Report of the Natural Gas Regulation Committee1

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This report summarizes decisions and policy developments that have occurred in the area of natural gas regulation. The time frame covered by this report is July 1, 2006 to June 30, 2007.

I. Oversight and Enforcement

A. Gas Standards of Conduct

1. The D.C. Circuit Vacates and Remands Order 2004 in National Fuel Gas Supply Corporation v. FERC.

Following the issuance of expanded Standards of Conduct for affiliates of natural gas and electric power transmission providers in Order No. 2004,2 natural gas pipelines and local distribution companies (LDCs) filed petitions for review in the United States Court of Appeals for the District of Columbia Circuit. In November 2006, the Court issued its decision in National Fuel3 The Court vacated and remanded Order No. 2004 as it applied to natural gas pipelines. Gas pipeline interests had challenged the rule broadly, particularly the extension of the Standards of Conduct to energy affiliates in addition to marketing affiliates.4 No electric industry petitioners had challenged die rules, and thus the Standards of Conduct for electric transmission providers were not vacated.

The Court reviewed the background to the Standards of Conduct,5 including the earlier standards established by Order No. 497 in 1988,6 and affirmed by its decision in Tenneco? According to the Court, Order No. 2004 made two fundamental changes from the Standards of Conduct applied under Order No. 497. First, the Court noted that the new Standards of Conduct expanded to govern not only pipeline marketing affiliates but "also pipelines' relationships with numerous non-marketing affiliates-processors, gatherers, producers, local distribution companies, and traders."8 Second, the Court stated that the revised Standards of Conduct would govern "a pipeline's relationships even with those affiliates that do not hold or control any capacity on the pipeline . . . [f]or example, a pipeline is subject to the Standards in its relationship with an affiliated producer that transports gas only on other pipelines."9 The Court then discussed in some detail the vigorous dissents filed by two Commissioners, emphasizing then-Commissioner Kelliher's dissenting contention that '"the flaw in the Standards of Conduct Final Rule is the lack of record evidence to support expanding the scope beyond Marketing Affiliates,'" which led to the Commissioner's conclusion that '"suspicion is not a sufficient basis for expanding the scope of Standards of Conduct beyond Marketing Affiliates.'"10 In addition, the Court noted Commissioner Kelliher's contention that evidence of abuse related to marketing affiliates failed to justify expansion of the Standards of Conduct to include nonmarketing affiliates, and his concern that the effect would be to reduce efficiency without preventing unduly discriminatory behavior. The Court further noted Commissioner Browned's partial dissent regarding the absence of sufficient evidence to support extending the Standards of Conduct to previously exempt affiliated producers, gatherers and processors.11

Citing the agency's obligation to articulate a basis for its rule in light of the record evidence, the Court examined the asserted record basis for the rule. The Court found Order No. 2004 justified on "an asserted theoretical threat of undue preferences and a claimed record of abuse," rather than "solely on the theoretical danger."12 If the Federal Energy Regulatory Commission (FERC or Commission) could not support Order No. 2004 on the "claimed record evidence,"13 the Court would not uphold it. As in Tenneco, the Court noted the consumer efficiencies arising from vertical integration, and further described Tenneco as standing "for the proposition that FERC cannot impede vertical integration between a pipeline and its affiliates without 'adequate justification.'"14 The Court largely affirmed Order No. 497 because it found that the FERC had properly re lied upon both evidence of "(i) a plausible theoretical threat[s] of anticompetitive information-sharing between pipelines and their marketing affiliates and (ii) vast record evidence of abuse. …