adds that seasonal rates do not allow pipelines to award the capacity
to the customers who value it most because there is still a maximum
rate. In addition, Spectra notes that pipelines are unable to respond
to market signals in the short-term market using seasonal recourse
rates. Williston asserts that seasonal rates are not a substitute for
the removal of a price ceiling because they do not necessarily align
prices with what the market will bear.
    98. We agree that the flexibility offered to pipelines and
releasing shippers is not identical, due to the differences already
noted between the primary and secondary markets. The recourse rate, for
example, may operate somewhat differently in the two markets by virtue
of the design of these markets; but as we have found, the retention of
the recourse rate is necessary to provide an effective check on both
markets. Thus, we have sought to provide both pipelines and shippers
with reasonably comparable flexibility consistent with the differences
between these entities and the need to provide protection against
market power.
    99. For example, the commentors assert that the Commission has
rarely granted a pipeline authority to price its capacity upon market
based rates. INGAA and the pipelines make this allegation to show that
it is administratively difficult to obtain market-based rates from the
Commission and that is a difference from the pricing authority the

Commission grants capacity releases in this rule. On the other hand,
the fact that the pipelines have not been granted market based rates
based on their factual showings is strong evidence that the recourse
rate is still needed to protect shippers against the exercise of market
power.\101\ This fact also leaves the Commission reluctant to find that
it should remove the ceiling from primary short term pipeline capacity.
---------------------------------------------------------------------------

    \101\ See e.g., Gas Transmission Northwest Corp., 119 FERC ]
61,288 (2007); Koch Gateway Pipeline Co., 85 FERC ] 61,013 (1998),
order on reh'g, 89 FERC ] 61,046 (1999).
---------------------------------------------------------------------------

    100. Spectra argues that the Commission uses a stricter market
power analysis to determine whether to grant a pipeline market based
rates than it did to conclude that it would remove the price caps for
short term capacity releases. Spectra asserts that the Commission, in
removing the price ceiling from short term capacity releases, did not
define the relevant product market and the relevant geographic market,
nor did it calculate a Herfindahl-Hirschman Index to measure market
concentration of the releasing shippers and other competing sellers in
the market. Spectra argues that the Commission should remove the price
caps on short-term pipeline capacity on the same basis it used for
removing the caps on short-term capacity releases.
    101. The Commission is not using the same analysis to remove the
price ceiling from short term capacity releases as it does to determine
whether a pipeline lacks market power and should therefore be permitted
market based rates. As we have explained, one of the principal reasons
for removing the price ceiling on released capacity is the existence of
the pipeline's service as recourse in the event market power is
exercised.\102\ As the court in INGAA observed:
---------------------------------------------------------------------------

    \102\ Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000), reh'g
denied, 94 FERC ] 61,097 (2001), petitions for review denied sub
nom., Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 (DC
Cir. 2002).

    If holders of firm capacity do not use or sell all of their
entitlement, the pipelines are required to sell the idle capacity as
interruptible service to any taker at no more than the maximum
rate--which is still applicable to the pipelines. [footnote omitted]
Even though interruptible service may not be as desirable as firm
service, the Commission concluded that it would provide an adequate
substitute, whose availability would place a meaningful check on
whatever anti-competitive tendencies the resellers might have.\103\
---------------------------------------------------------------------------

    \103\ INGAA at 22.

    102. The analysis we have employed in removing the price ceiling
for released capacity is therefore more comparable to that used for
pipeline negotiated rates than for the market power analysis under the
Alternative Rate Design Policy statement. The continuation of the
recourse rate provides sufficient protection to enable us to remove the
price ceiling for short term capacity releases without doing a more
detailed market power analysis.\104\ The Commission finds, however,
that there are sufficient concerns about the ability of pipelines to
exercise market power in short-term transactions on at least some
segments of their systems, that a blanket removal of the price cap on
all such pipeline transactions in this rulemaking proceeding, without
consideration of specific circumstances on individual pipeline systems,
would be inappropriate.
---------------------------------------------------------------------------

    \104\ Moreover, the Commission's use of stricter standard in
reviewing petitions by a pipeline for alternative pricing authority
for its primary transportation is not a new concept and is based
upon the different risks of abuses of market power. In Koch Gateway
Pipeline Co., 89 FERC ] 61,046 (1999), the Commission stated:
    As reflected in the market power analysis set forth in the
Policy Statement, the Commission has taken a conservative and
cautious approach concerning the showing a pipeline must make in
order to justify a finding that it lacks market power in its primary
transportation market, i.e., the pipeline's own sale of its
transportation capacity. In fact, many commenters asserted that it
would be unlikely that the pipeline's primary market would meet the
proposed criteria for market-based rates. The Commission recognizes
that it has taken a more relaxed and light-handed approach toward
market-based rates in other contexts, including for example, the
pipeline's sales of storage service and unbundled sales of the gas
commodity. Purchasers of such other services are more likely to have
good alternatives to purchasing from the pipeline; for example,
barriers to entry in the storage and gas commodity markets are
likely to be less. The Commission also recognizes that its Short-
Term Transportation NOPR proposed a different approach for
justifying removal of the price cap on short term (less than one
year) transportation services in both the pipeline's primary
transportation market and the secondary, capacity release market.
That proposal included the establishment of mandatory capacity
auctions to control market power. Id. at 61,129 (footnote omitted).
---------------------------------------------------------------------------

e. Bifurcation of the Markets
    103. The pipelines maintain that continuing the price ceiling on
pipeline short term services will create a bifurcated market with
higher market prices in the uncapped release market. The premise of
this argument is that if shippers that place a lower value on
transportation are able to acquire the capped pipeline service, the
prices in the uncapped market will be higher than if all capacity were
sold without a price ceiling. In the NOPR, the Commission responded to
similar arguments.\105\ The Commission pointed out that interruptible
service has lower priority than firm service so that even if a shipper
placing a relatively low value on the capacity has a higher position on
the pipeline's queue for price-controlled interruptible transportation,
it is not guaranteed that it can acquire that capacity, leading to the
supposed higher market clearing price. A firm shipper could always
release its unused firm capacity to a replacement shipper who places a
higher value on that capacity, thereby displacing the lower-value
interruptible shipper.
---------------------------------------------------------------------------

    \105\ NOPR at P 51.
---------------------------------------------------------------------------

    104. With respect to short-term firm service, the Commission stated
that higher market clearing prices would not occur as long as arbitrage
exists. Any shipper with a higher queue position that acquires the
pipeline capacity at the lower capped rate would have an incentive to
resell that capacity to another shipper who places a higher value on
the capacity, thus ensuring that the market clearing price will reflect
all relevant demand.
    105. INGAA asserts that the Commission's observation that pipeline
short-term capacity is interruptible and inferior to firm released
capacity is a partial answer to its argument that a bifurcated market
will produce higher prices in the regulated portion of the market than
would otherwise be the case. But INGAA and Spectra assert that short-
term pipeline capacity is not always interruptible--unsubscribed
pipeline capacity can be sold on a firm basis during periods of peak
demand, and would, if treated on a par with released capacity, compete
on a head to head basis. INGAA and Spectra argue that if the rate for
that short-term firm pipeline capacity is capped, the pricing
inefficiencies will occur because the arbitrage opportunities relied
upon by the Commission in the above-quoted text often entail high
costs, making reliance on such opportunities inefficient. For example,
Spectra cited articles for the proposition that arbitrage opportunities
``often entail high costs, making the reliance on them also
inefficient.'' \106\
---------------------------------------------------------------------------

    \106\ Spectra comments at 12, citing, Stephen J. Choi and A.C.
Pritchard, Behavioral Economics and the SEC, 56 Stan. L. Rev. 1, n.
11 (2003) (discussing that ``arbitrage is costly, which may limit
its effect''). See also Lynn A. Stout, The Mechanics of Market
Inefficiency: An Introduction to the New Finance, 28 J. Corp. L.
635, 655 (2003) (observing that ``arbitrage is costly and
imperfect'') and Andrei Shleifer & Robert W. Vishny, The Limits of
Arbitrage, 52 J. Fin. 35 (1997) (explaining why the capital costs
required to engage in arbitrage opportunities can hamper market
efficiency).
---------------------------------------------------------------------------

    106. The only arbitrage costs at issue in this case are the costs
of releasing that capacity, which is precisely the same cost releasing
shippers must incur and we have sought to reduce the costs

of capacity release over the years. In particular, the Commission's
action in Order No. 637, where the Commission instituted a number of
policy revisions that were designed to enhance competition and improve
efficiency across the pipeline grid should reduce arbitrage costs.
There the Commission required pipelines to permit releasing shippers to
use flexible point rights in order to compete effectively on release
transactions with other shippers and to fully segment their pipeline
capacity which permits the releasing shipper to retain the portion of
the pipeline capacity it needs while releasing the unneeded
portion.\107\ This combination of flexible point rights and
segmentation increases the alternatives available to shippers looking
for capacity. Moreover, the Commission also required that pipelines
provide shippers with scheduling equal to that provided by the
pipeline, so that replacement shippers can submit a nomination at the
first available opportunity after consummation of the capacity release
transaction. This action also makes the two types of capacity more
interchangeable and should reduce arbitrage costs.
---------------------------------------------------------------------------

    \107\ Order No. 637 at 31,300.
---------------------------------------------------------------------------

    107. On the other hand, we have to recognize that arbitrage can
never be perfect. If it were, no interruptible transportation would be
sold on fully subscribed pipelines. Moreover, as previously discussed,
in order to preserve at least some of the benefits of selective
discounting, the Commission permits pipelines to include provisions in
discounted rate agreements which may reduce a shipper's incentive to
engage in arbitrage in certain circumstances. It is also important to
recognize that the pipelines' argument for removing the price ceiling
for pipeline interruptible and short-term firm capacity is predicated
on arbitrage. Their essential argument is that as long as long-term
prices are regulated, short-term price ceilings can be removed because
shippers can purchase firm capacity in the long-term market and
arbitrage that capacity by releasing it in the short-term market. If
such arbitrage is costly or ineffective, as the pipelines argue here,
or if a pipeline uses selective discounting to discourage arbitrage on
some parts of its system, the pipelines retain market power over their
sales of short-term capacity. Thus, even if arbitrage is not fully
effective, that fact does not require removal of the price ceiling
because impediments to arbitrage may enhance pipeline market
power.\108\
---------------------------------------------------------------------------

    \108\ Further, even if maintenance of the price ceiling on
short-term firm capacity serves to bifurcate the market, we are
concerned that lifting the price ceiling on short term firm capacity
would create a perverse incentive for pipelines to forgo the sale of
firm capacity for periods of more than a year in order to reap the
uncapped rates that would be available in the short term.
---------------------------------------------------------------------------

    108. In balancing the risks of creating a somewhat bifurcated
market against the possibility of the exercise of market power by the
pipelines in the short-term market, we have determined to err on the
side of enhanced protection against market power. In INGAA, the court
recognized the importance of the same trade-off between the possible
bifurcation of the market and the need to continue to regulate pipeline
short-term capacity. It recognized that while price distortions might
occur if arbitrage is not effective,\109\ the recourse rate applied to
the pipelines provided protection with respect to both pipeline and
released capacity:
---------------------------------------------------------------------------

    \109\ ``The basic proposition asserted by the pipelines (and, as
we say, recognized by the Commission) is that where (1) a portion of
the supply of a good or service is subject to price controls, and
(2) demand exceeds (the price-controlled) supply at the fixed price,
the market-clearing price in the uncontrolled segment will be
normally higher than if no price controls were imposed on any of the
supply.'' INGAA at 33.

    If holders of firm capacity do not use or sell all of their
entitlement, the pipelines are required to sell the idle capacity as
interruptible service to any taker at no more than the maximum
rate--which is still applicable to the pipelines.\110\
---------------------------------------------------------------------------

    \110\ Id.

