[Federal Register: June 30, 2008 (Volume 73, Number 126)]
[Rules and Regulations]
[Page 37057-37093]
[DOCID:fr30jn08-13]

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Part III

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 284

Promotion of a More Efficient Capacity Release Market; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-000; Order No. 712]

Promotion of a More Efficient Capacity Release Market

Issued June 19, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: In this Final Rule the Federal Energy Regulatory Commission
revises its regulations governing interstate natural gas pipelines to
reflect changes in the market for short-term transportation services on
pipelines and to improve the efficiency of the Commission's capacity
release program. The Commission permits market based pricing for short-
term capacity releases and facilitates asset management arrangements by
relaxing the Commission's prohibition on tying and on its bidding
requirements for certain capacity releases. The Commission further
clarifies that its prohibition on tying does not apply to conditions
associated with gas inventory held in storage for releases of firm
storage capacity. Finally, the Commission waives its prohibition on
tying and bidding requirements for capacity releases made as part of
state-approved retail open access programs.

DATES: This rule will become effective July 30, 2008.

FOR FURTHER INFORMATION CONTACT:
William Murrell, Office of Energy Market Regulation, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-8703.
Robert McLean, Office of the General Counsel, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-8156.
David Maranville, Office of the General Counsel, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington DC 20426,
<EMAIL_ADDRESS>(202) 502-6351.

SUPPLEMENTARY INFORMATION:

Order No. 712

Final Rule

                            Table of Contents

                                                              Paragraph
                                                               Numbers

I. Background..............................................           2.
    A. The Capacity Release Program........................           2.
    B. The NOPR............................................          15.
    C. Comments............................................          19.
II. Overview of the Final Rule.............................          24.
III. Price Cap Issues......................................          30.
    A. Removal of Maximum Rate Ceiling for Short-Term                30.
     Capacity Releases.....................................
        1. Maximum Rate Ceiling Interferes With Efficient            32.
         Transactions......................................
        2. Assurance of Just and Reasonable Rates..........          38.
            a. Market Conditions Ensure Just and Reasonable          39.
             Rates.........................................
            b. Recourse Rate Protection....................          48.
            c. Short-Term Customers Are Not Captive........          50.
            d. Non-Cost Factors............................          51.
            e. Oversight...................................          55.
        3. Comments........................................          57.
            a. Lack of Competition in Certain Areas........          58.
            b. Benefits From Removing the Price Ceiling....          63.
            c. Promotion of Construction...................          67.
            d. Changed Circumstances.......................          68.
            e. Exemption From Bidding for Short-Term                 72.
             Releases at the Maximum Rate..................
    B. Removal of Price Ceiling for Long-Term Releases.....          74.
    C. Removal of Price Ceiling for Pipeline Short-Term              81.
     Transactions..........................................
        1. Removal of the Price Ceiling Is Not Justified...          82.
        2. Response to Specific Comments...................          87.
            a. Evidentiary Record..........................          87.
            b. Infrastructure Incentives...................          90.
            c. Competitive Market Structure................          92.
            d. Differences in Flexibility Between Pipeline           95.
             Capacity and Released Capacity................
            e. Bifurcation of the Markets..................         103.
IV. Asset Management Arrangements..........................         109.
    A. Background..........................................         110.
    B. Discussion..........................................         118.
        1. Tying...........................................         127.
        2. Bidding.........................................         132.
        3. Definition of AMAs..............................         138.
            a. NOPR Proposal...............................         138.
            b. Comments....................................         141.
            c. Modified Definition.........................         144.
        4. Supply AMAs.....................................         148.
        5. AMA Profit Sharing Arrangements.................         154.
        6. Exemption From Buy/Sell Prohibition.............         163.
        7. Other AMA Terms and Conditions..................         170.
        8. Posting and Reporting Requirements..............         172.
        9. Part 157 Capacity...............................         178.
V. Tying of Storage Capacity and Inventory.................         186.
VI. Liquefied Natural Gas..................................         191.

VII. State Mandated Retail Unbundling......................         194.
VIII. Implementation Schedule..............................         202.
IX. Information Collection Statement.......................         203.
X. Environmental Analysis..................................         216.
XI. Regulatory Flexibility Act.............................         217.
XII. Document Availability.................................         220.
XIII. Effective Date and Congressional Notification........         223.

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly,
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

Order No. 712

Final Rule

Issued June 19, 2008.
    1. In this Final Rule, the Commission revises its Part 284
regulations concerning the release of firm capacity by shippers on
interstate natural gas pipelines. First, as proposed in its Notice of
Proposed Rulemaking,\1\ the Commission will remove, on a permanent
basis, the rate ceiling on capacity release transactions of one year or
less. Second, the Commission will modify its regulations to facilitate
the use of asset management arrangements (AMAs), under which a capacity
holder releases some or all of its pipeline capacity to an asset
manager who agrees to either purchase from, or supply the gas needs of,
the capacity holder. Specifically, the Commission will exempt capacity
releases made as part of AMAs from the prohibition on tying and from
the bidding requirements of section 284.8. Third, the Commission
clarifies that its prohibition on tying does not apply to conditions
associated with gas inventory held in storage for releases of firm
storage capacity. Fourth, the Commission will modify its regulations to
facilitate retail open access programs by exempting capacity releases
made under state-approved retail access programs from the prohibition
on tying and from the bidding requirements of section 284.8. This Final
Rule is designed to enhance competition in the secondary capacity
release market and to increase shipper gas supply options. This rule
will become effective 30 days after publication in the Federal
Register.
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    \1\ Promotion of a More Efficient Capacity Release Market, 72 FR
65,916, FERC Stats. and Regs. ] 32,625 (November 26, 2007) 121 FERC
] 61,170 (2007) (NOPR).
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I. Background

A. The Capacity Release Program

    2. The Commission adopted its capacity release program as part of
the restructuring of natural gas pipelines required by Order No.
636.\2\ In Order No. 636, the Commission sought to foster two primary
goals. The first goal was to ensure that all shippers have meaningful
access to the pipeline transportation grid so that willing buyers and
sellers can meet in a competitive, national market to transact the most
efficient deals possible. The second goal was to ensure consumers have
``access to an adequate supply of gas at a reasonable price.'' \3\
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    \2\ Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation of
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No.
636, 57 FR 13,267 (April 16, 1992), FERC Stats. and Regs.,
Regulations Preambles January 1991-June 1996 ] 30,939 (April 8,
1992), order on reh'g, Order No. 636-A., 57 FR 36,128 (August 12,
1992), FERC Stats. and Regs., Regulations Preambles January 1991-
June 1996 ] 30,950 (August 3, 1992), order on reh'g, Order No. 636-
B, 57 FR 57,911 (Dec. 8, 1992), 61 FERC ] 61,272 (1992), notice of
denial of reh'g, 62 FERC ] 61,007 (1993); aff'd in part, vacated and
remanded in part, United Dist. Companies v. FERC, 88 F.3d 1105 (DC
Cir. 1996), order on remand, Order No. 636-C, 78 FERC ] 61,186
(1997).
    \3\ Order No. 636 at 30,393 (citations omitted).
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    3. To accomplish these goals, the Commission sought to maximize the
availability of unbundled firm transportation service to all
participants in the gas commodity market. The linchpin of Order No. 636
was the requirement that pipelines unbundle their transportation and
storage services from their sales service, so that gas purchasers could
obtain the same high quality firm transportation service whether they
purchased from the pipeline or another gas seller. In order to create a
transparent program for the reallocation of interstate pipeline
capacity to complement the unbundled, open access environment created
by Order No. 636, the Commission also adopted a comprehensive capacity
release program to increase the availability of unbundled firm
transportation capacity by permitting firm shippers to release their
capacity to others when they were not using it.\4\
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    \4\ In brief, under the Commission's current capacity release
program, a firm shipper (releasing shipper) sells its capacity by
returning its capacity to the pipeline for reassignment to the buyer
(replacement shipper). The pipeline contracts with, and receives
payment from, the replacement shipper and then issues a credit to
the releasing shipper. The replacement shipper may pay less than the
pipeline's maximum tariff rate, but not more. 18 CFR 284.8(e)
(2007). The results of all releases are posted by the pipeline on
its Internet web site and made available through standardized,
downloadable files.
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    4. The Commission reasoned that the capacity release program would
promote efficient load management by the pipeline and its customers and
would, therefore, result in the efficient use of firm pipeline capacity
throughout the year. It further concluded that, ``because more buyers
will be able to reach more sellers through firm transportation
capacity, capacity reallocation comports with the goal of improving
nondiscriminatory, open access transportation to maximize the benefits
of the decontrol of natural gas at the wellhead and in the field.'' \5\
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    \5\ Order No. 636 at 30,418.
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    5. In Order No. 636, the Commission expressed concerns regarding
its ability to ensure that firm shippers would reallocate their
capacity in a non-discriminatory manner to those who placed the highest
value on the capacity up to the maximum rate. The Commission noted that
prior to Order No. 636, it authorized some pipelines to permit their
shippers to ``broker'' their capacity to others. Under such capacity
brokering, firm shippers were permitted to assign their capacity
directly to a replacement shipper, without any requirement that the
brokering shipper post the availability of its capacity or allocate it
to the highest bidder.\6\ However, in Order No. 636, the Commission
found ``there [were] too many potential assignors of capacity and too
many different programs for the Commission to oversee capacity
brokering.'' \7\
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    \6\ See Algonquin Gas Transmission Corp., 59 FERC ] 61,032
(1992).
    \7\ Order No. 636 at 30,416.

