[Federal Register: December 1, 2008 (Volume 73, Number 231)]
[Rules and Regulations]
[Page 72692-72714]
[DOCID:fr01de08-3]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-001; Order No. 712-A]

Promotion of a More Efficient Capacity Release Market

Issued November 21, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
issuing an order addressing the requests for clarification and/or
rehearing of Order No. 712 [73 FR 37058, June 30, 2008]. Order No. 712
revised Commission regulations governing interstate natural gas
pipelines to reflect changes in the market for short-term
transportation services on pipelines and to improve the efficiency of
the Commission's capacity release program. The order permitted market
based pricing for short term capacity releases and facilitated asset
management arrangements (AMA) by relaxing the Commission's prohibition
on tying and on its bidding requirements for certain capacity releases.
The Commission further clarified in the order that its prohibition on
tying does not apply to conditions associated with gas inventory held
in storage for releases of firm storage capacity. Finally, the
Commission waived its prohibition on tying and bidding requirements for
capacity releases made as part of state-approved open access programs.
This order generally denies rehearing and clarifies Order No. 712.

DATES: Effective Date: The amendments to the regulations will become
effective 30 days after publication in the Federal Register.

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

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

                            Table of Contents

                                                               Paragraph
                                                                Numbers

I. Removal of the Price Ceiling for Released Capacity.......           3
    A. Background...........................................           3
    B. Price Ceiling Applicable to Pipeline Capacity........          13
        1. Rehearing Requests...............................          13

        2. Commission Determination.........................          16
            a. Competitive Market Findings..................          22
            b. Withholding Construction of Needed Pipeline            29
             Infrastructure.................................
            c. Pricing Flexibility..........................          38
            d. Bifurcated Markets...........................          50
            e. Proposed Alternatives........................          54
    C. Clarification Regarding Specific Issues..............          57
        1. Consecutive Releases.............................          57
            a. Clarification Requests.......................          57
            b. Commission Determination.....................          60
        2. Definition of Short-Term.........................          63
        3. Lump Sum Payments................................          65
II. Asset Management Arrangements...........................          68
    A. Background...........................................          68
    B. Definition of AMAs...................................          73
    C. Exemption from Bidding for AMAs......................          89
    D. Posting and Reporting Requirements...................         101
        1. Posting requirements.............................         102
        2. Index of Customers...............................         104
    E. Miscellaneous AMA Issues.............................         107
III. State Mandated Retail Unbundling.......................         115
IV. Tying of Storage Capacity and Inventory.................         128
V. Liquefied Natural Gas....................................         139
VI. Information Collection Statement........................         147
VII. Document Availability..................................         148
VIII. Effective Date and Congressional Notification.........         151

Order on Rehearing and Clarification

Order No. 712-A

(Issued November 21, 2008)

    1. On June 19, 2008, the Commission issued Order No. 712,\1\ a
Final Rule that revised the Commission's Part 284 regulations
concerning the release of firm capacity by shippers on interstate
natural gas pipelines in order to enhance the efficiency and
effectiveness of the secondary capacity release market. Specifically,
the Final Rule made the following changes to the Commission's policies
and regulations:
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    \1\ Promotion of a More Efficient Capacity Release Market, 73 FR
37058 (June 30, 2008), FERC Statutes and Regulations ] 31,271
(2008).
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     The rule lifted the maximum rate ceiling on secondary
capacity releases of one year or less to enhance the efficiency of the
market while continuing to regulate long term capacity releases of more
than one year and pipeline rates and services.
     The rule modified the Commission's policies and
regulations to facilitate the use of AMAs. The first modification is to
exempt capacity releases that implement AMAs from the Commission's
prohibition on tying capacity releases to any extraneous conditions.
The second change is to exempt capacity releases made as part of an AMA
from the bidding requirements set forth in section 284.8 of the
Commission's regulations.
     The rule established a definition of AMAs that will
qualify for the tying and bidding exemptions. The definition provides
for both delivery and supply side AMAs and requires that an asset
manager satisfy certain delivery and/or purchase obligations.
     The rule also revised the Commission's prohibition against
tying to allow a releasing shipper to include conditions in a release
of storage capacity regarding the sale and/or repurchase of gas in
storage inventory, even outside the AMA context. Specifically, this
exemption from tying is meant to allow a shipper that releases storage
capacity to require a replacement shipper to take title to any gas in
the released capacity at the time the release takes effect and/or to
return the storage capacity to the releasing shipper at the end of the
release with a specified amount of gas in storage.
     Finally, the rule modified the Commission's regulations to
facilitate retail open access programs by exempting capacity releases
made under state-approved programs from the Commission's capacity
release bidding requirements.
    2. Three parties sought rehearing of Order No. 712.\2\ Six parties
sought rehearing and/or clarification.\3\ Three parties filed for
clarification only.\4\ The Marketer Petitioners requested clarification
and reconsideration. As discussed below, the Commission largely denies
rehearing but grants clarification in part and makes certain
adjustments to the regulations regarding AMAs.
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    \2\ Those parties are Allegheny Energy Supply Company, LLC
(Allegheny), Shell NA LNG LLC (Shell LNG) and Statoil Natural Gas
LLC, Chevron USA Inc., and Constellation Energy Commodities Group,
Inc. (collectively, LNG Petitioners).
    \3\ Those parties are the Interstate Natural Gas Association of
America (INGAA), Iroquois Gas Transmission System, LP (Iroquois),
the Natural Gas Supply Association and the Electric Power Supply
Association (NGSA), Public Service Company of North Carolina, Inc.,
South Carolina Electric & Gas Company, and Scana Energy Marketing
Inc. (collectively Scana), Spectra Energy Transmission LLC and
Spectra Energy Partners (Spectra), Vector Pipeline LP (Vector) and
Williston Basin Interstate Pipeline Company (Williston). INGAA filed
a separate request for rehearing and a separate request for
clarification.
    \4\ Those parties are the American Gas Association (AGA), BP
Energy Company (BP) and Reliant Energy Inc. (Reliant).
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I. Removal of the Price Ceiling for Released Capacity

A. Background

    3. In Order No. 712, the Commission revised its regulations to
remove the price ceiling on short term capacity releases. The
Commission found that it had previously provided pipelines with the
flexibility to enter into negotiated rate transactions that are
permitted to exceed the maximum rate ceiling, as long as the shipper
could avail itself of the pipeline's cost-of-service recourse rate. The
Commission also found that