The Court concluded, and we agree that, the essential differences
between pipelines and releasing shippers justified their differential
---------------------------------------------------------------------------
treatment:

    Here, the distinction between pipelines and other holders of
unused capacity, based on probable likelihood of wielding market
power, seems to us to pass muster.\111\
---------------------------------------------------------------------------

    \111\ Id at 36.
---------------------------------------------------------------------------

IV. Asset Management Arrangements

    109. In this Final Rule, the Commission is revising its capacity
release policies to give releasing shippers greater flexibility to
negotiate and implement AMAs. AMAs are a relatively recent development
in the capacity release market, and are beneficial to numerous market
participants and to the market in general. However, the Commission's
existing regulations and policies concerning capacity release interfere
with the ability of releasing shippers to implement the most efficient
AMAs. Accordingly, as discussed below, the Commission is adopting its
NOPR proposals to grant an exemption from the prohibition against tying
and an exemption from bidding for AMAs. The Commission is also revising
the definition of AMAs proposed in the NOPR so as to relax the
requirements concerning an asset manager's obligation to deliver gas to
the releasing shipper and to allow supply side AMAs. In addition, the
Final Rule clarifies that uncapped AMA capacity releases of one-year or
less may be rolled over without competitive bidding, and that profit
sharing arrangements included in an AMA will not violate any applicable
price cap. The Commission also exempts certain AMAs from the buy/sell
prohibition.

A. Background

    110. In general, AMAs are contractual relationships where a party
agrees to manage gas supply and delivery arrangements, including
transportation and storage capacity, for another party. Typically a
shipper holding firm transportation and/or storage capacity on a
pipeline or multiple pipelines temporarily releases all or a portion of
that capacity along with associated gas production and gas purchase
agreements to an asset manager. The asset manager uses that capacity to
serve the gas supply requirements of the releasing shipper, and, when
the capacity is not needed for that purpose, uses the capacity to make
releases or bundled sales to third parties.
    111. While AMAs may be fashioned in a myriad of ways, there are
several common components of these arrangements. First, the releasing
shipper generally enters into a pre-arranged capacity release to an
asset manager ostensibly at the maximum rate in order to avoid the
bidding requirement. Second, the releasing shipper makes payments to
the asset manager for the gas supply service performed by the asset
manager for the releasing shipper. These payments may include the
releasing shipper paying the asset manager: (1) The full cost of the
released capacity (e.g., maximum rate) on the theory that the asset
manager is using the released capacity to transport the releasing
shipper's gas supplies, (2) a management fee for transportation-related
tasks (e.g. nominations, scheduling, storage injections, etc.)
associated with the asset manager's obligation to provide gas supplies
to the releasing shipper, and (3) the asset manager's cost of
purchasing gas supplies for the releasing shipper. Third, the asset
manager generally shares with the releasing shipper the value it is
able to obtain from the releasing shipper's capacity and supply
contracts when those assets are not

needed to supply the releasing shipper's gas needs. The asset manager
obtains such value either by re-releasing the capacity or by using it
to make bundled sales to third parties. The asset manager may share
that value by: (1) Paying a fixed ``optimization'' fee to the releasing
shipper, (2) sharing profits pursuant to an agreed-upon formula, or (3)
making its gas sales to the releasing shipper at a price below market
levels.
    112. In many instances the asset manager is chosen through a
request for proposal (RFP) process. The RFP describes the details and
terms and conditions of the proposed deal and seeks bids from service
providers willing to provide the requested services. The methodology
for choosing a winning bidder under an RFP often reflects many
different factors, including price, creditworthiness, experience,
reliability, and flexibility, and it is clear that price is not always
the determining factor. Some RFP procedures are state mandated, and
thus, in those situations, the LDC must get approval from the state for
the final agreement.
    113. As the Commission described in the NOPR, there are several
ways in which the Commission's current capacity release regulations may
interfere with the ability of shippers to negotiate and implement AMAs.
The first relates to the Commission's prohibition against the ``tying''
of release capacity to any condition. The Commission established this
prohibition in Order No. 636-A, using the following language:

    [t]he Commission reiterates that all terms and conditions for
capacity release must be posted and non-discriminatory and must
relate solely to the details of acquiring transportation on the
interstate pipelines. Release of capacity cannot be tied to any
other conditions. Moreover, the Commission will not tolerate deals
undertaken to avoid the notice requirements of the regulations.
Order No. 636-A at 30,559.\112\
---------------------------------------------------------------------------

    \112\ The Commission stated in Order No. 636-A that releasing
shippers may include in their offers to release capacity reasonable
and non-discriminatory terms and conditions to accommodate
individual release situations, including provisions for evaluating
bids. All such terms and conditions applicable to the release must
be posted on the pipeline's electronic bulletin board and must be
objectively stated, applicable to all potential bidders, and non-
discriminatory. For example, the terms and conditions could not
favor one set of buyers, such as end users of an LDC, or grant price
preferences or credits to certain buyers. The pipeline's tariff also
must require that all terms and conditions included in offers to
release capacity be objectively stated, applicable to all potential
bidders, and non-discriminatory. Order No. 636-A at 30,557.

A critical component of many AMAs is that the releasing shipper be able
to require the replacement shipper (asset manager) to satisfy the
supply needs of the releasing shipper and take assignment of the
releasing shipper's gas supply agreements as a condition of obtaining
the released capacity. However, such requirements could be considered
prohibited tying conditions that go beyond ``the details of acquiring
transportation on the interstate pipelines,'' because they relate to
the purchase and sale of the gas commodity.\113\
---------------------------------------------------------------------------

    \113\ Since Order No. 636-A, the Commission has granted several
waivers of the prohibition against tying, Tennessee Gas Pipeline
Co., 113 FERC ] 61,106 (2005); Northwest Pipeline Corp. and Duke
Energy Trading and Marketing, 109 FERC ] 61,044 (2004), but only
where an entity sought the waiver to exit the natural gas
transportation business. See Louis Dreyfus Energy Services, L.P.,
114 FERC ] 61,246, at 61,780 (2006), denying a waiver request.
---------------------------------------------------------------------------

    114. AMAs also have implications for the rate cap and bidding
regulations. Section 284.8 of the Commission's regulations requires
capacity release transactions to be posted for competitive bidding,
unless the transactions are at the maximum rate or are for 31 days or
less.\114\ Section 284.8 also allows the releasing shipper to enter
into a ``pre-arranged'' release with a designated replacement shipper
before any posting for bidding.\115\ Prearranged releases are subject
to the same bidding requirements as other releases; however, the
prearranged replacement shipper will receive the capacity if it matches
the highest bid submitted by any other bidder.\116\
---------------------------------------------------------------------------

    \114\ 18 CFR 284.8(h).
    \115\ 18 CFR 284.8(b).
    \116\ 18 CFR 284.8(e).
---------------------------------------------------------------------------

    115. As noted, in an AMA, the releasing shipper typically enters
into a prearranged deal to release all of its pipeline capacity at the
maximum rate to the marketer. It is reasonable to surmise that the main
reason for the maximum release rate is so the release will qualify for
the exemption from bidding of all maximum rate prearranged capacity
releases. By avoiding the requirement to post the release for bidding,
the releasing shipper can ensure that the capacity will go to the asset
manager whom the releasing shipper has determined will provide the most
effective asset management services.
    116. As described above, however, the releasing shipper may agree
to rebate some or all of the demand charge to the marketer so that the
marketer's actual cost of obtaining the capacity is something less than
the maximum rate. The Commission has held that such rebates render the
release to be at less than the maximum rate, thereby requiring that the
prearranged release be posted for bidding.\117\
---------------------------------------------------------------------------

    \117\ In Louis Dreyfus Energy Services, L.P, 114 FERC ] 61,246
(2006), the Commission stated that:
    [t]he Commission has held that any consideration paid by the
releasing shipper to a prearranged replacement shipper must be taken
into account in determining whether the prearranged release is at
the maximum rate. For instance, where the replacement shipper agrees
to pay the pipeline the maximum rate for the released capacity, but
the releasing shipper agrees to make a payment to the replacement
shipper, the release must be treated as a release at less than the
maximum rate to which the posting and bidding requirements of
sections 284.8(c) through (e) apply. Id. at P 15, citing, Pacific
Gas Transmission Co. and Southern California Edison Co., 82 FERC ]
61,227 (1998).
---------------------------------------------------------------------------

    117. Moreover, as described above, some AMAs may require the asset
manager (replacement shipper) to pay fees to the releasing shipper. The
Commission has ruled that if the prearranged release is at the maximum
rate, such additional payments violate the maximum rate ceiling on
capacity releases.\118\
---------------------------------------------------------------------------

    \118\ See Consumers Energy Co., 82 FERC ] 61,284, order
approving settlement, 84 FERC ] 61,240 (1998). See also Order No.
636-A at 30,561, where the Commission stated that capacity cannot be
``resold at a rate including the pipeline marketing fee. The
marketing fee is not part of the cost of transportation being
released and the replacement shipper should not pay more than the
maximum transportation rate for the capacity it is acquiring.''
---------------------------------------------------------------------------

B. Discussion

    118. In this rule, the Commission is revising its capacity release
regulations and policies in order to facilitate the use of AMAs. Based
on the industry-wide support for AMAs as shown in the comments, the
Commission finds that AMAs are in the public interest because they are
beneficial to numerous market participants and to the market in
general. Thus, the Commission is modifying the prohibition on tying,
the section 284.8 regulations concerning bidding, and making additional
policy changes requested by the commenters discussed below in order to
eliminate obstacles to the utilization and implementation of AMAs.
    119. AMAs are a relatively recent development in the natural gas
market, which the Commission did not anticipate when it adopted the
capacity release program in Order No. 636. The purpose of that program
was to permit shippers to ``reallocate unneeded firm capacity'' to
those who do need it.\119\ The bidding requirements of section 284.8
and the prohibition against tying the release to extraneous conditions
were all part of the Commission's fundamental goal of ensuring that
such unneeded capacity would be reallocated to the person who values it
the most. The Commission found that such ``capacity reallocation will
promote

efficient load management by the pipeline and its customers and,
therefore, efficient use of pipeline capacity on a firm basis
throughout the year.'' \120\
---------------------------------------------------------------------------

    \119\ Order No. 636 at 30,418.
    \120\ Id.
---------------------------------------------------------------------------

    120. The Commission thus developed its capacity release policies
and regulations based on the assumption that shippers would handle
their own gas purchase and transportation arrangements and release
their capacity only when they were not using the capacity to serve
their own needs. For example, the Commission envisioned that LDCs with
long-term contracts for firm transportation service up to the peak
needs of their retail customers would, during off-peak periods, release
that portion of capacity not needed to serve the lower off-peak demand
of its retail customers but otherwise would retain the capacity to
serve their own needs.
    121. However, this basic assumption underlying the capacity release
program does not hold true in the context of AMAs. As the Commission
stated in the NOPR, a distinguishing factor between standard capacity
releases and AMAs is that in the AMA context, the releasing shipper is
not releasing unneeded capacity, but capacity that it needs to serve
its own supply function. Releasing shippers in the AMA context are
releasing capacity for the primary purpose of transferring the capacity
to entities that they perceive have greater skill and expertise both in
purchasing low cost gas supplies, and in maximizing the value of the
capacity when it is not needed to meet the releasing shipper's gas
supply needs. In short, AMAs entail the releasing shipper transferring
its capacity to a third party expert who will perform the functions the
Commission expected releasing shippers would do for themselves--
purchase their own gas supplies and release capacity or make bundled
sales when the releasing shipper does not need the capacity to satisfy
its own needs. The goal of the changes adopted by the Commission herein
is to make the capacity release program more efficient by bringing it
in line with these developments in today's secondary gas markets.
    122. As virtually all the commenters on the NOPR agree, AMAs
provide significant benefits to a variety of participants in the
natural gas and electric marketplaces and to the secondary natural gas
market itself. One of the most important aspects of AMAs is that they
provide broad benefits to the marketplace in general. By permitting
capacity holders to use third party experts to manage their gas supply
arrangements and their pipeline capacity, AMAs provide for lower gas
supply costs and more efficient use of the pipeline grid. Asset
managers have resources and market knowledge not necessarily available
to natural gas capacity holders, such as trading platforms, credit
portfolios, hedge fund and risk management experience, cost containment
and counterparty credit and contracting expertise, which allow asset
managers to better maximize the value of the releasing party's assets
and manage the associated risk. AMAs bring diversity to the mix of
capacity holders and customers that are served through the capacity
release program, thus enhancing liquidity and diversity for natural gas
products and services. AMAs result in an overall increase in the use of
interstate pipeline capacity, as well as facilitating the use of
capacity by different types of customers in addition to LDCs. AMAs
benefit the natural gas market by creating efficiencies as a result of
more load responsive gas supply, and an increased utilization of
transportation capacity.
    123. AMAs are an important mechanism used by LDCs to enhance their
participation in the secondary market and allow LDCs to increase the
utilization of facilities and lower gas costs. They provide the needed
flexibility to customize arrangements to meet unique customer needs.
AMAs allow LDCs to use an entity with more expertise to manage their
gas supply and thus relieve LDCs of administrative burdens. The ability
of LDCs to use AMAs as a means of relieving the burdens of
administering their capacity or supply needs on a daily basis also
works to the benefit of the entire market because that burden may at
times result in LDCs not releasing unused capacity.
    124. AMAs also provide LDCs and their customers an increased
ability to offset their upstream transportation costs. The profit
sharing arrangements in AMAs often allow an LDC to reduce reservation
costs that it normally passes on to its customers. They foster market
efficiency by allowing the releasing shipper to reduce its costs to the
extent that its capacity is used to facilitate a third party sale that
also benefits that third party.
    125. LDCs are not the only entities that benefit from AMAs. As
evidenced by certain comments on the NOPR, many other large gas
purchasers, including electric generators and industrial users, may
desire to enter into such arrangements.\121\ AMAs increase the ability
of wholesale electric generators to provide customer benefits through
superior management of fuel supply risk, allow generators to focus
their attention on the electric market, and eliminate administrative
burdens relating to multiple suppliers, overheads, capital requirements
and the risks associated with marketing excess gas and pipeline
imbalances.
---------------------------------------------------------------------------

