Natural Gas Regulation: Little Opposition to FERC's Recent Policies on
Transportation-Related Services (Letter Report, 12/21/94,
GAO/RCED-95-39).

During the past decade, Congress and the Federal Energy Regulatory
Commission (FERC) have taken several steps to lessen federal regulation
of the production and interstate transportation of natural gas.
Industry attention has now focused on regulatory changes in
transportation services.  This report reviews recent regulatory changes
affecting three aspects of the industry--the collection of gas from
wells for delivery to a processing plant or pipeline; the holding of
gas, normally in underground reservoirs, for later use; and the
interconnection points among several pipelines where gas and
transportation services can be obtained easily.  GAO discusses how
producers, pipeline companies, and end-users view these changes.  GAO
also reviews the Energy Department's (DOE) plans to intervene in
energy-related regulatory proceedings in the states and the extent to
which DOE plans to work with FERC in such interventions.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-39
     TITLE:  Natural Gas Regulation: Little Opposition to FERC's Recent 
             Policies on Transportation-Related Services
      DATE:  12/21/94
   SUBJECT:  Natural gas
             Natural gas storage
             Gas pipeline operations
             Independent regulatory commissions
             Natural gas prices
             Transportation rates
             Energy industry
             Collusion
             Energy marketing
             Gas resources
IDENTIFIER:  DOE Domestic Gas and Oil Initiative
             
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Cover
================================================================ COVER


Report to the Chairman, Environment, Energy, and Natural Resources
Subcommittee, Committee on Government Operations, House of
Representatives

December 1994

NATURAL GAS REGULATION - LITTLE
OPPOSITION TO FERC'S RECENT
POLICIES ON TRANSPORTATION-RELATED
SERVICES

GAO/RCED-95-39

FERC's Policies on Transportation Services


Abbreviations
=============================================================== ABBREV

  DOE - Department of Energy
  FERC - Federal Energy Regulatory Commission
  GAO - General Accounting Office

Letter
=============================================================== LETTER



B-258820

December 21, 1994

The Honorable Mike Synar
Chairman, Environment, Energy, and
 Natural Resources Subcommittee
Committee on Government Operations
House of Representatives

Dear Mr.  Chairman: 

Over the past decade, the Congress and the Federal Energy Regulatory
Commission (FERC) have taken a number of steps to lessen federal
regulation of the production and interstate transportation of natural
gas and to promote competition.  Attention in the industry has now
turned toward regulatory changes in the services related to
transportation.  You asked us to review recent regulatory changes
affecting three aspects of the industry--gathering (the collection of
gas from wells for delivery to a processing plant or pipeline);
storage (the holding of gas, normally in underground reservoirs, for
later use); and market hubs (interconnection points among several
pipelines where gas and transportation services can be obtained
easily).  Specifically, you requested that we ascertain how
producers, pipeline companies, and end-users view these changes.  In
addition, you asked that we review the Department of Energy's (DOE)
plans to intervene in energy-related regulatory proceedings in the
states and the extent to which DOE plans to interact with FERC in
such interventions. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

While FERC regulates rates for the gathering services performed by
interstate pipeline companies, in May 1994 the Commission concluded
that it does not have jurisdiction over the rates charged for
gathering by the affiliates of these companies.  As a result,
gathering affiliates are now able to charge rates that are
competitive with those charged by other unregulated gatherers, such
as producers.  However, FERC said that it would use its authority
over the pipeline companies to regulate an affiliate of a pipeline
company if the affiliate and its parent company act together in a
collusive and anticompetitive manner.  Many segments of the industry,
including interstate pipeline companies, local distribution
companies, and end-users, find FERC's new policy acceptable. 
Producers generally believe that it is too early to determine the
effects of FERC's new policy.  However, several producers are
concerned that, under the new policy, they may not be able to obtain
fair rates, terms, and conditions of service for their existing wells
from gathering affiliates. 