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    6. The Commission sought to ensure that the efficiencies of the
secondary market were not frustrated by unduly discriminatory access to
the market.\8\ Therefore, the Commission replaced capacity brokering
with the capacity release program designed to provide greater assurance
that transfers of capacity from one shipper to another were transparent
and not unduly discriminatory. This assurance took the form of several
conditions that the Commission placed on the transfer of capacity under
its new program.
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    \8\ Order No. 636-A at 30,554.
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    7. First, the Commission prohibited private transfers of capacity
between shippers and, instead, required that all release transactions
be conducted through the pipeline. Therefore, when a releasing shipper
releases its capacity, the replacement shipper must enter into a
contract directly with the pipeline, and the pipeline must post
information regarding the contract, including any special
conditions.\9\ In order to enforce theprohibition on private transfers
of capacity, the Commission required that a shipper must have title to
any gas that it ships on the pipeline.\10\
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    \9\ Order No. 636 emphasized:
    The main difference between capacity brokering as it now exists
and the new capacity release program is that under capacity
brokering, the brokering customer could enter into and execute its
own deals without involving the pipeline. Under capacity releasing,
all offers must be put on the pipeline's electronic bulletin board
and contracting is done directly with the pipeline. Order No. 636 at
30,420 (emphasis in original).
    \10\ As the Commission subsequently explained in Order No. 637,
``the capacity release rules were designed with [the shipper-must-
have-title] policy as their foundation,'' because, without this
requirement, ``capacity holders could simply transport gas over the
pipeline for another entity.'' Regulation of Short-Term Natural Gas
Transportation Services and Regulation of Interstate Natural Gas
Transportation Services, Order No. 637, FERC Stats. & Regs. ] 31,091
at 31,300, clarified, Order No. 637-A, FERC Stats. & Regs. ] 31,099,
reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd in
part and remanded in part sub nom. Interstate Natural Gas Ass'n of
America v. FERC, 285 F.3d 18 (DC Cir. 2002), order on remand, 101
FERC ] 61,127 (2002), order on reh'g, 106 FERC ] 61,088 (2004),
aff'd sub nom. American Gas Ass'n v. FERC, 428 F.3d 255 (DC Cir.
2005).
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    8. Second, the Commission determined that the record of the
proceeding that led to Order No. 636 did not reflect that the market
for released capacity was competitive. The Commission reasoned that the
extent of competition in the secondary market may not be sufficient to
ensure that the rates for released capacity will be just and
reasonable. Therefore, the Commission imposed a ceiling on the rate
that the releasing shipper could charge for the released capacity.\11\
This ceiling was derived from the Commission-approved monthly maximum
tariff rates, necessary for the pipeline to recover its annual cost-of-
service revenue requirement.\12\
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    \11\ Order No. 636-A at 30,560.
    \12\ Order No. 637 at 31,270-71.
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    9. Third, the Commission required that capacity offered for release
at less than the maximum rate must be posted for bidding, and the
pipeline must allocate the capacity ``to the person offering the
highest rate (not over the maximum rate).'' \13\ The Commission
permitted the releasing shipper to choose a pre-arranged replacement
shipper who can retain the capacity by matching the highest bid rate.
The bidding requirement, however, does not apply to releases of 31 days
or less or to any release at the maximum rate. But all releases,
whether or not subject to bidding, must be posted.\14\
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    \13\ 18 CFR 284.8(e) (2007) provides in pertinent part that
``[t]he pipeline must allocate released capacity to the person
offering the highest rate (not over the maximum rate) and offering
to meet any other terms or conditions of the release.''
    \14\ 18 CFR 284.8(h)(1) provides that a release of capacity for
less than 31 days, or for any term at the maximum rate, need not
comply with certain notification and bidding requirements, but that
such release may not exceed the maximum rate. Notice of the release
``must be provided on the pipeline's electronic bulletin board as
soon as possible, but not later than forty-eight hours, after the
release transaction commences.''
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    10. Finally, the Commission prohibited tying the release of
capacity to any extraneous conditions so that the releasing shippers
could not attempt to add additional terms or conditions to the release
of capacity. The Commission articulated the prohibition against the
tying of capacity in Order No. 636-A, where it stated:

    The 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 (emphasis in the original).

    11. Subsequent to the Commission's adoption of its capacity release
program in Order No. 636, the Commission conducted two experimental
programs to provide more flexibility in the capacity release market. In
1996, the Commission sought to establish an experimental program
inviting individual shipper and pipeline applications to remove price
ceilings related to capacity release.\15\ The Commission recognized
that significant benefits could be realized through removal of the
price ceiling in a competitive secondary market. Removal of the ceiling
permits more efficient capacity utilization by permitting prices to
rise to market clearing levels and by permitting those who place the
highest value on the capacity to obtain it.\16\
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    \15\ Secondary Market Transactions on Interstate Natural Gas
Pipelines, Proposed Experimental Pilot Program to Relax the Price
Cap for Secondary Market Transactions, 61 FR 41,401 (Aug. 8, 1996),
76 FERC ] 61,120, order on reh'g, 77 FERC ] 61,183 (1996).
    \16\ 77 FERC ] 61,183 at 61,699 (1996).
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    12. In 2000, in Order No. 637, the Commission conducted a broader
experiment in which the Commission removed the rate ceiling for short-
term (less than one year) capacity release transactions for a two-year
period ending September 30, 2002. In contrast to the experiment that it
conducted in 1996, in the Order No. 637 experiment the Commission
granted blanket authorization in order to permit all firm shippers on
all open access pipelines to participate. The Commission stated that it
undertook this experiment to improve shipper options and market
efficiency during peak periods. The Commission reasoned that during
peak periods, the maximum rate cap on capacity release transactions
inhibits the creation of an effective transportation market by
preventing capacity from going to those that value it the most and
therefore the elimination of this rate ceiling would eliminate this
inefficiency and enhance shipper options in the short-term
marketplace.\17\
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    \17\ Order No. 637 at 31,263. The Commission also explained why
it was lifting the price cap on an experimental basis, instead of
permanently, stating:
    While the removal of the price cap is justified based on the
record in this rulemaking, the Commission recognizes that this is a
significant regulatory change that should be subject to ongoing
review by the Commission and the industry. No matter how good the
data suggesting that a regulatory change should be made, there is no
substitute for reviewing the actual results of a regulatory action.
The two year waiver will provide an opportunity for such a review
after sufficient information is obtained to validly assess the
results. Due to the variation between years in winter temperatures,
the waiver will provide the Commission and the industry with two
winter's worth of data with which to examine the effects of this
policy change and determine whether changes or modifications may be
needed prior to the expiration of the waiver. Order No. 637 at
31,279-80.
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    13. Upon an examination of pricing data on basis differentials
between points,\18\ the Commission found that the price ceiling on
capacity release transactions limited the capacity options of short-
term shippers because firm capacity holders were able to avoid

price ceilings on released capacity by substituting bundled sales
transactions at market prices (where the market place value of
transportation is an implicit component of the delivered price). As a
consequence, the Commission determined that the price ceilings did not
limit the prices paid by shippers in the short-term market as much as
the ceilings limit transportation options for shippers. In short, the
Commission found that the rate ceiling worked against the interests of
short-term shippers, because with the rate ceilings in place, a shipper
looking for short-term capacity on a peak day who was willing to offer
a higher price in order to obtain it, could not legally do so; this
reduced its options for procuring short-term transportation at the
times that it needed it most.\19\ Throughout this experiment, the
Commission retained the rate ceiling for firm and interruptible
capacity available from the pipeline as well as for long-term capacity
release transactions.
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    \18\ Among other things, the data showed that the value of
pipeline capacity, as shown by basis differentials, was generally
less than the pipelines' maximum interruptible transportation rates,
except during the coldest days of the year, and capacity release
prices also averaged somewhat less than pipelines' maximum
interruptible rates.
    \19\ Order No. 637 at 31,280-81.
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    14. On April 5, 2002, the United States Court of Appeals for the
District of Columbia Circuit, in Interstate Natural Gas Association of
America v. FERC,\20\ upheld the Commission's experimental price ceiling
program for short-term capacity release transactions as set forth in
Order No. 637.\21\ The court found that the Commission's ``light
handed'' approach to the regulation of capacity release prices was,
given the safeguards that the Commission had imposed, consistent with
the criteria set forth in Farmers Union Cent. Exch. v. FERC.\22\ The
court found that the Commission made a substantial record for the
proposition that market rates would not materially exceed the ``zone of
reasonableness'' required by Farmers Union. The court also found that
the Commission's inference of competition in the capacity release
market was well founded, that the price spikes shown in the
Commission's data were consistent with competition and reflected
scarcity of supply rather than monopoly power, and that outside of such
price spikes, the rates were well below the estimated regulated
price.\23\ The Commission's experiment in lifting the price ceiling for
short term capacity releases ended on September 20, 2002.\24\
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    \20\ 285 F.3d 18 (DC Cir. 2002) (INGAA).
    \21\ Specifically, the court found that: ``[g]iven the
substantial showing that in this context competition has every
reasonable prospect of preventing seriously monopolistic pricing,
together with the non-cost advantages cited by the Commission and
the experimental nature of this particular ``light handed''
regulation, we find the Commission's decision neither a violation of
the NGA, nor arbitrary or capricious.'' INGAA at 35.
    \22\ 734 F.2d 1486 (DC Cir. 1984) (Farmers Union) (finding that
a move from heavy-handed to light-handed regulation can be justified
by a showing that under current circumstances, the goals and
purposes of the Natural Gas Act (NGA) will be accomplished through
substantially less regulatory oversight.
    \23\ Id. at 33.
    \24\ Regulation of Short-Term Natural Gas Transportation
Services and Regulation of Interstate Natural Gas Transportation
Services, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,091 (Feb. 9, 2000), order on rehearing, Order
No. 637-A, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,099 (May 19, 2000), order on rehearing, Order
No. 637-B, 92 FERC ] 61,062 (July 26, 2000), aff'd in part and
remanded in part, Interstate Natural Gas Association of America v.
FERC, 285 F.3d 18 (DC Cir. Apr. 5, 2002).
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B. The NOPR

    15. On January 3, 2007, the Commission, in response to petitions
from various gas industry participants concerning issues related to
capacity releases,\25\ issued a request for comments on the operation
of the capacity release program and whether changes in any of its
capacity release policies would improve the efficiency of the natural
gas market.\26\ The Commission also included in its request for
comments a series of questions asking whether the Commission should
lift the price ceiling, remove its capacity release bidding
requirements, modify its prohibition on tying arrangements, and/or
remove the shipper-must-have-title requirement.
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    \25\ In August 2006, Pacific Gas and Electric Co. (PG&E) and
Southwest Gas Corp. (Southwest) filed a petition requesting the
Commission to amend sections 284.8(e) and (h)(1) of its regulations
to remove the maximum rate cap on capacity releases. Subsequently,
in October 2006, a group of large natural gas marketers (Marketer
Petitioners) requested clarification of the operation of the
Commission's capacity release rules in the context of asset (or
portfolio) management services.
    \26\ Pacific Gas & Electric Co., 118 FERC ] 61,005 (2007).
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    16. After review of the petitions, comments, responses to its
questions, and available data, the Commission issued a Notice of
Proposed Rulemaking (NOPR), proposing two major changes to its capacity
release regulations and policies. First, the Commission proposed to
lift the price ceiling for short-term capacity release transactions of
one year or less. The Commission determined that the traditional cost-
of-service price ceilings in pipeline tariffs, which are based on
annual costs recovered over twelve equal monthly payments, are not well
suited to the short-term capacity release market, because they do not
reflect short-term variations in the market value of the capacity.
Therefore, removing the price ceiling for short-term capacity releases
would permit more efficient utilization of capacity by allowing prices
to rise to market clearing levels, thereby permitting those who place
the highest value on the capacity to obtain it. The Commission
determined that the data obtained by the Commission both during the
Order No. 637 experiment and more recently indicated that short-term
release prices reflect market value of the capacity as revealed by
basis differentials, rather than the exercise of market power.
Moreover, the Commission reasoned that shippers purchasing capacity
would be adequately protected because the pipeline's firm and
interruptible services will provide just and reasonable recourse rates
limiting the ability of releasing shippers to exercise market power.
Finally, the Commission stated that reporting requirements in Order No.
637 and the Commission's implementation of the Energy Policy Act of
2005, specifically with respect to market manipulation, give the
Commission an enhanced ability to monitor the market and detect and
deter abuses. The Commission did not propose to remove the price
ceiling on either long-term capacity releases or the pipelines' sale of
their own primary capacity.
    17. Second, the Commission proposed to revise its capacity release
policies to give releasing shippers greater flexibility to negotiate
and implement AMAs, based on the Commission's findings that AMAs
provide significant benefits to participants in the natural gas and
electric marketplaces.\27\ Recognizing that the linking of
transportation capacity with gas supply arrangements would violate the
Commission's prohibition against ``tying'' released capacity to any
extraneous conditions, the Commission proposed to exempt pre-arranged
capacity release transactions that met certain criteria \28\ from the
prohibition against tying.\29\ This proposal would permit a releasing
shipper in a pre-arranged release to require that the replacement
shipper agree to supply the releasing shipper's gas requirements and
take assignment of the releasing shipper's gas supply contracts, as
well as released transportation capacity on one or more pipelines and
storage capacity with the gas currently in storage.\30\
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    \27\ NOPR at P 67-74.
    \28\ The Commission's definition of AMA as proposed in the NOPR
is discussed in detail below.
    \29\ NOPR at P 75-82.
    \30\ In addition, the releasing shipper could require that, upon
expiration of the AMA, the replacement shipper must return storage
capacity included in the release with an appropriate level of
inventory, e.g., to promise to replenish storage inventories to a
mutually agreed upon level.