    \121\ See e.g., Comments of the EPSA, Comments of the EEI,
Comments of FPL and Comments of the NWIGU. See also Comments of NJNG
to the Commission's January 3, 2007 request for comments (``in
addition to LDCs, there are many other types of large natural gas
purchasers, such as electric generation facilities and large gas
process industrial users, who face the same challenges with managing
and optimizing their natural gas portfolios. These customers, whose
core business lies outside the natural gas industry--are also likely
consumers of third party portfolio management services.'') at 9,
n.9.
---------------------------------------------------------------------------

    126. Finally, AMAs bring benefits to consumers, mostly through
reductions in consumer costs. AMAs provide in general for lower gas
supply costs, resulting in ultimate savings for end use customers. The
overall market benefits described above also inure to consumers. These
benefits have been recognized by state commissions and the National
Regulatory Research Institute.\122\ In light of these substantial
benefits provided by AMAs, the Commission is modifying its capacity
release regulations and policies in the specific respects discussed
below.
---------------------------------------------------------------------------

    \122\ See e.g., Comments of BGEM to the January 3, 2007 request
for comments at 8-9, citing to the Indiana Utility Regulatory
Commission's order in Case No. 42, 973, approved April 25, 2006. See
also Orders of the Massachusetts Department of Telecommunications
and Energy, attached to the Marketer Petitioners comments on the
January 3, 2007 request for comments, which describe and approve
certain asset management arrangements.
---------------------------------------------------------------------------

1. Tying
    127. First, the Commission adopts its proposal to exempt AMAs from
the prohibition against tying in order to permit a releasing shipper in
a pre-arranged release to require that the replacement shipper (1)
agree to supply the releasing shipper's gas requirements and (2) take
assignment of the releasing shipper's gas supply contracts, as well as
released transportation capacity on one or more pipelines \123\ and
storage capacity with the gas currently in storage. This exemption will
allow firm shippers to pre-arrange releases of capacity to an asset
manager (replacement shipper) along with upstream assets and gas
purchase agreements in a bundled transaction where the capacity being
released will

be used to meet that party's gas supply requirements.\124\
---------------------------------------------------------------------------

    \123\ Commission policy already permits a releasing shipper to
require a replacement shipper to take a release of aggregated
capacity contracts on one or more pipelines, at least in some
circumstances. See Order No. 636-A at 30,558 and n.144.
    \124\ The exemption is limited to releases to an asset manager
to implement an AMA, and does not apply to re-releases to third
parties during the term of the AMA.
---------------------------------------------------------------------------

    128. As discussed above, AMAs provide recognizable benefits to
market participants and the marketplace overall in terms of more load-
responsive use of gas supply, greater liquidity, increased utilization
of transportation capacity and the overall efficiencies these
arrangements bring to the marketplace. However, AMAs require that the
releasing shipper be able to release both its capacity and its natural
gas supply arrangements in a single package. The very purpose of the
transaction would be frustrated if the releasing shipper could not
combine the supply and capacity components of the deal. This tying is
meant to ensure that the released capacity will continue to be used to
support the releasing shipper's acquisition of needed gas supplies.
Based on the fact that AMAs provide benefits to the market, and that
tying of capacity and supply is necessary to implement beneficial AMAs,
it is reasonable to allow the tying conditions discussed above in the
AMA context in order to foster and facilitate the use and
implementation of such arrangements.
    129. All the commenters support this change in Commission policy,
except Williston. Williston argues that approval of the proposed
changes to exempt AMAs from the prohibition on tying (as well as the
bidding requirements discussed in the next section) would encourage
discrimination and preferential treatment toward asset managers by
allowing participants in the secondary capacity release market to
engage in activities prohibited to pipelines.\125\ According to
Williston, allowing releasing shippers to tie releases to a requirement
that the replacement shipper provide asset management services, and
exempting such releases from bidding, will give releasing shippers a
strong competitive edge over the pipelines for the sale of similar
types of services. Williston asserts the pipelines' reduced sale of
similar types of services will result in increased firm transportation
rates charged by pipelines. Williston also claims that exempting AMAs
from tying will nullify the goal of awarding capacity to the shipper
that values it most and that removing the bidding requirement will
inhibit transparency.\126\
---------------------------------------------------------------------------

    \125\ Comments of Williston Basin at 12-14.
    \126\ The Commission explains in the next section how the
benefits AMAs outweigh any disadvantages in exempting such releases
from bidding and how the Final Rule will continue to satisfy the
goals of disclosure and transparency.
---------------------------------------------------------------------------

    130. Williston has failed to show that exempting capacity releases
to implement AMAs from the prohibition against tying and bidding will
subject pipelines to unfair competition. Pipelines' core business is
providing unbundled transportation services. By contrast, a major
component of asset management service is the purchase and sale of gas
as a commodity. Williston does not assert that it has any interest in
either providing or purchasing asset management services. Therefore,
Williston has no need or reason to tie the sale of its transportation
services to the provision of asset management services. Many shippers,
by contrast, have indicated a desire to purchase (or provide) asset
management services, and as discussed above, the Commission has found
that such services provide substantial benefits to the natural gas and
electric markets as a whole. Williston has not identified any tying
requirement that it would desire to impose on the sale of its
unsubscribed capacity that would provide comparable benefits to the
market as a whole.
    131. The Commission recognizes that, to the extent asset managers
are more skilled at releasing and managing capacity in competition with
the pipelines' interruptible services, pipelines may face increased
competition from capacity release as a result of this rule. The
Commission, however, has always intended that capacity releases would
compete with the pipelines' short-term firm and interruptible
transportation services.\127\ Accordingly, the fact that this rule may
result in greater competition for pipelines' interruptible services is
not a compelling reason for the Commission to decline to facilitate
AMAs as set forth in this Final Rule.
---------------------------------------------------------------------------

    \127\ See Order No. 636-A at 30,553 and 30,556 (stating ``the
Commission views the competition between interruptible
transportation and capacity releasing as part of a healthy secondary
market'' and finding ``pipeline capacity (firm and interruptible)
must compete with released capacity''); see also UDC v. FERC, 88
F.3d 1105, 1149 (DC Cir. 1996) (recognizing that capacity release is
intended to develop an active secondary market with holders of
unutilized firm capacity rights reselling those rights in
competition with capacity offered directly by the pipeline).
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2. Bidding
    132. Second, the Commission adopts its proposal to exempt pre-
arranged releases to implement AMAs from the bidding requirements of
section 284.8 of its regulations. In light of its experience with
capacity releases and the comments discussed above, the Commission
concludes that, in the AMA context, the bidding requirement creates an
unwarranted obstacle to the efficient management of pipeline capacity
and supply assets.
    133. All capacity releases made to implement AMAs are pre-arranged
because it is important that a releasing shipper be able to use the
asset manager of its choice to effectuate the components of the
agreement. Unlike a normal capacity release where the releasing shipper
is often shedding excess capacity and has no intention of an ongoing
relationship with the replacement shipper, in the AMA context the
identity of the replacement shipper is often critical because it will
manage the releasing shipper's portfolio for some time into the future.
During the process of choosing an asset manager (often an RFP process),
the releasing shipper considers a number of factors, including
experience in managing capacity and gas sales, experience with a
particular pipeline or area of the country, flexibility,
creditworthiness and price. Because the asset manager will manage the
releasing shipper's gas supply operations on an ongoing basis, it is
critical that the releasing shipper be able to release the capacity to
its chosen asset manager. Requiring releases made in order to implement
an AMA to be posted for bidding would thus interfere with the
negotiation of beneficial AMAs, by potentially preventing the releasing
shipper from releasing the capacity to its chosen asset manager.
Moreover, AMAs at their core entail a bundling of commodity sales with
capacity release. As a result, it is difficult to have meaningful
bidding on the released capacity as a stand-alone component of the
arrangement, because the values of the commodity and capacity
components of the arrangement are not easily separated. The Commission
concludes that the benefits of facilitating AMAs outweigh any
disadvantages in exempting such releases from bidding.
    134. The exemption from bidding adopted by this rule will apply to
all releases to asset managers, made for the purpose of implementing an
AMA, regardless of the term of the AMA and whether the release is
subject to the price ceiling. As discussed above, in this rule the
Commission is removing the price ceiling for all short-term capacity
release transactions of one year or less, but is continuing the price
ceiling for capacity release transactions of more than one year. In the
NOPR, the Commission stated that, if the parties wanted to continue an
uncapped short-term capacity release beyond one year, the release
``would have to be re-posted for bidding to ensure the capacity is

allocated to the highest valued use.'' \128\ Some commenters \129\
request that the Commission clarify that the reposting and bidding
requirements for extending uncapped, short-term capacity releases
beyond one year do not apply in the context of short-term AMAs. They
assert that the proposed exemption from bidding for capacity releases
to asset managers should apply in all circumstances, including the
circumstance of an expiring short-term release related to an AMA. In
essence, they inquire whether the reposting and bidding requirements
for extensions of short-term capacity releases would trump the general
exemption from bidding requirements proposed by the Commission for
AMAs.
---------------------------------------------------------------------------

    \128\ NOPR at P 44.
    \129\ See e.g., comments of Southwest and BGEM.
---------------------------------------------------------------------------

    135. The Commission clarifies that the exemption from bidding for
AMAs adopted in this rule applies to all releases to an asset manager,
including those made for the purpose of extending a short-term
AMA.\130\ The rationale for exempting releases to an asset manager from
bidding applies equally to releases made for the purpose of extending a
short-term AMA as to any other release to an asset manager. In all such
releases, the identity of the asset manager is critical to the
releasing shipper, because the releasing shipper will be relying on the
asset manager to obtain its gas supplies. Therefore, as with any other
release to an asset manager, requiring releases made for the purpose of
extending a short-term AMA to be posted for bidding could interfere
with the negotiation of beneficial AMAs by potentially preventing such
releases to be made to the releasing shipper's chosen asset manager.
---------------------------------------------------------------------------

    \130\ Section 284.8(h)(1), as adopted by this rule, provides a
blanket exemption from posting and bidding for all releases to an
asset manager:
    A release of capacity by a firm shipper to a replacement shipper
for any period of 31 days or less, a release of capacity for more
than one year at the maximum tariff rate, or a release to an asset
manager as defined in (h)(3) of this section need not comply with
the notification and bidding requirements of paragraphs (c) through
(e) of this section. (emphasis added).
    The section 284.8(h)(2) prohibition on extending exempt releases
without posting and bidding expressly applies only to the first
category of releases included in the section 284.8(h)(1) exemption:
Releases for a period of 31 days or less.
---------------------------------------------------------------------------

