Report of the Natural Gas Regulation Committee

Energy Law Journal, January 1, 2003 | Go to article overview

Report of the Natural Gas Regulation Committee


This Report summarizes several major natural gas cases and policy developments that occurred at the Federal Energy Regulatory Commission (Commission or FERC) in 2002. During much of 2002, the Commission focused on allegations of market power abuse, manipulation, and other types of anti-competitive conduct. This Report addresses those issues raised, in the context of: (1) the FERC's Transwestern decision and Notice of Inquiry into negotiated rates; (2) the FERC's gathering policy with respect to the Outer Continental Shelf; (3) the FERC Staff's Preliminary Report on Published Natural Gas Prices and the Potential Manipulation of Natural Gas Prices; and (4) the decision of the FERC's Chief Administrative Law Judge in Public Utilities Commission of the State of California v. El Paso Natural Gas Co. The Report also addresses creditworthiness issues that arose in the natural gas industry during 2002, as well as, the FERC's efforts to promote expansion of the natural gas pipeline infrastructure and implement the competitive policies previously established by the FERC in Order No. 637.

I. THE TRANSWESTERN DECISION AND THE NOTICE OF INQUIRY INTO THE COMMISSION'S NEGOTIATED RATE PROGRAM

A. Introduction and Background

On July 17, 2002, the Commission issued a Notice of Inquiry (NOI)1 that invited comments on its negotiated rate policies and practices.2 The Commission stated that it was reviewing whether recourse rates are a viable alternative to negotiated rates and sufficient safeguard against the exercise of market power on interstate natural gas pipelines. The Commission also indicated that it was examining the entire spectrum of issues related to its negotiated rate program.3

The Commission established a negotiated rate program in 1996 to allow pipelines to adopt an alternative to traditional cost-of-service regulation if the pipelines chose not to seek market-based rates or to undertake an incentive rate program.4 The negotiated rate program was designed to help pipelines market turned-back capacity to new shippers, such as electric generators, as well as, to help retain local distribution customers whose contracts were expiring.5

Under the negotiated rate program, the pipeline and a shipper are permitted to negotiate rates that vary from the pipeline's otherwise applicable tariff rate.6 A recourse rate, i.e., the maximum tariff rate, is always available to those shippers preferring traditional cost-of-service rates.7 The Commission recognized, however, that if capacity became constrained, potential problems could occur, e.g., where shippers willing to pay negotiated rates higher than the maximum recourse rate were bidding against shippers willing to pay the maximum recourse rate.8 In such an instance, the Commission requires that customers bidding more than the maximum recourse rate would be treated as if they were bidding the recourse rate, and capacity is to be allocated pro rata among the negotiated rate bidders and recourse rate bidders.9 The Commission reasoned that the recourse rate option would prevent pipelines from exercising market power because the customer can fall back to cost-based traditional rate service if the pipeline unilaterally demands excessive rates or withholds service.10

In the NOI, the Commission stated, "[t]he failure of the recourse rate option to remain viable was an 'impermissible' result."11 The Commission cited two cases involving negotiated rate transactions based on price-index differentials, Transwestern Pipeline Company (Transwestern)12 and PG&E Gas Transmission, Northwest Corporation (GTN),13 "[as raising] serious concerns regarding the breadth and direction of the . . . negotiated rate program."14 In light of the concerns raised in the Transwestern and GTN proceedings, the Commission determined that it was an appropriate time to assess its negotiated rate program.15

B. The Transwestern Decision

On July 17, 2002, the Commission issued a decision finding that Transwestern had violated Order No. …

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