[Federal Register: November 26, 2007 (Volume 72, Number 226)]
[Proposed Rules]
[Page 65916-65936]
[DOCID:fr26no07-12]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-000]

Promotion of a More Efficient Capacity Release Market

November 15, 2007.
AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission is proposing
revisions to 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 mechanism. The Commission is proposing to permit market based
pricing for short-term capacity releases and to facilitate asset
management arrangements by relaxing the Commission's prohibition on
tying and on its bidding requirements for certain capacity releases.

DATES: Comments are due January 10, 2008.

ADDRESSES: You may submit comments, identified by docket number by any
of the following methods:
    Agency Web site: http://ferc.gov. Documents created electronically

using word processing software should be filed in native applications
or print-to-PDF format and not in a scanned format.
    Mail/Hand Delivery: Commenters unable to file comments
electronically must mail or hand deliver an original and 14 copies of
their comments to: Federal Energy Regulatory Commission, Secretary of
the Commission, 888 First Street, NE., Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and
additional information on the rulemaking process, see the Comment
Procedures section of this document.

FOR FURTHER INFORMATION CONTACT:
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:

Notice of Proposed Rulemaking

Table of Contents

                                                              Paragraph
                                                               numbers

I. Background..............................................           2.
  A. The Capacity Release Program..........................           2.
  B. Petitions and Industry Comments.......................          15.
II. Removal of Maximum Rate Ceiling for Short-Term Capacity          23.
 Release...................................................
  A. Policies Enhancing Competition........................          30.
  B. Data on Capacity Release Transactions.................          33.
  C. Available Pipeline Service Constrains Market Power              40.
   Abuses..................................................
  D. Monitoring............................................          42.
  E. Requests to Expand Market-Based Rate Authority........          43.
    1. Removal of Price Ceiling for Long-Term Releases.....          43.
    2. Removal of Price Ceiling for Pipeline Short-Term              46.
     Transactions..........................................
III. Asset Management Arrangements.........................          53.
  A. Background............................................          53.
  B. Discussion............................................          63.
    1. Tying...............................................          75.
    2. The Bidding Requirement.............................          83.
    3. Definition of AMAs..................................          91.
IV. State Mandated Retail Choice Programs..................          97.
V. Shipper Must-Have-Title Requirement.....................         106.
VI. Regulatory Requirements................................         111.
  A. Information Collection Statement......................         111.
  B. Environmental Analysis................................         114.
  C. Regulatory Flexibility Act............................         115.
  D. Comment Procedures....................................         117.
  E. Document Availability.................................         121.

    1. In this Notice of Proposed Rulemaking, the Commission proposes
to revise its Part 284 regulations

concerning the release of firm capacity by shippers on interstate
natural gas pipelines. First, the Commission proposes to remove, on a
permanent basis, the rate ceiling on capacity release transactions of
one year or less. Second, the Commission proposes to 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 supply the gas
needs of the capacity holder. Specifically, the Commission proposes to
exempt capacity releases made as part of AMAs from the prohibition on
tying and from the bidding requirements of section 284.8. These
proposals are designed to enhance competition in the secondary capacity
release market and increase shipper options for how they obtain gas
supplies.

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.\1\ 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.'' \2\
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    \1\ 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, 1002), 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 (D.C. Cir. 1996);
order on remand, Order No. 636-C, 78 FERC ] 61,186 (1997).
    \2\ 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.\3\
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    \3\ In brief, under the Commission's 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.'' \4\
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    \4\ 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.\5\ 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.'' \6\
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    \5\ See Algonquin Gas Transmission Corp., 59 FERC ] 61,032
(1992).
    \6\ 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.\7\ 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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    \7\ 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.\8\ In order to enforce the prohibition on private transfers
of capacity, the Commission required that a shipper must have title to
any gas that it ships on the pipeline.\9\
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    \8\ 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).
    \9\ 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 (D.C. 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 (D.C. Cir.
2005). See section V below for a further explanation of the shipper-
must-have-title requirement.
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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.\10\
This ceiling was derived from the Commission's estimate of the maximum
rates necessary for the pipeline to

recover its annual cost-of-service revenue requirement, which the
Commission prorated over the period of each release.\11\
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    \10\ Order No. 636 at 30,418; Order No. 636-A at 30,560.f
    \11\ 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).'' \12\ 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.\13\
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    \12\ 18 CFR Sec. 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.''
    \13\ 18 CFR Sec.  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.\14\ 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.\15\
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    \14\ Secondary Market Transactions on Interstate Natural Gas
Pipelines, Proposed Experimental Pilot Program to Relax the Price
Cap for Secondary Market Transactions, 61 FR 41401 (Aug. 8, 1996),
76 FERC ] 61,120, order on reh'g, 77 FERC ] 61,183 (1996).
    \15\ 77 FERC ] 61,183 (1996) at 61,699.
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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.\16\
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    \16\ 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.
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    13. Upon an examination of pricing data on basis differentials
between points,\17\ 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.\18\ Throughout this experiment, the
Commission retained the rate ceiling for firm and interruptible
capacity available from the pipeline as well as long-term capacity
release transactions.
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    \17\ 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.
    \18\ Order No. 637 at 31,282.
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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,\19\ upheld the Commission's experimental price ceiling
program for short-term capacity release transactions as set forth in
Order No. 637.\20\ 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.\21\ 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.\22\
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    \19\ 285 F.3d 18 (D.C. Cir. 2002) (INGAA).
    \20\ 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 ``lighthanded''
regulation, we find the Commission's decision neither a violation of
the NGA, nor arbitrary or capricious.'' INGAA at 35.
    \21\ 734 F.2d 1486 (D.C. Cir. 1984) (Farmers Union).
    \22\ Id. at 33.

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B. Petitions and Industry Comments

    15. 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 release transactions.\23\ They
stated that removing the price ceiling would improve the efficiency of
the capacity market by giving releasing shippers a greater incentive to
release their capacity during periods of constraint. They asserted that
this would allow shippers who value the capacity the most to obtain it,
provide more accurate price signals concerning the value of capacity,
and provide greater potential cost mitigation to holders of long-term
firm capacity. They also pointed out that the Commission now permits
pipelines to negotiate rates with individual customers using basis
differentials (i.e., the difference between natural gas commodity
prices at two trading points, such as a supply basin and a city gate
delivery point) and such negotiated rates may exceed the pipeline's
recourse maximum rate. PG&E and Southwest assert that releasing
shippers must have greater pricing flexibility in order to compete with
such negotiated rate deals offered by the pipelines.
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    \23\ Docket No. RM06-21-000. PG&E subsequently clarified that it
only seeks removal of the price cap for capacity releases of less
than a year.
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    16. In October 2006, a group of large natural gas marketers \24\
(Marketer Petitioners) requested clarification of the operation of the
Commission's capacity release rules in the context of asset (or
portfolio) management services.\25\ An AMA is an agreement under which
a capacity holder releases, on a pre-arranged basis, all or some of its
pipeline capacity, along with associated gas purchase contracts, to an
asset or portfolio manager. The asset manager uses the capacity to
satisfy the gas supply needs of the releasing shipper, and, when the
capacity is not needed to serve the releasing shipper, the asset
manager uses it to make gas sales or re-releases the capacity to third
parties.
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    \24\ Coral Energy Resources, LP; ConocoPhillips Co.; Chevron
USA, Inc.; Constellation Energy Commodities Group, Inc.; Tenaska
Marketing Ventures; Merrill Lynch Commodities, Inc.; Nexen Marketing
USA, Inc.; and UBS Energy LLC.
    \25\ The Marketer Petitioners originally filed their petition in
Docket Nos. RM91-11-009 and RM98-10-013. However, the Commission has
re-docketed the petition in Docket No. RM07-4-000.
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    17. The Marketer Petitioners state that Order No. 636 adopted the
capacity release program as a means for shippers to transfer unneeded
capacity to other entities who desired it. However, the Marketer
Petitioners state, today many local distribution companies (LDCs) and
others desire to release their capacity to a replacement shipper (asset
manager) with greater market expertise, who will continue to use the
capacity to provide gas supplies to the releasing shipper and will be
better able to maximize the value of the released capacity when it is
not needed to serve the releasing shipper. The Marketer Petitioners
state that the Commission's current capacity release rules may
interfere with marketers providing efficient asset management services.
They also assert that they are not seeking to remove the capacity
release rate cap, but acknowledge that if the Commission took such
action, it would eliminate some of their problems.
    18. On January 3, 2007, the Commission issued a request for
comments on the current operation of the Commission's 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's request for comments was in part in response to the
petitions discussed above. In addition to the issues raised by the
petitions, 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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    \26\ Pacific Gas & Electric Co., 118 FERC ] 61,005 (2007).
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    19. In response to the price ceiling issues, commenting LDCs and
pipelines both advocate lifting the ceiling, subject to different
conditions. The LDCs favor lifting the ceiling only if it would still
apply to the pipeline's direct sales of capacity because, among other
things, the pipelines have negotiated rate authority that is not
available to releasing shippers.\27\ The pipelines advocate the removal
of the cap only if the Commission removes the cap from the entire
capacity marketplace; otherwise, they argue, it will create a
bifurcated market and an uneven playing field.
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    \27\ Under the negotiated rate program, a pipeline may charge
rates different from those set forth in its open access tariff, as
long as the shipper has recourse to taking service at the maximum
tariff rate. See, 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 (D.C.
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,
dismissing reh'g and denying clarification, 114 FERC ] 61,304
(2006).
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    20. Producers and industrial customers generally oppose lifting the
price ceiling on a permanent basis, arguing that the Commission must
first develop new data to support such action and that it cannot rely
on the results of the Order No. 637 experiment that terminated five
years ago. Certain producers, however, would countenance a new
experiment conducted by the Commission to gather new data related to
the lifting of the price ceiling. Additionally, certain marketers and
the American Public Gas Association (APGA) argue that the Commission
cannot remove the ceiling unless there is a finding of lack of market
power.
    21. In response to the request for comments on whether the
Commission should consider adjusting the capacity release regulations
to foster AMAs, numerous commenters responded that AMAs are beneficial
to the market place and that the Commission should do something to
facilitate their use. A vast majority of the commenters assert that
AMAs provide substantial benefits, including more load responsive use
of gas supply, greater liquidity, increased use of transportation
capacity, cost effective procurement vehicles for LDCs and other end
users, and the enhancement of competition. They state that AMAs also
relieve LDCs from management of their daily gas supply and capacity
needs. Others comment that AMAs benefit all parties involved: The
releasing shipper reduces its costs through use of its capacity
entitlements to facilitate third party sales; the third parties benefit
from receiving a bundled product at an acceptable price; and the asset
manager receives whatever profits are not passed on to the releasing
shipper.
    22. In particular, the Marketer Petitioners and other commenters
request that the Commission clarify that the different payments made
between parties in an AMA do not constitute prohibited above maximum
rate transactions or below maximum rate transactions that thus require
posting and bidding. They also request that the Commission revisit its
prohibition on tying to allow the packaging of gas supply contracts and
pipeline or storage capacity, or multiple segments of capacity, as part
of an AMA. Certain commenters also suggest changes to the Commission's
notice and bidding requirements for capacity releases. A number of LDCs
and marketers request that the bidding requirement be eliminated
altogether or that the regulations be revised to eliminate