    136. While the Commission is exempting releases made to implement
AMAs from the capacity release bidding requirements, those releases
will remain subject to existing posting and reporting requirements,
including the section 284.13(c)(2)(viii) requirement to post the name
of any asset manager. In addition, as discussed below, the Commission
is adding a requirement to post the asset manager's delivery obligation
to the releasing shipper. Therefore, the Commission's goals of
disclosure and transparency will still be met. Williston's argument
that the exemption from bidding for AMAs will impair transparency and
allow deals to be consummated without Commission or market participant
knowledge thus fails.\131\
---------------------------------------------------------------------------

    \131\ Williston Basin is also incorrect in suggesting that the
Commission requires pipelines to sell their available capacity in a
bidding auction. See Northern Natural Gas Co., 110 FERC ] 61,361, at
P 10 (2005) (``[T]he Commission has not required pipelines to sell
capacity solely through open seasons. Rather, so long as the
pipeline posts all available firm capacity, it may sell that
capacity on a first-come, first-served basis'').
---------------------------------------------------------------------------

    137. The exemption from bidding adopted by this rule does not
extend to releases made outside the AMA context. There has been no
showing that non-AMA prearranged releases provide benefits of the type
we have found justify exempting AMA releases from bidding. Moreover, in
the typical non-AMA pre-arranged release, price is the primary factor,
and therefore the releasing shipper should generally be indifferent as
to the identity of the replacement shipper so long as it receives the
highest possible price. Accordingly, non-maximum rate capacity releases
of more than 31 days, made outside the AMA context, will still need to
be posted for bidding in order to ensure that the capacity is allocated
to the highest valued use.
3. Definition of AMAs
a. NOPR Proposal
    138. In the NOPR, the Commission proposed to define AMAs that would
qualify for the tying and bidding exemptions, as follows:

    Any pre-arranged release that contains a condition that the
releasing shipper may, on any day, call upon the replacement shipper
to deliver to the releasing shipper a volume of gas equal to the
daily contract demand of the released transportation capacity. If
the capacity release is a release of storage capacity, the asset
manager's delivery obligation need only equal the daily contract
demand under the release for storage withdrawals (emphasis added).

    139. The Commission developed this definition in order to address
two concerns relating to its facilitation of AMAs. It wanted to limit
the exemptions from tying and bidding to bona fide AMAs, that is,
arrangements that place a significant delivery obligation on the
replacement shipper so as to distinguish AMAs eligible for the
exemptions from standard capacity releases. The Commission also sought
to avoid a definition that was too narrow and would effectively limit
efficient and innovative AMAs. The Commission focused on what it
understood to be the fundamental purpose of AMAs, namely that the asset
manager would use the released capacity to deliver gas supplies to the
releasing shipper. Thus, it included the requirement that the
replacement shipper contractually commit itself to deliver to the
releasing shipper, on any day, gas supplies equal to the daily contract
demand of the released capacity. The Commission reasoned this would
achieve the goal of exempting only bona fide AMA transactions from
bidding and the prohibition against tying.
    140. The Commission also believed that the proposed definition was
sufficiently flexible to allow releasing shippers to use AMAs to obtain
only a portion of its required gas supplies or to enter into multiple
AMAs with different asset managers. In addition, the Commission noted
that the proposed definition does not require that the asset manager
make all its deliveries to the releasing shipper over the released
capacity, nor did it limit the types of entities that can use AMAs and
take advantage of the exemptions. The Commission recognized that
electric generators and industrial end-users may make use of AMAs, and
thus the exemption is not limited to LDCs utilizing AMAs.
b. Comments
    141. Numerous commenters \132\ requested that the Commission revise
or clarify the ``on any day'' and/or the ``equal to'' phrases
highlighted in the definition above. They claim that ``on any day'' may
be interpreted as requiring the asset manager to stand ready to deliver
the contract quantity on ``every day'' in order for the arrangement to
be considered an AMA. Commenters assert that such a requirement would
severely inhibit the asset manager's flexibility and its ability to
maximize the value of the capacity. Many commenters also seek to
replace ``equal to'' the daily contract demand of the released capacity
with ``up to.'' Again, commenters cite a lack of flexibility and
devaluation of the released capacity because it would inhibit the asset
manager from re-releasing the capacity. Commenters note that the
beneficial aspects of AMAs are hindered if the asset manager must hold
in reserve the entire portfolio of its

assets even on days when the releasing shipper does not need the
capacity for its supply needs.
---------------------------------------------------------------------------

    \132\ Those commenters include the AGA, BGEM, BP, Canadian
Association of Petroleum Producers (CAPP), FPL Hess, the Marketer
Petitioners, National Grid, NJNG, NGSA, Nicor Enerchange (Nicor),
NJR, Piedmont, PPM, PSNC, SCE&G, SEMI, Sequent, Statoil and WDG.
---------------------------------------------------------------------------

    142. Commenters suggest several general language changes to remedy
these perceived problems. AGA recommends that the Commission clarify
the definition by adding ``but not necessarily every day'' after the
phrase ``on any day.'' It also suggests changing ``equal to'' to ``up
to'' as noted above.\133\ BGEM agrees with this latter change, as do
FPL, National Grid, PPM, and PSNC. Others take a broader view,
suggesting that the delivery obligation should be left to the parties
to negotiate. BP, for example, advocates permitting the parties to
determine by mutual agreement when the releasing shipper may call upon
the replacement shipper to deliver to it a volume of gas equal to the
daily contract demand.\134\ Numerous parties agree with the concept
that the details of the delivery obligation should be left to the
parties and spelled out in the contract. NGSA comments that ``may, on
any day, call upon'' should be revised to ``may, as agreed by the
parties, require. * * *'' \135\ Nicor would add the phrase ``pursuant
to the terms of its contract'' after ``any day''. It would also clarify
that the replacement shipper should be required to deliver gas to a
``location'' specified in the agreement.\136\ Piedmont suggests that
parties be permitted to negotiate call rights ``as necessary and
appropriate for the contracting parties.'' \137\ SCANA suggests that
because the releasing shipper is in the best position to know the
appropriate level of delivery obligation it will require, the
definition should be revised to clarify that the delivery requirement
is limited to specified days set forth in the agreement.\138\ The WDG
suggests that parties should be given the flexibility to ``tailor''
capacity recall rights in AMA transactions to the releasing shipper's
market and supply needs.\139\
---------------------------------------------------------------------------

    \133\ AGA provides a revised definition on page 21 of its
comments.
    \134\ See BP comments at 2, 5-8.
    \135\ NGSA comments at 10.
    \136\ Nicor comments at 2-3.
    \137\ Piedmont comments at 6.
    \138\ Scana comments at 4-7.
    \139\ WDG comments at 4-5.
---------------------------------------------------------------------------

    143. NJNG also recommends that the definition of AMA be clarified
such that a releasing shipper's recall rights up to the maximum daily
quantity of the released capacity is limited to use by the releasing
shipper for its ``own load'' requirements--either its utility retail
service obligation or its own system generation or consumption needs.
c. Modified Definition
    144. In light of the comments received, the Commission has
reconsidered its definition of AMAs and in this rule is modifying the
definition to strike a balance between facilitating flexible and
innovative AMAs and drawing a clear line between AMAs and standard
capacity releases.\140\ The specific modifications to the definition
which the Commission is making for this purpose are shown in bold
below:
---------------------------------------------------------------------------

    \140\ As discussed in detail below, the Commission is also
revising the AMA definition to allow for supply AMAs and to extend
to retail state unbundling programs the same blanket exemption from
bidding granted for AMAs.

    Any pre-arranged release that contains a condition that the
releasing shipper may, on any day during a minimum period of five
months out of each twelve-month period of the release, call upon the
replacement shipper to deliver to the releasing shipper a volume of
gas up to one-hundred percent of the daily contract demand of the
released transportation capacity. If the capacity release is for a
period of less than one year, the asset manager's delivery
obligation described in the previous sentence must apply for the
lesser of five months or the term of the release. If the capacity
release is a release of storage capacity, the asset manager's
delivery obligation need only be one-hundred percent of the daily
contract demand under the release for storage withdrawals.\141\
---------------------------------------------------------------------------

    \141\ The annual five month minimum would apply to AMAs with
terms of one year or longer. The delivery obligation for any AMA
between five months and a year would be for five months of the
release. The delivery obligation would apply to the entire term for
any AMA of less than five months.

    145. The Commission finds that this definition of AMA will further
its goal of delineating AMAs from standard capacity releases. First, it
continues to differentiate bona fide AMAs from standard capacity
releases by placing a significant delivery obligation, applicable
during at least five months out of each 12 month period of the release,
on the asset manager, while alleviating the concerns of those
commenters that assert the NOPR definition was too restrictive. The
Commission has replaced ``equal'' in the definition with ``up to'' in
order to clarify that the asset manager does not have to actually make
deliveries equal to the daily contract demand on every day the delivery
obligation is in effect. However, by using the phrase ``up to'' in the
adopted definition, the Commission doest not intend to allow the
parties to negotiate a potential delivery obligation of less than one
hundred percent of the daily contract demand for the required time
period, even though that amount may not actually be delivered to the
releasing shipper every day. Before entering into an AMA an asset
manager should be able to make reasonable judgments about the releasing
shipper's requirements based upon the releasing shipper's gas usage in
earlier years, and thus make reliable estimations as to when it can use
the capacity for bundled sales or re-releases. Thus, under the
definition adopted in this rule, the releasing shipper will have the
right to call upon the asset manager to deliver the full contract
volume on every day of the five month minimum, though it need not
actually do so. This delivery obligation for the asset manager will
adequately distinguish AMAs from standard capacity releases as well as
ensure that AMAs eligible for the exemptions from tying and bidding
will fulfill the primary purpose of using the releasing shipper's
capacity to supply its gas needs during peak periods.
    146. The definition also furthers the goal of defining AMAs in such
a way that they will be flexible enough to allow diverse parties to
enter into AMAs and for those parties to be able to maximize the value
of pipeline capacity within the context of an AMA. The definition only
requires a delivery obligation on behalf of the replacement shipper for
a portion of each twelve month period, thus giving the asset manager
additional assurance it can utilize the capacity during non peak
periods. The definition adopted in this rule also allows for releasing
shippers to only release a portion of their capacity, places no
limitations on the asset manager that would require it to use the
released capacity to make its deliveries to the releasing shipper, and
does not limit the type of party that can enter into an AMA.
    147. The Commission considered the comments that the extent of the
asset manager's delivery obligation should be left to the parties to
negotiate themselves but ultimately determined that approach would not
further the primary goal of AMAs that they be used to serve the
releasing shipper's supply needs. Absent a specific delivery obligation
in the definition, there would be no assurances that capacity releases
meant to implement an AMA would actually contain a substantial delivery
obligation that would differentiate it from a standard capacity
release. Parties would be able to enter into arrangements that may
require an asset manager to deliver supply to the releasing shipper on
only one day of the year for instance. Such arrangements would
technically qualify as AMAs but would not serve the Commission's goal
to ensure that AMAs be used to serve the releasing shipper's needs.