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    18. The Commission's second proposal to facilitate AMAs was to
exempt pre-arranged releases to implement AMAs from competitive
bidding.\31\ The Commission stated that, 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. The Commission concluded that in the AMA context the bidding
requirement creates an unwarranted obstacle to the efficient management
of pipeline capacity and supply assets. The Commission emphasized that
AMAs would remain subject to all existing posting and reporting
requirements.\32\
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    \31\ See NOPR at P 83-90. Section 284.8 of the Commission's
regulations require capacity release transactions to be posted for
competitive bidding unless the transactions are at the maximum
tariff rate or are for a term of 31 days or less.
    \32\ While the NOPR originally required that any comments were
due January 10, 2008, a number of entities filed for an extension of
that deadline until February 8, 2008. On January 14, the Commission
granted an extension of time for filing comments until January 25,
2008.
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C. Comments

    19. Over 60 entities from all segments of the natural gas industry
filed comments on the NOPR. The vast majority of those who filed
comments regarding the Commission's proposal to permanently remove the
price cap for short-term capacity releases of one year or less support
the proposal, generally agreeing with the Commission's reasoning in
support of removing the cap. Many of the local distribution companies
(LDC), marketers, producers, and end-users who support lifting the
price cap on short-term capacity releases also support retaining the
price cap on long-term capacity releases \33\ and/or primary pipeline
capacity.\34\ These parties generally view retention of these price
caps as providing valuable safeguards in preventing the exercise of
market power in the uncapped short-term capacity release market.
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    \33\ Those commenters include Direct Energy Services, LLC
(Direct Energy), New Jersey Natural Gas Company (NJNG), Oklahoma
Independent Petroleum Association (OIPA), Reliant Energy Inc.
(Reliant), Statoil Natural Gas, LLC (Statoil), and Weyerhaeuser
Company (Weyerhaeuser).
    \34\ Such commenters include Edison Electric Institute (EEI),
NJNG, NJR Energy Services Company (NJR), Nstar Gas Company (Nstar),
OIPA, Piedmont Natural Gas Company, Inc. (Piedmont), Statoil,
Weyerhaeuser, and the Wisconsin Distributor Group (WDG). American
Gas Association (AGA), American Public Gas Association (APGA), and
Independent Petroleum Producers of America (IPAA) oppose lifting the
price cap for primary capacity, arguing that doing so would undercut
a major premise for lifting the price cap in the short-term
secondary market, namely, that the availability of recourse rates
from the pipeline will constrain the exercise of market power in the
secondary market.
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    20. Two commenters oppose the Commission's proposal to lift the
price cap for the short-term capacity release market, arguing that the
Commission has not supported its proposed rule and that the proposed
rule would fail a cost-benefit test.\35\ Other commenters express
concern over the potential for capacity owners to exercise market power
under the proposed rule.\36\ For example, some end-users of gas express
concerns about the concentration of capacity ownership on lateral
pipelines and therefore argue that the Commission should either not
remove the price cap for laterals or do so on a case-by-case basis.\37\
Other parties generally urge the Commission to carefully monitor
markets to ensure that they are functioning properly. Some suggest a
final test period before permanently removing the cap, periodic
reassessments of the uncapped market, or a process to revisit the
determination if the market becomes dysfunctional.\38\
---------------------------------------------------------------------------

    \35\ Tenaska Marketing Ventures (Tenaska) and National Energy
Marketers Association (NEM).
    \36\ See Comments of NEM.
    \37\ Weyerhaeuser, Northwest Industrial Gas Users (NWIGU), and
Process Gas Consumers (PGC).
    \38\ Direct Energy, OIPA, Honeywell International, Inc.
(Honeywell), Arizona Public Service Company (APS) (arguing that the
market currently served by El Paso Natural Gas Pipeline east of
California is not competitive). Commerce Energy Group, Inc.
(Commerce Energy) suggests including a contingency for replacing the
price cap in ``exceptional capacity situations.''
---------------------------------------------------------------------------

    21. In general, commenters also overwhelmingly supported the
Commission's efforts to facilitate the development of AMAs.\39\ Those
commenters agree with the Commission's assessment that AMAs provide
value and benefits to market participants and to natural gas markets
overall. Virtually all who commented support the steps proposed by the
Commission to facilitate AMAs, though many of those that support the
Commission's proposal regarding AMAs request that the Commission modify
or clarify the proposal in various ways in order to permit broader use
of AMAs and greater flexibility in the terms of permitted AMAs. They
request, for example, that the Commission permit uncapped AMA releases
of a year or less to be rolled over without bidding, clarify that
profit sharing arrangements in an AMA do not violate any applicable
price cap, relax the requirements concerning the replacement shipper's
obligation to deliver gas to the releasing shipper, exempt AMAs from
the Commission's prohibition against buy/sell arrangements, and allow
supply side AMAs. Williston Basin commented that exempting AMAs from
the tying prohibition and bidding requirements would encourage
discrimination against pipelines and provide preferential treatment to
asset managers.
---------------------------------------------------------------------------

    \39\ See e.g., Comments of the AGA at 1-2, Comments of APGA at
2-4; Comments of Atmos Energy Corporation (Atmos) at 2-4, Comments
of BG Energy Merchants (BGEM) at 1-2, Comments of BP Energy Company
(BP) at 2, Comments of Direct Energy at 3-4, Comments of Duke Energy
Corporation (Duke Energy) at 3, Comments of the EEI at 6, Comments
of the Electric Power Supply Association (EPSA) at 2, Comments of
Florida Cities at 2, Comments of the Interstate Natural Gas
Association of America (INGAA) at 6, Comments of Marketer
Petitioners at 2, Comments of National Grid Delivery Companies
(National Grid) at 2, Comments of NJNG at 1, Comments of the Natural
Gas Supply Association (NGSA) at 3, Comments of NJR at 1, Comments
of NWIGU at 6, Comments of Nstar at 1-2, Comments of the Ohio Gas
Marketers Group (OGMG) at 1, Comments of Piedmont at 1, Comments of
PPM Energy, Inc., (PPM) at 1-3, Comments of PGC at 5, Comments of
the Public Utilities Commission of Ohio (PUCO) at 5-7, Comments of
Puget Sound Energy, Inc. (Puget Sound) at 8-9, Comments of Sequent
Energy Management, L.P. (Sequent) at 5-6, Comments of the Financial
Institutions Energy Group (FEIG) at 6-7, Comments of Turlock
Irrigation District (Turlock) at 5, Comments of Ultra Petroleum
Corporation (Ultra) at 4, Comments of the WDG at 3, and Comments of
the Wyoming Pipeline Authority at 5.
---------------------------------------------------------------------------

    22. The Commission also received favorable comments on whether it
should clarify its prohibition against tying agreements to allow a
releasing shipper to include conditions in a storage release concerning
the sale and/or repurchase of gas in storage inventory outside the AMA
context. All comments that addressed this issue supported removing this
prohibition for storage services. They assert that a shipper releasing
storage capacity should be permitted to require the replacement shipper
to take assignment of any gas that remains in the released storage
capacity at the time the release takes effect; and/or to return the
storage capacity to releasing shipper at end of the release with a
specified amount of gas in storage.\40\ Commenters note that tying
storage capacity with storage inventory will enable transactions to be
consummated more readily and that the nature of the relationship
between storage capacity and storage inventory calls out for a waiver
of the tying rule. Others 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 in circumstances outside the
AMA context, will provide benefits to the marketplace similar to those
provided by AMAs.\41\
---------------------------------------------------------------------------

    \40\ Public Service Commission of New York (PSCNY) comments at
20-21.
    \41\ Comments of Marketer Petitioners.
---------------------------------------------------------------------------

    23. The Commission also received numerous comments on its inquiry
whether pre-arranged capacity release deals necessary to implement
retail access programs should be treated as similar to releases made as
part of an AMA, and thus accorded the same exemptions. The majority of
comments on this issue advocated affording capacity releases under
state retail choice programs the same blanket exemptions from the tying
prohibition \42\ and bidding requirements as those granted to asset
managers.\43\ AGA, for example, recommends that the Commission add an
exemption from the bidding requirements for any prearranged, recallable
capacity release from an LDC to a natural gas marketer in accordance
with the terms of a retail choice program approved by a State
commission. AGA also asks that the Commission clarify that LDC releases
to retail choice marketers would be entitled to the same partial
exemption from the tying prohibition as would be releases under AMAs.
The SPSCNY would extend the AMA exemption from the tying prohibition to
releases of storage capacity conducted according to state retail access
programs.
---------------------------------------------------------------------------

    \42\ Those commenters include AGA, Commerce Energy, Duke Energy,
Hess Corporation (Hess), Interstate Gas Supply (IGS), NJNG, New York
State Electric and Gas Corporation (NYSEG), Rochester Gas & Electric
Corporation (RG&E), OGMG, the Public Service Commission of North
Carolina (PSNC), South Carolina Electric and Gas Company (SCE&G),
SCANA Energy Marketing (SEMI), PSCNY, and Sequent.
    \43\ Those commenters include the AGA, Boardwalk Pipeline
Partners (Boardwalk), BP, Commerce Energy, Direct Energy, Duke
Energy, FPL Energy, LLC (FPL Energy), Hess, IGS, NJNG, NYSEG, RG&E,
Nstar, OGMG, Peoples Gas System, a Division of Tampa Electric
Company (Peoples), PG&E, PSCNY, PUCO, SEMI, Sequent, and the WDG.
---------------------------------------------------------------------------

II. Overview of the Final Rule

    24. In this Final Rule, the Commission is modifying its policies
and regulations concerning the release of capacity by firm shippers on
interstate pipelines in order to enhance the efficiency and
effectiveness of the secondary capacity release market. The
Commission's capacity release program has created a successful
secondary market for capacity.\44\ As a result, natural gas markets in
general, and the secondary release market in particular, have undergone
significant development and change in the sixteen years since Order No.
636 and the inception of the capacity release program. As this market
has developed, shippers and potential shippers have sought greater
flexibility in the use of capacity. They seek to better integrate
capacity with the underlying gas transactions, and are looking for more
flexible methods of pricing capacity to better reflect the value of
that capacity as revealed by the market price of gas at different
trading points. They also seek to implement AMAs, in which capacity
holders release their capacity to asset managers (generally marketers)
that have greater expertise in maximizing the value of pipeline
capacity and negotiating beneficial transactions in the gas commodity
markets.
---------------------------------------------------------------------------

    \44\ As the Commission observed in 2005, the ``capacity release
program together with the Commission's policies on segmentation, and
flexible point rights, has been successful in creating a robust
secondary market where pipelines must compete on price.'' Policy for
Selective Discounting by Natural Gas Pipelines, 111 FERC ] 61,309,
at P 39-41, order on reh'g, 113 FERC ] 61,173 (2005).
---------------------------------------------------------------------------