removing the price ceiling for short term releases would extend such
pricing flexibility to releasing shippers, subject to the continued
protection of the recourse rate for capacity purchased directly from
the pipeline.
    4. The Commission noted the increased use of negotiated rate
transactions by shippers and pipelines based on gas price differentials
and found that such use demonstrated that buyers and sellers are
attracted to the ability to calibrate the price of transportation to
its value in the market. The Commission also found that the maximum
rate ceiling as applied to capacity release transactions denied
releasing and replacement shippers the same ability enjoyed by the
pipelines to negotiate transactions that reflect the market value of
capacity at all times. With the price ceiling in effect, releasing
shippers were unable to effectively use price differentials as a
measure of capacity value because they were denied the ability to
recover the value of capacity during peak periods when that value
exceeds the maximum rate cap.
    5. The Commission further found that because the existing capacity
release price ceiling did not reflect short-term variations in the
market value of the capacity, the price ceiling inhibits the efficient
allocation of capacity and harms, rather than helps, the short-term
shippers it is intended to protect. Removal of the price ceiling will
permit short-term capacity release prices to rise to market clearing
levels, thereby allocating capacity to those that value it the most
while providing accurate price signals to the marketplace. The
Commission also found that the price ceiling harmed captive customers
holding long-term contracts on the pipeline, and that the price ceiling
reduces the dissemination of accurate capacity pricing information.
    6. The Commission recognized that in removing the price ceiling
from short term capacity releases it was departing from a cost-of-
service ratemaking methodology, but determined that given the benefits
to be derived from removing the price ceiling, sufficient protections
existed against the exercise of market power by releasing shippers.
    7. The Commission reviewed data collected over many years, which
showed that as a general matter, the rates resulting from removal of
the price cap for capacity release should be reasonably competitive.
But the Commission did not rely solely on competition to ensure just
and reasonable prices.\5\ The Commission found that the same recourse
rate that protects against the potential exercise of market power in
pipeline negotiated rate transactions would serve a similar function in
protecting against the potential exercise of market power by releasing
shippers. The Commission found that any attempt by a releasing shipper
to withhold capacity in order to raise rates will be undermined because
the pipeline will be required to sell that capacity as interruptible
capacity to a shipper willing to pay the maximum rate.\6\
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    \5\ Specifically, the Commission also stated:
    [t]he Commission finds that the short-term capacity release
market is generally competitive. Therefore competition, together
with our continuing requirement that pipelines must sell short-term
firm and interruptible services to any shipper offering the maximum
rate, and the Commission's ongoing monitoring efforts will keep
short-term capacity release rates within the ``zone of
reasonableness'' required by INGAA and Farmers Union. Order No. 712
at P 39.
    \6\ Order No. 712 at P48-49. In this respect, the Commission
continued the same protection on which it relied in Order No. 637.
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 31,282, 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) (Order No. 637).
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    8. The Commission also reasoned that the releasing shippers'
ability to exercise market power in the short-term capacity release
market is limited because short-term customers are not captive, even if
only connected to one pipeline. Thus, the Commission found that short-
term shippers always have the option simply not to take service, if the
price demanded is above competitive market levels.\7\
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    \7\ Order No. 712 at P 50.
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    9. In sum, the Commission found that its removal of the price
ceiling on short-term capacity release transactions provides on balance
advantages that ``offset whatever harm the occasional high rate might
entail.'' \8\ The Commission found that removal of the price cap
permits more efficient utilization of capacity by permitting prices for
short-term capacity releases to rise to market clearing levels, thereby
permitting those who place the highest value on the capacity to obtain
it and that it will also provide potential customers with additional
opportunities to acquire capacity. Finally, the Commission found that
by providing more accurate price signals concerning the market value of
pipeline capacity, removal of the price ceiling for short-term capacity
releases promotes the efficient construction of new capacity by
highlighting the location, frequency, and severity of transportation
constraints.
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    \8\ Order No. 712 at P 51 (citing, Interstate Natural Gas
Association of America, 285 F.3d 18, 33 (D.C. Cir. 2002) (INGAA)).
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    10. The Commission determined not to remove the price ceiling for
pipeline short-term services, stating that by its action in removing
the price ceiling from short-term capacity releases, the Commission
intended to permit releasing shippers some of the same flexible pricing
authority the Commission has already granted pipelines through the
negotiated rate program.\9\ The Commission stated that the pipelines'
request to lift the maximum rate on short-term releases would
effectively negate the recourse rate protection against the use of
market power that the Commission included in its negotiated rate
program. The Commission also determined that the maximum rate ceiling
on pipeline capacity acts as a recourse rate for both pipeline
transactions and capacity release transactions and thereby protects
both pipeline customers and replacement shippers on capacity release
transactions.\10\
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    \9\ Order No. 712 at P 83. In fact, the Commission reasoned that
pipelines already possess significant pricing discretion in that
they may enter into negotiated rate transactions above the maximum
rate or by establishing that they lack market power and requesting
market based rate authority or by requesting seasonal rates for
their systems. The Commission stated that its rule was designed
solely to give releasing shippers some of the same flexibility
enjoyed by the pipelines, subject to the same recourse rate
protection. Order No. 712 at P 86.
    \10\ Order No. 712 at P 83.
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    11. The Commission also explained that pipelines differed from
capacity releasers in that they are the principal holders of capacity
and, therefore, the pipelines possess greater ability to exercise
market power by withholding capacity and not constructing facilities
than do releasing shippers.\11\
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    \11\ Order No. 712 at P 84-85.
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    12. No party sought rehearing of the Commission's determination to
remove the price ceiling for capacity release transactions. The only
major issue raised on rehearing is whether to remove the price ceiling
from pipeline short-term services. A number of clarification and
rehearing requests also were filed regarding specific issues related to
the removal of the price ceiling for released capacity.

B. Price Ceiling Applicable to Pipeline Capacity

1. Rehearing Requests
    13. INGAA, Williston and Spectra filed requests for rehearing
regarding the

Commission's decision to retain the price ceiling for short-term
pipeline services, while removing the price ceiling on short-term
capacity releases.\12\ They assert that the same data and rationale
that supports removing the price ceiling from short-term capacity
releases also supports the removal of the price ceiling for short-term
pipeline capacity.\13\
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    \12\ These parties do not object to the removal of the price
ceiling for capacity release transactions. See INGAA at 6. (``INGAA
supports lifting the price cap on short-term released capacity * *
*''), Spectra at 5 (``The Commission was correct to remove the price
caps on short-term capacity release capacity'').
    \13\ INGAA at 1, Williston at 2, Spectra at 2.
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    14. They argue that the Commission acknowledged that short-term
released capacity and short-term pipeline capacity compete in the same
market, and maintain that the finding that the short-term market is
``generally competitive,'' supports lifting the price ceiling for
short-term pipeline capacity.
    15. They also maintain that the distinctions between released
capacity and pipeline capacity set forth by Order No. 712 do not
support retention of the price ceiling for pipeline capacity. They
maintain that these distinctions are based on two incorrect premises:
first, that interstate pipelines have market power in the relevant
market; and second, that a capped rate for pipeline capacity is
necessary as a safeguard against abuse in the released capacity and
pipeline capacity markets. Therefore, they maintain that the Commission
acted arbitrarily and capriciously in not treating short-term pipeline
and released capacity similarly. Further, INGAA argues that the
disparate treatment of released and pipeline capacity under Order No.
712 cannot be excused by reference to flexible rate options and
policies open to the pipelines because such options continue to leave
rates capped or cannot be attained as a practical matter.
2. Commission Determination
    16. The Commission denies the requests for rehearing, and continues
to find that maintenance of the maximum rate ceilings for pipeline
short-term transactions is necessary to protect against the potential
exercise of market power. As we explained in Order No. 712, the removal
of the rate ceiling for short-term capacity release transactions is
designed to extend to capacity release transactions the pricing
flexibility already available to pipelines through negotiated rates
without compromising the fundamental protection provided by the
availability of recourse rate service. In the Alternative Rate Design
Policy statement, we offered the pipelines the flexibility to exceed
the price cap in one of two ways: Pipelines can either make a filing
with appropriate information to establish the market is competitive or
pipelines can negotiate rates as long as the shipper has the option of
purchasing capacity at the recourse (maximum) tariff rate.\14\ In Order
No. 712, we provide releasing shippers with flexibility similar to that
enjoyed by the pipelines, while retaining the recourse rate as a
protection for the buyer against the potential exercise of market power
by both pipelines and releasing shippers.\15\
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    \14\ 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).
    \15\ The court in INGAA recognized the value of the recourse
rate in protecting against the exercise of market power by both
pipelines and releasing shippers:
    As to deliberate withholding of capacity, the Commission
reasoned that this too was not within the power of capacity holders.
If holders of firm capacity do not use or sell all of their
entitlement, the pipelines are required to sell the idle capacity as
interruptible service to any taker at no more than the maximum
rate--which is still applicable to the pipelines. 285 F.3d at 33.
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    17. While our examination of the capacity release record did
indicate that capacity release prices seem to suggest a competitive
market for released capacity as a general matter, we did not make a
finding, as suggested in the rehearing requests, that the entire
secondary market is competitive. We recognize that on some portions of
the pipeline grid, little effective competition may exist.\16\ As we
emphasized on several occasions in Order No. 712, precisely because we
did not make such a competitive market finding, we are ``continuing to
insist on the maintenance of the pipeline's recourse rate as protection
against the exercise of market power.'' \17\ As we explained, on parts
of the pipeline grid where all firm capacity may be held by only a few
or one firm shipper, the availability of the recourse rate prevents
those shippers from withholding their capacity in order to charge a
price above competitive levels. If a releasing shipper seeks to charge
more than the maximum rate for capacity, and the pipeline segment is
not constrained, the replacement shipper would have the option of
turning down the deal and purchasing the capacity from the pipeline at
the cost-based just and reasonable interruptible or short-term firm
rate.
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    \16\ Williston Basin Interstate Pipeline Co., 519 F.3d 497, 502
(D.C. Cir. 2008) (where the pipeline's largest customer is its
affiliate, the competitive capacity resale market is ``smaller than
one would otherwise expect''); United Distribution Cos. v. FERC, 88
F.3d 1105, 1156 (D.C. Cir. 1996) (``when the capacity available for
sale on a particular pipeline is limited, holders of even relatively
small capacity allotments can exercise market power'').
    \17\ Order No. 712 at P 61.
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    18. Moreover, as we also explained in Order No. 712, the
implications of removing the price ceiling for pipeline capacity are
more serious than for capacity release. Pipelines, due in part to their
economies of scale, can exercise market power over pipeline capacity,
particularly with respect to the construction of long-term
capacity.\18\ As the Court of Appeals for the District of Columbia
Circuit has stated:
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    \18\ Id. P 67, 85.