bidding for capacity releases made to implement an AMA.

II. Removal of Maximum Rate Ceiling for Short-Term Capacity Release

    23. Based upon its review of the petitions, comments and available
data, the Commission proposes to lift the price ceiling for short-term
capacity release transactions of one year or less. The Commission's
capacity release program has created a successful secondary market for
capacity.\28\ Commenters from disparate segments of the natural gas
industry agree that the capacity release program has been beneficial to
the industry in creating a competitive secondary market for natural gas
transportation.\29\
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    \28\ 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) (2005), order on reh'g, 113 FERC ] 61,173 (2005).
    \29\ See e.g., PG&E and Southwest Gas Petition at 10 (``There is
reason to believe that the secondary market is more competitive
today than it was six years ago.''); Market Petitioners at 3 (``The
Commission's capacity release program has proven to be a critical
initiative in opening U.S. natural gas markets to competition.'');
AGA Comments at 3 (``The Commission's regulations have permitted the
development of an open and active secondary market for pipeline
capacity that has provided significant benefits to natural gas
consumers.''); INGAA Comments at 12 (``The current market for short-
term transportation capacity is large and highly competitive.'');
and NGSA Comments at 2 (``The basic structure of the Commission's
policies is still providing the benefits intended of transparent,
nondiscriminatory, efficient allocation of capacity.'').
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    24. As the comments point out, shippers and potential shippers are
looking for 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. Pipelines, for example, have been using their
negotiated rate authority to sell their own capacity based on market-
derived basis differentials reflective of the difference in gas prices
between two points. The Commission recently clarified that pipelines
may use such basis differential pricing as a part of negotiated rate
transactions even when those prices exceed maximum tariff rates.\30\
Under the Commission's regulations, releasing shippers also may enter
into capacity release transactions based on basis differentials, but
such releases cannot exceed the maximum rate.\31\ In their comments,
releasing shippers request the ability to release at above the maximum
rate so that they may offer potential buyers rates competitive with
pipeline negotiated rate transactions.\32\
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    \30\ 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,
dismissing reh'g and denying clarification, 114 FERC ] 61,304
(2006).
    \31\ See Standards for Business Practices for Interstate Natural
Gas Pipelines and for Public Utilities, Order No. 698, 72 FR 38757
(July 16, 2007), FERC Stats. & Regs. ] 31,251 (June 25, 2007).
    \32\ See, e.g., PG&E and Southwest Gas Petition at 10-11.
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    25. As the Commission recognized in Order No. 637,\33\ the
traditional cost-of-service price ceilings in pipeline tariffs, which
are based on average yearly rates, are not well suited to the short-
term capacity release market.\34\ Removal of the price ceiling will
enable releasing shippers to offer competitively-priced alternatives to
the pipelines' negotiated rate offerings. Removal of the ceiling also
permits more efficient utilization of capacity by permitting prices 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. The price ceiling reduces the firm
capacity holders' incentive to release capacity during times of
scarcity, because they cannot obtain the market value of the capacity.
---------------------------------------------------------------------------

    \33\ Order No. 637 at 31,271-75.
    \34\ 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 virtually all pipelines have
taken advantage of negotiated rate authority.
---------------------------------------------------------------------------

    26. Further, the elimination of the price ceiling for short-term
capacity releases will provide more accurate price signals concerning
the market value of pipeline capacity. More accurate price signals 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.
    27. Moreover, removing the price ceiling on short-term capacity
releases should not harm, and may benefit, the ``primary intended
beneficiaries of the NGA--the `captive' shippers.'' \35\ Those shippers
typically have long-term firm contracts with the pipeline, and
therefore 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.'' \36\
---------------------------------------------------------------------------

    \35\ INGAA at 33.
    \36\ Id.
---------------------------------------------------------------------------

    28. 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.' \37\
---------------------------------------------------------------------------

    \37\ Id. at 31.

    29. Many of the changes effected in Order Nos. 636 and 637 have
enhanced competition between releasing shippers as well as between
releasing shippers and the pipeline. As discussed below, the data
obtained by the Commission both during the Order No. 637 experiment and
more recently confirms the finding made in Order No. 637 that short-
term release prices are reflective of market prices as revealed by
basis differentials, rather than reflecting the exercise of market
power. Moreover, shippers purchasing capacity will 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 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.

A. Policies Enhancing Competition

    30. In Order No. 636 and, as expanded in Order No. 637, the
Commission instituted a number of policy revisions designed to enhance
competition and improve efficiency across the pipeline grid. 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.

    31. 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 will
make more capacity available and enhance 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,\38\ 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.\39\
---------------------------------------------------------------------------

    \38\ 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.
    \39\ Order No. 637 at 31,300.

    32. 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.

B. Data on Capacity Release Transactions

    33. The data accumulated by the Commission during the Order No. 637
experiment, as well as review of more recent data, show 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.\40\ The staff paper
provided analysis of capacity release transactions on 34 pipelines
during the 22-month period from March 2000 to December 2001.\41\
---------------------------------------------------------------------------

    \40\ 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.
    \41\ 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.
---------------------------------------------------------------------------

    34. In brief, the data gathered during the 33-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                     Releases
                                                     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
----------------------------------------------------------------------------------------------------------------

    35. 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.\42\
---------------------------------------------------------------------------

    \42\ INGAA at 32.

    36. Several commenters argue that the data gathered by the
Commission is too stale to support the instant proposal to remove the
price ceiling on short-term capacity releases. However, these
commenters fail to produce any evidence to support specific concerns
existing today that did not exist during the experimental period.
Moreover, 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.
    37. 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.\43\
---------------------------------------------------------------------------

    \43\ 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.

