper to submit a request received the available capacity, even if 
the shipper requested service for only a few days or weeks while others 
sought transportation for longer periods.'' \2\
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    \1\ 18 CFR 284.13(d)(1).
    \2\ Process Gas Consumers Grp. v. FERC, 292 F.3d 831, 833 (D.C. 
Cir. 2002) (Process Gas Consumers).
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    3. While some pipelines still use a first-come, first-served 
method, it is now more common for pipelines to use an auction method to 
award available capacity. Under this approach, and consistent with the 
terms of their tariffs, pipelines can conduct an open season announcing 
available capacity and stating criteria for an acceptable bid, the 
method for determining the best bid, and the bid closing date.\3\ 
Pipelines evaluate capacity bids submitted during the open season 
timeframe on a net present value (NPV) basis, which is the discounted 
cash flow of incremental revenues that the pipeline receives that are 
based upon such factors as the price, term, and quantity of 
transportation service.
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    \3\ The Commission does not require pipelines to sell capacity 
solely through open seasons. So long as the pipeline posts all 
available firm capacity, it may sell that capacity on a first-come, 
first-served basis depending on the pipeline's tariff. Tenn. Gas 
Pipeline Co., 119 FERC ] 61,126, at P 20 (2007) (citing N. Nat. Gas 
Co., 110 FERC ] 61,361, at P 10 (2005)). The Commission has provided 
pipelines with some degree of flexibility in how they market their 
capacity to accomplish the goal of enabling those who value capacity 
the most to obtain it, because the Commission assumes that the 
pipeline will generally seek the highest possible rate from those to 
whom it sells capacity, since that is in the pipeline's economic 
interest. See, e.g., ANR Pipeline Co., 116 FERC ] 61,201, at P 9 
(2006).
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    4. The Commission allows pipelines to include multiple segments 
(including non-contiguous and/or operationally unrelated segments) of 
capacity together in an open season for the purposes of accepting and 
aggregating bids to determine NPV and award the capacity to the highest 
bidder.\4\ Bid values for each capacity segment cannot be greater than 
the maximum recourse rate for that segment. Moreover, shippers are not 
required to bid on all segments posted in the open season. However, a 
competing shipper willing to bid on multiple or all segments of the 
posting may generate a higher NPV and therefore become the winning 
bidder. For example, a shipper choosing to bid the maximum recourse 
rate on a single segment of desired capacity would generate an NPV 
based on the incremental revenues from the maximum recourse rate on the 
term of that segment, but a competing shipper willing to bid on 
multiple or all segments posted by the pipeline may generate a higher 
NPV.\5\ The Commission has allowed the inclusion of non-contiguous and/
or operationally unrelated segments in capacity postings because the 
practice allows the pipeline to sell more capacity than it otherwise 
would, potentially benefiting shippers in the long run. Specifically, 
the Commission has found that maximum revenues and increased use of 
pipeline capacity will increase billing determinants and thereby lower 
unit fixed costs in a pipeline's next rate case.\6\
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    \4\ N. Border Pipeline, 164 FERC ] 61,150 (2018) (Northern 
Border); Transcon. Gas Pipe Line Co., LLC, 172 FERC ] 61,258 (2020) 
(Transco).
    \5\ Northern Border, 164 FERC ] 61,150 at P 23, Transco, 172 
FERC ] 61,258 at P 15.
    \6\ Northern Border, 164 FERC ] 61,150 at P 24.
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    5. The Commission, and subsequently the D.C. Circuit, have 
addressed issues concerning the competitive effects of the NPV 
evaluation in a narrower context and have maintained that capacity 
should be awarded to the bid with the highest valuation. This arose 
with respect to the length of the contract term in a proposal submitted 
by Tennessee Gas Pipeline Company (Tennessee). The court upheld the 
Commission's decision to accept Tennessee's proposed NPV evaluation 
method for awarding pipeline capacity, which included no cap on the 
term of the contract in the NPV evaluation. The pipeline argued that, 
under this approach, it would be able to ``award firm capacity to those 
shippers who value the capacity most--that is, since rates are capped, 
to those shippers offering the longest contracts.'' \7\ The court 
stated, ``. . . as [the Commission] argues, the fact that shippers may 
at times bid up contract length likely reflects not an exercise of 
Tennessee's market power, but rather