    Federal regulation of the natural gas industry is thus designed
to curb pipelines' potential monopoly power over gas transportation.
The enormous economies of scale involved in the construction of
natural gas pipelines tend to make the transportation of gas a
natural monopoly.\19\
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    \19\ United Distribution Cos. v. FERC, 88 F.3d 1105, 1122 (D.C.
Cir. 1996).

    19. Unlike releasing shippers, pipelines have a greater ability to
exercise market power because of their control over the expansion of
the pipeline itself. If a pipeline could on its own or as part of an
oligopolistic market structure exercise market power in the short-term
market, it would have an incentive not to construct additional needed
capacity (withhold new capacity) because of the excess revenues it can
garner in the short-term market. As the Commission explained in Order
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No. 637:

    Without rate regulation, pipelines would have the economic
incentive to exercise market power by withholding capacity
(including not building new capacity) in order to raise rates and
earn greater revenue by creating scarcity. Because pipeline rates
are regulated, however, there is little incentive for a pipeline to
withhold capacity, because even if it creates scarcity, it cannot
charge rates above those set by its cost-of-service. Since pipelines
cannot increase revenues by withholding capacity, rate regulation
has the added benefit of providing pipelines with a financial
incentive to build new capacity when demand exists * * *. Thus,
annual rate regulation protects against the pipeline's exercise of
market power by limiting the incentive of a monopolist to withhold
capacity in order to increase price as well as creates a positive
incentive for a pipeline to add capacity when needed by the
market.\20\
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    \20\ Order No. 637 at 31,270. See Tennessee Gas Pipeline Co., 91
FERC ] 61,053, at 61,191 (2000) (``there is little reason for the
pipeline to exercise market power by withholding new capacity
because the maximum rates established by the Commission prevent it
from charging rates above the just and reasonable rates based on its
cost of service''), aff'd, Process Gas Consumers Group v. FERC, 292
F.3d 831, 834 (D.C. Cir. 2002).

    20. Not only may there be segments of a pipeline or even an entire
pipeline

that is not competitive, as discussed above, but as we found in Order
No. 712,\21\ and as the pipelines have conceded, perfect arbitrage does
not exist between the capacity release market and the market for
pipeline capacity.\22\ As a result, the pipelines will have the ability
to exercise market power, which will create the very incentive our
regulation is designed to prevent: An incentive to not construct
capacity when it is needed and would ordinarily be profitable.\23\ In
balancing the risks and benefits of removing the price ceiling for
pipeline capacity, we chose in Order No. 712 to err on the side of
providing greater protection against the exercise of market power by
both the pipelines and releasing shippers by retaining the recourse
rate protection of regulated pipeline rates.
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    \21\ Order No. 712 at P 107.
    \22\ INGAA at 11. If perfect arbitrage did exist, no market for
interruptible transportation would exist on fully subscribed
pipelines because releasing shippers would capture the benefits of
their unused capacity for themselves.
    \23\ C. McConnell, S. Brue, Microeconomics: Principles,
Problems, and Policies, 211 (McGraw-Hill, 2004) (``by making it
illegal to charge more than the [competitive price] per unit, the
regulatory agency has removed the monopolist's incentive to restrict
output to [the monopoly quantity] to obtain a higher price and
greater profit'').
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    21. We find that the arguments raised by the pipelines on rehearing
are the same arguments addressed in Order No. 712, and as discussed
below, we do not find these arguments sufficient to change our
determination to retain the price ceiling for short-term pipeline
services.
a. Competitive Market Findings
    22. INGAA, Williston, and Spectra all argue that the Commission's
finding that the capacity release market is ``generally competitive''
justifies removing the price ceiling for pipeline short-term services
as well. They maintain that released capacity and pipeline capacity
compete with each other and that by concluding that the presence of a
``generally competitive'' market justified the removal of the rate
ceiling for short-term release capacity the Commission also justified
the removal of the price ceiling for short term pipeline capacity.
These parties argue that because the data does not distinguish between
released capacity and pipeline capacity there is no reason to treat one
class of capacity differently from the other.\24\
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    \24\ See INGAA at 8, Spectra at 12 and Williston at 4 (``The
Commission's findings that the short term capacity release market is
workably competitive was not based on data that distinguishes
between the types of sellers of capacity.'').
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    23. The Commission agrees that to a large extent released capacity
and pipeline capacity compete against each other. But, as we discussed
above, we did not make a finding that the entire secondary market is
competitive. Rather, we found that the extent of competition in the
market for capacity release in conjunction with the maintenance of the
recourse rate for pipeline services was sufficient to remove the price
ceiling for capacity release.\25\ As the Commission stated:
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    \25\ As the Commission stated:
    One of the principal reasons for removing the price ceiling on
released capacity is the existence of the pipeline's service as
recourse in the event market power is exercised. Order No. 712 at P
101, citing, Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000),
reh'g denied, 94 FERC ] 61,097 (2001), petitions for review denied
sub nom., Process Gas Consumers Group v. FERC, 292 F.3d 831, 837
(D.C. Cir. 2002).

    The Commission is not relying only on a competitive market to
ensure just and reasonable rates. The pipeline's maximum rates for
short-term firm and interruptible services serve as recourse rate
protection for negotiated rate transactions, and will provide the
same protection to replacement shippers by giving them access to a
just and reasonable rate if the releasing shipper seeks to exercise
market power.\26\
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    \26\ Order No. 712 at P 48. The reliance on the recourse rate as
protection was repeated continuously throughout the order. Order No.
712 at P 31, 39, 61, 101.

    24. Relying on our finding in Order No. 637, we explained that
maintenance of the recourse rate is necessary in factual circumstances
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in which even with capacity release, competition is limited:

    The Commission is continuing to protect against the possibility
that, in an oligopolistic market structure, the pipe-line and firm
shipper will have a mutual interest in withholding capacity to raise
the price because the Commission is continuing cost based regulation
of pipeline transportation transactions. The pipeline will be
required to sell both short-term and long-term capacity at just and
reasonable rates. In the short-term, a releasing shipper's attempt
to withhold capacity in order to raise prices above maximum rates
will be undermined because the pipeline will be required to sell
that capacity as interruptible capacity to a shipper willing to pay
the maximum rate. Shippers also have the option of purchasing long-
term firm capacity from the pipelines at just and reasonable
rates.\27\
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    \27\ Order No. 637 at 31,282, aff'd, INGAA, at 32 (``[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'').