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

[GRAPHIC] [TIFF OMITTED] TP26NO07.004

    38. 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] TP26NO07.005

[GRAPHIC] [TIFF OMITTED] TP26NO07.006

    39. 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.\44\ 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. \45\
---------------------------------------------------------------------------

    \44\ Order No. 637 at 31,273-75.
    \45\ INGAA at 32.
---------------------------------------------------------------------------

C. Available Pipeline Service Constrains Market Power Abuses

    40. The Commission envisions that under the instant proposal the
pipeline's open access transportation maximum tariff rates (recourse
rates) will serve as additional protection against possible abuses of
market power by releasing shippers. The Commission requires pipelines
to sell all their available capacity to shippers willing to pay the
pipeline's maximum recourse rate.\46\ Under their negotiated rate
authority, pipelines are free to negotiate individualized rates with
particular shippers that may be above the maximum tariff rate, subject
to several conditions including the availability of the maximum tariff
rate as a recourse rate for potential firm shippers.\47\ 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.'' \48\
---------------------------------------------------------------------------

    \46\ Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2002), 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 (D.C.
Cir. 2002).
    \47\ See, 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 (D.C. 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, dismissing
reh'g and denying clarification, 114 FERC ] 61,304 (2006).
    \48\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 74 FERC ] 61,076 at 61,240 (1996).
---------------------------------------------------------------------------

    41. The court in INGAA recognized the value of the pipeline's
recourse rate protecting against possible abuses of market 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.\49\
---------------------------------------------------------------------------

    \49\ INGAA at 32.

Removing the price ceiling for short-term capacity release transactions
will enable releasing shippers to offer negotiated rate transactions
similar to those offered by the pipelines. Moreover, the same pipeline
open access service will protect against the possibility that a
releasing shipper will attempt to exercise market power by withholding
capacity. For example, should a releasing shipper attempt to charge a
price above competitive levels, the potential purchaser could seek to
negotiate a more acceptable rate with the pipeline. Even when the
pipeline's firm service is not available, a cost based interruptible
rate is always available as an alternative when a releasing shipper
attempts to withhold capacity.

D. Monitoring

    42. 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.\50\ 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.\51\ 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
will direct 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.
---------------------------------------------------------------------------

    \50\ 18 CFR 284.8 (2007).
    \51\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
---------------------------------------------------------------------------

E. Requests to Expand Market-Based Rate Authority

1. Removal of Price Ceiling for Long-Term Releases
    43. Several commenters 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. The Commission declines
to make such an adjustment to its policies at this time for several
reasons. As discussed above, by lifting the price ceiling for short-
term capacity releases, the Commission seeks to provide releasing
shippers the flexibility to price their capacity in a manner consistent
with the short-term price variations in transportation capacity market
values. This action will ameliorate restrictions on the efficient
allocation of capacity during the short-term periods when demand drives
the value of transportation capacity above the current maximum rate.
    44. Limiting the removal of the release ceiling to short-term
transactions will also serve as additional protection for potential
replacement shippers. Such a limit will ensure that a replacement
shipper cannot be locked into a transaction that is not protected by
the maximum rate ceiling for more than one year. The expiration of such
a short-term transaction would give the replacement shipper an
opportunity to explore other options for satisfying its capacity needs.
The replacement shipper could seek to negotiate a different price with
its current releasing shipper or to obtain capacity from another
releasing shipper or directly from the pipeline.\52\ 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. This bidding process could provide an
opportunity for re-determining the current market value of the
capacity.
---------------------------------------------------------------------------

    \52\ Releasing and replacement shippers cannot simply roll over
a short-term release transaction in order to extend the release
beyond one year. The Commission's current regulations do not permit
rollovers or extensions of capacity releases made at less than
maximum rate or for less than 31 days without re-posting and bidding
of that capacity. 18 CFR Section 284.8(h) (2007).
---------------------------------------------------------------------------

    45. Finally, because any such release of a year or less would have
to be re-posted for bidding upon its expiration, the second release
would be a new release separate from the first release, and thus such a
second release of a year or less would also not be subject to the price
ceiling. The Commission, however, requests comment on whether there
should be any limit on the ability of releasing shippers to make
multiple, consecutive short-term releases not subject to the price
ceiling.
2. Removal of Price Ceiling for Pipeline Short-Term Transactions
    46. Pipelines request that the Commission remove the price ceiling
for primary pipeline capacity whether firm

or interruptible. In sum, they argue that because the transportation of
gas on pipelines has become sufficiently competitive, and because
released capacity competes directly with primary short-term firm,
interruptible transportation and storage services provided by
interstate pipelines, the Commission should lift the rate ceiling on
the entire short-term capacity market, not just on capacity releases.
Further, they assert that because short-term firm and interruptible
services compete directly with capacity release, the same market
liquidity considerations that warrant lifting the ceiling on short-term
releases support lifting the price ceiling in the primary market. The
pipelines assert that the Commission should treat all holders of
capacity equally, whether they are pipelines or releasing shippers.
    47. The pipelines also assert that removing the price ceiling only
on short-term capacity releases would bifurcate the single marketplace
for natural gas transportation services. They argue that if prices for
some of the capacity in the marketplace remain subject to a price
ceiling while the price ceiling is removed for other forms of capacity,
then once the capped capacity has been fully utilized, prices for the
uncapped capacity will be higher than they would have been without any
price ceiling at all. They assert that in affirming the Commission's
experiment in removing the price ceiling for short-term capacity
releases, the court in INGAA recognized this economic cost and labeled
it as a ``cost of gradualism.'' \53\
---------------------------------------------------------------------------

    \53\ INGAA at 36.
---------------------------------------------------------------------------

    48. The Commission is not proposing to remove the price ceiling for
primary pipeline capacity. Pipelines already have significant ability
to use market based pricing. Unlike capacity release transactions,
pipelines, as discussed above, currently 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.\54\ 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.\55\
---------------------------------------------------------------------------

    \54\ 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).
    \55\ See Order No. 637 at 31,574-31, 581.
---------------------------------------------------------------------------

    49. Moreover, the Commission is concerned about removing rate
ceilings for all pipeline transactions without the showings required
above in order to protect against the possible exercise of market
power. First, as discussed above, the price ceilings on pipeline
capacity serve as an effective recourse rate for both pipeline
negotiated rate transactions and capacity release transactions to
prevent pipelines and releasing shippers from withholding capacity.\56\
Second, pipeline capacity is not identical to release capacity, because
ownership of the pipeline capacity is likely to be more concentrated
than capacity held by shippers for release.\57\ Third, the Commission
has found that it needs to regulate primary pipeline capacity to ensure
that pipelines do not withhold capacity in the long-term by not
constructing additional 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.'' \58\ 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.'' \59\ 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 above the maximum rate will indicate that pipeline
capacity is constrained and demonstrate that constructing additional
capacity could be profitable.
---------------------------------------------------------------------------

    \56\ In Order No. 890, the Commission retained price ceilings on
transportation capacity for transmission owners to provide similar
recourse rate protection. Preventing Undue Discrimination and
Preference in Transmission Service, Order No. 890, 72 FR 12,266
(March 15, 2007), 12366, FERC Stats. & Regs. ] 31,241 at P 808-09
(2007).
    \57\ As the INGAA court stated:
    In fact the Commission's distinction is not unreasonable.
Despite the absence of Herfindahl-Hirschman indices for non pipeline
capacity holders, there seems every reason to suppose that their
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.
    INGAA at 23-24, citing, FPC v. Texaco, 417 U.S. 380, 398 n.8
(1974).
    \58\ 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 (D.C. 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 (D.C. Cir. 2002).
    \59\ Id.
---------------------------------------------------------------------------

    50. The pipelines also maintain that not removing the price ceiling
for their capacity that competes with released capacity will bifurcate
the market, resulting in possibly higher prices for the uncapped
release market. They argue that where a portion of the supply of a good
or service is subject to price controls, and demand exceeds (the price-
controlled) supply at the fixed price, the market-clearing price in the
uncontrolled segment will normally be higher than if no price controls
were imposed on any of the supply. Purchasers placing a lower value on
the good may nevertheless be able to purchase the price-controlled
supply, thereby ``using up'' some of the aggregate supply that would
otherwise be available to purchasers placing a higher value on the
good. This alters the demand-supply ratio in the uncontrolled market,
leading to a higher market clearing price in that market.
    51. Because of the nature of the pipeline short-term capacity, we
do not think that retaining the cost of service recourse rates for that
capacity will create such pricing distortions. The premise of the
pipelines' argument is that continued price controls on the pipeline's
sales of short-term capacity will enable shippers placing a lower value
on the capacity to ``use up'' some of the supply, thereby reducing the
amount of capacity available for purchase by shippers placing a higher
value on the capacity. This premise is incorrect. Short-term pipeline
capacity is sold as interruptible transportation; therefore, firm
capacity held by shippers will have scheduling priority over the
pipeline's interruptible capacity. In essence, pipeline interruptible
service is derived from existing shippers' decision not to use or
release their firm capacity or from unsold pipeline capacity. Thus,
even if a shipper placing a relatively low value on the capacity has a
higher position on the pipeline's queue for price-controlled
interruptible transportation, it is not guaranteed that it can acquire
(or ``use up'') that capacity, leading to the supposed higher market
clearing price. A firm shipper could always release its unused firm
capacity to a replacement shipper who places a higher value on that
capacity, thereby displacing the lower-value interruptible shipper.\60\
---------------------------------------------------------------------------

    \60\ For example, assume the maximum rate is $1.00 and there are
several shippers. One shipper is willing to pay up to $1.00 for
capacity, while the other shippers are willing to pay much higher
rates. Even if the shipper placing the lowest value on the capacity
was the highest on the pipeline's interruptible queue, it would not
be able to acquire capacity at the $1.00 rate, because the other
shippers could acquire released capacity by bidding above the
maximum rate, thereby preventing the allocation of any interruptible
service.