[[Page 22099]]

competition for scarce capacity.'' \8\ The court supported the 
Commission's conclusion that ``an uncapped bidding process maximizes 
market efficiency by identifying which shipper is willing to pay the 
most--in terms of contract length--to obtain such capacity.'' \9\
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    \7\ Process Gas Consumers, 292 F.3d at 833.
    \8\ Id. at 837 (noting that, even under an NPV allocation 
method, the Commission regulates the rates pipelines may charge and 
requires them to sell available capacity at those rates, such that 
there is neither the legal ability to withhold existing capacity nor 
an incentive to refuse to build new capacity).
    \9\ Id. at 838.
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II. Petition

    6. On June 22, 2022, in Docket No. RM22-17-000, American Gas 
Association (AGA), American Public Gas Association (APGA), Process Gas 
Consumers Group (PGC), and Natural Gas Supply Association (NGSA) 
(collectively, Petitioners) filed a petition requesting that the 
Commission initiate a rulemaking to consider precluding interstate 
natural gas pipelines from aggregating bids on non-contiguous and/or 
operationally unrelated capacity segments to determine the highest 
value bid for the purpose of allocating capacity (Petition).
    7. Petitioners assert that the interstate natural gas pipeline 
practice of packaging high market value capacity with non-contiguous 
and/or operationally unrelated parcels of capacity that Petitioners 
consider to be unwanted capacity with little or no market value is 
becoming increasingly commonplace in the market. Petitioners submit 
that this practice results in unjust and unreasonable rates, distorts 
market pricing, removes the incentive for pipelines to build more 
capacity where needed, and constitutes illegal tying. Petitioners 
further contend that this practice effectively denies many shippers 
access to needed capacity and, as a practical matter, results in undue 
discrimination against industrial gas consumers, municipal gas systems, 
and local distribution utilities. They also allege that this practice 
results in higher prices for the ultimate gas consumers. Petitioners 
state that the Commission has only previously considered this issue 
within the narrow context of tariff filings by individual pipelines and 
not on a generic basis. Petitioners request that the Commission 
initiate a rulemaking to consider new regulations that would prevent 
interstate natural gas pipelines from continuing the practice of: (1) 
packaging non-contiguous and/or operationally unrelated segments of 
capacity in auctions; and (2) awarding capacity based on an NPV basis 
that includes the aggregate bids.
    8. Notice of the Petition was issued on June 15, 2022. 
Interventions, protests, and comments were due on or before July 18, 
2022. The notice did not provide for reply comments. Supporting 
comments were filed by seven entities.\10\ Comments in opposition or 
protests were filed by five entities.\11\
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    \10\ 1.5C, LLC, bp Energy Company, Interstate Power and Light 
Company, Continental Resources, Inc., and the Indicated Shippers 
(Ascent Resources-Utica, LLC, Chesapeake Energy Marketing, L.L.C., 
ConocoPhillips Company, Continental Resources, Inc., and XTO Energy 
Inc.). Sabine Pass Liquefaction, LLC and the National Association of 
Regulatory Utility Commissioners also filed late comments in support 
of the Petition.
    \11\ Interstate Natural Gas Association of America (INGAA), 
Transcontinental Gas Pipe Line Company, LLC (Transco), Northern 
Natural Gas Company (Northern Natural), Kinder Morgan, Inc. (Kinder 
Morgan), and ANR Pipeline Company and Northern Border Pipeline 
Company (jointly) (ANR and Northern Border).
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III. Commission Staff Informal Survey