    25. In retaining the recourse rate as protection against the
exercise of market power, we recognized that, on many parts of the
pipeline grid, sufficient competition may not exist to discipline
pricing.\28\ This can occur on laterals, at the extreme ends of certain
pipeline systems where only one or a small number of firm capacity
holders are present, or in some cases on an entire small pipeline. For
example, on the Williston Basin pipeline as of 2000, 93 percent of the
capacity of the pipeline was held by an affiliate of the pipeline.\29\
We did not, and cannot, make a finding that such a market is
sufficiently competitive to remove the protection afforded by the
recourse rate.\30\ As we explained in Order No. 712, the recourse rate
in this situation will serve to protect the replacement shipper because
if Williston's affiliate seeks to charge a price for released capacity
above the just and reasonable maximum rate that is unjustified by
competitive conditions, ``the replacement shipper has the option of
turning down the deal and purchasing the capacity from the pipeline at
the just and reasonable interruptible rate.'' \31\
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    \28\ Order No. 712 at P 61 (the recourse rate provides
protection ``even on laterals or other parts of the pipeline grid
where all firm capacity may be held by only a few or one firm
shipper, those shippers cannot withhold their capacity in order to
charge a price above competitive levels'').
    \29\ Williston Basin Interstate Pipeline Co., 115 FERC ] 61081,
at P24 n.29 (2006), remanded on other grounds, Williston Basin
Interstate Pipeline Co. v. FERC, 519 F.3d 497, 502 (DC Cir. 2008)
(recognizing that where the pipeline's largest customer is its
affiliate, the competitive capacity resale market is ``smaller than
one would otherwise expect''). In the proceeding at issue in these
opinions, Williston did not even agree to permit a small customer to
convert to Part 284 service so that it would be able to release
capacity in competition with Williston and its affiliate.
    \30\ Such competitive problems can occur on other pipelines as
well. For example, in addition to the Williston pipeline, affiliates
on Equitrans, L.P, National Fuel Gas Supply Corp., and Questar
Pipeline have a very high proportion of transportation service (from
50 percent-70 percent, and Tuscarora Gas Transmission Company has a
non-affiliated shipper with 77 percent of its capacity. See Index of
Customers, July 2008, FERC Form No. 549-B (http://www.ferc.gov/docs-
filing/eforms/form-549b/data.asp). Considering the relevant
information, we cannot make a finding that the secondary market is
sufficiently competitive throughout the country that we can safely
eliminate the recourse rate.
    \31\ Order No. 712 at P 61.
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    26. Pipelines that believe their markets are competitive can file
for market based rates under our Alternative Rate Design Policy
Statement to show that their markets are competitive. We did not
undertake such an analysis in this rulemaking, however, and therefore
cannot find that removing the price ceiling from pipeline short-term
services, and hence eliminating the recourse rate protection, assures
just and reasonable rates.
    27. Even on pipelines with secondary markets more competitive than
Williston's, market power may exist on

particular portions of the pipelines. Moreover, in Order No. 712, the
Commission pointed out that a variety of pipeline limitations on
shippers' release rights can limit the effectiveness of competition and
arbitrage between the pipelines and releasing shippers. Pipelines'
ability to selectively discount \32\ can reduce the incentive of
releasing shippers to compete with pipelines, as do negotiated rate
agreements that contain provisions providing that the pipeline will
share any revenues the shipper receives from a capacity release in
excess of its discounted or negotiated rate.\33\ Pipelines have indeed
recognized that these provisions help insulate them from
competition.\34\ But the pipelines cannot legitimately argue that they
should be able to limit themselves from competition on the one hand,
and then seek to remove the recourse rate which serves to protect
customers from the effects of such insulation. Retaining the recourse
rate helps protect against the exercise of market power on such
segments.\35\
---------------------------------------------------------------------------

    \32\ Selective discounting refers to the ability of pipelines to
limit discounts to specific points so that those discounts cannot be
arbitraged to alternate points at which the pipelines have less
competition. In cases where pipelines use selective discounting,
shippers can release at alternate points only if they pay the
pipeline's maximum rate, thus eliminating or decreasing the profit
the shipper can make on the release.
    \33\ See LSP Cottage Grove, L.P. v. Northern Natural Gas Co.,
111 FERC ] 61,108, at P 58-59 (2005).
    \34\ See Williston Basin Interstate Pipeline Co. v. FERC, 358
F.3d 45, 50 (D.C. Cir. 2004).
    \35\ Order No. 712 at P 88.
---------------------------------------------------------------------------

    28. Williston, in its rehearing request, claims that the Commission
failed to explain how pipelines' ability to selectively discount
relates to the retention of the maximum rate for pipeline short-term
services. The ability of pipelines to selectively discount demonstrates
that they have market power and are able to prevent arbitrage.\36\ As
we have explained above, limitations on the effectiveness of arbitrage
could enable pipelines to exercise market power in some markets.\37\
---------------------------------------------------------------------------

    \36\ As the U.S. Court of Appeals recognized in a case brought
by Williston itself:
    A pipeline is unlikely to be able to increase throughput by
selective discounting, however, if capacity at secondary points can
be transferred readily among shippers through resale at the
discounted rate. Indeed, economic theory tells us price
discrimination, of which selective discounting is a species, is
least practical where arbitrage is possible--that is, where a low-
price buyer can resell to a high-price buyer.
    Williston Basin Interstate Pipeline Co. v. FERC, 358 F.3d 45, 50
(D.C. Cir. 2004). See F.M. Scherer, Industrial Market Structure and
Economic Performance, 253 (Rand McNally College Publishing Co. 1970)
(in order to price discriminate ``the seller must have some control
over price--some market power'').
    \37\ Selective discounting decreases competition even when price
exceeds the maximum rate. For example, assume that on a pipeline
with a maximum rate of $1.00, a shipper has a discounted rate of
$.75, and it values the capacity at $1.10, perhaps because it would
cost $1.10 to use storage or a peak shaving device to replace the
gas lost through the capacity release. If the shipper were required
to pay the additional $.25 to the pipeline under the Commission's
selective discounting policy, the shipper would release its capacity
only when the capacity price is $1.35 or greater. Without the
selective discounting policy, the shipper would be willing to
release whenever the capacity price is $1.10 or greater.
---------------------------------------------------------------------------

b. Withholding Construction of Needed Pipeline Infrastructure
    29. In Order No. 712, the Commission found that maintenance of the
price ceiling on pipeline capacity was necessary to ensure that proper
incentives to construct needed pipeline infrastructure were retained.
On rehearing, the pipelines argue that because the pipeline capacity is
identical to the released capacity, the Commission acted arbitrarily in
lifting the capacity only on short-term released capacity and not on
pipeline capacity. They argue that the Commission erred in asserting
that they could exercise market power by withholding capacity,
maintaining that capacity is either subscribed or not and that the
Commission regulations require that all available capacity be sold.
    30. First, as discussed above, the Commission has a sound basis for
not removing the recourse rate from pipeline services, because the
recourse rate acts as a check against both the market power of
releasing shippers and the pipelines themselves in situations in which
insufficient competition exists. Second, as we found in Order No. 712,
and discussed above, ownership of the pipeline is not identical to
shippers that lease the use of such capacity.\38\
---------------------------------------------------------------------------

    \38\ Order No. 712 at P 84 (quoting, INGAA at 35).
---------------------------------------------------------------------------

    31. Unlike shippers that cannot control the total amount of
capacity, pipelines, because they control their own systems, can affect
the total quantum of capacity by determining whether to construct
additional capacity. The fundamental precept of our cost-of-service
regulation of pipelines is based on ensuring that pipelines do not
withhold existing capacity or future capacity.\39\ The Commission
prevents the withholding of future capacity by ensuring that pipelines
do not have an economic incentive to refrain from constructing
additional capacity when demand suggests that such capacity is needed
and would be profitable. A pipeline that possesses market power and
could charge supra-competitive prices in the short-term market will
have an economic incentive not to build new capacity to relieve the
scarcity permitting it to charge higher prices. As we stated in Order
No. 712, as long as cost-of-service rate ceilings apply, pipelines will
have a greater incentive to build new capacity to serve all the demand
for their service than to withhold capacity, because the only way the
pipeline could increase current revenues and profits would be to invest
in additional facilities to serve the increased demand.\40\
---------------------------------------------------------------------------

    \39\ Order No. 637 at 31,270.
    \40\ Order No. 712 at P 85.
---------------------------------------------------------------------------

    32. The pipelines assert, without evidentiary support, that their
construction decisions would not be influenced by prices in the short-
term market. INGAA, for example, contends that ``rather than driving up
prices, withholding unsubscribed firm capacity only results in lost
sales.'' \41\
---------------------------------------------------------------------------

    \41\ INGAA at 7 (citing, Comments of the Interstate Natural Gas
Association of America, Docket No. RM08-1 (filed Jan. 25, 2008)).
---------------------------------------------------------------------------

    33. Basic economic theory holds that firms with market power, like
pipelines, will construct less capacity than competitive firms because
doing so results in higher prices and profits. A company with market
power will produce less of a product or service, and at a higher price,
than if the company were in a competitive market. Unlike a competitive
firm that produces where marginal cost \42\ intersects demand,\43\ a
firm with market power produces where the revenue from producing one
additional unit of output (marginal revenue) \44\ is greater than the
cost of producing that unit (marginal cost).\45\ With a typical
downward sloping demand curve, the intersection of marginal cost and
marginal revenue is at a smaller output and a higher price than would
be produced by a competitive

outcome.\46\ As the following graph demonstrates, a firm with market
power will produce at Point QM with a price at PM, although the
competitive quantity would be at Point QC and price at Point PC.\47\
---------------------------------------------------------------------------