 Accordingly, the Commission does not deem it appropriate to grant the
benefits of the exemptions from tying and bidding to such arrangements.
4. Supply AMAs
    148. In the NOPR the Commission sought comments on whether it
should expand the definition of AMAs and if so, how supply side AMAs
should be distinguished from other capacity releases. The Commission in
this Final Rule is revising its regulations and the proposed definition
of AMAs to allow for supply side AMAs. Pursuant to the revised
definition for AMAs discussed below, a supply AMA will be
distinguishable from a standard capacity release, and thus eligible for
the tying and bidding exemptions, only if it includes a condition that
requires the replacement shipper to purchase a volume from the
releasing shipper up to the maximum daily contract demand of the
released capacity.
    149. In general, gas supply AMAs are arrangements where a
production area capacity holder releases capacity to an asset manager
that commits to purchase (receive) the releasing shipper's gas and use
the capacity to transport and market that gas. The asset manager nets
back to the producer a fixed percentage of the price that the asset
manager is able to obtain for resale of the gas on a delivered basis.
Numerous producer and marketer commenters filed in favor of AMAs for
gas sellers.\142\ No commenter opposed expanding the AMA definition to
include gas supply AMAs.
---------------------------------------------------------------------------

    \142\ See e.g., comments of NGSA, BGEM, BP, Dominion Marketers,
FPL, Marketer Petitioners, Mewbourne Oil, NEM, Nicor, NJR, Statoil,
Ultra, Walter Oil and Gas, and the Wyoming Pipeline Authority.
---------------------------------------------------------------------------

    150. Based on the comments received, the Commission finds that the
benefits of AMAs as identified in the NOPR apply with equal weight to
producers that want to optimize the value of their capacity and
minimize costs. The Commission understands from producer commenters
that producers often acquire firm pipeline capacity for flow assurance,
that is, to ensure that there will be sufficient capacity to transport
the gas they produce to relevant markets.\143\ Because of the
fluctuation in flows related to new wells in particular, producers
often purchase capacity in excess of their immediate needs to ensure
that there is sufficient capacity for their gas to flow once the
production volumes ramp up. The Commission's approval of supply AMAs
will allow a producer to release all of its capacity to an asset
manager who could maximize the value of that capacity during the start-
up period when producers may not need it, resulting in increased and
efficient use of capacity.
---------------------------------------------------------------------------

    \143\ See e.g., comments of BP.
---------------------------------------------------------------------------

    151. The Commission also finds that the rationale supporting AMAs
for end users equally supports supply AMAs. Supply AMAs will help to
alleviate a producer's burden of administering capacity on a day to day
basis, will maximize the value of pipeline capacity, and will further
diversify the mix of capacity holders and customers served through
capacity releases. Similar to delivery AMAs, supply AMAs involve an
ongoing relationship between the releasing shipper and the asset
manager that differentiates the deals from normal capacity
releases.\144\ Further, supply AMA capacity will be used for its
original purpose, that is, to transport the producer's gas to the
market place. The Commission finds reasonable comments that the
purchase obligation in a supply side AMA is a mirror image of the
delivery obligation required by the Commission for the downstream AMA's
facilitated in the NOPR.\145\
---------------------------------------------------------------------------

    \144\ See e.g., comments of NGSA at 14.
    \145\ Comment of NGSA at 13, comments of Ultra at 8.
---------------------------------------------------------------------------

    152. As discussed above, in the Commission's view the most
important aspect of a supply AMA is the requirement that the asset
manager commit to purchasing the releasing shipper's gas as a part of
the agreement. While several commenters suggest definitional language
for gas supply AMAs that would require the replacement shipper to
``receive'' the releasing shipper's gas,\146\ the Commission finds that
the condition must be to ``purchase'' the gas in order to avoid running
afoul of the shipper must have title rule.\147\ This condition would
also help ensure that such arrangements are bona fide AMAs because it
imposes a significant purchase obligation on the asset manager.
---------------------------------------------------------------------------

    \146\ For example, Statoil states that the Commission should
extend the exemption to include supply-side AMAs by expanding its
proposed section 284.8(h) as follows:
    (h)(3) A release to an asset manager exempt from bidding
requirements under paragraph (h)(1) of this section is any
prearranged capacity release that contains a condition that the
releasing shipper may, on any day, call upon the replacement shipper
to (i) deliver to the releasing shipper a volume of gas equal to the
daily contract demand of the released transportation capacity or the
daily contract demand for storage withdrawals or (ii) receive from
the releasing shipper a volume of gas equal to the daily contract
demand of the released transportation capacity or the daily contract
demand for storage withdrawals. Statoil comments at 12-13.
    \147\ As described in the comments, a typical supply AMA could
involve a requirement that the replacement shipper accept delivery
of the releasing shipper's gas, and use the capacity released to
ship and market that gas. Under that scenario, where the replacement
shipper would accept the releasing shipper's gas and transport that
gas on the released capacity to the releasing shippers' customers,
the arrangement would violate the Commission's requirement that the
shipper hold title to the gas. The shipper in that situation would
be the replacement shipper, and it would be transporting gas that
was owned by the releasing shipper. Thus, in order for there to be a
valid supply AMA, the replacement shipper must purchase and take
title to the gas that it will ship for the releasing shipper.
---------------------------------------------------------------------------

    153. Based on the determination to allow supply AMAs, the
Commission will further modify the proposed definition of capacity
releases to asset managers to accommodate supply AMAs. Thus, the full
definition of the capacity releases that will be eligible for the tying
and bidding exemptions adopted by this rule is as follows:

    Any pre-arranged release that contains a condition that the
releasing shipper may, on any day during a minimum period of five
months out of each twelve-month period of the release, call upon the
replacement shipper to (i) deliver to the releasing shipper a volume
of gas up to one-hundred percent of the daily contract demand of the
released transportation capacity or (ii) purchase a volume of gas up
to the daily contract demand of the released transportation
capacity. If the capacity release is for a period of less than one
year, the asset manager's delivery or purchase obligation described
in the previous sentence must apply for the lesser of five months or
the term of the release. If the capacity release is a release of
storage capacity, the asset manager's delivery or purchase
obligation need only be one-hundred percent of the daily contract
demand under the release for storage withdrawals or injections, as
applicable.
5. AMA Profit Sharing Arrangements
    154. AMAs generally include provisions for the asset manager to
share with the releasing shipper the value it is able to obtain from
the releasing shipper's capacity and other assigned assets when those
assets are not used to serve the releasing shipper. The manager may
share that value by: (1) Paying a fixed ``optimization'' fee to the
releasing shipper; (2) sharing with the releasing shipper the asset
manager's profits from the use of the released capacity and other
assigned assets \148\ pursuant to an agreed-upon formula; (3) making
gas sales to the releasing shipper at a below-market commodity price;
or (4) in some other way mutually agreed to by the contracting
parties.\149\
---------------------------------------------------------------------------

    \148\ These uses could include re-releases of the capacity or
bundled sales to third parties.
    \149\ The AMA may also require the releasing shipper to make
payments to the manager for the services performed by the manager
for the releasing shipper under the AMA. These payments may include
the releasing shipper paying the manager: (1) A management fee for
transportation related tasks (e.g. nominations, scheduling, storage
injections) associated with the manager's obligation to provide gas
supplies to the releasing shipper, and (2) the manager's cost of
purchasing gas supplies for the releasing shipper.

---------------------------------------------------------------------------

    155. As discussed above, while this rule removes the price ceiling
for all short-term capacity release transactions of one year or less,
the Commission is continuing the price ceiling for capacity release
transactions of more than one year. Numerous commenters, including
marketers, LDCs, and producers are concerned that AMA profit sharing
arrangements, such as those described above, may be considered to
violate the price ceiling for long-term capacity releases. Accordingly,
they contend that the Commission should either (1) exempt long-term
capacity releases to asset managers from the price ceiling or (2)
determine that the maximum rate does not apply to the asset manager's
payments to the releasing shipper under such profit sharing
arrangements.
    156. AGA, FPL, Integrys,\150\ the Marketer Petitioners, NGSA, PGC,
NWIGU, Southwest, and others request that the Commission clarify that
the various payments made by or to an asset manager under an AMA will
not be attributed or imputed to the transportation component of an AMA,
and that payments by the parties to one another will not be viewed as
causing the maximum rate ceiling to be exceeded for any releases made
pursuant to an AMA. Alternatively, they request that the Commission
clarify that the price ceiling is removed for all capacity releases
associated with an AMA, regardless of their term.
---------------------------------------------------------------------------

    \150\ The Integrys Gas Group (Integrys) consists of the Michigan
Gas Utilities Corporation, Minnesota Energy Resources Corporation,
North Shore Gas Company, The Peoples Gas Light and Coke Company, and
Wisconsin Public Service Corporation.
---------------------------------------------------------------------------

    157. These commenters explain that applying the price ceiling to
profit sharing arrangements in long-term releases to an asset manager
could significantly hinder parties' ability to successfully structure
an acceptable AMA. They assert that limiting the compensation the
releasing shipper can collect from the asset manager under long-term
releases would prevent the releasing shipper from sharing in the full
market value the asset manager is able to obtain from the capacity,
contrary to the basic purpose of an AMA. This could discourage parties
from entering into AMAs with terms of more than a year. These
commenters further state that the parties frequently desire to enter
into AMAs with terms of two or three years, because longer-term AMAs
provide the parties with a greater ability to plan their business
operations for a longer period of time and are administratively more
efficient.
    158. In response to these comments, the Commission is modifying
section 284.8(b) of its regulations to clarify that the price ceiling
does not apply to any consideration provided by an asset manager to the
releasing shipper as part of an AMA. However, apart from this
clarification, capacity releases of more than one year to an asset
manager will, like any other long-term capacity release, remain subject
to the price ceiling. This modification of the Commission's regulations
will provide the parties to an AMA the flexibility to negotiate
mutually acceptable arrangements under which the asset manager shares
with the releasing shipper the value it obtains from the released
capacity, without running afoul of the capacity release price ceiling.
However, the price ceiling will continue to apply to the rates the
asset manager pays to the pipeline for the released capacity.\151\
---------------------------------------------------------------------------

    \151\ As pointed out in the NOPR, in Consumers Energy Co., 82
FERC ] 61,284, order approving settlement, 84 FERC ] 61,240 (1998),
the Commission investigated certain joint marketing agreements
whereby replacement shippers agreed either to share with the
releasing shipper revenues obtained by the replacement shippers on
the sales of the gas transported by means of the released capacity
or to pay the releasing shipper prices based on the amount of gas
bought and sold. The Commission found in this situation that
Consumers had collected money in excess of the pipeline's maximum
rate, thereby violating the capacity release price ceiling.
Recently, the Commission similarly held in Louis Dreyfus Energy
Services, L.P., 114 FERC ] 61,246, at 61,779 (2006), that if a pre-
arranged release is at the maximum rate, additional payments by the
replacement shipper to the releasing shipper are deemed to render
the release price above the maximum rate. As a result of the
modification to section 284.8(b) adopted in this rule, these
precedents will not apply in the context of capacity releases to
asset managers. However, these precedents will continue to apply to
all other capacity releases.
---------------------------------------------------------------------------

    159. The Commission finds that this change in its regulations is
consistent with the overall goal of this rulemaking of facilitating
beneficial AMAs. In the AMA context, unlike in other capacity release
situations, the releasing shipper is not releasing unneeded capacity,
but capacity that is needed to serve its own supply function and will
be so used during the term of the release. Releasing shippers enter
into AMAs ``for the primary purpose of transferring the[ir] capacity to
entities they perceive have greater skill and expertise both in
purchasing low cost gas supplies and in maximizing the value of the
capacity when it is not needed to meet the releasing shipper's gas
supply needs. In short, AMAs entail the releasing shipper transferring
its capacity to another entity that will perform the functions the
Commission expected releasing shippers would do for themselves--
purchase their own gas supplies and release capacity or make bundled
sales when the releasing shipper does not need the capacity to satisfy
it owns needs.'' \152\
---------------------------------------------------------------------------

    \152\ NOPR at P 66.
---------------------------------------------------------------------------

    160. Thus, a fundamental purpose of an AMA is for the asset manager
to extract as much value from the released capacity and assigned assets
as possible and to share that value with the releasing shipper, who has
contracted with the asset manager precisely because of the asset
manager's expertise in this area. The asset manager generally obtains
revenues related to the released capacity from two basic revenue
sources. First, the asset manager may earn money through the re-release
of the releasing shipper's capacity for a higher value. For example,
the asset manager could enter into short-term re-releases of the
capacity that are not subject to the price cap. Second, the asset
manager could garner funds through utilizing the released capacity to
make bundled sales to third parties. In either situation, the releasing
shipper could have attempted to garner these revenues by itself, but
instead it utilized the asset manager's skills through the use of an
AMA to increase the value of its capacity.\153\
---------------------------------------------------------------------------

    \153\ There are a number of other potential methods for an asset
manager to gain additional revenues from a releasing shipper's
transportation, storage, gas supply, and hedging ``assets''. An
asset manager may use the full range of acquired ``assets'' to enter
into a variety of financial, commodity, transportation, or storage-
related arrangements which allows the asset manager to generate more
revenues from these ``assets,'' when they are not needed to serve
the releasing shipper's direct needs, than the releasing shipper
would have generated on its own. We do not mean to suggest here any
limit to the range of legally-allowed transactions that an asset
manager may pursue, but merely provide illustrative examples.
---------------------------------------------------------------------------