    25. In this Final Rule the Commission is taking actions to respond
to the industry's request for greater flexibility in the capacity
release market and to revise its policies and regulations to reflect
the changes and developments in the marketplace. The first major
revision is the removal of the price ceiling on short term capacity
releases. The permanent elimination of the price ceiling for short term
releases will enable shippers to offer competitively-priced
alternatives to pipelines' negotiated rate offerings and will permit
short-term capacity release prices to rise to market clearing levels,
thereby allocating capacity to those that value it the most. It will
also provide more accurate price signals concerning the market value of
pipeline capacity.
    26. The Commission is also revising its regulations and policies to
accommodate and facilitate AMAs, a relatively recent development in the
industry. AMAs provide significant benefits to many participants in the
natural gas and electric marketplaces and to the secondary marketplace
itself. They maximize the utilization and value of capacity by creating
a mechanism for capacity holders to use third party experts to both (1)
manage their gas supply arrangements and (2) use that capacity to make
gas sales or re-releases of the capacity to others when the capacity is
not needed to serve the releasing shipper. AMAs result in ultimate
savings for end-use customers by providing for lower gas supply costs
and more efficient use of the pipeline grid.\45\ The Commission's goal
in facilitating AMAs in this rule is to make the capacity release
program more efficient by bringing it into line with the realities of
today's secondary gas marketplace.
---------------------------------------------------------------------------

    \45\ See Comments of BGEM at 2, Comments of BP at 5, Comments of
Nstar at 8, Comments of Piedmont at 4-5, Comments of PUCO at 7,
Comments of WDG at 3.
---------------------------------------------------------------------------

    27. To that end, the Commission in this rule is adopting its NOPR
proposal to exempt capacity releases made to implement AMAs from the
prohibition on tying and the bidding requirements of section 284.8. The
Commission is also making several revisions to the definition of AMAs
as proposed in the NOPR. The Final Rule modifies the definition of AMAs
proposed in the NOPR to relax the delivery obligation of the
replacement shipper to the releasing shipper and to permit supply side
AMAs. The Final Rule also clarifies that short term AMAs may be rolled
over without bidding. Further, the Final Rule clarifies that the price
ceiling does not apply to any consideration provided by an asset
manager to the releasing shipper as part of an AMA. These steps,
requested by many industry commenters that support the Commission's
efforts in the NOPR to facilitate AMA's, will further enhance the
efficiency of AMAs by allowing greater flexibility for parties to
customize arrangements to meet unique customer needs while at the same
time ensuring that capacity releases that qualify for the exemptions
from tying and bidding granted in this rule are bona fide AMAs. The
rule also extends the benefits of AMAs to sellers of natural gas,
creating an even greater diversity of potential suppliers and
participants in the secondary market.
    28. The Commission is also revising its policies to reflect the
realities of today's marketplace by allowing a releasing shipper to
include conditions in a release concerning the sale/and repurchase of
gas in storage inventory, even outside the AMA context. Allowing such
arrangements reflects the fact that in the storage context, storage
capacity is inextricably linked to storage inventory. By permitting the
tying of releases of storage capacity to conditions on storage
inventory, the Commission will enhance the efficient use of storage
capacity while at the same time ensuring that releasing shippers will
have adequate storage inventories for the winter.
    29. The Final Rule also extends the blanket exemptions from the
prohibition against tying and from bidding granted to AMAs to capacity
releases made to a

marketer participating in a state approved retail access program,
finding that such programs provide benefits similar to AMAs.

III. Price Cap Issues

A. Removal of Maximum Rate Ceiling for Short-Term Capacity Releases

    30. In this Final Rule, the Commission amends section 284.8 of its
regulations to eliminate the price ceiling for short-term capacity
release transactions of one year or less. The Commission finds that
this action will improve shipper options and market efficiency,
particularly during peak periods, by allowing the prices of short-term
capacity release transactions to reflect short-term variations in the
market value of that capacity. This will enable shippers to better
integrate capacity with the underlying gas transactions, and will
permit more flexible methods of pricing capacity to better reflect the
value of that capacity as revealed by the market price of gas at
different trading points. The Commission has previously provided
pipelines with the flexibility to enter into negotiated rate
transactions which are permitted to exceed the maximum rate ceiling,
and this rule will permit releasing shippers similar flexibility in
pricing release transactions.
    31. At the same time, we are convinced that the rates resulting
from removal of the price cap for capacity release will be just and
reasonable. The data collected over many years shows that the value of
short term capacity only exceeds the price ceiling in times when
capacity is scarce. These data are confirmed by the data gathered
during the experimental release of the price ceiling which showed that
capacity release prices exceed the price ceiling only for brief periods
of constraint. Moreover, we are not relying solely on competition to
ensure just and reasonable prices. We are maintaining the rate cap on
pipeline services that will provide the same protection for capacity
release transactions as it now does for pipeline negotiated rate
transactions. Further, we have required informational postings of
capacity release transactions that will provide transparency and
facilitate the filing of complaints if circumstances warrant. The
Commission will also continue to actively monitor the release market.
1. Maximum Rate Ceiling Interferes With Efficient Transactions
    32. As we explained in Order No. 637,\46\ the traditional cost-of-
service maximum rates in pipeline tariffs are not well suited to the
short-term capacity release market.\47\ Under the traditional
ratemaking methodology, the Commission develops a maximum annual
transportation rate for each pipeline that, when applied to the
pipeline's contract demand and throughput levels, will enable the
pipeline to recover its annual cost-of-service revenue requirement.
Each pipeline's maximum rates for services of less than a year are
simply the maximum annual rate prorated over the shorter period.
---------------------------------------------------------------------------

    \46\ Order No. 637 at 31,271-75.
    \47\ While the Commission offered pipelines the opportunity to
propose other types of rate designs, such as seasonal and term-
differentiated rates, only a very few pipelines have sought to make
such rate design changes, although many pipelines have taken
advantage of negotiated rate authority.
---------------------------------------------------------------------------

    33. Such prorated annual rates bear no relationship to the
competitive rates that would be established in the short-term capacity
market, particularly during peak periods. The market value of
transportation service from the production area to the downstream
market may be inferred by comparing the downstream delivered gas price
in bundled sales to the market price at upstream market centers in the
production area.\48\ As the DC Circuit recognized in INGAA, ``if the
difference between field prices and city gate prices in a particular
pathway is only $.07, people will not pay more than $.07 for the
unbundled transportation.'' \49\ As discussed in more detail below, the
data set forth in Order No. 637 and the updated data in Figures 1
through 3 below concerning the implicit value of transportation in the
bundled sales market demonstrates the variability of transportation
value in the short-term market and the divergence between the
transportation value and cost-of-service rates. This data shows that
during most of the year, the value of transportation service is
significantly less than the pipelines' annual cost-of-service maximum
transportation rates, but during brief, peak demand periods, the value
of transportation service is measurably greater than the maximum
transportation rates.
---------------------------------------------------------------------------

    \48\ In Order No. 637, the Commission explained ``gas commodity
markets now determine the economic value of pipeline services in
many parts of the country. Thus, even as FERC has sought to isolate
pipeline services from commodity sales, it is within the commodity
markets that one can see revealed the true price for gas
transportation.'' Order No. 637 at 31,274 (quoting M. Barcella, How
Commodity Markets Drive Gas Pipeline Values, Public Utilities
Fortnightly, February 1, 1998 at 24-25).
    \49\ INGAA at 31.
---------------------------------------------------------------------------

    34. Because the existing capacity release price ceiling does not
reflect short-term variations in the market value of the capacity, the
price ceiling inhibits the efficient allocation of capacity and harms,
rather than helps, the short-term shippers it is intended to protect.
The price ceiling operates to prevent the shipper most valuing short-
term capacity on a peak day from being able to obtain it, because that
shipper cannot offer a releasing shipper the full value the shipper
places on that capacity. The price ceiling may also reduce the amount
of released capacity available during peak periods. As the Commission
explained in Order No. 637, ``As a result of the maximum rate, firm
capacity holders may not find it sufficiently profitable to make their
capacity available for release. For instance, a dual fuel industrial
customer might determine that it would be more economic not to use gas,
and to substitute a different fuel, if it could obtain a sufficiently
high price for its released capacity.'' \50\ Thus, during a peak day
the price ceiling may only serve to limit a purchasing shipper's
capacity options, with the result that it must purchase gas in a
bundled transaction in the downstream market at a price reflecting the
market-determined value of the transportation.
---------------------------------------------------------------------------

    \50\ Order No. 637 at 31,279.
---------------------------------------------------------------------------

    35. The increased use by pipelines and shippers of negotiated rate
transactions based on gas price differentials demonstrates that buyers
and sellers value the ability to calibrate the price of transportation
to its value in the market. The maximum rate ceiling applied to
capacity release transactions denies releasing and replacement shippers
the same ability to negotiate transactions that reflect the market
value of capacity at all times. As the Commission has found, providing
the ability to negotiate capacity release transactions based on price
differentials will help in providing short-term capacity to replacement
shippers, such as gas-fired electric generators.\51\ With the price
ceiling in effect, releasing shippers are unable to effectively use
price differentials as a measure of capacity value because they are
denied the ability to recover the value of capacity during peak periods
when that value exceeds the maximum rate cap.
---------------------------------------------------------------------------

    \51\ Standards for Business Practices for Interstate Natural Gas
Pipelines, Notice of Proposed Rulemaking, 71 FR 64,655 (November 3,
2006), FERC Stats. & Regs. Proposed Regulations ] 32,609, P 17 (Oct.
25, 2006), Order No. 698, 72 FR 38,757 (July 16, 2007), FERC Stats.
& Regs. Regulations Preambles ] 31,251 at P 51 (Jun. 25, 2007).
---------------------------------------------------------------------------

    36. The price ceiling also harms captive customers holding long-
term contracts on the pipeline. Those customers pay maximum rates for
both peak and off-peak periods. During off-

peak periods, they can only recover a small portion of the capacity
cost through capacity release because of the low market value of off-
peak capacity. However, during peak periods, the price ceiling prevents
those customers from releasing their capacity for its full market
value.
    37. Finally, the price ceiling reduces the dissemination of
accurate capacity pricing information. That is because the price
ceiling causes transactions to move to the bundled sales market during
peak periods, so that there is no separate capacity transaction to be
reported.
2. Assurance of Just and Reasonable Rates
    38. As the court stated in INGAA, the Commission may depart from
cost of service ratemaking upon:

    A showing that * * * the goals and purposes of the statute will
be accomplished `through the proposed changes.' To satisfy that
standard, we demanded that the resulting rates be expected to fall
within a `zone of reasonableness, where [they] are neither less than
compensatory nor excessive.' [citation omitted]. While the expected
rates' proximity to cost was a starting point for this inquiry into
reasonableness, [citation omitted], we were quite explicit that
`non-cost factors may legitimate a departure from a rigid cost-based
approach,' [citation omitted]. Finally, we said that FERC must
retain some general oversight over the system, to see if competition
in fact drives rates into the zone of reasonableness `or to check
rates if it does not.' \52\
---------------------------------------------------------------------------

    \52\ INGAA at 31.