    \42\ Marginal cost is the added cost of producing one more unit.
    \43\ At this price, the firm recovers in price the added cost of
producing one more unit. If the firm produced more units, the extra
cost of producing those units would be less than the price paid for
them.
    \44\ Marginal revenue is the extra revenue created by producing
one more unit of output.
    \45\ As long as producing one more unit adds more to revenue
than to cost, the firm with market power is better off (earns a
profit) by producing that unit. Although producing one more unit
would still be profitable even at a higher output (because the cost
of producing that unit is less than the price) the firm with market
power's overall revenue would decline because it has to charge
everyone the lower price in order to add that unit. See A. Mas-
Colell, M.D. Whinston, J. Green, Microeconomic Theory, 385 (Oxford
University Press US, 1995) (the reason the monopolist's output is
below the competitive level is ``the monopolist's recognition that a
reduction in the quantity it sells allows it to increase the price
on its remaining sales'').
    \46\ Jean Tirole, The Theory of Industrial Organization, 66 (MIT
Press, 1988) (''The monopoly sells at a price greater than the
socially optimal price, which is its marginal cost'').
    \47\ Deadweight loss refers to the loss to society resulting
from the firm with market power withholding the production of
product that consumers value at more than the cost of production.
Transfer payments refer to the extra income that the firm with
market power earns as compared to what it would earn in a
competitive market. It represents the amount of money transferred
from consumers to the producer.
[GRAPHIC] [TIFF OMITTED] TR01DE08.000

    34. Although producing at the higher output (and lower price) of a
competitive market would still be profitable even for the firm with
market power, the firm with market power makes more money if it reduces
output and increases price.\48\
---------------------------------------------------------------------------

    \48\ In a competitive market, if a firm tried to price at Point
PM, other firms would enter the market at that price, which would
have the effect of increasing output and reducing the price for all
firms to Point PC. R. Posner, Economic Analysis of the Law 198 (2d
ed. Little, Brown, and Company, 1977).
---------------------------------------------------------------------------

    35. While current Commission regulations do not permit pipelines to
withhold already-constructed capacity,\49\ pipelines can withhold
capacity by not constructing as much capacity as a competitive market
would dictate. Even though long-term rates would still be capped under
the pipelines' proposals, pipelines able to charge supra-competitive
prices in the interruptible or short-term firm market would still have
the same disincentive to build capacity to reach the competitive level,
because such construction would result in less overall profit for the
pipeline.\50\
---------------------------------------------------------------------------

    \49\ See Tennessee Gas Pipeline Co., 91 FERC ] 61,053, at 61,191
(2000) (``there is little reason for the pipeline to exercise market
power by withholding new capacity because the maximum rates
established by the Commission prevent it from charging rates above
the just and reasonable rates based on its cost of service''),
aff'd, Process Gas Consumers Group v. FERC, 292 F.3d 831, 834 (D.C.
Cir. 2002).
    \50\ For example, if a pipeline's affiliate holds the bulk of
transportation capacity of a pipeline, the affiliate (if the
recourse rate protection were removed) presumably has sufficient
market power to raise short-term prices in a constrained market. The
construction of additional capacity to relieve that scarcity could
then result in a diminishment of the overall profitability of the
company.
---------------------------------------------------------------------------

    36. INGAA argues that the Commission is acting inconsistently
because the Commission found that lifting the price ceiling on released
capacity gave an incentive to increase construction.\51\ But INGAA
takes the quoted portion of Order No. 712 out of context. The
Commission was pointing out that high capacity release prices would
send pipelines a signal that capacity is scarce and additional capacity
is needed to relieve the scarcity. This same principle does not apply
to removing the price ceiling for pipeline capacity. As pointed out
above, if pipelines with market power find that maintaining scarce
pipeline capacity increases their profits, then they will have much
less incentive to construct long-term capacity because such capacity
could result in lower profitability. The extent to which the pipelines'
incentives to construct will be reduced is dependent on the
circumstances facing each pipeline. But because pipelines can still
exercise market power (as discussed above), we cannot find sufficient
justification for removing recourse rate protection based solely on the
unsupported statements of pipelines that short-term rates will never be
sufficient to reduce or eliminate the amount of long-term capacity they
choose to construct.
---------------------------------------------------------------------------

    \51\ INGAA at 7 (citing, Order No. 712 at P 60).
---------------------------------------------------------------------------

    37. A recent example illustrates why the recourse rate is needed to
ensure that pipelines retain the incentive to build needed pipeline
infrastructure. After Order No. 712 became effective, capacity release
prices exceeded maximum rates principally from the Rocky Mountains to
the northwest and to the east. This was attributed to an excess supply
of gas to be transported from the Rocky Mountains in relation to
pipeline capacity.\52\ Such scarcity

should be a prime indicator to the pipelines of the need to expand
capacity from the Rocky Mountains. Because shippers do not control
expansion decisions, permitting the price to exceed the maximum rate
helps to allocate scarce capacity efficiently to the highest valued
user. However, if pipelines were able to capture the higher than
maximum rate prices for such transactions, their incentives to expand
would be blunted because any such expansion would reduce the scarcity
revenues they would be receiving. The retention of the recourse rate
for pipeline transactions ensures that pipelines have the proper
incentive to build new capacity when capacity release prices show that
construction of such capacity is needed and would be profitable.
---------------------------------------------------------------------------

    \52\ See G. Lander, Capacity Center Releases Post Order 712
Capacity Trading Stats (September 2008) (contact CapacityCenter.com)
as reported in Foster Natural Gas Report No. 2711 (September 12,
2008) (describing report issued by CapacityCenter.com on post Order
No. 712 capacity release transactions showing higher than maximum
rate releases out of the Rocky Mountains); Letter from Wyoming
Governor Dave Freudenthal to Wyoming Legislature's Joint Minerals,
Business and Economic Development Interim Committee (August 21,
2008) (indicating need for additional pipeline infrastructure),
http://governor.wy.gov/press-releases/state-of-wyoming-should-not-
enter-into-the-pipeline-business-governor-says.html.
---------------------------------------------------------------------------

c. Pricing Flexibility
    38. INGAA, Williston and Spectra all maintain that the Commission's
action in removing the price ceiling from short term capacity releases
has given releasing shippers more flexibility in pricing their capacity
than the pipelines have in pricing their capacity under the
Commission's programs.\53\
---------------------------------------------------------------------------

    \53\ See Spectra at 30 (pipelines will face a competitive
disadvantage); INGAA at 10 (alternatives do not provide comparable
rate flexibility) and Williston at 12 (Order No. 712 provides
releasing shippers with significantly greater pricing flexibility
than is available to pipelines).
---------------------------------------------------------------------------

    39. In particular, they assert that negotiated rates are not as
flexible as capacity releases. Williston asserts that negotiated rates
must be submitted as a tariff filing, which requires a period of 30
days advance notice, before the rates can go into effect. Therefore,
Williston argues that negotiated rate agreements are not useful in
responding to a short-term price spike. Spectra argues that the
requirement that the negotiated rate must be accompanied by a recourse
rate alternative effectively means that pipelines are unable to sell
short-term services above the maximum recourse rate. Spectra asserts
that under either the net present value or first-come, first-served
allocation methodologies, shippers have no reason to offer to pay more
than the maximum rate for service even if the market would bear such a
rate. Spectra maintains that as a result pipelines cannot recover their
cost-of-service because they are required to discount capacity prices
during off-peak periods, but cannot charge above maximum rates when
such prices are justified, as shown in the following hypothetical graph
included in Spectra's rehearing request.\54\
---------------------------------------------------------------------------

    \54\ Spectra at 17.
    [GRAPHIC] [TIFF OMITTED] TR01DE08.001

    40. We recognize that negotiated rates and the capacity release
program are not identical. For example, the capacity release program
still requires bidding for deals of greater than one month (except for
AMA transactions), while pipelines can negotiate rates without any
bidding delay. On the other hand, negotiated rates do have to be filed
with the Commission as Williston points out.
    41. But we do not agree that the differences between these programs
are as significant as the pipelines suggest. For example, contrary to
Williston's argument, the Commission has waived the 30-day notice
filing for negotiated rate deals, allowing such transactions to go into
effect immediately:

    A pipeline may file the numbered tariff sheet implementing the
negotiated rate at the time it intends the rate to go into effect.
The Commission does not intend to suspend the effectiveness of the
negotiated rate filings or impose a refund obligation for those
rates. For these reasons, the Commission will readily grant requests
to waive the 30 day notice requirement.\55\
---------------------------------------------------------------------------

    \55\ 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, at 61,241-42.
(1996).