    161. Given that the purpose of an AMA is to allow a releasing
shipper to maximize the value of its capacity by obtaining the services
of an asset manager with greater expertise at accomplishing that goal,
it makes little sense to apply the price ceiling on long-term capacity
releases in a manner which limits the amount of that value which the
asset manager can share with the releasing shipper. As discussed above,
permitting the asset manager to maximize the value of released capacity
and share that value with the releasing shipper provides numerous
benefits, including reducing the releasing shipper's costs of reserving
pipeline capacity, and these benefits ultimately serve to reduce
consumer costs. Moreover, as some commenters point out, applying the
long-term capacity release price ceiling to AMA profit sharing
arrangements would likely

discourage parties from negotiating AMAs with terms of more than a year
in order to avoid the price ceiling. However, longer-term AMAs may
provide the parties significant advantages, for example, by enabling
the parties to obtain greater certainty concerning their gas supply and
sale arrangements for a longer period of time and by minimizing the
administrative costs of negotiating multiple AMA arrangements over a
relatively short period of time.
    162. Thus, the Commission concludes that profit sharing agreements
between the releasing shipper and the replacement shipper in the
context of an AMA, where the releasing shipper could have earned the
monies itself, should not violate the price ceiling just because the
releasing shipper utilized the skills of an asset manager. Modifying
our regulations to exempt all such profit sharing arrangements from the
price ceiling will permit the parties flexibility to craft AMAs in a
manner that they perceive as capturing the true value of the release
and related assignments of other assets, consistent with our goal of
facilitating the use of AMAs.
6. Exemption From Buy/Sell Prohibition
    163. Some commenters state that they wish to enter into AMAs
whereby they would release their capacity to an asset manager, but
would continue to negotiate their own gas purchase contracts. Because
such gas supply contracts would be competitively negotiated
arrangements containing confidential pricing information, these
commenters do not want to assign such contracts to the asset
manager.\154\ Instead, they want to sell the gas they purchase from
their supplier to their asset manager and then direct the asset manager
to transport the gas to their city gate and resell the gas to them.
These commenters ask that the Commission exempt such arrangements from
the Commission prohibition on buy/sell arrangements.
---------------------------------------------------------------------------

    \154\ See e.g., NWIGU comments at 7, PGC comments at 6,
Weyerhaeuser comments at 3-11.
---------------------------------------------------------------------------

    164. The Commission prohibited buy/sell arrangements in Order No.
636 and companion orders in El Paso Natural Gas Company.\155\ Order No.
636 stated that ``[u]nder those arrangements, an LDC will purchase gas
in the production area from an end-user or a merchant designated by an
end-user. The LDC will ship the gas on its own firm capacity and sell
the gas to the end-user at the retail delivery point.'' \156\ The
Commission explained that it had adopted a nationally uniform capacity
release program in order to provide greater assurance that transfers of
capacity from one shipper to another were transparent and not unduly
discriminatory. The Commission found that permitting buy/sell
arrangements would frustrate this goal, because such arrangements
``would provide a major loophole, potentially inviting substantial
circumvention of the capacity release mechanism.'' \157\
---------------------------------------------------------------------------

    \155\ 59 FERC ] 61,031, reh'g denied, 60 FERC ] 61,117 (1992).
    \156\ Order No. 636 at 30,416. In Order No. 636-B, 61 FERC ]
61,272, at 61,997 (1992), the Commission clarified that the buy/sell
prohibition applies to all firm capacity holders, not just LDCs. See
also, In re BP Energy Co., 121 FERC ] 61,088, at P 14 (2007).
    \157\ El Paso, 59 FERC at 61,080.
---------------------------------------------------------------------------

    165. The Commission grants an exemption from the buy/sell
prohibition for AMAs that qualify for the exemptions from bidding and
tying, but only for volumes of gas delivered to the releasing shipper.
In this proceeding, the Commission is modifying its regulations and
policies in order to facilitate the development of efficient and
beneficial AMAs. Consistent with this objective, the Commission will
permit shippers to hire an asset manager solely for the purpose of
managing their interstate pipeline capacity, while they continue to
purchase their gas supplies from a different marketer under contracts
which they do not assign to the asset manager.
    166. As the commenters explain, the marketer having the best terms
and price for asset management services is not always the marketer who
is able to supply the gas commodity at the lowest cost. Moreover, such
marketers may be in direct competition with each other, both in the
asset management field and in the commodity supply area. Such
competition helps the end-user obtain the lowest possible delivered
cost for its gas supplies. The commenters state, however, that in such
circumstances, the releasing shipper may prefer not to assign its gas
purchase contracts to the marketer providing asset management services
for their pipeline capacity because this would reveal competitively
sensitive information concerning the commodity prices offered by the
other marketer. Rather, the releasing shipper could avoid this result
by entering into what is in essence a buy/sell transaction, in which
the releasing shipper would purchase the gas commodity from someone
other than its asset manager and sell that gas to the asset
manager.\158\ The asset manager would then use the released capacity to
transport the gas to the shipper and resell the gas to the shipper at
the delivery point.
---------------------------------------------------------------------------

    \158\ The sale to the asset manager is necessary to avoid a
violation of the shipper-must-have title requirement.
---------------------------------------------------------------------------

    167. The Commission finds that exempting such transactions from the
buy/sell prohibition is appropriate, in light of the above-described
benefits of AMAs in which the asset manager only manages the releasing
shipper's pipeline capacity. This exemption will not undercut the
Commission's goal in adopting the prohibition on buy/sell arrangements
of preventing circumvention of the capacity release program. As we have
previously explained, capacity releases to an asset manager differ from
other releases, because the releasing shipper is not releasing unneeded
capacity, but capacity that will continue to be used to serve its own
supply function during the term of the release. The purpose of the buy/
sell transactions at issue here is to permit the releasing shipper to
negotiate its own gas purchase arrangements with a third party, while
having its asset manager transport the gas over the released capacity
to the releasing shipper. Thus, the asset manager's purchase from the
releasing shipper and resale to that shipper enables the released
capacity to be used to meet the releasing shipper's own gas
requirements and is a condition of the capacity release. This is unlike
the buy/sell transactions prohibited by Order No. 636, where the
purchases, transportation, and re-sales were for the purpose of meeting
the gas requirements of a third party, and there was no capacity
release to any participant in the transactions. While, here, the asset
manager would be buying gas from, and reselling it to, the releasing
shipper, the capacity release to the asset manager would be done in
accordance with the Commission's capacity release regulations and as
such, would be transparent to the market. The parties would need to
comply with all the notice and posting provisions currently in place.
Further, the Commission has found that AMAs are beneficial to the
secondary gas markets. By providing a limited exemption from the buy/
sell prohibition for AMAs, the Commission is further facilitating the
flexibility of AMAs and promoting enhanced competition in the capacity
release market.
    168. The Commission also clarifies, as requested by several
commenters, that an AMA does not necessarily need to involve an
assignment of gas supply contracts.\159\ Those commenters suggest

that while an AMA may involve an assignment of gas supply agreements,
an AMA should not be so limited because the asset manager may have
different supply sources from which to draw. For example, the releasing
shipper may enter into a supply agreement directly with the asset
manager, or the asset manager itself may be responsible for acquiring
supply for delivery to the releasing shipper. Some commenters seek
clarification that an end use customer need not assign actual gas
supply contracts under which it takes service to an asset manager but
that it may avail itself of ``any lawful mechanism for transferring
title to gas supply.'' \160\
---------------------------------------------------------------------------

    \159\ Commenters supportive of this general view include the
AGA, BGEM, Direct Energy, NWIGU, Nstar, PPM, PGC, Sequent and
Weyerhaeuser.
    \160\ Weyerhaeuser comments at 2-5.
---------------------------------------------------------------------------

    169. The Commission notes that the definition for AMAs approved in
this rule does not include a requirement that the releasing shipper
assign gas supply contracts. As discussed above, the releasing shipper
may want to negotiate its own gas supply contracts. Alternatively, the
releasing shipper may not currently have any of its gas supply
contracts to assign, but is hiring an asset manager in part for the
purpose of having the asset manager negotiate and enter into gas supply
contracts for the purpose of supplying the releasing shippers' gas
supply needs. Consistent with the Commission's desire to give the
parties the flexibility to negotiate the most efficient AMA
arrangements to fit their needs, the definition of AMA-related releases
adopted in this rule only requires that the replacement shipper enter
into a contractual commitment to make the requisite delivery of gas
supplies to the releasing shipper. The mechanism by which the
replacement shipper will obtain those supplies is left to the parties
to negotiate.
7. Other AMA Terms and Conditions
    170. Several commenters request that the Commission clarify that
parties are free to negotiate all relevant terms and conditions of an
AMA, and the Commission does not intend to preclude parties from
including in their AMA agreements terms and conditions relating to
matters beyond the asset manager's delivery obligation to the releasing
shipper. For example, Sequent comments that the definition of AMA
should not preclude parties from negotiating terms and conditions in
addition to capacity release and delivery/receipt requirements, such as
form of service and other related agreements, compensation, operating
and communication protocols, asset descriptions and risk
allocations.\161\ NJNG likewise seeks clarification that the tying
exemption for AMAs applies to all aspects of an AMA, including
financial risk management products and services, nominations and
scheduling services, asset optimization fees and profit sharing
arrangements and other products and services reasonably related to an
AMA.
---------------------------------------------------------------------------

    \161\ Sequent comments at 8-9.
---------------------------------------------------------------------------

    171. The Commission clarifies that its definition of AMAs is not
meant to preclude the parties from negotiating the terms and conditions
of other agreements necessary to implement AMAs, provided the elements
of the AMA definition are satisfied. It is the Commission's intention
in this rule to facilitate innovative and efficient AMAs. The
Commission recognizes that in order to successfully implement an AMA,
the parties will need to negotiate and agree upon certain other
practical elements of the transaction aside from the release terms and
delivery aspects of the deal. Those items may include communication
protocols, risk management arrangements, nominations and scheduling
services, asset optimization fees and profit sharing arrangements and
other products and services reasonably related to an AMA. It would be
counterproductive to the Commission's goal of facilitating AMAs to
disallow parties to tie these other necessary aspects of AMAs to the
deal. Thus, the Commission clarifies that if the arrangement meets the
essential elements of the definition of AMAs, then the tying exemption
applies to all other agreements necessary to implement the AMA. The
Commission also clarifies that payments made by or to an asset manager
under an AMA that are separate and apart from the cost of the released
capacity do not violate the prohibition against tying.
8. Posting and Reporting Requirements
    172. In the NOPR, the Commission stated that, while it proposed to
exempt capacity releases implementing AMAs from bidding, such releases
would remain subject to all existing posting and reporting
requirements. Accordingly, the Commission stated, pipelines would still
be obligated to provide notice of the release pursuant to 18 CFR
section 284.8(d). In addition, the details of the release transaction
would have to be posted on the pipeline's Internet web site under 18
CFR section 284.13(b)(1)(viii), which requires the posting of ``special
terms and conditions applicable to a capacity release transaction.''
The Commission also stated that sections 284.13(c)(2)(viii) and (ix)
require that the pipeline's index of customers include the name of any
agent or asset manager managing a shipper's transportation service and
whether that agent or asset manager is an affiliate of the releasing
shipper.
    173. Several parties filed comments regarding the posting and
reporting requirements for AMAs.\162\ While most support the
Commission's goals of transparency and disclosure, they seek
clarification as to what exactly must be posted. Essentially these
comments request clarification that commercially sensitive details of
an AMA, such as the structure, assets available for use by the asset
manager, and the compensation to be paid, do not need to be posted as
``special terms and conditions'' of the release pursuant to section
284.13(b)(1)(viii). They assert that only the fact that the release is
an AMA needs to be disclosed. FPL requests that the Commission
specifically define the facts that must be reported for there to be a
valid AMA. Hess makes a similar request, and emphasizes that releasing
shippers should not be required to post an RFP or any other details of
the AMA because they are proprietary, confidential and commercially
sensitive. Hess also requests the Commission confirm that it is not
expanding the details that it expects to be disclosed as special terms
and conditions. Hess and Integrys assert that posting and reporting on
AMAs should be limited to the fact that the release is part of an AMA
and describing the terms and conditions of the release associated with
the AMA.\163\ NGSA also requests clarification that the posting of a
capacity release in the context of an AMA should require only the
information normally posted for a typical release of capacity (receipt
and delivery points, term), along with a statement that acknowledges
that it is part of an AMA.
---------------------------------------------------------------------------