FERC has historically set the rates for interstate storage service on
the basis of the storage operator's cost of providing this service. 
However, in several cases since 1992, FERC has determined that
competition is sufficient to allow storage operators to charge rates
that are set by the market.  No segment of the industry has objected
to the use of market-based rates in locations where the storage
market is competitive. 

While FERC does not currently regulate market hubs, it sets the rates
for the services an interstate pipeline company provides throughout
its system, including the services performed at hubs.  In order to
compete better at market hubs, a few pipeline companies have asked
permission to vary their rates from those set by FERC.  FERC has
agreed and is allowing these pipeline companies to charge rates that
are generally lower than the existing cost-of-service rates. 
According to FERC officials and industry analysts, market hubs are
still in the early stages of development.  As a result, it is too
early to determine what FERC's regulatory role should be, if any. 

DOE plans to intervene or participate in energy-related regulatory
proceedings in the states, or collaborate in less formal ways, when
it believes its participation can result in a more comprehensive
assessment of policy options for energy.  DOE officials have stated
that the Department will be sensitive to the states' authority and
that its participation in state regulatory proceedings will be
limited primarily to submitting expert written or oral testimony. 
Although FERC's role in regulating utilities precludes close
coordination with DOE, the two agencies have established a working
group to ensure that their staffs interact and are aware of the goals
and objectives of each other's programs and policies. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Natural gas gathering is the collection of gas from the wellhead for
delivery to the processing plant or transportation pipeline. 
Compared with transportation pipelines, gathering lines are generally
smaller in diameter and shorter in length, and require relatively
lower pressure to push the gas through the line.  According to a
recent report, over 2,100 companies perform gathering services in the
states that produce natural gas.\1

Natural gas storage involves the transfer of natural gas from the
production field to a depleted underground reservoir or other holding
facility for later use.  Gas is generally injected into storage
facilities during warmer months, when demand is lower, and withdrawn
during winter months.  Traditionally, pipeline companies use storage
to manage and balance the movement of gas throughout their systems. 
Local distribution companies--the companies that deliver gas from the
interstate pipeline to the ultimate end-user--have a critical need
for storage because they must provide gas on demand to residential
end-users and other customers who lack the ability to switch to
another fuel when gas is not available.  According to the Energy
Information Administration, as of December 31, 1993, a total of 103
operators were providing storage service in the United States.  These
operators included pipeline companies, local distribution companies,
and independent marketers. 

Market hubs are areas where several pipelines connect, generally near
a production area, storage field, or major market area.  A relatively
new phenomenon in the industry, hubs create central points where many
buyers and sellers can come together to obtain natural gas and a
variety of services.  These services can be physical, such as
transportation, storage, or the transfer of gas from one pipeline to
another, or they can be contractual, such as the trading of titles to
gas supplies.  In theory, market hubs can improve the efficiency and
flexibility of the interstate gas market by increasing producers' and
end-users' access to each other and by reducing transaction costs
when they make deals.  According to FERC, as of July 1994, there were
19 market centers operating in the United States, and another 11 are
scheduled to be opened by the end of 1995.  Each of these hubs has an
administrator who oversees its operation and performs a variety of
functions, such as tracking the exchange of titles to gas supplies,
invoicing customers for services, and allocating pipeline capacity
and services at the hub when they are in short supply. 


--------------------
\1 Profile of Natural Gas Gathering in the U.S., Foster Associates,
Inc., 1994, p.  17. 


   INDUSTRY'S REACTION IS MIXED TO
   FERC'S NEW POLICY ON GATHERING
------------------------------------------------------------ Letter :3

In May 1994, FERC announced its policy on interstate pipeline
companies' gathering affiliates.  In a series of seven orders, the
Commission concluded that it does not have the authority to regulate
the rates charged by affiliates.  However, FERC added that it could
use its authority to regulate the rates charged by interstate
pipeline companies for gathering, transportation, and other services
to regulate a gathering affiliate if the affiliate and its parent
pipeline company act together in a collusive and anticompetitive
manner.  This policy has generally been accepted by pipeline
companies, local distribution companies, and end-users.  While
producers are generally reserving judgment on the new policy, several
are concerned about its effect on their ability to negotiate fair
agreements with gathering affiliates.\2


--------------------
\2 App.  I provides a more detailed discussion of FERC's previous
policies on gathering services. 