    42. Thus, negotiated rate transactions can occur as quickly as
capacity release transactions. Moreover, there is no restriction on the
use of negotiated rates even for short-term transactions.
    43. Spectra argues that shippers will not enter into negotiated
rate contracts above the recourse rate. The principal use of negotiated
rates is to enable pipelines and shippers to enter into transactions
that reflect the value of capacity as measured by price indices.
Indeed, one of the principal reasons for removing the rate ceiling on
capacity releases is to extend similar flexibility to price releases on
price indices even when such prices exceed the maximum rate.\56\
Spectra offers no reason why shippers would be any more reluctant to
enter into negotiated rate contracts with the pipeline for short-terms
using index

prices than they would be to enter into such contracts with releasing
shippers.
---------------------------------------------------------------------------

    \56\ See Standards for Business Practices for Interstate Natural
Gas Pipelines, 72 FR 38,757 (July 16, 2007), FERC Stats. & Regs. ]
31,251 at P 51 (2007), (industry requesting ability to use price
indices for released capacity).
---------------------------------------------------------------------------

    44. We also disagree with Spectra's contention that under the
Commission's determination, the pipeline will be unable to recover its
cost-of-service. The graph included by Spectra is a typical graph of
demand on a pipeline, where capacity is more valuable during the winter
heating season than during the off-peak summer season. But that does
not mean that the pipeline will be unable to recover its cost-of-
service. As Spectra recognizes, shippers needing capacity in the winter
cannot simply wait until they need capacity because capacity in the
winter is scarce and under the pipeline's allocation requirements,
shippers are unlikely to obtain the amount of capacity they need if
they wait. Therefore, shippers like local distribution companies (LDCs)
that need capacity for the winter typically will sign a long-term
contract (or at least a full year's contract) at maximum rate to ensure
that they will have the capacity they need during the peak winter
season.
    45. Moreover, pipelines are not precluded from recovering their
cost-of-service in any event. Under longstanding Commission policy,\57\
pipelines may adjust the volumes used to design their maximum recourse
rates, so that they can recover their full cost-of-service, even though
competition requires them to offer discounts including during off-peak
periods. Also, as we pointed out in Order No. 712, pipelines have the
option of applying for seasonal rates in such circumstances.
---------------------------------------------------------------------------

    \57\ See e.g. Southern Natural Gas Co., 65 FERC ] 61,347, at
62,829-40 (1993), order on reh'g, 67 FERC ] 61,155, at 61,456
(1994); Williston Basin Interstate Pipeline Company, 67 FERC ]
61,137, at 61,377-383 (1994) (``Williston's ceiling rates will be
designed to give it the opportunity to recover its new cost-of-
service if throughput is the same as during the base period despite
the fact that it is reasonable to project a continuation of lower
discounted rates for certain customers after the effective date of
the subject rates.''); see also Williston Basin Interstate Pipeline
Company, 107 FERC ] 61,164, at P 79-80 (2004).
---------------------------------------------------------------------------

    46. Spectra is correct that in limited circumstances (where a
pipeline has unsubscribed capacity and suddenly demand for that
capacity exceeds the available supply), the recourse rate will prevent
the pipeline from allocating capacity to the shipper placing the
highest value on the capacity. But that is the very nature of the
protection afforded by recourse rates, and as discussed above, we
cannot relax the recourse rate protection given that the entirety of
the market has not been shown to be sufficiently competitive. As we
explained in Order No. 712, we need to balance the risks of removing
the price ceiling and the benefits from such removal, and we have
decided that ensuring sufficient protection against market power must
take precedence over potential losses in efficiency.\58\
---------------------------------------------------------------------------

    \58\ Order No. 712 at P 108. Depending on the costs of
arbitrage, Spectra's example would not result in an inefficient
allocation of capacity. As long as one shipper can release capacity
to the other, the shipper placing the greatest value on the capacity
would be able to obtain the capacity.
---------------------------------------------------------------------------

    47. Williston, Spectra, and INGAA also maintain that the other
pricing flexibility the Commission mentioned in Order No. 712, filing
for market-based rates and the use of seasonal rates, are not as
flexible as removal of the price ceiling for capacity release. We did
not maintain that these programs were identical. We simply pointed to
them as potential flexibility that is available to the pipelines, and
as discussed above, the use of seasonal rates may be a solution for
situations in which demand differs significantly between seasons.
    48. The pipelines specifically argue that market-based rate filings
for pipeline transportation are difficult to make and that the
Commission utilizes stringent criteria in evaluating such filings. But
we find that, precisely because pipelines have such enormous economies
of scale and enjoy market power, the application of economically
correct standards is appropriate in reviewing an application to remove
rate regulation entirely.
    49. INGAA and Williston maintain that because the alternatives
proposed by the Commission for pipelines are not as flexible as
capacity release, the Commission's policy unjustifiably burdens and
injures pipelines. Because the pipelines, even under their own
proposals, would still be regulated under cost-of-service principles,
any lack of flexibility would not result in losses to pipelines because
cost-of-service ratemaking provides each pipeline with an opportunity
to recover all of their reasonably incurred costs. If the Commission
were to remove the recourse rate from the pipelines' short-term
services, pipelines still would need to account for any extra revenues
derived from short-term services as part of their overall cost-of-
service. Because, as discussed above, we have not found the short-term
market to be fully competitive, and pipelines are able to recover their
cost-of-service, we find that maintaining the recourse rate is
necessary to ensure continued protection of customers and does not
unduly harm pipelines.
d. Bifurcated Markets
    50. The pipelines again assert that the Commission has created a
bifurcated market and that such a market will compromise allocative
efficiency. INGAA asserts that because pipelines do not have market
power there is no reason for the Commission to bifurcate the market to
mitigate against pipeline market power and to rely on arbitrage, which
the Commission admits is imperfect, to correct any market
inefficiencies. Spectra argues that Order No. 712 regulates the short
term capacity market on an asymmetric basis and that this will create a
bifurcated market. It asserts that Order No. 712 regulated the short
term capacity release market subject to light-handed, market-based
regulation, but regulated pipeline participants in the same market
continue under the more burdensome cost-of-service regime. Sempra also
argues that the Commission's examples of arbitrage in Order No. 712
apply only to interruptible service, but that pipelines may have firm
service available and bifurcated markets can occur.
    51. As we explained in Order No. 712, we have attempted to reduce
the costs of arbitrage so that we do not create a seriously bifurcated
market. If arbitrage exists, then a bifurcated market will not be
created regardless of whether the pipeline is selling interruptible or
firm service. With respect to interruptible service, no shipper can
rely on obtaining interruptible service at a lower than market price
because it can lose the capacity to a replacement shipper obtaining a
release, which has higher priority. Thus, if the market is constrained,
those needing capacity will not be attempting to rely on their position
in the interruptible queue but will be seeking firm released capacity.
Similarly, bifurcated markets would not be created with respect to firm
service because, as we discussed earlier, even if one shipper obtained
capacity from the pipeline at a lower than market price, it could
reallocate that capacity through the release market as long as
arbitrage costs are not too high.
    52. But as we recognized in Order No. 712, arbitrage is not
perfect, and so there may be situations in which a bifurcated market
may occur. Indeed, the fact that arbitrage is not perfect may provide
the pipelines with market power.
    53. Whatever amount of limited market bifurcation occurs,
therefore, is a cost that must be incurred to maintain the protection
against market power afforded by the recourse rate. INGAA provides no
data supporting its contention that the markets are competitive, and,
as discussed earlier, the Commission did not make such a finding, and
in fact found that maintenance of the recourse rate is

necessary precisely because various parts of the interstate grid may
not be competitive. No amount of arbitrage will ensure a competitive
market if a single shipper controls a large portion of the pipeline
capacity either on the pipeline as a whole or in any individual market.
e. Proposed Alternatives
    54. On rehearing Spectra offers two alternatives that it suggests
will potentially mitigate any harm from removing the price ceiling from
pipeline services.\59\ It argues that the Commission could allow
pipelines to post capacity, at the pipeline's option, through the same
process and requirements as short-term capacity releases. If the
pipeline opted to post some of its capacity using this mechanism, the
capacity would be awarded to the highest bidder, without a rate cap.
Spectra argues that, if the Commission deems further safeguards
necessary, it proposed in its initial comments that the Commission
could remove the price cap on short-term firm services but retain it on
short-term interruptible services. This approach, it asserts, would
retain a recourse rate alternative for all firm customers.
---------------------------------------------------------------------------