    9. In 2019, in response to outreach from stakeholders concerned 
about bid aggregation for non-contiguous capacity postings,\12\ 
Commission staff (Staff) surveyed short-term capacity postings publicly 
available on 50 pipelines' Electronic Bulletin Boards (EBB).\13\ Staff 
identified a total of 98 firm capacity auction postings.\14\ Staff 
performed a similar informal survey in August 2023, reviewing publicly 
available capacity postings from most of the same pipelines but with 
some substitutions. Staff identified a total of 85 firm capacity 
auction postings.\15\ In its review, Staff focused on determining the 
frequency with which the pipelines offered non-contiguous paths 
available for bidding because such postings could reflect the practices 
opposed by the Petitioners. For the surveyed periods in 2019 and 2023, 
Staff identified 11 examples and 7 examples, respectively, of postings 
for non-contiguous paths for which the rules of the pipeline's NPV 
analysis stated that parties could increase the NPV of bids by bidding 
on additional segments of capacity. However, Staff could not determine 
whether any of these examples reflect the packaging of high-value 
capacity with low-value capacity criticized by the Petitioners because 
Staff did not analyze the market value of any paths.
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    \12\ According to comments filed by Indicated Shippers in the 
RM22-17-000 Petition for Rulemaking, high market value capacity can 
be considered ``jewel'' and capacity with little or no market or 
operational value can be considered ``junk.'' As argued in the 
Petition, Indicated Shippers assert that interstate natural gas 
pipelines can use ``jewel'' capacity to extract additional revenues 
for the ``junk'' capacity from those placing bids on the combined 
packages of ``junk'' and ``jewel'' capacity, distorting the value of 
the packages and resulting in higher prices for natural gas 
consumers. Indicated Shippers Comments at 2-3. We use the phrase 
``junk and jewel'' to refer to this scenario throughout the 
document.
    \13\ We note that pipelines are only required to publicly 
provide informational postings on their EBBs for 90 days. 18 CFR 
284.13(b). After the 90 days, pipelines are required to archive this 
information for a period of three years. 18 CFR 284.12(a)(3)(v).
    \14\ In conducting its survey, Staff did not examine postings 
related to new expansions, right-of-first-refusal, receipt point 
shifts, and reserving capacity.
    \15\ As noted above, in conducting its survey, Staff did not 
examine postings related to new expansions, right-of-first-refusal, 
receipt point shifts, and reserving capacity.
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IV. Request for Comments

    10. As part of ensuring that the Commission continues to meet its 
statutory obligations, the Commission, on occasion, engages in public 
inquiry to gauge whether there is a need to add to, modify, or 
eliminate certain policies or regulatory requirements. Following our 
review of the Petition and of Staff's 2019 and 2023 surveys, we are 
issuing this NOI to examine the practices of interstate natural gas 
pipelines related to the packaging of non-contiguous and/or 
operationally unrelated segments of capacity in a single auction or 
open season and the aggregation of bids across those segments to 
determine the highest value bid for the purpose of awarding capacity, 
as well as whether the Commission should continue to allow such 
practices. We invite comments from interested persons on what, if any, 
policy changes the Commission should implement, as well as the 
potential impacts of any such policy changes.
    11. We invite interested persons to submit comments and reply 
comments on any or all of the questions listed below. Commenters need 
not respond to all of the questions.

A. Frequency of the Inclusion of Aggregated Non-Contiguous Segments in 
Capacity Postings

    A1. In the Docket No. RM22-17-000 Petition for Rulemaking, 
Petitioners provided 15 examples of what they describe as ``junk and 
jewel'' postings from 2018 through 2022. If available, please provide 
the Commission with any more recent examples of postings pairing 
desirable, high-value capacity with unwanted, low-value capacity. 
Explain, with supporting data if possible, whether there has been a 
change in frequency of such postings since the filing of the Petition. 
Is the publicly available information on pipelines' EBBs sufficient to 
identify the frequency with which pipelines offer non-contiguous and/or 
operationally unrelated paths for aggregated bidding?
    A2. Please comment on the frequency with which shippers who were 
allowed to bid on multiple segments of capacity

[[Page 22100]]

were awarded capacity in the auction despite bidding on only a portion 
of the posted capacity.
    A3. It appears that the examples of ``junk and jewel'' scenarios 
provided by the Petition only include short-term (less than one year) 
capacity auctions. Please provide information that might explain why 
these scenarios are mostly occurring with short-term capacity auctions. 
If available, please provide specific examples of postings for long-
term (equal to or greater than one year) capacity that use bid 
aggregation with non-contiguous and/or operationally unrelated segments 
of capacity.
    A4. Please provide information on how and why non-contiguous and/or 
operationally unrelated segments are chosen to package together in the 
same open season. Comment as to what extent capacity that Petitioners 
label as ``junk'' is still required to serve certain markets.
    A5. Please explain if there are any seasonal trends for available 
capacity postings, particularly for any non-contiguous paths that 
appear together in postings. What are the times of year at which these 
situations occur for short-term, seasonal, and long-term capacity? 
What, if any, market conditions (time of year, pipeline-specific 
business practices, market scenarios, etc.) elevate the potential for 
pipelines to post capacity with bid aggregation for non-contiguous and/
or operationally unrelated capacity postings?