      FERC'S REGULATION OF
      GATHERING SERVICES
---------------------------------------------------------- Letter :3.1

FERC has traditionally included the costs of gathering services
provided by interstate pipeline companies in the rates it approves
for such companies.  FERC does not regulate the rates for gathering
services provided by other entities, such as producers.  Most of
these unregulated gatherers, who provide almost 70 percent of the
gathering services in the United States, are free to negotiate with
their customers on the rates, terms, and conditions of service. 

Since the early 1990s, several interstate pipeline companies have
created affiliates to provide their gathering services.  These
pipeline companies asked FERC for permission to sell their gathering
facilities to the new affiliates.  The requests created a need for
FERC to clarify its policy on gathering affiliates. 


      1994 ORDERS CLARIFY FERC'S
      POLICY ON GATHERING
---------------------------------------------------------- Letter :3.2

On May 27, 1994, FERC issued a series of seven orders that, taken
together, define its new policy on gathering.\3 In these orders, FERC
elaborating that it does not have the authority to regulate the
rates, terms, and conditions of the gathering services provided by
interstate pipeline companies' affiliates.  As a result, when
pipeline companies sell their gathering facilities to their
affiliates, the rates these affiliates charge will no longer be under
FERC's regulation. 

However, FERC also said it would do the following: 

Require pipeline companies, before they sell their gathering
facilities to an affiliate or unregulated third party, to negotiate
new contracts with existing customers.  If the pipeline company is
unable to reach agreement with a customer, it must offer a "default
contract" that reflects the rates, terms, and conditions of service
offered by the independent gatherers in the region.  If the customer
refuses the default contract, it loses its guarantee of continued
service.  FERC imposed this condition to protect existing customers
that had entered into arrangements with pipeline companies for
gathering services expecting that these services would be regulated
by FERC. 

Assert jurisdiction over gathering affiliates if it finds, upon a
customer's complaint, that the affiliate and its parent pipeline
company have acted together in a collusive and anticompetitive
manner.  For example, FERC could assert its jurisdiction, as part of
its regulation of the pipeline company, if a gathering affiliate
requires a customer to transport gas on the parent company's
pipeline.  Under the new policy, FERC will regulate a gathering
affiliate only if the affiliate acts with its parent company in an
anticompetitive manner. 

In analyzing its jurisdiction, FERC asserted that sections 4 and 5 of
the Natural Gas Act give it the authority to regulate gathering
performed by natural gas companies (i.e., interstate pipeline
companies) "in connection with" interstate transportation.  Gathering
affiliates, because they perform only a gathering function, are not
natural gas companies as defined by the act.  Thus, FERC reasoned
that gathering affiliates are not under its jurisdiction.  FERC
determined, however, that it may assert jurisdiction when the
pipeline company and its gathering affiliate act together to
discriminate because they are then effectively acting as a single
natural gas company involved in the interstate transportation of
natural gas. 


--------------------
\3 These orders are listed in app.  II. 


      REACTION TO FERC'S GATHERING
      POLICY IS MIXED
---------------------------------------------------------- Letter :3.3

The Interstate Natural Gas Association of America, the trade
association that represents interstate pipeline companies, has stated
that it is pleased with FERC's new policy and believes the policy
will promote competition and regulatory certainty.  As a result of
this policy, pipeline companies will be able to sell their gathering
facilities to affiliates, which, in turn, can set rates that are
competitive with those set by unregulated gatherers.  According to an
association official responsible for policy issues, many pipeline
companies plan to sell their gathering facilities to either
affiliates or independent third parties in response to the new
policy. 