    \59\ Williston, in a single sentence without providing details,
seems also to endorse a bidding approach. Williston at 10.
---------------------------------------------------------------------------

    55. In the NOPR leading to Order No. 637, the Commission proposed
an auction to provide recourse rate protection, similar to the one
proposed by Spectra, in which pipelines would be able to participate by
including their capacity along with that of released capacity. At that
time most of the comments, including those of the pipelines, opposed
such mandatory auctions, and the Commission did not adopt that
proposal.\60\ The Commission, however, did indicate in Order No. 637
that it would be open to a voluntary auction proposal from pipelines,
such as the one suggested by Spectra, so long as such a proposal would
protect against the exercise of market power by the pipeline:
---------------------------------------------------------------------------

    \60\ Regulation of Short-Term Natural Gas Transportation
Services, Order No. 637, 65 FR 10,156 (Feb. 25, 2000), FERC Stats. &
Regs. ] 31,091, at 31,279 (Feb. 9, 2000).

    An auction also may be a means by which a pipeline could sell
some or all of its capacity without a price cap if the auction is
designed in such a way as to protect against the pipeline's ability
to withhold capacity and exercise market power.* * * [T]he pipelines
must design the auction in ways to prevent the withholding of
capacity and the exercise of market power. Capacity can be withheld
by a pipeline in two primary ways: the pipeline can withhold
capacity directly by not putting it into the auction; or it can
indirectly withhold capacity through the use of a reserve price. In
a proposal for auctions without a rate cap, all capacity available
at the time of the auction would have to be included in the auction.
The auction proposal also needs to address the appropriate
limitations that should be placed on the level at which the pipeline
can establish reserve prices, particularly whether different reserve
prices should be established for peak and off-peak capacity.\61\
---------------------------------------------------------------------------

    \61\ Order No. 637, FERC Stats. & Regs. ] 31,091 at 31,295. The
Commission's concern with reserve prices was to ensure that if a
pipeline can benefit from competition by selling at above the
maximum rate during peak periods, it also should be required to sell
capacity at more competitive prices during off-peak periods. If
pipelines were permitted to set the reserve price at the existing
maximum rate during off-peak periods, they still would be able to
exercise market power with respect to off-peak transactions, for
example, by selectively discounting. Requiring the pipeline to set a
lower reserve price during off-peak periods, therefore, would ensure
more competitive pricing during all time periods.

    56. The Commission also included specific guidance addressing basic
principles for constructing such an auction to ensure that it would be
transparent, verifiable, and non-discriminatory.\62\ Despite the
opportunity offered in Order No. 637, no pipeline has ever proposed to
use an auction methodology to allocate capacity at prices exceeding the
maximum recourse rate. Spectra does not claim that it proposed this
auction proposal in its initial comments, and provides no details in
its rehearing request about how it would structure such an auction to
ensure that pipelines cannot exercise market power, ensure that
sufficient arbitrage opportunities exist so that releasing shippers can
compete equally, and ensure that the pipeline retains an incentive to
construct long-term capacity when it is needed.\63\ Other parties have
not had an opportunity to comment on the details of such a proposal,
and we, therefore, do not have a sufficient record to rule on a generic
basis on such a proposal in this rulemaking. But Spectra, and other
pipelines, can still make such a proposal through an NGA section 4
filing on an individual case-by-case basis, as indicated in Order No.
637.
---------------------------------------------------------------------------

    \62\ See Order No. 637, FERC Stats. & Regs. ] 31,091 at 31,296.
    \63\ In its initial comment and its rehearing request, Spectra
also offers no details about how its proposal to allow pipelines to
sell short-term firm capacity without a rate ceiling would work. For
example, it does not explain how short-term firm capacity is to be
differentiated from long-term firm capacity because available
capacity on a pipeline would be available for any time period.
Spectra also fails to explain how bidding on short-term and long-
term capacity would be evaluated to ensure that the pipeline was not
favoring a short-term bid over a long-term bid. Should Spectra
choose to make a Natural Gas Act (NGA) section 4 filing with respect
to its proposals, it would need to specify the details of its plan
and how it would protect against market power.
---------------------------------------------------------------------------

C. Clarification Regarding Specific Issues

1. Consecutive Releases
a. Clarification Requests
    57. Allegheny, the Marketer Petitioners and Reliant all note that
under the Commission's regulations, they would be permitted to post for
bid at around the same time capacity to be released for multiple,
consecutive short-term periods. Each of these parties requests that in
order to provide clarity to the market, the Commission specifically
clarify that such releases are permissible.
    58. Allegheny argues that the Commission erred by failing
specifically to find that the offer by a capacity holder of
simultaneous discrete sequential releases of its capacity, each for up
to one year at prices above the pipeline's current maximum tariff
rates, is consistent with Order No. 712. Allegheny asserts that such a
clarification would allow a capacity holder to auction all of its
capacity rights in one-year blocks, and to award the capacity to the
replacement shippers offering the highest price for the capacity in
future years without running afoul of the price cap. Each replacement
shipper would lock into a contractual commitment for only one year.
Allegheny asserts that each auction could produce a different price for
the capacity, and thereby allow the market to reflect changing
expectation about the congestion value of the capacity.
    59. The Marketer Petitioners also request clarification that it is
permissible for a releasing shipper and a replacement shipper to engage
in two (or more) consecutive short-term (one year or less) releases of
the same capacity, at the same (or approximately the same) time,
without subjecting the releases to the maximum rate cap.\64\ Reliant
adds that permitting a firm shipper to post for bidding, at or near the
same time, capacity for multiple successive short-term releases would
work to achieve the Commission's goal of ensuring that capacity be
allocated to those who value it most.
---------------------------------------------------------------------------

    \64\ Marketer Petitioners at 11. As an example, the Marketer
Petitioners question whether, subject to applicable pipeline tariff
provisions, a shipper may, on the same day, post for bidding without
a maximum rate cap limitation (i) a release of a capacity package
for the year 2009, (ii) a release of the same capacity package for
the year 2010, and (iii) a release of the same capacity package for
the year 2011.

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

b. Commission Determination
    60. The Commission will deny the requests for clarification as
discussed below. In the Commission's view, permitting a releasing
shipper to simultaneously post for bid consecutive short-term contracts
whose total term exceeds one year would be contrary to the Commission's
decision to lift the price ceiling only for releases of one year or
less. In Order No. 712, the Commission explained that it removed the
price ceiling for short-term capacity releases in order to allow the
prices of short-term capacity release transactions to reflect short-
term variations in the market value of that capacity. Specifically, the
Commission stated that, ``[b]ecause the existing capacity release price
ceiling does not reflect short-term variations in the market value of
the capacity, the price ceiling inhibits the efficient allocation of
capacity and harms, rather than helps, the short-term shippers it is
intended to protect.'' \65\ Moreover, in Order No. 712, the Commission
also considered whether to extend the removal of the price cap to long-
term releases, but reasoned that, ``the Commission's policy emphasis in
this rule is on short-term transactions, because that is where there is
a problem to be solved. No commenter has made a convincing argument
that price ceilings on longer term transactions create significant
allocative inefficiencies or market failures. Accordingly, the
Commission concludes that the current record does not warrant removal
of the price ceiling on long-term capacity releases.'' \66\
---------------------------------------------------------------------------

    \65\ Order No. 712 at P 34.
    \66\ Id. P 79.
---------------------------------------------------------------------------