Accordingly, we analyze below (1) the extent to which market conditions
and other factors may be expected to keep short-term capacity release
prices within a reasonable zone despite the removal of the price
ceiling, (2) the non-cost factors supporting a removal of the price
ceiling, and (3) our oversight of the short-term capacity release
market after removal of the price ceiling.
a. Market Conditions Ensure Just and Reasonable Rates
    39. The Commission finds that the short-term capacity release
market is generally competitive. Therefore competition, together with
our continuing requirement that pipelines must sell short-term firm and
interruptible services to any shipper offering the maximum rate, and
the Commission's ongoing monitoring efforts will keep short-term
capacity release rates within the ``zone of reasonableness'' required
by INGAA and Farmers Union.
    40. In Order Nos. 636 and 637, the Commission instituted a number
of policy revisions which have enhanced competition between releasing
shippers as well as between releasing shippers and the pipeline. These
revisions provide shippers with enhanced market mechanisms that will
help ensure a more competitive market and mitigate the potential for
the exercise of market power. The Commission required pipelines to
permit releasing shippers to use flexible point rights and to fully
segment their pipeline capacity. Flexible point rights enable shippers
to use any points within their capacity path on a secondary basis,
which enables shippers to compete effectively on release transactions
with other shippers. Segmentation further enhances the ability to
compete because it enables the releasing shipper to retain the portion
of the pipeline capacity it needs while releasing the unneeded portion.
Effective segmentation makes more capacity available and enhances
competition. As the Commission explained in Order No. 637:

    The combination of flexible point rights and segmentation
increases the alternatives available to shippers looking for
capacity. In the example,\53\ a shipper in Atlanta looking for
capacity has multiple choices. It can purchase available capacity
from the pipeline. It can obtain capacity from a shipper with firm
delivery rights at Atlanta or from any shipper with delivery point
rights downstream of Atlanta. The ability to segment capacity
enhances options further. The shipper in New York does not have to
forgo deliveries of gas to New York in order to release capacity to
the shipper seeking to deliver gas in Atlanta. The New York shipper
can both sell capacity to the shipper in Atlanta and retain the
right to inject gas downstream of Atlanta to serve its New York
market.\54\
---------------------------------------------------------------------------

    \53\ In the example used in Order No. 636, a shipper holding
firm capacity from a primary receipt point in the Gulf of Mexico to
primary delivery points in New York could release that capacity to a
replacement shipper moving gas from the Gulf to Atlanta while the
New York releasing shipper could inject gas downstream of Atlanta
and use the remainder of the capacity to deliver the gas to New
York.
    \54\ Order No. 637 at 31,301.

    41. In addition to enhancing competition through expansion of
flexible point rights and segmentation, the Commission in Order No. 637
also required pipelines to 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. The change makes capacity release
more competitive with pipeline services and increases competition
between capacity releasers by enabling replacement shippers to schedule
the use of capacity obtained through release transactions quickly
rather than having to wait until the next day.
    42. The data accumulated by the Commission during the Order No. 637
experiment, as well as review of more recent data, confirm that
capacity release prices reflect competitive conditions in the industry.
On May 30, 2002, the Commission issued a notice of staff paper
presenting data on capacity release transactions during the
experimental period when the capacity release ceiling price was
waived.\55\ The staff paper provided analysis of capacity release
transactions on 34 pipelines during the 22-month period from March 2000
to December 2001.\56\
---------------------------------------------------------------------------

    \55\ On May 30, 2002, a staff paper was posted on the
Commission's web site presenting, and analyzing data on capacity
release transactions relating to the experimental period when the
rate ceiling on short-term released capacity was waived.
    \56\ Many of these release transactions would have occurred
prior to completion of the pipeline's Order No. 637 compliance
proceedings and the implementation of the changes to flexible point
rights, segmentation and scheduling described above.
---------------------------------------------------------------------------

    43. In brief, the data gathered during the 22-month period show
that without the price ceiling, prices exceeded the maximum rate only
during short time periods and appear to be reflective of competitive
conditions in the industry. The following table shows the distribution
of above ceiling price releases among the pipelines studied.

                                    Table I.--Above Cap Releases by Pipeline
                         [Releases Awarded Between March 26, 2000 and December 31, 2001]
----------------------------------------------------------------------------------------------------------------
                                                  Releases above                      Release
                                                     max rate       % of total    quantity above    % of total
                    Pipeline                        (number of       releases        max rate         release
                                                   transactions)                    (MMBtu/day)      quantity
----------------------------------------------------------------------------------------------------------------
Algonquin.......................................               1             0.1          18,453             0.2
ANR Pipeline....................................               1             0.1          30,000             0.2
CIG.............................................              19             6.5         109,984             4.4
Dominion (CNGT).................................              21             1.0          65,789             0.7
Columbia Gas....................................             101             4.4         374,727             2.7
Columbia Gulf...................................  ..............  ..............  ..............  ..............
East Tennessee..................................  ..............  ..............  ..............  ..............
El Paso.........................................             135            13.3         631,683            12.5
Florida Gas.....................................              25             1.7          43,526             1.4
Great Lakes.....................................               3             1.3          15,000             0.6
Iroquois........................................  ..............  ..............  ..............  ..............
Kern River......................................               2             3.9          55,000             2.5
KMI (KNEnergy)..................................               3             1.0           1,409             0.0
Gulf South (Koch)...............................  ..............  ..............  ..............  ..............
Midwestern......................................               1             0.6          50,000             2.3
Mississippi River...............................  ..............  ..............  ..............  ..............
Mojave Pipeline Co..............................               1             2.6          40,000             4.7
Natural Gas Pipeline Co.........................              16             3.2         270,489             2.3
Reliant (Noram).................................  ..............  ..............  ..............  ..............
Northern Border.................................  ..............  ..............  ..............  ..............
Northern Natural................................              12             1.6          23,273             0.5
Northwest Pipeline..............................              24             1.8         139,850             4.1
Paiute Pipeline.................................  ..............  ..............  ..............  ..............
Panhandle Eastern...............................               1             0.4           1,000             0.1
Southern Natural................................               7             0.3          24,101             0.2
Tennessee Gas...................................              11             0.4          36,421             0.2
TETCO...........................................             122             3.8         645,856             3.3
Texas Gas.......................................               6             0.5         103,237             1.0
Trailblazer.....................................               3            25.0          15,000            10.0
Transco.........................................             183             3.3       1,540,885             4.1
Transwestern....................................              11             4.5          64,058             6.5
Trunkline.......................................  ..............  ..............  ..............  ..............
Williams........................................               4             0.4          16,500             0.3
Williston Basin.................................  ..............  ..............  ..............  ..............
                                                 ---------------------------------------------------------------
    Total.......................................             713             2.2       4,316,241             2.1
----------------------------------------------------------------------------------------------------------------

    44. These data show that during periods without capacity
constraints, prices remained at or below the maximum rate. The staff
paper does identify 713 releases above the ceiling price, representing
an average total capacity release contract volume of 4.3 billion cubic
feet (Bcf) per day. However, the staff paper reflects that these above-
ceiling price releases represented only a small portion of the total
releases on these pipelines, comprising approximately two percent of
total transactions on the pipelines studied for the entire period, and
two percent of gas volumes. Further, above ceiling releases accounted
for no more than six or seven percent of transactions during any given
month of the period. As one would expect, the percentages of releases
occurring above the ceiling increased during peak periods. However,
average release rates were higher by only one cent per MMBtu per day or
five and one-half percent higher than they would have been with the
price ceiling in place. Of the 34 pipelines in the study, 10 reported
no releases above the ceiling price, and 20 pipelines reported fewer
than 25 above-ceiling price releases. The data gathered during this 22-
month period reflects the Commission's expectations and affirms the
Commission's findings in the Order No. 637 proceeding. As the court
stated in INGAA:

    The data represented in the graph [ ] do support the
Commission's view that the capacity release market enjoys
considerable competition. The brief spikes in moments of extreme
exigency are completely consistent with competition, reflecting
scarcity rather than monopoly. * * * [citation omitted] A surge in
the price of candles during a power outage is no evidence of
monopoly in the candle market.\57\
---------------------------------------------------------------------------

    \57\ INGAA at 32.

    45. The Commission has gathered additional current data and has
replicated the evidence presented in Order No. 637. The current data
shows that the conditions that existed at the time of Order No. 637 and
during the past experimental period continue in today's marketplace.
    46. For example, Figure 1 illustrates the fluctuations in the
market value of transportation service, as shown by the basis
differentials between Louisiana and New York City. This graph compares
the daily difference in gas prices between Louisiana and New York City
to Transcontinental Gas Pipe Line Corporation's maximum interruptible
transportation rate, including fuel retainage, during the 12 months
ending July 31, 2007. This graph shows that for most of the year, the
value of transportation service, as indicated by the basis
differentials, is less than the maximum transportation rate. However,
during brief, peak demand periods, the value of transportation service
is measurably greater than the maximum transportation rate. For
example, on

February 5, 2007, the basis differential between Louisiana and New York
City was in excess of $27.00 per MMBtu, while the maximum tariff rate
plus the cost of fuel was approximately $1.08 per MMBtu.\58\
---------------------------------------------------------------------------

    \58\ In Order No. 637, the Commission presented similar data in
figure 6 showing the implicit transportation value between South
Louisiana and Chicago. Order No. 637 at 31,274.
---------------------------------------------------------------------------

BILLING CODE 6717-01-P
[GRAPHIC] [TIFF OMITTED] TR30JN08.020

    47. Figures 2 and 3 below reflect that a similar pattern of
transportation value is evident in other areas of the country. Focusing
on fluctuations in the market value of transportation service as shown
by basis differentials between Louisiana and Chicago and between the
Permian Basin and the California border, respectively, these figures
show that for most of the year, the value of transportation service is
less than the maximum transportation rate of Natural Gas Pipeline
Company of America and El Paso Natural Gas Company, respectively.
However, similar to figure 1, these figures also reflect that during
brief peak-demand periods the value of transportation service is
measurably greater than the maximum transportation rate.

[GRAPHIC] [TIFF OMITTED] TR30JN08.021

[GRAPHIC] [TIFF OMITTED] TR30JN08.022

BILLING CODE 6717-01-C

    The data in all three of the above figures reflect similar market
conditions to the data that the Commission relied upon in lifting the
price ceiling for short-term capacity releases in Order No. 637, with
the market value of capacity generally below the pipeline's maximum
rate except for relatively brief price spikes.\59\ In affirming the
Commission's actions, the court in INGAA found that the data presented
by the Commission constituted a substantial basis for the conclusion
that a considerable amount of competition existed in the capacity
release market. Further, the INGAA court concluded that the price
spikes reflected in the data were consistent with competition and that
such spikes reflected scarcity rather than monopoly power.\60\
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    \59\ Order No. 637 at 31,273-75.
    \60\ INGAA at 31-32.
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b. Recourse Rate Protection
    48. Moreover, the Commission is not relying only on a competitive
market to ensure just and reasonable rates. The pipeline's maximum
rates for short-term firm and interruptible services serve as recourse
rate protection for negotiated rate transactions,\61\ and will provide
the same protection to replacement shippers by giving them access to a
just and reasonable rate if the releasing shipper seeks to exercise
market power.\62\ As the Commission explained in Order No. 637:
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    \61\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 74 FERC ] 61,076, reh'g denied, 75 FERC ]
61,024 (1996), petitions for review denied sub nom., Burlington
Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (DC Cir. 1998). See
also Natural Gas Pipelines Negotiated Rate Policies and Practices;
Modification of Negotiated Rate Policy, 104 FERC ] 61,134 (2003),
order on reh'g and clarification, 114 FERC ] 61,042, order
dismissing reh'g and denying clarification, 114 FERC ] 61,304
(2006). As the Commission explained in its negotiated rate policy
statement, ``[t]he availability of a recourse service would prevent
pipelines from exercising market power by assuring that the customer
can fall back to traditional cost-based service if the pipeline
unilaterally demands excessive prices or withholds service.'' 74
FERC ] 61,076 at 61,240 (1996).
    \62\ The pipeline is obligated to sell capacity at the just and
reasonable rate. 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).