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

    52. Moreover, even in the context of firm short-term pipeline
capacity, the scenario posited by the pipelines would not result in
higher market clearing prices as long as arbitrage exists. Any shipper
with a higher queue position that acquires the pipeline capacity at the
lower capped rate would have an incentive to resell that capacity to
another shipper who places a higher value on the capacity, thus
ensuring that the market clearing price will reflect all relevant
demand.\61\
---------------------------------------------------------------------------

    \61\ The pipelines rely on an example in Order No. 637-B that
was cited by the court in INGAA for the proposition that capping one
part of the market will result in overall higher prices. But that
example was in a very different context, a situation in which a
releasing shipper in a retail access state provided released
capacity at a preferential rate to one set of marketers that were
obligated to serve retail load, while selling at an uncapped rate to
other marketers. In the first place, this situation did not involve
interruptible capacity. Moreover, unlike the case with pipeline
capacity, the favored marketer could not arbitrage its lower price
because it was committed to serving retail load.
---------------------------------------------------------------------------

III. Asset Management Arrangements

A. Background

    53. In general, AMAs are contractual relationships where a party
agrees to manage gas supply and delivery arrangements, including
transportation and storage capacity, for another party. Typically a
shipper holding firm transportation and/or storage capacity on a
pipeline or multiple pipelines temporarily releases all or a portion of
that capacity along with associated gas production and gas purchase
agreements to an asset manager (commonly a marketer). The asset manager
uses that capacity to serve the gas supply requirements of the
releasing shipper, and, when the capacity is not needed for that
purpose, uses the capacity to make releases or bundled sales to third
parties.
    54. While AMAs may be fashioned in a myriad of ways, there are
several common components of these arrangements. First, the releasing
shipper generally enters into a pre-arranged capacity release to an
asset manager ostensibly at the maximum rate in order to avoid the
bidding requirement. Second, the releasing shipper makes payments to
the asset manager for the gas supply service performed by the asset
manager for the releasing shipper. These payments may include the
releasing shipper paying the asset manager: (1) The full cost of the
released capacity (e.g., maximum rate) on the theory that the asset
manager is using the released capacity to transport the releasing
shipper's gas supplies, (2) a management fee for transportation-related
tasks (e.g. nominations, scheduling, storage injections, etc.)
associated with the asset manager's obligation to provide gas supplies
to the releasing shipper, and (3) the asset manager's cost of
purchasing gas supplies for the releasing shipper. Third, the asset
manager generally shares with the releasing shipper the value it is
able to obtain from the releasing shipper's capacity and supply
contracts when those assets are not needed to supply the releasing
shipper's gas needs. The asset manager obtains such value either by re-
releasing the capacity or by using it to make bundled sales to third
parties. The asset manager may share that value by: (1) Paying a fixed
``optimization'' fee to the releasing shipper, (2) sharing profits
pursuant to an agreed-upon formula, or (3) making its gas sales to the
releasing shipper at a lower price.
    55. In many instances the asset manager is chosen through a request
for proposal (RFP) process. The RFP describes the details and terms and
conditions of the proposed deal and seeks bids from service providers
willing to provide the requested services. The methodology for choosing
a winning bidder under an RFP often reflects many different factors,
including price, creditworthiness, experience, reliability, and
flexibility, and it is clear that price is not always the determining
factor. Some RFP procedures are state mandated, and thus, in those
situations, the LDC must get approval from the state for the final
agreement.
    56. There are several ways in which the AMAs described above
implicate the Commission's current regulations. The first relates to
the Commission's prohibition against the ``tying'' of release capacity
to any condition. As discussed above, the Commission instituted the
prohibition against the tying of capacity in response to concerns that
releasing shippers would attempt to add terms and conditions that would
``tie the release of capacity to other compensation paid to the
releasing shipper.'' \62\ A critical component of many AMAs is that the
releasing shipper wants to be able to require the replacement shipper
(asset manager) to satisfy the supply needs of the releasing shipper
and take assignment of the releasing shipper's gas supply agreements as
a condition of obtaining the released capacity.
---------------------------------------------------------------------------

    \62\ Order No. 636-A at 30,559.
---------------------------------------------------------------------------

    57. AMAs also have implications for the rate cap and bidding
regulations. As noted, in an AMA, the releasing shipper typically
enters into a prearranged deal to release all of its pipeline capacity
at the maximum rate to the marketer. It is reasonable to surmise that
the main reason for the maximum release rate is so the release will
qualify for the exemption from bidding of all maximum rate prearranged
capacity releases.\63\ By avoiding the requirement to post the release
for bidding, the releasing shipper can ensure that the capacity will go
to the asset manager whom the releasing shipper has determined will
provide the most effective asset management services.
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    \63\ 18 CFR 284.8 (c)-(e). The Commission stated in Order No.
636-A that releasing shippers may include in their offers to release
capacity reasonable and non-discriminatory terms and conditions to
accommodate individual release situations, including provisions for
evaluating bids. All such terms and conditions applicable to the
release must be posted on the pipeline's electronic bulletin board
and must be objectively stated, applicable to all potential bidders,
and non-discriminatory. For example, the terms and conditions could
not favor one set of buyers, such as end users of an LDC, or grant
price preferences or credits to certain buyers. The pipeline's
tariff also must require that all terms and conditions included in
offers to release capacity be objectively stated, applicable to all
potential bidders, and non-discriminatory. Order No. 636-A at
30,557.
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    58. As described above, however, the releasing shipper may agree to
rebate some or all of the demand charge to the marketer so that the
marketer's actual cost of obtaining the capacity is something less than
the maximum rate.\64\ The Commission has held that such rebates render
the release to be at less than the maximum rate, thereby requiring that
the prearranged release be posted for bidding.\65\
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    \64\ Typically, the releasing shipper first releases its
upstream assets, including pipeline capacity, storage, and gas
supply, to the asset manager at cost. During the remaining term of
the deal the releasing shipper purchases delivered gas at the agreed
upon rate, which is usually the transportation and storage costs
plus the market price of gas, plus fees and less whatever sharing of
efficiency gains the asset manager is able to achieve. Sometimes
fees and shared efficiency gains are reflected in some agreed upon
reduction in the price of delivered gas. (The details are subject to
negotiation and vary tremendously.) Because the mechanics of
capacity releases often require the releasing shipper to release
pipeline capacity at the maximum rate, rather than a discounted rate
that the releasing shipper may actually pay to the pipeline, some
other consideration must be worked into the transaction to balance
the difference between the discounted rate and the maximum rate at
which the release is set.
    \65\ In Louis Dreyfus Energy Services, L.P., 114 FERC ] 61,246
(2006), the Commission stated that:
    [t]he Commission has held that any consideration paid by the
releasing shipper to a prearranged replacement shipper must be taken
into account in determining whether the prearranged release is at
the maximum rate. For instance, where the replacement shipper agrees
to pay the pipeline the maximum rate for the released capacity, but
the releasing shipper agrees to make a payment to the replacement
shipper, the release must be treated as a release at less than the
maximum rate to which the posting and bidding requirements of
sections 284.8(c) through (e) apply. Id. at P 15, citing, Pacific
Gas Transmission Co. and Southern California Edison Co., 82 FERC ]
61,227 (1998).

