FERC's proposed affiliate rule creates industry confusion, alarm

Kate Thomas
OGJ Online Staff

HOUSTON, Dec. 21 -- The US Federal Energy Regulatory Commission's proposal to apply the electric industry discount standard to natural gas pipeline transactions is creating both confusion and opposition in the industry.

The Natural Gas Supply Association said it has long favored "stronger regulations over the relationships between interstate natural gas pipelines and their affiliates," but asked FERC to clarify the proposal's wording.

"All segments of the energy industry are interdependent and rely on communications to ensure natural gas gets to market," said NGSA Vice-Pres. Patricia Jagtiani. "We know that FERC's intentions are not to hinder that communication; therefore, we are asking for standards that are well-defined and straightforward to administer, and that are clear about what lines of communication are open, and which ones are closed."

The Interstate Natural Gas Association of America, representing US gas pipeline companies, said the "simplistic electric model" would disrupt "necessary collaboration and communication" between industry segments that are fully dependent on one another.

FERC asked for comment on its Notice for Proposed Rulemaking, which would alter existing affiliate rules for both electric and natural gas suppliers. With the gas and power industries converging, the commission proposed the new rule to unify its treatment of the relationship between all transmission suppliers and their affiliated energy companies, including marketers.

The new rule would apply to "any interstate pipeline that transports gas for others" under commission regulation and to "any public utility that owns, operates, or controls facilities used for transmission of electric energy in interstate commerce," other than a FERC-approved regional transmission organization.

Selective discounts barred?
Under existing rules, if an interstate pipeline grants a discount to any shipper, the discount must be posted on the pipeline's website no later than the date of the first nominations under the contract. Pipelines are generally free to give selective discounts, if they are not unduly discriminatory under commission rules, according to NGSA.

Electric utilities, on the other hand, notify customers of potential discounts on a given transmission path through postings on the industry's OASIS system. As a result, the electric industry doesn't appear to engage in selective discounting, it said.

In comments, the NGSA said wording of the proposed rule is confusing and asked FERC to clarify whether it intends to allow the natural gas industry to continue offering bilateral discounts. Under one interpretation, NGSA said it appears the proposed rule would require a pipeline to offer path-specific rather than shipper-specific discounts, effectively barring selective discounts.

But under another, the commission doesn't appear to want to change the current policy allowing pipeline companies to offer selective discounts. NGSA also raised questions about the treatment of communications between producers affiliated with offshore pipelines under the proposal and whether sharing employees would be prohibited by the rule.

NGSA also urged the commission to develop stiff penalties to deter affiliate abuse. "Without the specter of such penalties, the benefits gained from illicit activity between the pipeline and its affiliate will often outweigh the sanction imposed," it said.

INGAA said the proposal omitted the "incalculable competitive harm wrought by the rule," which would discourage intracompany business dealings and efforts to offer seamless, value-added services. It noted FERC calculated the cost of collecting and posting required information would amount to $241.6 million/year.

The pipeline group cautioned the rule would force transmission suppliers to post material that could reveal proprietary and confidential information. "Competitors unaffiliated with transmission providers are not so encumbered by the disclosure rule," INGAA said.

The association also warned adopting the electric industry disclosure model would be a mistake because the natural gas infrastructure includes critical elements that don't exist in the electrical model, such as gathering field services and intrastate pipelines.

"The proposed broadening of the definition of 'affiliate' and the effective prohibition of beneficial communication are, at best, expensive and unnecessary and, at worst, potentially devastating to an industry that is already workably competitive," it said.

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