    \162\ See e.g., Comments of AGA; Comments of FPL, Comments of
Hess; Comments of Integrys, and NGSA comments.
    \163\ Integrys comments at 6-7.
---------------------------------------------------------------------------

    174. In response to these comments, the Commission clarifies in
this rule the posting and reporting requirements that will be
applicable to release transactions implementing AMAs. By stating in the
NOPR that existing section 284.13(b)(1)(viii) requires that any
``special terms and conditions'' of such releases must be posted, the
Commission did not intend to require that commercially sensitive
details of an AMA be disclosed, particularly information concerning the
gas commodity aspects of the AMA.\164\ The

Commission recognizes that in order to promote competition certain
details of the AMA are commercially sensitive and thus should remain
confidential.
---------------------------------------------------------------------------

    \164\ The Commission retains the right, however, to require a
releasing shipper to make all relevant agreements and supporting
documents available to the Commission for review if questions arise
as to whether a purported AMA satisfies the Commission's
regulations.
---------------------------------------------------------------------------

    175. However, the Commission finds that any posting under section
284.13(b) that relates to a release to implement an AMA should include
(1) the fact that the release is to an asset manager and (2) the
delivery or purchase obligation of the AMA, in addition to the
information required to be posted for all capacity releases. As
discussed in detail above, the requirement that the asset manager
deliver or purchase gas to fulfill the releasing shipper's supply or
marketing obligations is the cornerstone for differentiating AMAs from
standard capacity releases. In order to ensure that capacity releases
posited as AMAs eligible for the exemptions from tying and bidding are
bona fide AMAs, the Commission must have a means to monitor this
critical component of the arrangement. Other information specifically
related to the AMA, however, such as the pricing of any sales of gas
commodity and any profit sharing arrangements between the releasing and
replacement shipper need not be posted pursuant to section 284.13(b).
Consistent with this discussion, the Commission is revising section
284.13(b)(1) of its regulations to add a new subsection (x) specifying
the information concerning an AMA that must be included in the posting
of any capacity release meant to implement an AMA. The required posting
concerning the delivery or purchase obligation that qualifies the
release as an AMA under the definition discussed above should specify
the volumetric level of the replacement shipper's delivery or purchase
obligation and the time periods during which that obligation is in
effect.
    176. INGAA and other pipeline commenters state that as pipelines
already have a substantial role in administering the Commission's
capacity release program, pipelines should not be overburdened by the
proposed changes nor should they be responsible for policing asset
managers' compliance therewith. They assert that pipelines' obligations
should be limited to posting offers submitted by releasing shippers
using the terms and conditions provided to the pipeline.\165\
---------------------------------------------------------------------------

    \165\ INGAA comments at 21; Spectra comments at 29.
---------------------------------------------------------------------------

    177. The Commission hereby clarifies in this rule that pipelines
are responsible for posting offers submitted by releasing shippers that
are meant to implement AMAs using the terms and conditions provided by
the releasing shipper to the pipeline. It is incumbent upon the
releasing shipper to include the details discussed above to qualify the
release as an AMA. The Commission further clarifies that the pipeline
has no obligation to act on any information other than is provided to
it by its customers. The pipeline must of course, comply with all
applicable elements of section 284.13 of the Commission's regulations.
9. Part 157 Capacity
    178. Several commentors \166\ urge the Commission to permit Part
157 individually certificated transportation and storage agreements to
be used in the AMA context.\167\ The Commission's Part 284 regulations,
including the provisions for flexible receipt points and capacity
release, do not apply to Part 157 services. This is because pipelines
perform Part 157 services pursuant to an individual certificate rather
than a Part 284 blanket certificate for open access transportation.
Under Part 157, a pipeline negotiates a service with a particular
shipper, including the terms and conditions of service. Such an
agreement generally would only provide for service between specified
receipt and delivery points. Subsequently, the pipeline would apply to
the Commission under NGA section 7 for a certificate to perform this
individual service.
---------------------------------------------------------------------------

    \166\ See e.g., comments of AGA, National Grid, NJNG, Nstar, and
PPM.
    \167\ Individually-certificated service agreements are
transportation and storage services that have been certificated
pursuant to Part 157 of the Commission's regulations and under the
authority of Section 7(c) of the NGA. See 18 CFR 157 Subpart A
(2007).
---------------------------------------------------------------------------

    179. NJNG states that the Commission should permit a capacity
holder desiring to enter into an AMA ``to release Part 157, as well as
Part 284, capacity to the asset manager.'' However, it qualifies its
request to explain that while it believes that a release of Part 157
capacity should be permitted in this context, it does not request all
the flexibility of Part 284 capacity. NJNG states that a limited
expansion of flexibility afforded to Part 157 transactions will
facilitate the asset manager's ability to optimize the customer's
portfolio of transactions.\168\ NGNJ also suggests that inclusion of
Part 157 service in AMAs could be achieved ``either by making Part 157
services releasable for this limited purpose, or it could be
effectuated by affording the asset manager a waiver of the Shipper Must
Have Title requirement * * *.'' \169\
---------------------------------------------------------------------------

    \168\ NJNG comments at 3.
    \169\ Id.
---------------------------------------------------------------------------

    180. National Grid also requests that the Commission clarify that
``as part of an AMA, a shipper can include all of its pipeline
contracts, including individually certificated Part 157 contracts and
upstream sales agreements without violating any otherwise applicable
Commission rules or policies * * *.'' \170\ AGA recommends that the
Commission allow Part 157 capacity to be included in the portfolio of
assets that a releasing shipper may assign to an asset manager, but
does not advocate that Part 157 capacity be permitted to be released or
assigned on a stand-alone basis.\171\ PPM and Nstar request that the
Commission permit customers to include Part 157 service as part of an
AMA. They argue that inclusion of Part 157 capacity in AMAs would
further advance the Commission's goal of facilitating AMAs and warrants
an exception from the rules that otherwise prohibit shippers from
releasing their Part 157 capacity, while exclusion of Part 157
capacity, would serve as an obstacle to the maximization of efficient
capacity.
---------------------------------------------------------------------------

    \170\ National Grid comments at 5.
    \171\ AGA comments at 22.
---------------------------------------------------------------------------

    181. On February 15, 2008, Spectra filed a reply to these comments.
Spectra supports the ability of customers to have asset managers act as
their agents in managing Part 157 service agreements, so long as the
agreements themselves are not released or otherwise assigned to the
asset manager and the customer and asset manager follow all other
Commission policies and regulations related to Part 157 service.
Spectra opposes requests that the Commission allow Part 157 service to
be released or, in any way, be treated in the same manner as Part 284
services and states that such suggestions are inconsistent with
Commission policy and are outside the scope of the NOPR.
    182. On March 3, 2008, Nstar filed a response to Spectra and
clarifies that commentors requesting this treatment for Part 157
capacity are not arguing for flexibility equal to that the Commission
provides shippers under Part 284 service. Rather, they simply urge the
Commission to clarify that Part 157 rights may be among the assets
conveyed under an AMA, and that they seek no additional Part 284
service flexibilities. Nstar argues that the Commission should not
require shippers to convert Part 157 service to Part 284 service as a
condition of subjecting such capacity to an AMA. Nstar argues that such
conversion

would be costly and the added flexibilities would not warrant the cost
of conversion as they are unnecessary.
    183. The Commission did not propose in the NOPR to require
pipelines to allow shippers to transfer their Part 157 service
agreements to an AMA, because the essence of an AMA, as defined by
Commission, is a pre-arranged capacity release, pursuant to the Part
284 regulations, from the holder of the capacity to the asset manager.
The Commission's policies regarding the release of Part 157 capacity
are well set:

    In Order No. 636-A, the Commission determined that holders of
individually certificated transportation under section 7(c) of the
Natural Gas Act and Part 157 of the Commission's regulations (Part
157 shippers), i.e. not Part 284 shippers, are not eligible to
release capacity under section 284.243 since they are not governed
by Part 284 or affected by the provisions of Order No. 636 that
amended the Part 284 regulations.\172\
---------------------------------------------------------------------------

    \172\ Order No. 636-B, 61 FERC ] 61,272 at 61,992 (1992),
citing, Order No. 636-A at 30,569.

    184. In its Order No. 636 proceeding, the Commission recognized
that shippers under Part 157 service would not have the same rights and
flexibility as Part 284 shippers such as flexible receipt and delivery
points and the right to release their capacity to another shipper.
However, the Commission stated that shippers with Part 157 service
could convert their Part 157 service to Part 284 service if they wanted
to release capacity or use flexible receipt and delivery points.\173\
Further, in Order No. 636-B, the Commission recognized that while its
open access program under Part 284 granted shippers benefits not
enjoyed by Part 157 shippers, it also imposed obligations upon Part 284
shippers that were not imposed on Part 157 shippers, such as requiring
non-discriminatory access for all shippers under Part 284 while Part
157 arrangements may include unique terms and conditions.\174\ The
Commission also pointed out that, because the Part 284 capacity
releasing program permits releases at discounted rates but Part 157
capacity cannot be discounted, Part 157 shippers cannot simply be
included in the Part 284 capacity release program.\175\
---------------------------------------------------------------------------

    \173\ Order No. 636-A at 30,569. Moreover, in Order No. 636-B,
the Commission stated:
    Although the Commission is denying the requests for rehearing,
the Commission reemphasizes that it finds conversions from
individually certificated transportation to open access
transportation to be in the public interest. The Commission
anticipates that pipelines and their customers will be able to reach
agreement on proposals for implementing such conversions and
encourages them to do so. Id. at 61,994. (footnote omitted)
    \174\ Order No. 636-B at 61,992.
    \175\ Order No. 636-B at 61,993.
---------------------------------------------------------------------------

    185. For the reasons stated above, the Commission is not persuaded
to revise its longstanding policy of not permitting Part 157 shippers
to participate in the capacity release program without converting their
services to service under Part 284 blanket authority. Further, to the
extent that Nstar argues that the commentors do not seek capacity
release rights such as those enjoyed by Part 284 shippers but, rather
the ability to assign a Part 157 individually certificated service
agreement to its asset manager, such a request entails a change of the
contract between the pipeline and the shipper. That is because such a
modification would replace the existing shipper under a contract
individually certificated by the Commission with another shipper. If
the contract does not include a provision permitting such an
assignment, the Commission could only require the pipeline to permit
the assignment by acting under NGA section 5. The Commission finds that
such modifications to individually certificated agreements should be
addressed on a case by case basis, rather than in this rulemaking
proceeding.