The representatives of local distribution companies and end-users we
interviewed expressed little concern about FERC's new policy on
gathering.  An official of the American Gas Association, which
represents, among others, larger distribution companies, stated that
the association has received no complaints from the local
distribution companies among its members about the new policy. 
According to a representative of municipal distributors, smaller
distribution companies have little interest in the issue of
gathering.  Distribution companies and the residential, commercial,
and industrial end-users to whom they deliver gas are more concerned
about the price of gas supplies, which is determined by the market. 
Because gathering rates affect the division of proceeds from gas
sales, they concern only producers and gatherers. 

In contrast to other segments of the industry, producers generally
believe that it is too early to determine the effects of FERC's new
policy.  According to a representative of the Natural Gas Supply
Association, the trade association representing major producers,
several producers are concerned that they will not be able to get
fair rates, terms, and conditions of service in their negotiations
with pipeline companies or in default contracts.  Although producers
are generally pleased that FERC will review the sale of gathering
facilities to affiliates on a case-by-case basis, several believe
that unless FERC establishes clearer guidelines on the terms of the
default contracts, the affiliates that have market power could impose
significantly higher rates for gathering services for existing wells. 
In cases in which a producer and a gathering affiliate cannot reach a
new agreement, producers would like to continue the rates, terms, and
conditions of service that existed when they originally drilled the
well. 

Some producers have asked FERC to reconsider its new gathering
policy.  A group of six major producers, known as the "Indicated
Parties," and the Independent Petroleum Association of America have
filed motions with FERC objecting to the new policy and requesting a
new hearing.  In the grounds for rehearing, the Indicated Parties and
the association contend, among other things, that (1) FERC should
regulate gathering affiliates, (2) FERC erred in approving pipeline
companies' sale of gathering facilities to their affiliates without
showing that the relevant gathering markets were competitive, and (3)
the provision requiring default contracts needs reconsideration or
clarification.  In addition, the Indicated Parties provided FERC with
an offer of settlement in one of the seven cases.  In this offer, the
Indicated Parties agree to accept the sale of gathering facilities by
the pipeline company to its affiliates if, among other things, FERC
retracts its determination that it lacks jurisdiction over gathering
affiliates.  On November 30, 1994, FERC denied the requests for
rehearing, but it also amended the requirements of default contracts. 
According to the new guidelines, when a pipeline company sells its
gathering facilities to an affiliate or independent gatherer,
existing customers will be able to purchase gathering services from
the new provider at the current cost-of-service rates for a period of
up to 2 years. 


   FERC HAS APPROVED MARKET-BASED
   RATES FOR STORAGE
------------------------------------------------------------ Letter :4

FERC's jurisdiction over storage is limited to the storage of gas
transported in the interstate market.  As a result, FERC has
regulatory authority primarily over storage facilities owned by
interstate pipeline companies.  According to the Energy Information
Administration, these facilities hold about 61 percent of the total
gas stored in the United States.  As in the case of gathering and
transportation, FERC has traditionally set the rates for storage
according to a storage operator's cost of providing service. 

Since 1992, however, FERC has approved the use of market-based rates
for storage services in six orders.\4 In each case, FERC has required
the storage provider to show that it lacks the power to set rates
above competitive levels in the local storage market.  To do so, the
storage provider must demonstrate that there are good alternatives to
its service.  FERC has defined a "good alternative" as one that "is
available soon enough, has a price that is low enough, and has a
quality high enough to permit customers to substitute the
alternative" for the storage provider's service.\5

None of the industry representatives we interviewed expressed concern
over FERC's use of market-based rates in areas where the storage
market is competitive.  According to a FERC official, storage
customers expressed no objections in the six cases in which FERC has
approved market-based rates. 


--------------------
\4 These orders are listed in app.  II. 

\5 Koch Gateway Pipeline Company, 66 FERC ï¿½ 61,385, 62,302 (1994). 