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

    59. Moreover, as described above, some AMAs may require the asset
manager (replacement shipper) to pay fees to the releasing shipper. The
Commission has ruled that if the prearranged release is at the maximum
rate, such additional payments violate the maximum rate ceiling on
capacity releases.\66\
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    \66\ See Consumers Energy Co., 82 FERC ] 61,284, order
approving, 84 FERC ] 61,240 (1998). See also Order No. 636-A at
30,561, where the Commission stated that capacity cannot be ``resold
at a rate including the pipeline marketing fee. The marketing fee is
not part of the cost of transportation being released and the
replacement shipper should not pay more than the maximum
transportation rate for the capacity it is acquiring.''
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    60. Many commenters consider the applications of the Commission's
policies and regulations described above as obstacles to fashioning
AMAs. They request clarification of, or revisions to, the current
policies and regulations to allow releasing shippers to release a
package of transportation or storage capacity and gas supply contracts
to a willing party who will sell the gas to the releasing shipper and
take assignment of the gas purchase contracts without running afoul of
the prohibition against tying. Some commenters also request that the
Commission clarify that packaging gas supply and pipeline capacity, or
multiple segments of capacity, as part of an asset management
arrangement, would not violate the Commission's prohibition against
tying. Others suggest that the tying prohibition should be eliminated
altogether or that bundling of pipeline capacity and gas commodity
should be allowed as long as there is a legitimate business purpose.
    61. A large number of commenters advocate elimination of the
bidding requirement discussed above, particularly in the AMA context.
These parties argue that there is no need for posting and bidding of
capacity release transactions and state that it is unduly burdensome,
makes it difficult to respond quickly to market opportunities to
release, and no longer makes sense in terms of the arrangements being
made in today's AMAs. Others contend that the bidding requirement is
redundant in instances where states require that asset managers be
selected in an RFP process, which results in a chosen asset manager and
one or more pre-arranged capacity release transactions. They argue that
a further bidding requirement compromises the integrity and efficiency
of the RFP process at the state level. Commenters also argue that there
should be no bidding in the AMA context because those transactions are
not suited to a single auction methodology.
    62. Below, we discuss the Commission's proposal to revise the
Commission's capacity release policies to give releasing shippers
greater flexibility to negotiate and implement efficient AMAs. The
proposal has two main parts: (1) Modifications to the current
prohibition against tying releases to other conditions; and, (2)
modifications to current bidding requirements.

B. Discussion

    63. The Commission proposes revisions to its prohibition on tying
of release capacity and to section 284.8 of its regulations in order to
facilitate the use of AMAs. Specifically, as discussed below, the
Commission proposes two revisions to its capacity release policy and
regulations to facilitate the use of AMAs. First, the Commission
proposes to exempt AMAs from the prohibition against tying in order to
permit a releasing shipper to require that the replacement shipper
agree to supply the releasing shipper's gas requirements and to require
the replacement shipper to take assignment of the releasing shipper's
various gas supply arrangements, in addition to the released capacity.
Second, the Commission proposes to eliminate the current bidding
requirement for AMAs only, such that all releases to an asset manager,
made in order to implement an AMA between the releasing shipper and the
asset manager, are exempt from bidding. This would exempt from bidding
all such releases, including those of less than one year for which we
are proposing to remove the price ceiling and those of a year or more
that are at rates below the continuing maximum rate for long-term
capacity releases. Both of the exemptions above would also be limited
to pre-arranged releases.
    64. Gas markets in general, and the secondary release market in
particular, have undergone significant development and change since the
inception of the Commission's capacity release program. The Commission
adopted the capacity release program in Order No. 636 ``so that
shippers can reallocate unneeded firm capacity'' to those who do need
it.\67\ The bidding requirement and the prohibition against tying the
release to extraneous conditions were all part of the Commission's
fundamental goal of ensuring that such unneeded capacity would be
reallocated to the person who values it the most. The Commission found
that such ``capacity reallocation will promote efficient load
management by the pipeline and its customers and, therefore, efficient
use of pipeline capacity on a firm basis throughout the year.'' \68\
---------------------------------------------------------------------------

    \67\ Order No. 636 at 30,418.
    \68\ Id.
---------------------------------------------------------------------------

    65. Thus, the Commission developed its capacity release policies
and regulations based on the assumption that shippers would release
their capacity only when they were not using the capacity to serve
their own needs. For example, the Commission envisioned that LDCs with
long-term contracts for firm transportation service up to the peak
needs of their retail customers would, during off-peak periods, release
that portion of capacity not needed to serve the lower off-peak demand
of its retail customers. However, this basic assumption underlying the
capacity release program does not hold true in the context of AMAs, a
relatively recent development in the capacity release market that the
Commission had not anticipated.
    66. In the AMA context, the releasing shipper is not releasing
unneeded capacity, but capacity that is needed to serve its own supply
function and will be so used during the term of the release. Releasing
shippers in the AMA context are releasing capacity for the primary
purpose of transferring the capacity to entities that they perceive
have greater skill and expertise both in purchasing low cost gas
supplies, and in maximizing the value of the capacity when it is not
needed to meet the releasing shipper's gas supply needs. In short, AMAs
entail the releasing shipper transferring its capacity to another
entity which will perform the functions the Commission expected
releasing shippers would do for themselves--purchase their own gas
supplies and release capacity or make bundled sales when the releasing
shipper does not need the capacity to satisfy its own needs. The goal
of the changes proposed by the Commission herein is to make the
capacity release program more efficient by bringing it in line with the
realities of today's secondary gas markets.
    67. The Commission finds that AMAs provide significant benefits to
many participants in the natural gas and electric marketplaces and to
the secondary natural gas market itself. The

American Gas Association (AGA), for example, notes that AMAs are an
important mechanism used by LDCs to enhance their participation in the
secondary market, and states that the growth and development of AMAs
may represent the largest change since the Commission's market review
in the Order No. 637 proceeding.\69\ AMAs allow LDCs to increase the
utilization of facilities and lower gas costs. They also provide the
needed flexibility to customize arrangements to meet unique customer
needs.\70\ One important benefit of AMAs is that they allow for the
maximization of the value of capacity though the synergy of interstate
capacity and natural gas as a commodity. As expressed by AGA:
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    \69\ See Comments of AGA at 21.
    \70\ See e.g., Comments of New Jersey Natural Gas Company at 9.

    [AMAs] are widely utilized and provide considerable benefits,
i.e. lower gas supply costs generated from offsets to pipeline
capacity costs and gas supply arrangements more carefully tailored
to the specific requirements of the market. These benefits are
generated by assembling innovative arrangements in which the
unbundled components--capacity, gas supply and other services--are
combined in a manner such that the total value created by the
arrangement exceeds the value of the individual parts.\71\
---------------------------------------------------------------------------

    \71\ AGA Comments at 14.

    68. AMAs are also beneficial because they provide a mechanism for
capacity holders to use third party experts to manage their gas supply
arrangements, an opportunity the LDCs did not have prior to Order No.
636. The time, expense and expertise involved with managing gas supply
arrangements is considerable and thus many capacity holders, and LDCs
in particular, have come to rely on more sophisticated marketers to
take on their requirements.\72\ This results in benefits to the LDCs by
allowing an entity with more expertise to manage their gas supply. The
ability of LDCs to use AMAs as a means of relieving the burdens of
administering their capacity or supply needs on a daily basis also
works to the benefit of the entire market because that burden may at
times result in LDCs not releasing unused capacity.\73\
---------------------------------------------------------------------------

    \72\ See, e.g., Comments of BG Energy Merchants, LLC at 3-4;
APGA Comments at 2-3; Comments of BG Energy Merchants, LLC at 8;
Comments of the Marketer Petitioners at 11; and Comments of FPL
Energy LLC at 10.
    \73\ See Comments of Marketer Petitioners at 11.
---------------------------------------------------------------------------

    69. AMAs also provide LDCs and their customers a mechanism for
offsetting their upstream transportation costs. AMAs often allow an LDC
to reduce reservation costs that it normally passes on to its
customers. They also foster market efficiency by allowing the releasing
shipper to reduce its costs to the extent that its capacity is used to
facilitate a third party sale that also benefits that third party (who
gets a bundled product at a price acceptable to it).
    70. LDCs are not the only entities that benefit from AMAs. Many
other large gas purchasers, including electric generators and
industrial users may desire to enter into such arrangements.\74\ For
example, AMAs increase the ability of wholesale electric generators to
provide customer benefits through superior management of fuel supply
risk, allow generators to focus their attention on the electric market,
and eliminate administrative burdens relating to multiple suppliers,
overheads, capital requirements and the risks associated with marketing
excess gas and pipeline imbalances.\75\
---------------------------------------------------------------------------