    The Commission is continuing to protect against the possibility
that, in an oligopolistic market structure, the pipeline and firm
shipper will have a mutual interest in withholding capacity to raise
the price because the Commission is continuing cost based regulation
of pipeline transportation transactions. The pipeline will be
required to sell both short-term and long-term capacity at just and
reasonable rates. In the short-term, a releasing shipper's attempt
to withhold capacity in order to raise prices above maximum rates
will be undermined because the pipeline will be required to sell
that capacity as interruptible capacity to a shipper willing to pay
the maximum rate. Shippers also have the option of purchasing long-
term firm capacity from the pipelines at just and reasonable
rates.\63\
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    \63\ Order 637 at 31,282.

    49. The court in INGAA similarly recognized the value of the
pipeline's recourse rate protecting against possible abuses of market
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power by releasing shippers stating that:

    [i]f 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.\64\
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    \64\ INGAA at 32.
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c. Short-Term Customers Are Not Captive
    50. The releasing shippers' ability to exercise market power in the
short-term capacity release market also is limited because short-term
customers are not captive, even if only connected to one pipeline.
Short-term customers, those using interruptible or short-term firm
pipeline service or relying on capacity release transactions, are by
the very nature of the service for which they are contracting,
expressly taking the risk that they may have to forgo the use of gas
entirely if short-term capacity is too expensive, or not available,
when they need it.\65\ Thus, short-term shippers always have the option
simply not to take service, if the price demanded is above competitive
market levels.
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    \65\ Order No. 637 at 31,285, 31,336-42.
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d. Non-Cost Factors
    51. Removal of the price ceiling on short-term capacity release
transactions provides a number of advantages which ``offset whatever
harm the occasional high rate might entail.'' \66\ Most importantly,
removal of the price cap permits more efficient utilization of capacity
by permitting prices for short-term capacity releases to rise to market
clearing levels, thereby permitting those who place the highest value
on the capacity to obtain it. Removal of the price ceiling also will
provide potential customers with additional opportunities to acquire
capacity. Without the price ceiling, firm capacity holders will have a
greater incentive to release capacity during times of scarcity, because
they will be able to obtain the full market value of the capacity.\67\
Therefore, a shipper needing gas on a peak day will have a greater
opportunity to obtain the capacity it needs from a firm capacity
holder, instead of having only the choices of purchasing a bundled sale
or taking gas out of the pipeline and paying the pipeline's scheduling
or overrun penalties.\68\ Thus, removal of the price ceiling benefits
short-term shippers because the shipper placing a high value on the
capacity has a greater assurance of obtaining the capacity it needs
than it does under a price cap where that shipper may be unable to
obtain any capacity.
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    \66\ INGAA at 33.
    \67\ For example, an LDC shipper may hold capacity on one or
more pipelines and have access to storage and peak shaving
facilities. Using these facilities may cost the LDC more to deliver
gas than purchasing gas in the upstream markets and using its
transportation capacity to transport that gas to the city gate.
However, the LDC might be willing to release its transportation
capacity and use its peak shaving device instead if it could receive
a price above the maximum rate for its transportation capacity so
that the price it receives will cover the costs of the peak shaving
device. Order No. 637 at 31,277.
    \68\ Order No. 637 at 31,280; INGAA at 34.
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    52. Second, even if replacement shippers do end up paying higher
prices for capacity during peak periods than they did with the
regulated rate in effect, it is appropriate for shippers using the
system only during peak periods to pay higher prices reflecting the
greater demand on the system. Short-term shippers currently receive the
benefit of paying reduced capacity release prices during off-peak
periods but face a cap on the market price during peak periods. Removal
of the price ceiling on short-term capacity releases will ensure that
those shippers that receive the benefit of lower market prices during
off-peak periods face the higher market prices during peak periods.
    53. Third, removing the price ceiling on short-term capacity
releases should benefit the ``primary intended beneficiaries of the
NGA--the `captive' shippers'' \69\ by removing the regulatory bias
built into the current rate structure. Those shippers typically have
long-term firm contracts with the pipeline. Long-term shippers pay the
same rate for capacity during both peak and off-peak periods. During
off-peak periods they can recover only a small portion of their
capacity cost through capacity release, because the market value for
release capacity is generally quite low due to the reduced demand for
capacity and the increased availability of released capacity. But
during peak periods, the price cap limits long-term captive customers
(who cannot make bundled sales) from receiving the full market value of
their capacity. Long-term shippers pay for the largest proportion of
the pipeline's fixed costs through their annual reservation charges,
and

permitting them to receive more revenue from capacity release during
peak periods will help them defray those costs. In short, the captive
customers will ``continue to receive whatever benefits the rate
ceilings generally provide,'' while also ``reaping the benefits of
[the] new rule, in the form of higher payments for their releases of
surplus capacity.'' \70\
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    \69\ INGAA at 33.
    \70\ Id.
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    54. Finally, by providing more accurate price signals concerning
the market value of pipeline capacity, removal of the price ceiling for
short-term capacity releases will promote the efficient construction of
new capacity by highlighting the location, frequency, and severity of
transportation constraints. Correct capacity pricing information will
also provide transparent market values that will better enable
pipelines and their lenders to calculate the potential profitability
and associated risk of additional construction designed to alleviate
transportation constraints.
e. Oversight
    55. The reporting requirements in Order No. 637 and the
Commission's implementation of the Energy Policy Act of 2005,
specifically with respect to market manipulation, provide the
Commission with enhanced ability to monitor the market and detect and
deter abuses.
    56. Order No. 637 improved the Commission's and the industry's
ability to monitor capacity release transactions by requiring daily
posting of these transactions on pipeline Web sites.\71\ This has
increased the information available to buyers while at the same time
making it easier for the Commission to identify situations in which
shippers are abusing their market power.\72\ Further, the Commission
will entertain complaints and respond to specific allegations of market
power on a case-by-case basis if necessary. Furthermore, the Commission
directs staff to monitor the capacity release program and, using all
available information, issue a report on the general performance of the
capacity release program, within six months after two years of
experience under the new rules.
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    \71\ 18 CFR 284.8 (2007).
    \72\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
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3. Comments
    57. The vast majority of comments support the removal of the price
ceiling for capacity release transactions. But some commenters have
raised limited concerns.
a. Lack of Competition in Certain Areas
    58. A few commentors have alleged that certain discrete portions of
the short term capacity release market may not be competitive at all
times. For example, Arizona Public Service states that the
transportation markets served by El Paso Natural Gas Company (El Paso)
located east of California are not currently competitive. It asserts
that during the 2000-2002 California energy crisis, when the Commission
had lifted the price cap on short term capacity releases, prices of
releases of El Paso capacity spiked to levels in excess of $20 per Dth.
Honeywell similarly argues that the Commission has failed to address
the fact that many geographical areas do not operate as a free market
and that areas in the Northeast, East, and Southwest portions of the
country faced constrained capacity and difficulties in building new
pipeline facilities. Honeywell argues that lifting the price cap on
short term capacity release will only exacerbate prices while not
addressing the underlying problem of these constrained markets. In
addition, some end-users of gas express concerns about the
concentration of capacity ownership on lateral pipelines and therefore
argue that the Commission should either not remove the price cap for
laterals or do so on a case-by-case basis, after a review of market
concentration and a demonstration that the releasing shipper does not
have market power on the lateral.\73\
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    \73\ Weyerhaeuser, NWIGU, and PGC.
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    59. While the Commission has not conducted a detailed market
analysis for each discrete area of the interstate pipeline grid, the
data previously discussed shows that the short-term capacity release
market is generally competitive. Indeed, with respect to the El Paso
market, the data in Table 1 shows that during the period March 26, 2000
to December 31, 2001, which included the California energy crisis
referred to by APS, only 12.5 percent of the total volume of capacity
released on El Paso was released at prices above the maximum rate.
Moreover, the updated data in Figure 3 for August 2006 through July
2007 shows that the market value of transportation service from the
Permian Basin to the California border was less than El Paso's maximum
transportation rate, except during brief, peak-demand periods when the
value of transportation service was somewhat greater than the maximum
transportation rate. Similar data for deliveries to East of California
markets on El Paso's South Mainline reflects the same overall pattern,
as shown in the following graph.\74\
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    \74\ The data for this chart comes from ICE, an on-line
electronic trading platform. The El Paso South Mainline area is
described on ICE as: El Paso-South Mainline--buyers' choice west of
Cornudas.

BILLING CODE 6717-01-P

[GRAPHIC] [TIFF OMITTED] TR30JN08.023

BILLING CODE 6717-01-C

    60. Similarly, while Honeywell suggests that capacity is
constrained in areas in the East and Northeast, the data in Figure 1
shows that for most of the year the value of transportation service
from Louisiana to New York City is less than the maximum transportation
rate on Transco, with only brief spikes above that level during peak
demand periods.
    61. These data are consistent with the proposition that prices will
exceed the maximum rate only during periods of constraint. Moreover, it
is precisely for these reasons that the Commission is continuing to
insist on the maintenance of the pipeline's recourse rate as protection
against the exercise of market power. Even on laterals or other parts
of the pipeline grid where all firm capacity may be held by only a few
or one firm shipper, those shippers cannot withhold their capacity in
order to charge a price above competitive levels. The pipeline's cost-
based interruptible rate is always available as an alternative when a
releasing shipper attempts to withhold its capacity. For example,
assume that a releasing shipper with available capacity on a little
used lateral seeks to exercise market power by withholding capacity
unless a potential replacement shipper pays a higher than justified
rate. If market demand for capacity at that rate does not exist,\75\
the replacement shipper has the option of turning down the deal and
purchasing the capacity from the pipeline at the just and reasonable
interruptible rate.
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    \75\ In other words, the market is not constrained.
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    62. NEM remains concerned that in spite of the Commission's finding
that the short term capacity release market is competitive, market
power may exist for some market participants resulting in historically
high natural gas prices reaching even higher levels. However, the data
reflects the competitive nature of the short term capacity release
market and the safeguards that the Commission employs in the instant
Final Rule to mitigate any residual market power. The Commission
accordingly finds that NEM's speculative concerns are unwarranted.\76\
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    \76\ NEM also posits that the lifting of the short term capacity
release market price ceiling in states where LDCs are required to
release their capacity to marketers as part of a state retail
unbundling program will place the marketer in a position where they
would no longer be guaranteed the same underlying capacity costs as
if the capacity had remained with the utility, and this could
increase the costs the marketers must pass on to their state retail
customers. To the extent that this feature causes problems in states
where capacity release assignments are a mandatory part of a state
retail unbundling program, the Commission would expect that the
State would consider this in its policies.
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b. Benefits From Removing the Price Ceiling
    63. Tenaska contests some of the benefits the Commission has cited
for removing the price ceiling. It argues there will be no overall
increase in allocative efficiency from removal of the short term
release price cap. It asserts that capacity that is in excess to the
current capacity holder's needs already finds it way to those who value
it more by a variety of means, including bundled downstream sales,
short and long term capacity releases, and pipeline sales of short-term
firm and interruptible service. It also argues that releasing shippers
with excess capacity are more likely to release that capacity over a
longer term, perhaps multiple years, rather than speculate that it
could profit by making very short-term releases during peak period
price spikes. It states that releases over relatively long term with
few exceptions allow the releasing shipper to realize its full market
value without being constrained by maximum pipeline rates.\77\
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    \77\ Tenaska explains, ``[c]apacity that basis markets show to
be worth more than the applicable pipeline maximum rate in the
prompt month will almost always drop in value to a level below that
maximum rate at some future point. Such capacity can be sold for its
full value within the pipeline maximum rate cap simply by extending
the term.'' Tenaska comments at 4-5.