   FERC HAS ISSUED NO POLICIES ON
   MARKET HUBS
------------------------------------------------------------ Letter :5

FERC currently has no regulations specifically aimed at market hubs. 
FERC regulates the rates charged by an interstate pipeline company
for the services, such as transportation and storage, that it
provides at a hub.  However, the rates for these services are set in
the same way--on the basis of a company's cost of providing the
service--as the rates for the services the pipeline company provides
outside the market hub.  According to an official with FERC's Office
of Pipeline Regulation, as of October 1994, a few pipeline companies
have asked FERC to let them vary from these rates so that they can
compete more effectively at market hubs.  However, the rates they
seek to use are not market-based.  Instead, these rates, known as
"market center rates," are still derived from the existing
cost-of-service rates.  However, they are generally lower than the
full cost-of-service rates. 

FERC officials believe that it is too early in the development of
hubs to determine what, if any, regulatory role the Commission should
play or what rates it should approve.  The structure and workings of
market hubs are still evolving.  As a result, according to FERC's
Director of the Office of Pipeline Regulation, FERC has not dealt
with the issue. 

Most of the industry representatives with whom we spoke agreed that
it is too early to determine how market hubs should be regulated, if
at all.  According to an official with the American Gas Association,
none of its members have voiced complaints about operations at the
hubs.  Moreover, the association maintains that FERC should generally
rely on market forces unless it finds compelling evidence of market
failures. 

However, some marketers have expressed concern that some hubs are
being administered by competing marketers.  According to those
concerned, these hub administrators may have an incentive to use
their access to information about competitors' deals at hubs to their
competitive advantage.  Others in the industry believe that conflicts
of interest may not be a problem.  They contend that the hub
administrators will be reluctant to exploit their access to
information because, if they do, no one will be willing to use their
hub. 


   DOE'S PARTICIPATION IN
   REGULATORY PROCEEDINGS IS PART
   OF A LARGER EFFORT
------------------------------------------------------------ Letter :6

As part of an overall strategy to work in a more collaborative manner
in developing energy policy, DOE plans to participate in FERC and
state regulatory proceedings.\6 DOE officials say they will be
sensitive to the states' authority when interacting with state
governments.  Although DOE has not participated in a proceeding
involving natural gas issues, it has participated in several FERC and
state proceedings involving electric utility issues.  DOE has other
ongoing efforts, including sponsorship of conferences and workshops,
intended to contribute to its overall strategy.  DOE and FERC have
also established a working group to increase mutual understanding on
natural gas and oil issues. 


--------------------
\6 According to DOE officials, their strategy for participation may
extend to other federal agencies that could affect energy policy,
such as the Environmental Protection Agency. 


      DOE'S PARTICIPATION STRATEGY
      INCORPORATES NUMEROUS GOALS
---------------------------------------------------------- Letter :6.1

In October 1993, DOE established the Utility Commission Proceedings
Participation Program as a mechanism through which it can participate
in FERC and state regulatory proceedings on energy.  This program
provides for DOE's participation when DOE's technical and policy
expertise could lead to a greater understanding of the available
policy options.  DOE's participation in regulatory proceedings will
consist primarily of submitting written comments and testimony and,
in some cases, having DOE officials testify as expert witnesses. 

DOE announced in February 1994 that it would use its participation
program as a means to implement its Domestic Natural Gas and Oil
Initiative.  This initiative, announced in December 1993, includes
proposals for, among other things, reforming regulatory structures at
both the federal and state level that may be inhibiting a more
efficient use of natural gas and electric power.  At the federal
level, the initiative targets improving the use of gas pipeline
capacity and encouraging the full use of the electric power
transmission system.  At the state level, the initiative focuses on
potential regulatory reforms, such as revising pricing strategies for
natural gas and electric power and ending subsidies for specific
fuels. 


      DOE SAYS IT WILL NOT BE
      PRESCRIPTIVE
---------------------------------------------------------- Letter :6.2

DOE officials responsible for the Department's participation in
regulatory proceedings say that they do not intend to be prescriptive
or adversarial in their interactions with federal or state agencies. 
Rather, they stated that they want to draw on their technical
expertise and act as advocates of particular policies on energy.  DOE
officials also pointed out that several of the Department's key
executive-level staff involved in this effort have extensive
experience in federal and state energy regulation and thus have an
appreciation of the issues of federal and state authority that
frequently arise in the energy arena. 