    \74\ As noted by New Jersey Natural Gas Company (NJNG), ``in
addition to LDCs, there are many other types of large natural gas
purchasers, such as electric generation facilities and large gas
process industrial users, who face the same challenges with managing
and optimizing their natural gas portfolios. These customers, whose
core business lies outside the natural gas industry--are also likely
consumers of third party portfolio management services.'' NJNG
Comments at 9, n. 9.
    \75\ EPSA Comments at 4-5.
---------------------------------------------------------------------------

    71. More importantly, AMAs provide broad benefits to the
marketplace in general. They bring diversity to the mix of capacity
holders and customers that are served through the capacity release
program, thus enhancing liquidity and diversity for natural gas
products and services. AMAs result in an overall increase in the use of
interstate pipeline capacity, as well as facilitating the use of
capacity by different types of customers in addition to LDCs.\76\ AMAs
benefit the natural gas market by creating efficiencies as a result of
more load responsive gas supply, and an increased utilization of
transportation capacity.
---------------------------------------------------------------------------

    \76\ With regard to the advantages of diversity among shippers,
the EPSA provides as an example the situation where an LDC looking
to shed underutilized summer capacity may not have the capability to
identify and contract with an electric generator that needs summer
gas, whereas an asset manager would likely be much better equipped
to handling the logistics and risks associated with such an off
system sale by the LDC.
---------------------------------------------------------------------------

    72. AMAs further bring benefits to consumers, mostly through
reductions in consumer costs. AMAs provide in general for lower gas
supply costs, resulting in ultimate savings for end use customers. The
overall market benefits described above also inure to consumers. These
benefits have been recognized by state commissions and the National
Regulatory Research Institute.\77\
---------------------------------------------------------------------------

    \77\ See Comments of BG Energy Merchants, LLC at 8-9.
---------------------------------------------------------------------------

    73. The Interstate Natural Gas Association of America (INGAA)
agrees with the Marketer Petitioners and others that the Commission
``should adapt its regulations to facilitate efficient and innovative
marketing of capacity that have developed since Order No. 636,''
provided the Commission remains guided by the ``principle of full
transparency of the terms of such capacity release arrangements.'' \78\
---------------------------------------------------------------------------

    \78\ INGAA Comments at 3.
---------------------------------------------------------------------------

    74. Based on this industry-wide support, the Commission believes
that AMAs are in the public interest because they are beneficial to
numerous market participants and the market in general. Accordingly,
the Commission is proposing changes to its policies and regulations to
facilitate the utilization and implementation of AMAs.
1. Tying
    75. As noted above, in Order No. 636-A, the Commission established
a prohibition against the tying of capacity release to conditions
unrelated to acquiring transportation capacity, where it stated that:

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

    76. The Commission established the prohibition against tying in
response to commenters' concerns that releasing shippers would attempt
to add terms and conditions that would ``tie the release of capacity to
other compensation paid to the releasing shipper.'' The examples of
illicit tying given by the commenters included an LDC requiring a
potential replacement shipper to pay a certain price for local gas
transportation service or a producer conditioning the release of
capacity on the purchase of the producer's gas.\79\ Since then, the
Commission has granted several waivers of the prohibition against
tying,\80\ but only where an entity sought the waiver to exit the
natural gas transportation business.\81\
---------------------------------------------------------------------------

    \79\ Order No. 636-A at 30,559.
    \80\ Tennessee Gas Pipeline Co., 113 FERC ] 61,106 (2005);
Northwest Pipeline Corp. and Duke Energy Trading and Marketing, 109
FERC ] 61,044 (2004).
    \81\ See Louis Dreyfus Energy Services, L.P., 114 FERC ] 61,246
at 61,780 (2006), denying a waiver request.

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

    77. Some commenting parties claim that the Commission's recent
orders waiving certain of its capacity release requirements in specific
situations have increased uncertainty regarding the use of pre-arranged
capacity release transactions to implement portfolio management
services. They state that the language in these orders suggests that
combining gas supply and pipeline capacity, or packaging multiple
segments of capacity together, violates the prohibition against tying,
absent a prior waiver of the Commission's capacity release rules.
    78. The Commission recognizes that the broad language in Order No.
636-A setting forth the prohibition against tying, as well as the
Commission's subsequent rulings in individual cases, have raised a
concern that the types of transactions proponents of AMAs want to
implement may run afoul of the current policy. For example, capacity
releases made for the purpose of implementing an AMA generally include
a condition that the asset manager taking the release will supply the
gas requirements of the releasing shipper. The release may also require
the asset manager to take assignment of the releasing shipper's gas
supply contracts. However, such conditions could be considered to go
beyond ``the details of acquiring transportation on the interstate
pipelines,'' because these conditions relate to the purchase and sale
of the gas commodity.
    79. The Commission thus proposes a partial exemption of AMAs from
the prohibition against tying in order to permit a releasing shipper in
a pre-arranged release to require that the replacement shipper (1)
agree to supply the releasing shipper's gas requirements and (2) take
assignment of the releasing shipper's gas supply contracts, as well as
released transportation capacity on one or more pipelines \82\ and
storage capacity with the gas currently in storage. This exemption
would allow firm shippers to pre-arrange releases of capacity to an
asset manager (replacement shipper) along with upstream assets and gas
purchase agreements in a bundled transaction where the capacity being
released will be used to meet that party's gas supply requirements. In
addition, the proposed exemption would be limited to releases to an
asset manager as part of establishing an AMA. Thus, the asset manager
would be subject to the policy against tying when it makes subsequent
re-releases to third parties during the term of the AMA. For purposes
of this exemption and the proposed exemption from bidding discussed in
the next section, a release transaction made in the context of
implementing an AMA will be any pre-arranged capacity release that
includes a condition that the releasing shipper may, on any day, call
upon the replacement shipper to deliver a volume of gas equal to the
daily contract demand of the released capacity. This proposed
definition is discussed further below.
---------------------------------------------------------------------------

    \82\ Commission policy already permits a releasing shipper to
require a replacement shipper to take a release of aggregated
capacity contracts on one or more pipelines, at least in some
circumstances. See Order No. 636-A at 30,558 and n. 144.
---------------------------------------------------------------------------

    80. As discussed above, AMAs provide recognizable benefits to
market participants and the marketplace overall in terms of more load-
responsive use of gas supply, greater liquidity, increased utilization
of transportation capacity and the overall efficiencies these
arrangements bring to the marketplace. However, AMAs require that the
releasing shipper be able to release both its capacity and its natural
gas supply arrangements in a single package. The very purpose of the
transaction is frustrated if the releasing shipper cannot combine the
supply and capacity components of the deal. This tying is meant to
ensure that the released capacity will continue to be used to support
the releasing shipper's acquisition of needed gas supplies. Based on
the fact that AMAs provide benefits to the market, and that tying of
capacity and supply is necessary to implement beneficial AMAs, it seems
reasonable to allow the tying conditions discussed above in the AMA
context in order to foster and facilitate the use and implementation of
such arrangements. The partial exemption of AMAs proposed here will
foster maximization of the interstate pipeline grid and enhance
competition.
    81. While the Commission is proposing changes to its prohibition
against tying in order to facilitate AMAs, the Commission is not
adopting the proposals of some commenters that the restriction against
tying be eliminated altogether.\83\ The Commission's primary goal in
establishing the capacity release program was to ensure that transfers
of interstate pipeline capacity from one shipper to another are made in
a not unduly discriminatory or preferential manner to the person
placing the highest value on the pipeline capacity. If a shipper ties a
release of unneeded capacity to matters that are unrelated to the
details of acquiring that transportation capacity, the capacity may not
go to the person who values it the most. The comments on this issue
have not persuaded the Commission that, outside the AMA context,
release conditions unrelated to the details of acquiring transportation
service provide significant benefits to the natural gas market as a
whole similar to those provided by AMAs. Therefore, when a shipper
releases excess capacity that it does not need for the purpose for
which it was originally acquired, the Commission's original concerns
underlying the prohibition against tying still apply. The Commission
continues to believe that such excess capacity should be allocated to
the shipper who values it the most, regardless of whether the releasing
shipper has some private business reason why it might prefer the
replacement shipper to use its unneeded capacity in some particular
manner. Thus, based on the distinguishing and mitigating factors of
AMAs as related to the reasons underlying the prohibition against
tying, the Commission is only proposing to modify its prohibition
against tying with respect to pre-arranged releases to implement AMAs,
and not all capacity releases.
---------------------------------------------------------------------------