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    64. Rather than undercutting the removal of the price cap,
Tenaska's argument that releasing shippers can now avoid the price
ceiling by making gas sales (in effect bundled sales of gas and
transportation) supports our determination. Shippers may well find that
releasing transportation alone is far more efficient than making a
bundled sales transaction, and therefore, removal of the price ceiling
will serve only to promote efficiency with negligible effect, if any,
on price levels. Similarly, requiring shippers to execute long-term
contracts in order to effectuate short-term transactions is
inefficient, and would mask more accurate short-term price signals.
Moreover, as discussed earlier, releasing and replacement shippers want
to contract based on price differentials between markets even when such
differentials exceed the maximum rate, and executing long term
contracts at some approximate capped rate would not achieve that goal.
    65. Tenaska also argues that holders of long term pipeline
contracts, that are ``net long'' compared to their actual capacity
needs will be the only shippers to benefit. Market participants that
are ``net short'' hold less capacity than they need and choose to match
some portion of their demand with short term services and delivered gas
purchases rather than to rely exclusively on long term pipeline
contracts. Tenaska argues that the effect of the removal of the short
term release rate cap, if there is any effect on reallocation of
capacity at all, will be a transfer of value from net short companies
to net long companies and states that there will be no net market
benefit of the type the Commission must show to justify the proposed
removal of the cap.
    66. Tenaska ignores the fact that ``net short'' holders of capacity
under its scenario will benefit from the removal of the price cap from
short term capacity release because they may be able to gain access to
capacity in a constrained market that they could not if the price cap
remained. A releasing shipper, subject to a rate ceiling, may well hold
onto capacity if the maximum rate is less than its opportunity cost,
such as using an alternative fuel, using expensive storage, or
conservation of gas.\78\ Moreover, the fact low load factor ``net
long'' holders of capacity of the type described by Tenaska can profit
from above-cap short term releases is one of the benefits of removing
the short-term price cap.
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    \78\ Order No. 637 at 31,554.
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c. Promotion of Construction
    67. Honeywell argues that the Commission has failed to show that
more accurate price signals concerning the value of pipeline capacity
will, in fact, promote construction of needed capacity. First, higher
prices should serve as price signals indicating where capacity
shortages exist and where potentially profitable construction can take
place. If prices are ``exacerbated'' as Honeywell argues, replacement
shippers paying such prices have every incentive to go to the pipeline
and support economically efficient construction to rectify the
shortage. While political and environmental obstacles are also a factor
in construction, this factor has not stymied construction. The
Commission has processed a large number of certificate applications for
new construction of capacity, storage, and liquefied natural gas
terminals in every region.\79\ Third, providing incentives for new
construction is not the only benefit of removing the price ceiling. As
discussed earlier, removal of the price ceiling will benefit the market
even in the short term by providing for a more efficient allocation of
capacity to those who value that capacity.
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    \79\ In 2007 alone, approximately 34 major pipeline projects
were authorized by the Commission which was comprised of
approximately 2,782 miles of pipeline, 850 thousand horsepower of
compression and the capacity to transport some 23,000 million MMd/t
of gas. See the ``2007'' data at http://www.ferc.gov/industries/gas/
indus-act/pipelines/approved-projects.asp. See similar data for
storage at http://www.ferc.gov/industries.asp and liquefied natural
gas terminals at http://www.ferc.gov/industries/lng.asp.
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d. Changed Circumstances
    68. Tenaska and APS argue that even if the Commission's conclusion
that all pipeline capacity release markets are competitive is
supportable at this time, circumstances could change dramatically in
this industry. As a result, they assert that the Commission must
include a process for promptly revisiting its determination that the
market is competitive if there is evidence that the market is
dysfunctional. Honeywell also states that the Commission also proposes
to blind itself for almost three years to any problems in the capacity
release market by directing its staff to issue a report within six
months after gaining two years of experience under the new rules.
    69. As set forth above, we are maintaining oversight over the
market and can act if market power is being abused in particular
circumstances. Order No. 637 improved the Commission's and the
industry's ability to monitor capacity release transactions by
requiring daily posting of these transactions on pipeline Web
sites.\80\ This has increased the information available to buyers while
at the same time making it easier for the Commission to identify
situations in which shippers are abusing their market power.\81\ Such
information allows the Commission to monitor, with the assistance of
all industry participants, the overall competitiveness of the market
including discrete portions of the market that may not be competitive
at all times. Moreover, the Commission will entertain complaints and
respond to specific allegations of market power on a case-by-case basis
if necessary. This action will also guard against the use of market
power by any market participant.
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    \80\ 18 CFR 284.8 (2007).
    \81\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
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    70. Further, Honeywell misreads the Commission's directives and
intent when it claims the Commission has voluntarily blinded itself to
market forces for some three years. While the Commission directs its
staff to monitor the capacity release program and issue a report on the
general performance of the capacity release program within six months
after two years of experience under the new rules, nothing in this
directive precludes staff from alerting the Commission to any
irregularities in the capacity release market before it issues its
general report.
    71. Moreover, while Tenaska refers to the Commission lifting of the
short term price cap as permanent, and notes that the INGAA court
reviewed a proposal by the Commission to lift the price ceiling only on
a temporary basis, it is important to note that, although the
Commission will remove the price ceiling on short term capacity
releases it will monitor the capacity release market and review its
staff's report on the effects of the new rule and the overall
functioning of the capacity release market.
e. Exemption From Bidding for Short-Term Releases at the Maximum Rate
    72. The NGSA and others request that the Commission continue to
allow market participants to enter into a pre-arranged capacity release
transaction without bidding for releases of capacity with a term of a
year or less as long as those releases are made at the pipeline's
maximum tariff rate. NGSA asserts that prearranged releases at the
pipeline's maximum rate without the competitive bidding requirement
have been proven to provide significant market benefits and should not
be eliminated, solely

because the Commission removes the rate cap on short-term capacity
release transactions.
    73. The reason for the prior exemption from bidding for pre-
arranged capacity release transactions at the maximum rate was based
solely on the fact that with the rate cap in place, no one could submit
a higher bid and win the capacity. As discussed earlier, one of the
reasons for removing the price ceiling for short-term releases is to
ensure that capacity is allocated to the shipper that values it the
most. NGSA has not provided a sufficient justification for permitting
shippers to consummate a capacity release at the maximum rate when
another potential shipper places a greater value on that capacity.

B. Removal of Price Ceiling for Long-Term Releases

    74. Several commenters to the NOPR request that the Commission
remove the price ceiling on long-term capacity releases in addition to
eliminating the price ceiling on short-term capacity releases. \82\
These commenters assert that the same arguments that support removal of
the price cap for short-term capacity releases apply equally to lifting
the price cap for long-term capacity releases. For example, commenters
argue that lifting the price ceiling on long-term capacity releases
would increase liquidity and competition in the market for capacity
release and primary pipeline capacity, thereby promoting the goals of
allocative efficiency. Moreover, commentors assert that lifting the
price cap on long-term capacity releases will promote the construction
of additional pipeline capacity by providing more accurate price
signals reflecting the value of such capacity.
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    \82\ See, e.g., Comments of Allegheny Energy Supply Co.
(Allegheny), Duke Energy, Dynegy Marketing and Trade (Dynegy), and
Southwest .
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    75. Commentors also point out that the Commission's concern over
replacement shippers being ``locked in'' to high price long-term
contracts is misplaced because such releases of capacity would likely
be priced using basis differentials at different price index
locations.\83\ Other commentors such as Duke assert that the
Commission's concerns are misplaced because replacement shippers
accepting such multi-year deals are sophisticated market participants
capable of negotiating fair agreements.
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    \83\ See e.g., Comments of Southwest at 10; Allegheny at 6-7.
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    76. Allegheny argues that the pipelines' recourse rates will serve
as a check on over-priced long-term capacity releases because
replacement shippers would have the ability to negotiate for capacity
from a pipeline at the recourse rate if the releasing shippers were
seeking excessive prices. Allegheny also points to the Commission's
reporting requirements, complaints process, and enhanced civil penalty
authority as additional safeguards against the exercise of market
power.
    77. Several commenters support the retention of the price ceiling
on long term capacity releases and argue that it protects customers
from being locked into a long term contract without price cap
protection, that the price cap provides protection against possible
abuse of market power and that removal of the price cap for long term
capacity releases does not provide the efficiency gains provided by the
removal of the price ceiling on short term capacity release.\84\
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    \84\ See, e.g., Comments of NJNG at 33, OIPA at 3, Statoil at
14, Weyerhaeuser at 11.
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    78. In this instant Final Rule, the Commission will not extend the
removal of price ceilings to long term releases as urged by these
commentors. The data discussed above indicate only that removal of the
price cap for short-term releases is needed to reflect market values.
The Commission removed the price ceiling to permit shippers to quickly
align their capacity prices with the fluctuating short term market for
capacity releases. Such flexibility is not relevant to long-term
releases.
    79. Limiting this rulemaking to short-term transactions is a
reasonable response to the circumstances the Commission is trying to
address, i.e., short term price spikes. Only under these conditions do
Commission-approved maximum rates prevent the market from rationally
allocating scarce capacity to those shippers who value it most.
Removing the price cap only for short-term transactions allows a more
efficient market-driven allocation of capacity during those brief peak
demand periods, and provides more detailed price signals to the market
on the value of peak capacity, while retaining valuable consumer
protections provided by the price ceiling for longer term transactions.
The Commission's policy emphasis in this rule is on short-term
transactions, because that is where there is a problem to be solved. No
commenter has made a convincing argument that price ceilings on longer
term transactions create significant allocative inefficiencies or
market failures. Accordingly, the Commission concludes that the current
record does not warrant removal of the price ceiling on long-term
capacity releases.
    80. Moreover, as we said in the NOPR,\85\ limiting the release to
one year will not prevent the releasing and replacement shipper from
continuing an index-based release past one year, because they could
repost the release for another year, and the price ceiling would not
apply to the release. However, such reposting provides additional
assurance to the market that capacity will be allocated to those who
value it the most. Any transaction in which the parties want to
continue the release past one year would have to be re-posted for
bidding to ensure that the capacity is allocated to the highest valued
use.\86\ This bidding process could provide an opportunity for re-
determining the current market value of the capacity.
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    \85\ NOPR at P 44-45.
    \86\ As discussed below, however, short term capacity releases
made in context of an AMA need not be re-posted for bidding at the
end of their term.
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C. Removal of Price Ceiling for Pipeline Short-Term Transactions

    81. Pipelines request that the Commission remove the price ceiling
for short-term primary pipeline capacity whether firm or interruptible.
In sum, the Interstate Natural Gas Association of America (INGAA) and
the commenting pipelines argue that if the Commission lifts the price
cap for short-term capacity releases, it should also lift the price cap
for primary pipeline capacity.\87\
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    \87\ See e.g., Comments of Boardwalk, Spectra Energy
Transmission, LLC and Spectra Energy Partners, LP (Spectra), and
Williston Basin Interstate Pipeline Co. (Williston Basin).
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1. Removal of the Price Ceiling Is Not Justified
    82. The Commission declines to remove the ceiling from short-term
pipeline capacity. In the Alternative Rate Design Policy statement, we
offered the pipelines the flexibility to exceed the price cap in one of
two ways: either pipelines can make a filing with appropriate
information to establish the market is competitive or pipelines can
negotiate rates as long as the shipper has the option of purchasing
capacity at the recourse (maximum) tariff rate.\88\ These two
approaches assured shippers that the pipelines were not exercising
market power. The pipelines request for lifting the maximum rate on
short-term releases would effectively negate the recourse rate
protection we included in the negotiated rate program.
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    \88\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines and Regulation of Negotiated Transportation
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996).
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    83. Our action here is designed to permit releasing shippers some
of the

same flexible pricing authority the Commission has already granted
pipelines through the negotiated rate program. But, as discussed
earlier, the Commission is retaining the maximum rate ceiling on
pipeline capacity because it acts as the recourse rate for both
pipeline transactions as well as release transactions. Removing the
rate ceiling for pipeline transactions would therefore remove an
important protection both for pipeline customers and for replacement
shippers on capacity release transactions.
    84. In addition, pipelines are the principal holders of capacity.
As the court recognized in INGAA:

    There seems every reason to suppose that [releasing shipper]
ownership of such capacity (in any given market) is not so
concentrated as that of the pipelines themselves--the concentration
that prompted Congress to impose rate regulation in the first place.
* * * * *
    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.\89\
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    \89\ INGAA at 35.