B. Impacts of Bid Aggregation on Pipeline Rates

    B1. Please explain whether and how shippers do or do not receive 
the benefit of a rate reduction related to capacity awards of short-
term capacity in rate cases (i.e., including billing determinants and 
revenues in the test period, along with selection of the test period 
itself). Provide examples from specific rate cases if possible. Include 
information about distance-based allocation and zoned billing 
determinants.
    B2. Petitioners claim that current Commission policy allows for 
pipelines to collect revenue from shippers above the Commission-
approved maximum tariff rates by packaging high-value segments with 
non-contiguous and/or operationally unrelated low-value segments. 
Please explain in more detail. If this practice is effectively allowing 
pipelines to collect over the maximum tariff rate, then please provide 
other methods for awarding capacity desired by multiple customers.

C. Customers and Operational Need

    C1. Petitioners argue that LDCs, municipal gas systems, and 
industrial customers have an operational need for segments of capacity 
to serve LDC load or a power plant or manufacturing facility but, due 
to various constraints, cannot justify bidding on other segments of the 
``effectively tied'' capacity that they do not need for their 
customers. Given the short-term nature of the example contracts cited 
by Petitioners, please describe how these short-term contracts would 
help meet long-term load growth and please explain alternative 
solutions employed by these entities to meet their load growth and/or 
long-term supply needs.
    C2. Please explain or provide specific examples of how certain 
shippers such as LDCs and municipal gas systems might not have the 
creditworthiness to bid on multiple unrelated paths to increase their 
chance of winning valuable capacity or how they might be subject to a 
prudence review from state regulators for bidding on non-contiguous 
and/or operationally unrelated capacity packages.
    C3. Please explain to what extent industrial customers are 
prohibited from bidding on non-contiguous and/or operationally 
unrelated capacity packages.

D. Potential Policy Changes

    D1. Please comment on whether the Commission should change its 
current policy, which allows bid aggregation on non-contiguous segments 
so long as shippers are not required to bid on undesired segments of 
capacity. Explain any issues that the Commission should consider when 
determining whether to make this policy change. What policy and/or 
regulation changes should the Commission implement if it determines 
that it should no longer allow interstate natural gas pipelines to 
package non-contiguous and/or operationally unrelated segments of 
capacity in an open season? Explain any additional issues that the 
Commission should consider if it were to make this policy change (e.g., 
how should the Commission determine whether segments of capacity are 
non-contiguous and/or operationally unrelated, etc.). Additionally, 
please provide any potential alternative policy change and explain how 
it would be implemented.
    D2. Explain how a policy change might affect short-term capacity 
auctions and how it would affect shippers (e.g., LDCs, marketers, 
producers, etc.) and interstate natural gas pipelines. Explain any 
interactions between this policy and the Commission's negotiated rate 
policy.\16\
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    \16\ Nat. Gas Pipelines Negotiated Rate Policies & Pracs.; 
Modification of Negotiated Rate Pol'y, 104 FERC ] 61,134 (2003), 
order on reh'g and clarification, 114 FERC ] 61,042, reh'g dismissed 
and clarification denied, 114 FERC ] 61,304 (2006).
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V. Comment Procedures

    12. The Commission invites interested persons to submit comments 
and reply comments on the matters and issues addressed in this 
document, including any related matters or alternative proposals that 
commenters may wish to discuss. Comments are due June 27, 2024 and 
reply comments are due July 29, 2024. Comments must refer to Docket No 
RM22-17-000 and must include the commenter's name, the organization 
they represent, if applicable, and their address in their comments.
    13. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's website at http://www.ferc.gov. The Commission accepts most standard word-processing 
formats. Documents created electronically using word-processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    14. Commenters that are not able to file comments electronically 
may file an original of their comment by USPS mail or by courier or 
other delivery services. For submissions sent via USPS only, filings 
should be mailed to: Federal Energy Regulatory Commission, Office of 
the Secretary, 888 First Street NE, Washington, DC 20426. Submission of 
filings other than by USPS should be delivered to: Federal Energy 
Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.

VI. Document Availability

    15. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
internet through the Commission's Home Page (http://www.ferc.gov).
    16. From the Commission'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.
    17. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
the Commission's Online Support at 202-

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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 or email at [email protected].

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

    By direction of the Commission.

    Issued: March 21, 2024.
Debbie-Anne Reese,
Acting Secretary.
[FR Doc. 2024-06562 Filed 3-28-24; 8:45 am]
BILLING CODE 6717-01-P