    \83\ See e.g., Comments of Nstar at 7 (LDCs should be allowed to
link capacity to whatever it wants to make an ``effective''
package); Comments of Direct Energy Services, LLC at 6 (Commission
should permit market participants to offer whatever bundled
transactions they perceive to be in their best interests).
---------------------------------------------------------------------------

    82. However, the Commission requests comment on whether it should
clarify its prohibition concerning tying in one additional
circumstance, which is not related to the AMA context. Some commenters
assert that the Commission should facilitate the release of storage
capacity by permitting a releasing shipper to (1) require a replacement
shipper to take assignment of any gas that remains in the released
storage capacity at the time the release takes effect and/or (2)
require a replacement shipper to return the storage capacity to the
releasing shipper at the end of the release with a specified amount of
gas in storage.\84\ For example, some LDC commenters point out that
they rely on having a certain level of gas in storage by the end of the
off-peak summer injection season in order to be able to serve their
customers during the peak winter season.\85\ Therefore, while they may
desire to release storage capacity at times during the off-peak summer
period, gas must be injected into the storage capacity at a rate that
will permit the LDC to have its required amount of gas in storage by
the end of the injection period. If an LDC could require the
replacement shipper to return the storage capacity with the required
amount of gas in storage at the

end of the release, it would be able to release more storage capacity
than it can currently. The Commission requests comment on whether it
should clarify its prohibition on tying to allow a releasing shipper to
include conditions in a storage release concerning the sale and/or
repurchase of gas in storage inventory.
---------------------------------------------------------------------------

    \84\ See e.g. Comments of AGA at 24.
    \85\ Id. See also Comments of Keyspan at 36.
---------------------------------------------------------------------------

2. The Bidding Requirement
    83. The Commission's current regulations require capacity release
transactions to be posted for competitive bidding, unless the
transactions are at the maximum rate or are for 31 days or less.\86\
The Commission's principal goal in requiring release transactions to be
posted for bidding was to ensure that interstate transportation
capacity would be allocated to those placing the highest value on
obtaining that capacity and to prevent discriminatory allocation of
interstate capacity at prices below the market price. The regulations
also allow the releasing shipper to enter into a ``pre-arranged''
release with a designated replacement shipper before any posting for
bidding.\87\ Prearranged releases are subject to the same bidding
requirements as other releases; however, the prearranged replacement
shipper will receive the capacity if it matches the highest bid
submitted by any other bidder.\88\ In Order 636-A, the Commission
rejected requests for a general exception to the bidding process for
all pre-arranged deals.\89\
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    \86\ 18 CFR Sec.  284.8(h).
    \87\ 18 CFR Sec.  284.8(b).
    \88\ 18 CFR Sec.  284.8(e).
    \89\ Order No. 636-A at 30, 555.
---------------------------------------------------------------------------

    84. As noted, the Commission has received a number of comments
suggesting that it eliminate the requirement for competitive bidding
for capacity releases, especially in the AMA context. LDCs in
particular comment that bidding is unduly burdensome and often results
in time consuming procedures that have little practical benefit. They
maintain that bidding adds uncertainty to the process because it
creates a risk for the replacement shipper that it will be unable to
acquire capacity at the price it expected, and thus bidding can prevent
parties from negotiating mutually beneficial transactions. Others
comment that the delay caused by bidding makes it difficult to respond
to market opportunities to release, and thus bidding no longer makes
sense in today's marketplace. Some claim that given the development of
the natural gas market and the natural economic incentive to release at
the highest price, the competitive bidding requirement is no longer
necessary to achieve allocative efficiency.
    85. Commenters assert that the inefficiencies of the bidding
process pose substantial obstacles to successful releases to implement
AMAs. Bidding and matching often prevent timely closing of AMA
transactions involving aggregation of capacity and supply or
aggregation of capacity on multiple pipelines. This can result in
preventing willing buyers and sellers attempting to reach agreements
that are in their respective best interests from consummating deals.
Commenters also note that AMAs usually involve complex contractual
structures with a variety of valued pieces. These deals are often
negotiated at arms' length, and thus, requiring that they be made
subject to bidding creates a risk that one aspect of the deal could be
lost thus dooming the entire transaction. Because AMAs often involve
extensive negotiations that lead to pre-arranged deals, the releasing
party wants to be sure that the replacement shipper with whom it struck
the deal is the one to get it, on the terms discussed during
negotiations. Again, a bidding requirement puts that goal at risk.
    86. Proponents of eliminating bidding for AMAs also point out that
when an entity wishes to use a asset manager in the interest of
efficient use of gas supply and pipeline capacity assets, it is often
required by state regulation to select the asset manager though a
competitive RFP process. This process allows entities that are
interested in managing the assets to submit a bid to do so, subject to
the terms and conditions of the RFP. This process results in a chosen
asset manager for one or more pre-arranged capacity releases. The
commenters state that, if this same pre-arranged deal is subject to a
further bidding process under the Commission's regulations, then that
second process is redundant, and compromises the integrity and
efficiency of the state mandated competitive process that has already
been completed.
    87. The Commission proposes to exempt pre-arranged releases to
implement AMAs from the bidding requirements of section 284.8 of its
regulations, such that pre-arranged releases made to asset managers in
order to implement AMAs will not be subject to competitive bidding.\90\
In light of its experience with capacity releases and the comments
discussed above, the Commission has reconsidered the need for bidding
in the AMA context. It appears that at least in the AMA context, the
bidding requirement creates an unwarranted obstacle to the efficient
management of pipeline capacity and supply assets.
---------------------------------------------------------------------------

    \90\ For the purposes of this exemption the Commission will use
the same definition as discussed in the tying section above, and
explained more fully below, for identifying releases eligible for
the exemption.
---------------------------------------------------------------------------

    88. All capacity releases made to implement AMAs are pre-arranged
because it is important that a releasing shipper be able to use the
asset manager of its choice to effectuate the components of the
agreement. Unlike a normal capacity release where the releasing shipper
is often shedding excess capacity and has no intention of an ongoing
relationship with the replacement shipper, in the AMA context the
identity of the replacement shipper is often critical because it will
manage the releasing shipper's portfolio for some time into the future.
During the process of choosing an asset manager (often an RFP process),
the releasing shipper considers a number of factors, including
experience in managing capacity and gas sales, experience with a
particular pipeline or area of the country, flexibility,
creditworthiness and price. Because the asset manager will manage the
releasing shipper's gas supply operations on an ongoing basis, it is
critical that the releasing shipper be able to release the capacity to
its chosen asset manager. Requiring releases made in order to implement
an AMA to be posted for bidding would thus interfere with the
negotiation of beneficial AMAs, by potentially preventing the releasing
shipper from releasing the capacity to its chosen asset manager. The
Commission concludes that the benefits of facilitating AMAs outweigh
any disadvantages in exempting such releases from bidding.
    89. While the Commission is proposing to exempt AMAs from the
capacity release bidding requirements, AMAs will remain subject to all
existing posting and reporting requirements. Pipelines will still be
obligated to provide notice of the release pursuant to 18 CFR 284.8(d).
The details of the release transaction must also be posted on the
pipeline's Internet Web site under 18 CFR 284.13(b), including any
special terms and conditions applicable to the capacity release
transaction. Moreover, the pipeline's index of customers must include
the name of any agent or asset manager managing a shipper's
transportation service and whether that agent or asset manager is an
affiliate of the releasing shipper.\91\ Therefore, the Commission's
goals of disclosure and transparency will still be met.
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    \91\ 18 CFR 284.13(c)(2)(viii) and 284.13(c)(2)(ix).