      DOE HAS PARTICIPATED IN
      REGULATORY PROCEEDINGS
---------------------------------------------------------- Letter :6.3

Although DOE has yet to participate in a regulatory proceeding
involving natural gas issues, it has participated in several FERC and
state regulatory proceedings involving electric utilities.  DOE
officials explained that they have not yet decided on a strategy for
participating in proceedings involving natural gas. 

DOE has participated in several FERC proceedings within the past
year.  For example, it submitted comments in two electric utility
cases before FERC involving cost recovery issues resulting from the
decommissioning of nuclear power plants. 

The state proceedings in which DOE has participated primarily
involved states' efforts to examine proposed changes to the
regulation of electric utility companies.  In some cases, DOE
submitted written comments; in other cases, DOE officials appeared as
expert witnesses before state utility commissions. 


      OTHER EFFORTS ARE INTENDED
      TO CONTRIBUTE TO
      COLLABORATIVE APPROACH
---------------------------------------------------------- Letter :6.4

In addition to its strategy for participating in regulatory
proceedings, DOE's other ongoing efforts may also help the Department
work in a more collaborative manner with federal and state regulators
in developing energy policy.  These efforts include sponsoring annual
conferences and participating in industry meetings and workshops. 
For example, since 1992 DOE has cosponsored an annual conference with
the National Association of Regulatory Utility Commissioners to
discuss issues facing the natural gas industry.\7


--------------------
\7 The National Association of Regulatory Utility Commissioners
represents the interests of the nation's state public utility
commissions. 


      DOE AND FERC HAVE
      ESTABLISHED A WORKING GROUP
---------------------------------------------------------- Letter :6.5

To carry out the goals of its Domestic Natural Gas and Oil
Initiative, DOE established a working group with FERC intended to
facilitate discussions between the two agencies and allow a better
understanding of the goals and objectives of each other's programs
and policies.  However, because FERC is responsible for regulating
electric and gas utilities, the working group will be restricted from
discussing any proceedings ongoing before FERC.  The working group
has had one meeting at which the two agencies mainly provided status
reports on their current and planned efforts involving electric, gas,
and hydropower issues.  Officials from both agencies who participated
in the meeting expressed satisfaction with the working group and
agreed that it should continue to meet. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

As requested, we did not obtain written agency comments on this
report.  However, we discussed the information in the report with
various FERC officials, including the Director of the Office of
Pipeline Regulation, the Director of the Office of Economic Policy,
and the General Counsel.  We also discussed the information in the
report with DOE's Director of Natural Gas Policy and officials
responsible for DOE's participation in FERC and state regulatory
proceedings.  To ensure that we characterized industry's views
accurately, we also discussed information in the report with
officials from the industry associations mentioned in this letter. 
FERC, DOE, and industry officials all agreed with the factual
material presented; they suggested minor technical changes that we
incorporated where appropriate. 


---------------------------------------------------------- Letter :7.1

We performed our work between March and November 1994 in accordance
with generally accepted government auditing standards.  Appendix III
describes the scope and methodology of our review in detail. 

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 15 days after the date of this
letter.  At that time, we will send copies to congressional energy
committees and other interested parties.  We will also make copies
available to others on

If you or your staff have any questions or need additional
information, please call me at (202) 512-3841.  Major contributors to
this report are listed in appendix IV. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy and
 Science Issues


PREVIOUS POLICIES ON GATHERING
=========================================================== Appendix I

Under sections 4 and 5 of the Natural Gas Act, as amended, the
Federal Energy Regulatory Commission (FERC) has traditionally
regulated the rates, terms, and conditions of all services provided
by interstate pipeline companies in connection with the interstate
transportation of natural gas.\1 In Northern Natural Gas Company v. 
FERC, a federal appeals court interpreted the act so that FERC's
authority extends to regulating the gathering services provided by
interstate pipeline companies if the gathering is performed in
connection with the interstate transportation of natural gas.\2
According to a report sponsored by the Interstate Natural Gas
Association of America, interstate pipeline companies and their
affiliates provide about 30 percent of all the gathering services in
the United States.\3