V. Tying of Storage Capacity and Inventory

    186. In its decision in Texas Eastern Transmission, LP,\176\ the
Commission found that a proposed tariff provision stating that ``[i]f
the Releasing Customer proposes or requires a transfer of all or a
portion of its Storage Inventory in conjunction with its release of
storage capacity rights, it shall so specify in its offer to release
capacity'' constituted a broad authorization for shippers on Texas
Eastern's system to tie their release of storage capacity to an
extraneous condition (i.e. the taking of gas inventory) in all
situations. The Commission held that this proposed tariff provision
violated the Commission's current prohibition against tying a release
of its capacity to any extraneous conditions. The Commission thus
required Texas Eastern to delete the proposed language.
---------------------------------------------------------------------------

    \176\ Texas Eastern Transmission LP, 120 FERC ] 61,199, order on
compliance filing, 121 FERC ] 61,026 (2007), reh'g denied without
prejudice, 122 FERC 61,014 (2008) (Texas Eastern). The Commission
stated in its rehearing order that the issues raised in the requests
for clarification and/or rehearing in the Texas Eastern case were
general policy issues that would be more appropriately addressed in
this rulemaking proceeding.
---------------------------------------------------------------------------

    187. Subsequent to the Texas Eastern decision, the Commission in
the NOPR requested comment on whether it should clarify its prohibition
concerning tying agreements outside of the AMA context to allow a
releasing shipper to include conditions in a storage release concerning
the sale and/or repurchase of gas in storage inventory.\177\ All
commenters that addressed this issue supported removing the tying
prohibition for storage services to allow a shipper that releases
storage capacity to condition a release of storage capacity on the sale
and/or repurchase of gas in storage inventory. They want to be able to
require that a replacement shipper take title to any gas that remains
in the storage at the time the release takes effect and/or to require
the releasing shipper to return the storage capacity to the releasing
shipper at the end of the release with a specified amount of gas in
storage.\178\ Commenters supporting this change argue that there is
nothing extraneous about a releasing shipper addressing gas in storage
at the time it releases storage capacity, and thus the requisite
``tying'' should be permitted.
---------------------------------------------------------------------------

    \177\ NOPR at P 82.
    \178\ See e.g. Comments of the AGA, Duke Energy, Florida Cities,
INGAA, the NGSA, Piedmont, National Grid, NYSEG and RG&E.
---------------------------------------------------------------------------

    188. Commenters note that tying storage capacity with storage
inventory will allow the releasing shipper greater ease in releasing
capacity and will enable transactions to be consummated more
readily.\179\ Further, because releasing shippers may want to release
storage capacity in the summer when they do not need it, they need to
get the capacity back with gas in storage or there will not be enough
time to re-fill it for the winter season.
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    \179\ See e.g. Comments of Piedmont at 7.
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    189. Commenters also assert that the nature of the relationship
between storage capacity and storage inventory calls out for a waiver
of the tying rule. They add that the ability of releasing shippers to
``tie'' storage capacity with storage inventory such that releasing
shippers would be permitted to require that replacement shippers take
inventory as a condition of release, even outside the AMA context, will
provide benefits to the marketplace similar to those provided by
AMA.\180\ Finally, the NYPSC asserts that the AMA exemption from tying
prohibition should be extended to releases of storage capacity
performed pursuant to state retail access programs.
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    \180\ Comments of Marketer Petitioners at 15-16.
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    190. Based on the substantial support expressed in the comments,
the Commission is clarifying in this rule its prohibition on tying to
allow a releasing shipper to include conditions in a release concerning
the sale and/or repurchase of gas in storage inventory even outside the
AMA context. Specifically, this exception to the tying

rule is meant to allow a shipper that releases storage capacity to
require the replacement shipper to (1) take title to any gas in the
released storage capacity at the time the release takes effect and/or
(2) return the storage capacity to the releasing shipper at the end of
the release with a specified amount of gas in storage. The Commission
is persuaded in the storage context, storage capacity is inextricably
attached to the gas in storage. By allowing releasing shippers to
condition the release of storage capacity on sale and or repurchase of
gas in storage inventory and on there being a certain amount of gas
left in storage at the end of the release, the Commission will enhance
the efficient use of storage capacity while at the same time ensuring
that the releasing shipper will have gas in storage for the winter. The
Commission also agrees that allowing the tying of storage capacity to
storage inventory will provide benefits to the market by enabling more
active release of storage capacity into the wholesale market.

VI. Liquefied Natural Gas

    191. Statoil seeks clarification that akin to the exemption for
AMAs that would allow the tying of released capacity to gas sales
agreements, it would be permissible to link throughput agreements and/
or sales of gas at the outlet of an NGA Section 3 liquefied natural gas
(LNG) terminal with a prearranged capacity release on an interstate
pipeline connected to the terminal. Statoil comments that LNG importers
often hold firm capacity on interstate pipelines adjacent to the
terminals to ensure that re-gasified LNG can exit the terminal
efficiently and be transported to the markets on the interstate
pipeline grid. Noting that while the contracts governing the use of NGA
section 3 capacity are not subject to the Commission's open access or
capacity release policies, and that the terms of agreements for the
sale of LNG are not governed by the Commission, the NGA section 7
pipelines that connect the terminals to the interstate grid are subject
to those regulations. Accordingly, Statoil suggests that the Commission
should recognize and permit the natural link between an LNG terminal
throughput agreement and an agreement to release downstream pipeline
capacity and clarify that such a tie is permissible. Shell LNG filed in
support of Statoil's comments.\181\
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    \181\ Chevron also filed late supporting comments on May 27,
2008.
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    192. The Commission declines to grant the requested clarification
in this generic rulemaking proceeding. In this rule, the Commission is
providing an exemption from bidding and the prohibition on tying in
order to permit gas sellers to use supply AMAs. Statoil and other LNG
importers holding firm capacity on interstate pipelines connected to an
LNG terminal can use a supply AMA. The comments of Statoil and other
LNG importers do not provide adequate detail on the types of
transactions for which they seek a tying exemption to explain why a
further exemption beyond that provided for supply AMAs is required for
LNG facilities. Likewise, it is unclear from the comments how far
downstream they seek to have the exemption apply. For example, while
some terminals may have direct connection to a dedicated lateral line,
others interconnect directly with a major interstate natural gas
pipeline. Nor do we have a sufficient record at this time to evaluate
the possible benefits of such an exemption or the effect on open access
competition that such an exemption might have.
    193. While the Commission declines to grant the clarification in
this general rulemaking proceeding, the Commission is open to
considering this issue on a case-by-case basis if presented to it in a
fully justified proposal.

VII. State Mandated Retail Unbundling

    194. Section 284.8(h)(1) of the Commission's current capacity
release regulations exempts prearranged releases of more than 31 days
from bidding only if they are at the ``maximum tariff rate applicable
to the release.'' States with retail open access gas programs (in which
customers can buy gas from marketers rather than LDCs) have relied on
this ``safe harbor'' exemption from bidding in structuring their
programs. Specifically, a key component of most such programs is a
provision for the LDC to make periodic releases, at the maximum rate,
of its interstate pipeline capacity to the marketers participating in
the program. The marketers then use the released capacity to transport
the gas supplies that they sell to their retail customers. The
exemption from bidding ensures that the LDC's capacity is transferred
only to the marketers participating in the state retail unbundling
program and is not obtained by non-participating third parties.
    195. However, the Commission's removal of the price ceiling for
releases of one year or less in this rule eliminates the bidding
exemption for releases with terms of between 31 days and one year. That
is because there will no longer be a maximum tariff rate applicable to
such releases. As a result, absent some additional modification of the
regulations concerning bidding, LDCs will have to post for bidding all
releases of between 31 days and one year that are made as part of a
state retail unbundling program. This would mean that the marketers
participating in the program could only obtain the capacity if they
matched any third party bid for the capacity.
    196. In the NOPR, the Commission proposed to address this issue in
a manner generally consistent with its actions in Order No. 637, when a
similar issue arose with respect to the experimental lifting of the
price ceiling for short-term capacity releases. In Order Nos. 637-A and
637-B,\182\ the Commission denied the request by LDCs for a blanket
exemption from bidding of all capacity releases made as part of a state
retail unbundling program. The Commission explained that, with the
price ceiling removed, posting and bidding was necessary to protect
against undue discrimination and ensure that the capacity is properly
allocated to the shipper placing the greatest value on the capacity.
The Commission nevertheless provided that, if an LDC considered an
exemption from bidding essential to further a state retail unbundling
program, the LDC could request a waiver of the bidding regulation to
allow the LDC to consummate pre-arranged capacity release deals at the
maximum rate, subject to certain conditions.\183\
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    \182\ Order No. 637-A at 31,569; Order No. 637-B, 92 FERC at
61,163.
    \183\ On appeal of Order No. 637, the court in INGAA affirmed
the Commission's refusal to grant a blanket waiver of the bidding
requirement for releases made as part of a state retail unbundling
program, finding that the Commission's concern about discrimination
was reasonable. However, the court remanded the issue of the
reasonableness of the Commission's condition that an LDC seeking a
waiver must agree to subject all its releases to the maximum rate.
The Commission did not address this issue in its order on remand,
because the price ceiling had been re-imposed by the time of the
remand order, thus rendering the issue moot.
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    197. In the NOPR, the Commission similarly proposed to permit LDCs
to request a waiver of the bidding regulation to allow them to
consummate short-term pre-arranged capacity release deals necessary to
implement retail access at the maximum rate without bidding. The
Commission stated that this limited waiver of the bidding requirement
would enable retail access programs to continue to operate with the
same exemption from bidding which they now have. While the Commission
did not propose a blanket exemption from bidding for releases made by
LDCs under state retail choice programs comparable to the blanket
exemption for AMAs, the Commission requested

comment on whether such releases should be treated as similar to
releases made as part of an AMA and thus accorded the same full
exemption from bidding. The Commission recognized that there are
similarities between releases made pursuant to a state retail
unbundling program and those made as part of an AMA, but requested
comment on whether a blanket exemption for state programs would entail
greater potential for undue discrimination.
    198. The vast majority of comments that addressed this issue
supported treating capacity releases under state retail choice programs
the same way as AMAs, advocating that those capacity releases be
afforded the same blanket exemptions from capacity release bidding
requirements as those granted to releases to implement AMAs.\184\
Commenters assert that releases made by LDCs for state unbundling
programs closely resemble AMAs in that the capacity is committed to be
used for its original purpose, to serve the LDC's customers. Commenters
also note that the reasons given by the Commission in the NOPR for the
bidding and tying exemptions for AMAs apply with equal force to
releases to implement state approved retail access programs. Others
argue that the Commission's case-by-case exemption analysis creates a
greater potential for discrimination than a blanket exemption would. As
pointed out by the NYPSC, requiring LDCs seeking to participate in
state approved unbundling programs will inject a level of uncertainty
into the process as well as impose additional expensive burdens on
those LDCs. AGA urges the Commission to permit LDCs to make exempt
releases at the price the LDC paid for the capacity as opposed to the
applicable maximum tariff rate.\185\ FPL Energy provides the Commission
with an alternative suggestion that would continue to allow a general
exemption from bidding for prearranged releases where the replacement
shipper agrees to pay the maximum tariff rate.\186\
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    \184\ Those commenters include the AGA, Boardwalk, BP, Commerce
Energy, Direct Energy, Duke Energy, FPL, Hess, IGS, NJNG, NStar,
NYSEG, RG&E, Ohio OGMG, PG&E, PSCNY, PUCO, SEMI, Sequent and WDG.
    \185\ AGA comments at 7.
    \186\ FPL Energy comments at 23.
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    199. The Commission finds that capacity releases by LDCs to
implement state approved retail access programs should be granted the
same blanket exemptions from the prohibition against tying and the
bidding requirements as capacity releases made in the AMA context. As
the Commission stated in Georgia Public Service Commission,\187\
``state retail unbundling is consistent with the Commission's overall
goals in Order No. 636 of improving the competitive structure of the
natural gas industry by promoting access to the interstate pipeline
transportation grid and the wellhead market so that willing buyers and
sellers can meet in a competitive, national market to transact the most
efficient deals possible. Therefore the Commission does not wish to
discourage state retail unbundling programs that give retail end-users
a greater choice of suppliers from whom to purchase their gas.'' State
retail unbundling programs provide benefits similar to AMAs.
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    \187\ 110 FERC ] 61,048 at P 20 (2005).
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    200. Accordingly, this rule clarifies that the prohibition against
tying does not apply to releases by an LDC to a marketer that agrees to
sell gas to the LDC's retail customers under a state approved retail
access program. The final rule also amends section 284.8(h) in order to
provide for such an exemption from bidding. The exemption from bidding
will apply regardless of the rate at which the LDC makes its releases
to the marketers participating in the state retail unbundling program.
In order to qualify for the exemption, the capacity release must be
used by the replacement shipper to provide the gas supply requirement
of retail consumers pursuant to a retail access program approved by the
state agency with jurisdiction over the LDC that provides delivery
service to such retail consumers. The exemption does not apply to re-
releases made by marketers participating in the retail access program.
    201. In light of our granting this blanket bidding exemption, the
Commission is also modifying section 284.13(b)(1) of its regulations to
add a requirement that the pipeline's posting of a capacity release
must state whether the release is to a marketer participating in an
eligible state retail access program.

VIII. Implementation Schedule

    202. The regulatory changes in this rule will become effective as
of the effective date of this rule, at which time parties may act in
accordance with the revised regulations adopted by this rule. Pipelines
must file within 180 days of the effective date of this rule to remove
any inconsistent tariff provisions and can incorporate this filing into
any other tariff filing made by the pipeline within the 180 day period.

IX. Information Collection Statement

    203. The Office of Management and Budget (OMB) regulations require
that OMB approve certain reporting, recordkeeping, and public
disclosure (collections of information) imposed by an agency.\188\