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    90. The Commission is not proposing at this time to modify its
existing bidding requirements with respect to capacity releases made
outside the AMA context (including releases the asset manager makes to
third parties). As discussed, the Commission originally adopted the
bidding requirements in order to ensure that releases are made in a
non-discriminatory manner to the person placing the highest value on
the capacity. The comments received by the Commission show broad
support from all segments of the industry for modifying the bidding
requirements in order to facilitate AMAs, which most commenters believe
provide significant benefits to the natural gas market. However, the
comments do not reflect a similar level of support for removing the
bidding requirements altogether. In addition, there has been no showing
that non-AMA prearranged releases provide benefits of the type we have
found justify exempting AMA releases from bidding. Moreover, in the
typical non-AMA pre-arranged release, price is the primary factor, and
therefore the releasing shipper should generally be indifferent as to
the identity of the replacement shipper so long as it receives the
highest possible price for its release. Therefore, the Commission does
not presently have information showing that, outside the AMA context,
the existing bidding requirements hinder beneficial developments in the
market or no longer serve their original purpose.
3. Definition of AMAs
    91. In light of the proposed exemptions for AMAs discussed above,
the Commission proposes to define a capacity release that is made as
part of an AMA, and thus would qualify for the exemptions, to be: Any
pre-arranged release that contains a condition that the releasing
shipper may, on any day, call upon the replacement shipper to deliver
to the releasing shipper a volume of gas equal to the daily contract
demand of the released transportation capacity.\92\ If the capacity
release is a release of storage capacity, the asset manager's delivery
obligation need only equal the daily contract demand under the release
for storage withdrawals.
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    \92\ It is the Commission's intention that with regard to an AMA
involving several separate releases to the asset manager, the
delivery obligation would be applied separately to each release, not
on cumulative basis to the whole AMA. For example if an LDC has
capacity of 100,000 Dth on both upstream Pipeline A and downstream
Pipeline B, the asset manager could comply with the proposed
delivery condition by shipping the same 100,000 Dth over both
Pipeline A and Pipeline B.
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    92. In developing a definition of AMA releases, the Commission
seeks to balance two concerns. First, because the Commission is
proposing that the exemptions from bidding and the prohibition against
tying apply only in the context of AMAs, the Commission seeks a
definition of the eligible releases that is limited to those releases
that are made as part of a bona fide AMA. On the other hand, because
the purpose of the proposed exemption is to facilitate AMAs, the
Commission wants to avoid a definition that is so narrow it would limit
the types of AMAs which shippers and asset managers may negotiate and
thus discourage efficient and innovative arrangements.
    93. The proposed definition focuses on what the Commission
understands to be the fundamental purpose of AMAs: That the asset
manager will use the released capacity to deliver gas supplies to the
releasing shipper. The Commission believes that the requirement that
the replacement shipper contractually commit itself to deliver to the
releasing shipper, on any day, gas supplies equal to the daily contract
demand of the released capacity should achieve the goal of exempting
only AMA transactions from bidding and the prohibition against tying.
Further, because all AMAs are done as pre-arranged deals, the proposed
definition requires that the release be pre-arranged. The Commission
requests comment on whether other conditions should be imposed on the
eligible releases in order to ensure that the proposed exemptions are
limited to AMAs.
    94. The Commission also believes that the proposed definition is
sufficiently flexible that it should not interfere with the development
of efficient and beneficial AMAs. The Commission recognizes that a
shipper may desire to enter into an AMA for the purpose of obtaining
only a portion of its required gas supplies. Or it may desire to enter
into multiple AMAs with different asset managers. The proposed
definition does not prevent such arrangements, since it contains no
requirement that the releasing shipper obtain any particular percentage
of its gas supplies pursuant to a particular AMA. The only requirement
is that the asset manager commits itself to providing gas supplies up
to the contract demand of the released contract. In addition, while the
Commission expects that the released capacity will be used by the asset
manager to ship gas supplies to the releasing shipper, the proposed
definition does not require that the asset manager make all its
deliveries to the releasing shipper over the released capacity.
    95. The Commission also is not proposing to limit the types of
entities that can use AMAs and take advantage of the exemptions from
bidding and the prohibition against tying, provided the criteria stated
above are met. The Commission recognizes that electric generators and
industrial end-users may make use of AMAs, and thus the exemption is
not limited to LDCs utilizing AMAs.
    96. Finally, the Marketer Petitioners, in their original request
for clarification, suggested that gas sellers may desire to use AMAs.
However, as proposed, the definition of AMA does not include such
arrangements, unless the replacement shipper has an obligation to re-
sell to the releasing shipper equivalent quantities of natural gas. The
Commission requests comments on whether it should expand the definition
of AMAs eligible for the partial exemptions from the prohibition on
tying and bidding to include gas marketing AMAs. Commenters should also
address the question of how the Commission would distinguish a gas
marketing AMA eligible for such an exemption from other release
transactions.

IV. State Mandated Retail Choice Programs

    97. Section 284.8(h)(1) of the Commission's current capacity
release regulations exempt prearranged releases of more than 31 days
from bidding only if they are at the ``maximum tariff rate applicable
to the release.'' States with retail open access gas programs (in which
customers can buy gas from marketers rather than LDCs) have relied on
this ``safe harbor'' exemption from bidding in structuring their
programs. Specifically, a key component of most such programs is a
provision for the LDC to make periodic releases, at the maximum rate,
of its interstate pipeline capacity to the marketers participating in
the program. The marketers then use the released capacity to transport
the gas supplies that they sell to their retail customers. The
exemption from bidding ensures that the LDC's capacity is transferred
only to the marketers participating in the state retail unbundling
program and is not obtained by non-participating third parties.
    98. However, the Commission's proposal to lift the price ceiling
for releases of one year or less would have the effect of eliminating
the bidding exemption for releases with terms of between 31 days and
one year. That is because there would no longer be a maximum tariff
rate applicable to such

releases. Moreover, in this NOPR, the Commission is proposing an
additional exemption from bidding only for releases made in the context
of an AMA, and releases made as part of a retail unbundling program
would not qualify for that exemption as it is currently proposed. As a
result, absent some additional modification of the regulations
concerning bidding, LDCs would have to post for bidding all releases of
between 31 days and one year that are made as part of a state retail
unbundling program. This would mean that the marketers participating in
the program could only obtain the capacity if they matched any third
party bid for the capacity.
    99. In Order Nos. 637-A and 637-B,\93\ the Commission denied the
request by LDCs for a blanket exemption from bidding of all capacity
releases made as part of state retail unbundling program. The
Commission explained that, with the price ceiling removed, posting and
bidding was necessary to protect against undue discrimination and
ensure that the capacity is properly allocated to the shipper placing
the greatest value on the capacity. The Commission nevertheless sought
to accommodate the state retail access programs by providing that, if
an LDC considered an exemption from bidding essential to further a
state retail unbundling program, the LDC, together with its state
regulatory agency, could request a waiver of the bidding regulation to
allow the LDC to consummate pre-arranged capacity release deals at the
maximum rate. However, the Commission stated that, if the LDC made such
a request, it had to be prepared to have all its capacity release
transactions, including those not made as part of the state retail
unbundling program, subject to the maximum rate.
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    \93\ Order No. 637-A at 31,569; Order No. 637-B, 92 FERC at
61,163.
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    100. On appeal of Order No. 637, the court in INGAA affirmed the
Commission's refusal to grant a blanket waiver of the bidding
requirement for releases made as part of a state retail unbundling
program. The court stated that, absent a showing that the retail
unbundling programs are structured as largely to moot the Commission's
concern about discrimination, the Commission's caution in granting a
blanket waiver was reasonable. However, the court remanded the issue of
the reasonableness of the condition that an LDC seeking a waiver must
agree to subject all its releases to the maximum rate. The court stated
that the requirement of state regulatory endorsement of the requested
waiver seemed to give the Commission an avenue to verify the
discrimination risk. The Commission did not address this issue in its
order on remand, because the price ceiling had been re-imposed by the
time of the remand order, thus rendering the issue moot.
    101. Several commenters in the instant proceeding again assert
that, if the Commission removes the price ceiling on capacity release,
the Commission should exempt all capacity releases to retail choice
providers, that is, releases that are part of a state approved
unbundling program, from the Commission's bidding requirements. AGA and
several individual member LDCs, for example, contend that the
Commission recognized the value of retail choice programs to the
development of a competitive natural gas market by providing a waiver
procedure for such releases in Order No. 637-A. AGA argues that the
Commission should now take the next step to allow an LDC to release
capacity to a retail choice provider at the rate paid by the LDC
without bidding and without the need to seek a waiver from the
Commission, particularly if the Commission removes the price ceiling on
capacity release.\94\ It reasons that releases to retail choice
providers are not releases of excess capacity but of capacity needed to
better serve their core markets or to comply with state requirements.
The capacity is still being used for the purpose it was purchased and
the intention is to allow the LDC's retail customers to obtain the
benefit of the LDCs firm pipeline entitlements and rates. AGA and other
LDC commenters assert that requiring the LDCs to seek a waiver, as the
Commission did in Order No. 637, adds a cumbersome layer of regulation.
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    \94\ See AGA Comments at 47.
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    102. Because the state programs generally allow choice providers to
step into the shoes of the LDC, commenters suggest that there is little
chance for undue discrimination or exercise of market power. Moreover,
in order for retail customers to benefit from the discounted or
negotiated rates that the LDC may have been able to obtain from the