FERC sets tougher standards for gas pipelines, electric power transmission

By OGJ editors
WASHINGTON, DC, Dec. 4 -- The US Federal Energy Regulatory Commission Nov. 26 adopted a final rule that sets tougher standards of conduct between interstate natural gas pipelines and their energy affiliates. The rule also applies to public electric utilities.

FERC officials said the final rule "ensures that transmission providers cannot extend their market power over transmission to other energy markets by giving their energy affiliates unduly preferential treatment." Under the FERC rule, a "transmission provider" is defined as an interstate natural gas pipeline that transports gas for others and public utilities that own, operate, or control transmission facilities used for the transmission of electric energy in interstate commerce.

FERC officials said the code of conduct needed updating to reflect "unprecedented changes" in both the gas and electric industries. The rules follow well-publicized market manipulation cases connected with the California power crisis. FERC said that a stronger code of conduct was needed because "transmission providers continue to have economic incentives to give undue preferences to their energy affiliates."

FERC's assertiveness
A portion of the stalled congressional energy bill sought to leave no room for doubt on the issue. It spelled out that it was against the law to misreport prices deliberately to a market data collector. Provisions also clarified that FERC had the authority to prosecute so-called "round trip" insider trades. But as Wall Street analyst Christine Tezak of Schwab Capital Markets noted in a Nov. 26 client note, FERC is asserting itself with or without the bill in place.

"We think it is pretty clear now what sort of behavior is wrong and therefore what profits could be subject to refund," she said. But an advantage of having a bill become law would be that FERC had stronger civil penalty authority, she added.

FERC said that its latest rule is intended to give transmission providers specific guidance on how to eliminate undue discrimination and undue preferences in providing interstate transmission services, consistent with the provisions of the Natural Gas Act and the Federal Power Act.

The revised rules require transmission providers' employees who are engaged in transmission system operations to function independently from the transmission providers' sales or marketing employees and from any employees of their energy affiliates. In addition, the transmission provider must treat all transmission customers, affiliated and nonaffiliated, on a nondiscriminatory basis and cannot operate its transmission system to benefit preferentially an energy affiliate or marketing affiliate.

"The commission believes that the revised standards of conduct will ensure that transmission providers function independent of all of their energy affiliates. Such separation is vital if the commission is to ensure that transmission providers do not use their access to information about transmission to unfairly benefit their own or their affiliates' sales to the detriment of customers," FERC said.

The new rule unifies previously dissimilar standards of conduct applicable to the gas and electric industries and dramatically expands the range of affiliated entities covered by the standards, according to an analysis by the law firm VanNess Feldman.

The final rule is effective 60 days after publication in the Federal Register. On that date, each transmission provider is required to submit an informational filing describing the measures it will take to bring itself into compliance with the new standards by June 1, 2004.

In general, energy affiliates of a transmission provider must operate independently and may not receive access to nonpublic transmission information. Companies that fall under FERC's "affiliate" rule include providers that engage or "are involved in transmission transactions in US markets; manage or control transmission capacity of a transmission provider in US markets; buy, sell, trade, or administer natural gas or electric energy in US markets; or engage in financial transactions relating to the sale or transmission of natural gas or electric energy in US markets."

FERC's new rule also clarifies cases in which a company may be granted an exemption from the new energy affiliate conduct standards. In a significant change from an earlier proposal, the agency excludes state-regulated local distribution companies that do not make any off-system sales of natural gas from the definition of "energy affiliate." The rule also does not exclude affiliated natural gas producers, gatherers, processors, intrastate pipelines or Hinshaw pipelines from the energy affiliate definition.

The Interstate Natural Gas Association of America, the trade group that represents many of the nation's largest gas pipelines, was expected to ask for a rehearing of the rule because it had concerns that the energy affiliate definition is too ambiguous, especially for its members upstream interests. INGAA noted that FERC Commissioner Nora Brownell dissented with her fellow commissioners on this point; she indicated she would have excluded affiliated producers from the rule.

Other stakeholder views
The American Gas Association, which represents 191 local energy utilities, was happier with the rule, calling it "well-balanced and fair."

The group singled out FERC's decision to retain an exemption for local distribution companies and the adoption of the "no-conduit" rule. That rule allows shared employees, including senior officers and directors, to receive certain information as long as the shared employee does not actively share the information with a marketing or energy affiliate.

AGA feared that without the exemption it would be hard for its members to meet financial disclosure information required by other government agencies, such as corporate governance functions under the Sarbanes-Oxley Act of 2002 regulated by the Securities and Exchange Commission.

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