FERC sets the rates for transportation and gathering services on the
basis of a pipeline company's cost of providing those services, which
consists of the cost of facilities, expenses for operation and
maintenance, and a reasonable return on investment.  This approach is
known as cost-of-service regulation.  Before FERC's Order 636
(described below), the costs of gathering services were incorporated
into the rates that pipeline companies charged for sales and
transportation service.  In contrast, the rates charged for the
gathering services provided by producers and other entities are not
under FERC's regulation.  Generally, these providers can negotiate
contracts with customers that state the rates, terms, and conditions
of their gathering services.\4 Unregulated gatherers provide most of
the remaining 70 percent of the gathering services performed in the
United States. 

In a 1992 order, FERC articulated a policy on pipeline companies'
gathering affiliates.  In Northwest Pipeline Corporation, the
Commission relied on an interpretation by the federal appeals court
in Northern Natural Gas Company v.  FERC to assert that its
jurisdiction extended to pipeline companies' gathering affiliates if
the affiliates perform the services in connection with the interstate
transportation of natural gas.\5 However, the Commission added that
it would not exercise its jurisdiction to regulate the rates charged
by gathering affiliates except in response to a customer's complaint
that an affiliate was acting in an anticompetitive manner.  This
approach was referred to in the industry as "light- handed"
regulation. 

According to an official representing pipeline companies, as a result
of this decision, many pipeline companies petitioned FERC to be
allowed to sell their gathering operations to affiliates so that they
could set their own rates and better compete with unregulated
gatherers.  However, some pipeline companies were reluctant to sell
their gathering facilities because they believed FERC did not clearly
define when it would assert jurisdiction under its new policy of
light-handed regulation.  Pipeline companies and their affiliates
could not be sure what rates and practices would be acceptable to
FERC.  In addition, gas producers that purchased gathering services
from pipeline companies were concerned that, under light-handed
regulation, pipeline companies would transfer their gathering
facilities to affiliates to escape FERC's regulation and then raise
their rates substantially.  In contrast to pipeline companies, which
support the deregulation of gathering, producers wanted FERC to
regulate the rates charged by affiliates in the same manner as it
regulates pipeline companies' transportation and gathering rates. 

Also in 1992, FERC announced Order 636, which required all pipeline
companies to separate, or "unbundle," the rates they charge for
various services, including gathering.\6 This separation was designed
to increase competition and efficiency in the industry by enabling
customers to purchase only the services they desire.  As a result of
this order, pipeline companies for the first time began to charge
rates for gathering services that were independent of the rates they
charged for interstate transportation.  This heightened the pipeline
companies' desire to sell their gathering operations to affiliates
that could set their own rates.  According to industry officials,
because of Order 636 and concerns about FERC's Northwest Pipeline
decision, both pipeline companies and producers wanted FERC to review
and clarify its regulatory authority over gathering affiliates. 

On May 27, 1994, FERC restated its policy on gathering affiliates in
a series of seven orders.  In these orders, FERC consistently stated
that it regulates the rates charged for gathering services only for
gathering performed by pipeline companies or when the pipeline
company and its affiliate engage in collusive and anticompetitive
practices.  As stated above, Order 636 separated the rates charged by
pipeline companies for gathering and interstate transportation
services.  In this new context, FERC elaborated in the orders that it
does not ordinarily have regulatory authority over pipeline
companies' gathering affiliates.\7


--------------------
\1 15 U.S.C.  717c and 717d. 

\2 Northern Natural Gas Company v.  FERC, 929 F.2d 1261 (8th Cir. 
1991). 

\3 Profile of Natural Gas Gathering in the U.S., Foster Associates,
Inc., 1994, p.  1. 

