Report of the Natural Gas Regulation Committee

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This Report summarizes several major gas policy developments occurring at the Federal Energy Regulatory Commission (Commission or FERC) in 2001, including the FERC's: (1) interpretation and implementation of Order No. 637 on a case-by-case basis; (2) reversal of its prior policy requiring pipelines to obtain pre-approval before contracting for off system capacity; (3) initiatives to alleviate the energy crisis in the West, including waivers of existing regulatory requirements to expedite the construction of new interstate pipeline transportation capacity; and (4) notice of proposed rulemaking on standards of conduct governing interstate pipelines' relationships with electric utilities and other energy affiliates.

I. RULINGS ON PIPELINE FILINGS To IMPLEMENT ORDER No. 637

On February 9, 2000, the Commission issued Order No. 637(1) to foster competition and increase efficiency across the interstate natural gas pipeline grid. In Order No. 637, the Commission revamped its existing policies with respect to many key elements of interstate natural gas transportation by promulgating new regulations relating to, inter alia, scheduling procedures, segmentation and flexible point rights, imbalance management services, penalties and Operational Flow Orders (OFOs). Notably, the new and enhanced policy initiatives adopted in Order No. 637 were designed to emphasize a "service-oriented" approach to interstate natural gas transportation in an effort to provide shippers with a more complete arsenal of tools to compete with interstate pipelines and each other on a level playing field.

To effectuate its Order No. 637 goals, the Commission required pipelines to make compliance filings implementing the policies set forth in the new regulations or, alternatively, to demonstrate how a particular pipeline's existing tariff and operating practices are in compliance with the Order No. 637 requirements.2 This section of the Natural Gas Regulation Committee Report summarizes the major requirements of Order No. 637 and highlights the Commission's application of its new policies and regulations in a few of the individual pipeline implementation cases. Some of the FERC's decisions in the pipeline implementation cases have involved Commission review of settlements reached between the pipeline and its shippers with respect to the Order No. 637 requirements and, although many implementation cases have concluded, several hotly contested pipeline compliance proceedings remain pending before the FERC. In particular, this section discusses some of the more rudimentary requirements set forth in the rulings issued thus far, and notes a few controversial requirements that have evolved through the Order No. 637 implementation process at the FERC.

A. Scheduling Equality

Order No. 637 requires pipelines to make revisions to their pro forma tariffs to include scheduling procedures so that capacity release transactions can be scheduled on a comparable basis to other pipeline services. According to the Commission, placing released capacity on a level playing field with pipeline capacity will fuel a more competitive short-term market.4 Therefore, new section 284.12(c)(1)(ii) provides that replacement shippers must be able to submit a nomination at the earliest available nomination opportunity after the acquisition of released capacity, and, if the pipeline requires the replacement shipper to execute a contract, the contract must be issued within one hour after the pipeline has been notified of the release.5 As explained by the FERC, the new rule "will enable shippers to acquire released capacity at any of the nomination or intra-day nomination times, and nominate gas coincident with their acquisition of capacity."6

To date, the FERC's decisions in the individual pipeline implementation cases addressing scheduling equality have been fairly consistent across the board and have strictly adhered to the FERC's threshold requirement that nothing (including contracting requirements) should impede the ability of a replacement shipper to submit a nomination at the earliest available opportunity. …