    85. Unlike releasing shippers, the pipeline holders of primary
capacity have a greater ability to exercise market power by withholding
capacity and not constructing facilities. Because pipelines are in the
best position to expand their own systems, cost-of-service rate
ceilings help to ensure that pipelines have appropriate incentives to
construct new facilities when needed. As the Commission found, ``the
only way a pipeline [can] create scarcity to force shippers to accept
longer term contracts would be to refuse to build additional capacity
when demand requires it.'' \90\ As long as cost-of-service rate
ceilings apply, however, ``pipelines [will] have a greater incentive to
build new capacity to serve all the demand for their service, than to
withhold capacity, since the only way the pipeline could increase
current revenues and profits would be to invest in additional
facilities to serve the increased demand.'' \91\ Similarly, as long as
pipeline short-term services are subject to a cost of service rate, the
pipelines will not limit their construction of new capacity to meet
demand in order to create scarcity that increases short-term prices.
Indeed, releases at prices above the maximum rate will indicate that
pipeline capacity is constrained and demonstrate that constructing
additional capacity could be profitable.
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    \90\ Regulation of Short-Term Natural Gas Transportation
Services, 101 FERC ] 61,127, at P 12 (2002), aff'd, American Gas
Ass'n v. FERC, 428 F.3d 255 (DC Cir. 2005). See also Tennessee Gas
Pipeline Co., 91 FERC ] 61,053 (2000), reh'g denied, 94 FERC ]
61,097 (2001), aff'd, 292 F.3d 831 (DC Cir. 2002).
    \91\ Id.
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    86. Further, pipelines already have significant pricing discretion.
As discussed above, pipelines can enter into negotiated rate
transactions above the maximum rate. Pipelines also may seek market-
based rates by making a filing with the Commission establishing that
they lack market power in the markets they serve.\92\ In addition,
pipelines have the ability to propose seasonal rates for their systems,
and therefore, recover more of their annual revenue requirement in peak
seasons.\93\ The proposed rule is designed solely to give releasing
shippers some of the same flexibility enjoyed by the pipelines, subject
to the same recourse rate protection. But removing the ceiling price
from the release market does not justify removing all regulatory
protections applicable to the primary capacity holder.
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    \92\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines and Regulation of Negotiated Transportation
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996).
    \93\ See Order No. 637 at 31,574-81.
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2. Response to Specific Comments
a. Evidentiary Record
    87. INGAA states that the same evidentiary record relied upon by
the Commission to propose lifting the ceiling on capacity releases
reflects that the entire market, including short-term pipeline
services, is competitive, and therefore contends that the Commission
should lift the rate ceilings on the entire short-term market. Spectra
adds that the evidence cited by the Commission supports the existence
of competition by all participants in the single market for short-term
capacity, not just competition in the capacity release sector of the
overall market. INGAA asserts that if the market is competitive, the
identity of the seller should be irrelevant.
    88. As we have explained above, while the data indicates that the
short-term secondary market is competitive in general, we have not made
a finding that every segment of every pipeline is competitive; we
retained the recourse rate as a protection against the potential
exercise of market power by both pipelines and releasing shippers in
those cases in which the market may not be competitive. While the
purpose of capacity release, segmentation, and flexible point rights is
to encourage competition between the pipeline's sale of its own
capacity and capacity release, and those policies have successfully
created a robust secondary market as demonstrated by the data discussed
earlier in this rule, that does not necessarily mean that every
pipeline faces competition in the sale of its short-term capacity on
all segments of its system. For example, the Commission's selective
discounting policy permits pipelines to restrict a shipper's discount
to specific points, so that the shipper must pay the pipeline's maximum
rate if it releases the capacity to a replacement shipper who uses
different points where the pipeline faces less competition.\94\ This
may reduce that shipper's incentive to release its capacity to a
replacement shipper who will use points on a segment with less
competition.\95\ Retaining the recourse rate helps protect against the
pipeline's abuse of market power in the sale of capacity on any such
segments of its system.
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    \94\ Williston Basin Interstate Pipeline Co., 110 FERC ] 61,210
at P 22, order on reh'g, 112 FERC ] 61, 038 (2005). These orders
responded to a decision by the United States Court of Appeals for
the District of Columbia Circuit in Williston Basin Interstate
Pipeline Co. v. FERC, 358 F.3d 45 (DC Cir. 2004) (Williston),
vacating orders in an Order No. 637 compliance proceeding permitting
releasing shippers to retain primary point discounts when their
replacement shippers used different points. The DC Circuit held that
the policy could undermine the benefits of selective discounting,
stating that ``economic theory tells us price discrimination, of
which selective discounting is a species, is least practical where
arbitrage is possible--that is, where a low price buyer can resell
to a high price buyer * * * yet this is precisely what the
Commission's policy would appear not only to allow but to
encourage.'' 358 F.3d at 50 (cite omitted).
    \95\ In addition, a particular shipper's incentive to release
capacity in competition with the pipeline could be reduced, if its
discounted or negotiated rate agreement contains a provision, as
permitted by Commission policy, providing that the pipeline will
share any revenues the shipper receives from a capacity release in
excess of its discounted or negotiated rate. See LSP Cottage Grove,
L.P. v. Northern Natural Gas Co., 111 FERC ] 61,108 at P58-59
(2005), and cases cited.
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    89. Further, the repercussions of removing price ceilings for
pipeline transactions are more serious than for released capacity,
because the exercise of market power by pipelines could reduce the
total amount of primary pipeline capacity available to the market.
Finally, to the extent pipelines believe their markets are competitive,
they have a full opportunity to make a filing with the Commission to
obtain market based rates based on a showing of lack of market
power.\96\
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    \96\ Pipelines so far have not been successful in demonstrating
that their major markets are competitive. 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).

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b. Infrastructure Incentives
    90. INGAA alleges that maintaining cost-based recourse rates for
pipelines is not required to preserve an incentive for pipelines to
construct needed pipeline infrastructure. It asserts this runs counter
to the general presumption that market-based rates send the proper
signals as to whether new pipeline construction is needed and can be
constructed economically. In their comments, INGAA and Spectra argue
that pipelines actually compete to build new capacity, and that there
is no reason to assume that non-pipeline investment will not fill any
void caused by pipelines withholding capacity.\97\
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    \97\ Spectra also argues that the Commission should remove the
price caps for pipeline short-term firm and interruptible capacity,
and suggests that to the extent the Commission retains its concerns
regarding withholding of capacity, the Commission could retain the
price caps for interruptible service. Spectra further argues that
this action would provide shippers with a recourse alternative that
would be available if the pipeline attempted to withhold short-term
firm capacity or the releasing customer tried to withhold short-term
release capacity.
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    91. Neither INGAA nor Spectra have shown that the entry barriers to
constructing capacity on existing pipeline rights of way are so low
that there is effective competition. Moreover, they have the
opportunity to present any such detailed evidence in a proceeding
seeking to show that they do not have market power, and other parties
would have an opportunity to challenge such evidence. This is not a
finding we can make on a generic basis in this proceeding.
c. Competitive Market Structure
    92. INGAA asserts that the Commission's concern that pipelines own
more pipeline capacity than their firm shippers is based on a pre-
restructuring, pre-open access view of the industry, and not based on
any empirical study of pipeline market power. Moreover, INGAA and
Spectra assert that control of the short-term market is now primarily
in the hands of pipelines' firm shippers, which have substantial rights
such as capacity release, flexible point rights and segmentation
rights. These shipper rights produce a competitive short-term market
that cannot reasonably be bifurcated based on the identity of the
seller. INGAA and Spectra state that the Commission should focus its
concern not on formal ownership, but rather on the entity that controls
access to or use of the capacity.
    93. Spectra points out that a check on prices is not needed to
prevent the exercise of market power because sufficient safeguards--in
the form of competition between shippers seeking to release or acquire
capacity in the short-term markets, as well as the competition between
shippers and pipelines themselves--will protect the market from abuse.
Further, Spectra asserts that construction of new capacity, the open
access tariff, reporting and posting requirements, and the Commission's
oversight and enforcement authority will also serve as added
safeguards.
    94. However, as the Court of Appeals found, these arguments are
comparing ``apples and oranges.'' \98\ First, the available capacity of
the pipeline is on hand and ready to be sold, whereas the capacity held
by releasing shippers is not necessarily available, since much of it
may be needed to serve its native loads:
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    \98\ INGAA at 24.

    The petitioning pipelines assert that pipelines hold only about
7% of pipeline transportation capacity, while shippers hold the
remaining 93%. This is classic apples and oranges. The Commission
points out that whereas the uncontracted capacity of a pipeline is
presumptively available for the short-term market, no such
presumption makes sense for the non-pipeline capacity holders: they
presumably contracted for the capacity in anticipation of actually
using it.\99\
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    \99\ Id. In addition, as previously discussed, there may be
circumstances in which shippers' discounted or negotiated rate
agreements contain provisions that have the effect of reducing
competition from capacity release on some segments of the pipeline.

    Second, using the market shares for already existing capacity does
not reflect the more important relationship of the price ceiling to
construction of new capacity infrastructure which is far more critical
to ensuring that the pipeline grid is expanded to meet demand. Because
the pipelines are the principal parties constructing additional
capacity, it is crucial that their incentive to build is not diluted by
the ability to earn scarcity rents in the short-term market.
d. Differences in Flexibility Between Pipeline Capacity and Released
Capacity
    95. INGAA and the pipelines argue that the pricing flexibility
available to the pipelines does not allow pipelines to compete with
shippers offering short-term capacity releases without a price ceiling.
They argue that market-based pricing for pipelines is subject to a
strenuous market-power test that involves lengthy and costly
administrative proceedings. They argue that the Commission rarely finds
that a pipeline meets this market-power test, and therefore it is
impractical for pipelines to engage in competition with capacity
releases.\100\
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    \100\ INGAA at 12 (citing, KN Interstate Gas Transmission Co.,
76 FERC ] 61,134 (1996); and Rendezvous Gas Services, LLC, 112 FERC
] 61,141, at 61,792-94 (2005)). Spectra notes that the Commission
has never approved market based rates for a major natural gas
pipeline. Spectra comments at 24.
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    96. In regard to negotiated rates, the pipelines argue that their
flexibility is limited because the maximum rate is always subject to
the shipper's right to elect the recourse rate, and implementation is
subject to regulatory delays. INGAA and Williston also argue that the
negotiated rate program offers pipelines very little, if any,
opportunity to employ market-based pricing to efficiently allocate
capacity to those who desire it most.
    97. Third, INGAA asserts that seasonal rates do not provide the
flexibility necessary to address the pipelines' competitive
disadvantage under the Commission's proposal because seasonal rates
result in new recourse rates, capped at the pipeline's annual revenues,
not the ability to charge rates in excess of recourse rates. Spectra