\4 Section 1(b) of the Natural Gas Act, 15 U.S.C.  717(b), leaves the
authority over the physical aspects of gathering lines, such as line
specification, to the states. 

\5 59 FERC ï¿½ 61,115 (1992). 

\6 Technically, Order 636 required all pipeline companies to separate
the rates they charged for transportation services and gas sales. 
However, the Commission encouraged pipeline companies to unbundle
fully their rates for all services.  In response, most pipeline
companies restructured their rates so that they charge separate rates
for transportation, storage, and gathering services. 

\7 FERC's new policy differs from its previous policy of light-handed
regulation in that, under the new policy, FERC will assert
jurisdiction over gathering affiliates only when they engage in
collusive and anticompetitive behavior with their parent pipeline
companies.  Under light-handed regulation, FERC could assert
authority over gathering affiliates for any discriminatory or
anticompetitive act. 


FERC ORDERS ON GATHERING
AFFILIATES AND STORAGE
========================================================== Appendix II


      FERC ORDERS EXPLAINING
      POLICY ON GATHERING
      AFFILIATES, ISSUED MAY 27,
      1994
------------------------------------------------------ Appendix II:0.1

Williams Natural Gas Co., 67 FERC ï¿½ 61,252 (1994) Superior Offshore
Pipeline Co., 67 FERC ï¿½ 61,253 (1994) Amerada Hess Corp., 67 FERC ï¿½
61,254 (1994) Mid-Louisiana Gas Co., 67 FERC ï¿½ 61,255 (1994)
Trunkline Gas Co., 67 FERC ï¿½ 61,256 (1994) Arkla Gathering Services
Co., 67 FERC ï¿½ 61,257 (1994) Eastern American Energy Co., 67 FERC ï¿½
61,258 (1994). 


      FERC ORDERS AUTHORIZING
      MARKET-BASED RATES FOR
      STORAGE
------------------------------------------------------ Appendix II:0.2

Richfield Gas Storage System, 59 FERC ï¿½ 61,316 (1992) Petal Gas
Storage Company, 64 FERC ï¿½ 61,190 (1993) Transok, Inc., 64 FERC ï¿½
61,095 (1993) Bay Gas Storage Company, Ltd., 66 FERC ï¿½ 61,354 (1994)
Koch Gateway Pipeline Company, 66 FERC ï¿½ 61, 385 (1994) Avoca Natural
Gas Storage, 68 FERC ï¿½ 61,045 (1994)


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III

The Chairman, Environment, Energy, and Natural Resources
Subcommittee, House Committee on Government Operations, requested
that we assess recent regulatory changes affecting three aspects of
the industry:  gathering, storage, and market hubs.  In addition, the
Chairman asked us to review the Department of Energy's (DOE) plans to
intervene in energy-related regulatory proceedings in the states and
the extent to which DOE plans to interact with FERC in carrying out
such interventions. 

To obtain information on FERC's policies on gathering, storage, and
market hubs, we reviewed existing industry literature and relevant
FERC orders and documents.  We also interviewed FERC and industry
officials about these policies.  To learn the opinions of various
industry segments on FERC's regulatory approaches, we reviewed
comments filed by industry officials with FERC.  We also spoke to
various FERC officials and representatives of several natural gas
trade associations, including the American Gas Association, the
American Public Gas Association, the Independent Petroleum
Association of America, the Interstate Natural Gas Association of
America, the Natural Gas Supply Association, and the National
Association of Utility Consumer Advocates. 

To examine how DOE plans to intervene in state regulatory
proceedings, we reviewed various DOE documents and spoke to DOE
officials and officials from several state utility commissions.  We
also spoke to DOE and FERC officials about how DOE may interact with
FERC in implementing its strategy on participation. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Jim Wells, Associate Director
Bernice Steinhardt, Associate Director
Gregg Fisher, Assistant Director
Daniel J.  Feehan, Assignment Manager
Daren Sweeney, Evaluator-in-Charge

OFFICE OF THE GENERAL COUNSEL

Jackie A.  Goff, Senior Counsel