    61. When a shipper seeks to release its capacity for a period of
more than one year, albeit in separate blocks of a year or less, the
release cannot be considered to be for the purpose of responding to
short-term variations in the value of the capacity as contemplated by
the Commission when it removed the price ceiling for short-term
capacity. Further, if the Commission were to permit releasing shippers
to simultaneously post for bidding consecutive short-term releases at
market rates extending for more than a year, such action would result
in granting de facto permission to permit long-term releases at market
rates, contrary to the Commission's findings in Order No. 712.
    62. Therefore, the Commission will revise its regulations so that
the lifting of the price cap for short-term releases will only apply to
releases that take effect within one year of the date the pipeline is
notified of the release. This will prevent shippers from releasing
units of capacity in a manner designed to circumvent the price ceilings
that the Commission has determined must remain in effect.
2. Definition of Short-Term
    63. Iroquois states that Order No. 712 defines a short-term release
as a release of capacity for ``one year or less''; and defines a long-
term release as ``more than one year.'' \67\ Iroquois argues that this
definition is different from the Commission's current definitions of
short and long term as applied to the right of first refusal. Iroquois
points out that in Order No. 636-A, the Commission determined that the
regulation's right of first refusal applies to firm long-term contracts
and that ``[a] long-term transportation service is one that is pursuant
to a contract for a term of one year or more.'' \68\ Iroquois argues
that modifying the determination of what is a short-term or long-term
contract in the manner proposed by the Commission in Order No. 712
could reduce customer rights. Iroquois seeks clarification that Order
No. 712 did not modify the definition of ``short term'' and ``long
term,'' so that a long-term contract will continue to be defined as a
contract for a term that is one year or more and that the current
definition of short term as being ``less than one year'' will remain in
effect.
---------------------------------------------------------------------------

    \67\ Iroquois at 2 (citing, proposed section 284.8 (b) of the
Commission's regulations and Order No. 712 at P 30).
    \68\ Iroquois at 3 (citing, Order No. 636-A, Pipeline Service
Obligations and Revisions to Regulations Governing Self-Implementing
Transportation; and Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, FERC Stats. & Regs. ] 30,950 at 30,627,
order on reh'g, Order No. 636-B, 61 FERC ] 61,272 (1992), order on
reh'g, 62 FERC ] 61,007 (1993), aff'd in part and remanded in part
sub nom. United Distribution Cos. v. FERC, 88 F.3d 1105 (D.C. Cir.
1996), order on remand, Order No. 636-C, 78 FERC ] 61,186 (1997).
---------------------------------------------------------------------------

    64. We chose to define a release exempt from the price ceiling as
being one year or more to enable releasing shippers to enter into
reasonable commercial contracts for a standard duration, rather than
for atypical periods, such as 364 days. However, we clarify that this
definition has no application beyond defining those capacity releases
exempt from the price ceiling. Specifically, we have not changed the
definition of those contracts that qualify for the right of first
refusal, as raised by Iroquois.\69\ Shippers will continue to qualify
for a right of first refusal by entering into contracts to purchase
transportation or storage services directly from a pipeline of one year
or more.\70\
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    \69\ Order No. 712 did not modify 18 CFR 284.221 (d)(2), which
continues to provide a right of first refusal ``if the individual
transportation arrangement is for firm transportation under a
contract with a term of one year or more'' and satisfies certain
other requirements.
    \70\ The Commission chose to make the ROFR applicable to
contracts of one year or more for the same reason we have chosen to
apply the price cap exemption to contracts of one year or less: both
definitions enable reasonable commercial contracts to qualify. We
also clarify that capacity release contracts are not subject to a
right of first refusal.
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3. Lump Sum Payments
    65. Allegheny states that the Commission's regulations, rules and
precedents do not clearly specify how to determine whether a permanent
release of a discounted rate contract exceeds the maximum tariff rate
when the replacement shipper makes a lump-sum payment to the releasing
shipper of the present value difference between the maximum rate and
the discounted rate. Allegheny argues that the Commission's regulations
permit a capacity holder paying a discounted rate to release its
capacity to a replacement shipper at the maximum rate and keep the
difference, unless the service agreement with the pipeline specifically
provides for a different arrangement.\71\ Allegheny points out that the
Commission has granted waivers of the long-tem release price cap in the
context of shippers seeking to exit the natural gas business but it did
not rule on the question of whether the lump sum payment exceeded the
price cap on capacity releases.\72\ Allegheny asserts that the
Commission should resolve this uncertainty regarding the calculation of
the maximum rate because it inhibits the negotiation of permanent
capacity releases.
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    \71\ Allegheny at 7 ((citing, Order No. 636-A at p. 30,557;
Great Lakes Gas Transmission Limited Partnership, 64 FERC ] 61,017,
at p. 61,170 (1993) (``As provided in Order No. 636-A, Great Lakes
should clarify that a releasing shipper is credited with the total
amount of the replacement shipper's reservation charge, even if it
exceeds the reservation charge paid by the releasing shipper to
Great Lakes.'')); Southern Natural Gas Co., 62 FERC ] 61,136, at p.
61,960 (1993).
    \72\ Allegheny at 8 (citing, Wasatch Energy, LLC, 118 FERC ]
61,173, at P 9 (2007); Duke Energy Marketing America, LLC, 114 FERC
] 61,198, at P 13 (2006); Northwest Pipeline Corp., 109 FERC ]
61,044, at P 30 (2004)).
---------------------------------------------------------------------------

    66. We find no need to provide clarification with respect to lump
sum payments for permanent releases because under our regulations
permanent releases cannot involve lump sum payments. Allegheny is
correct that under our capacity release program, shippers holding
discount contracts are permitted to release capacity at a rate up to
the maximum rate under the contract. Under such releases, the releasing
shipper remains liable for the full

amount of its reservation charges.\73\ But in such temporary releases
no lump sum payment is made. Rather, because the releasing shipper is
still obligated to the pipeline for its full reservation charge, the
releasing shipper receives a credit or payment against its overall bill
reflecting the replacement shipper's payment. Therefore, a shipper
releasing capacity on a temporary basis pays its full reservation
charge to the pipeline and receives a payment representing the rate
paid by the replacement shipper.
---------------------------------------------------------------------------

    \73\ 18 CFR 284.8(f) (``unless otherwise agreed by the pipeline,
the contract of the shipper releasing capacity will remain in full
force and effect'').
---------------------------------------------------------------------------

    67. Permanent releases, however, are different, because under a
permanent release, the releasing shipper releases its capacity for the
entire remaining term of its contract and the pipeline and shipper
agree to terminate the releasing shipper's contract, so that the
releasing shipper no longer has any liability to the pipeline to pay
for the capacity.\74\ Under a permanent release, therefore, the
releasing shipper receives no payment or credit (whether lump sum or
otherwise); its contract simply is terminated.\75\
---------------------------------------------------------------------------

    \74\ El Paso Natural Gas Co., 61 FERC ] 61,333, at 62,311-12
(1992); Rockies Express Pipeline LLC, 121 FERC ] 61, 130 (2007)
(Rockies Express) (citing, Pacific Gas Transmission Co., 76 FERC ]
61,246, at 62,270 (1996), reh'g denied, 82 FERC ] 61,289, at 62,135
(1998) (stating that the Commission's general policy is that there
are no credits to the releasing shipper after a permanent release,
but approving a settlement provision allowing a particular shipper
such credits for permanent releases in the unique circumstances of
that case)).
    \75\ The cases cited by Allegheny on reverse auctions are
inapposite because these were special requests for waivers for firms
that were exiting the gas business, and the Commission made clear
that the releasing shipper could not profit from the transaction by
receiving more than the maximum rate for the capacity. Duke Energy
Marketing America, LLC, 114 FERC ] 61,198, at P 29 (2006). Allegheny
can apply for waivers if it can similarly justify its request based
on exigent circumstances.
---------------------------------------------------------------------------

II. Asset Management Arrangements

A. Background

    68. In Order No. 712, the Commission revised its capacity release
regulations and policies in order to facilitate the use of AMAs. Based
on the industry-wide support for the use of AMAs, the Commission found
that AMAs are in the public interest because they are beneficial to
numerous market participants and to the market in general. The
Commission therefore made two basic changes in order to eliminate
obstacles to the utilization and implementation of AMAs. First, we
exempted capacity releases meant to implement AMAs from the prohibition
on tying capacity releases to extraneous conditions. Second, the
Commission amended its section 284.8 regulations to exempt capacity
releases meant to implement AMAs from competitive bidding.
    69. In Order No. 712, the Commission noted that AMAs are a
relatively recent development in the natural gas market, which the
Commission did not anticipate when it adopted the capacity release
program in Order No. 636. The intended purpose of the capacity release
program under Order No. 636 was to permit shippers to ``reallocate
unneeded firm capacity'' to those who do need it.\76\ The bidding
requirements of section 284.8 and the prohibition against tying the
release to extraneous conditions were all part of the Commission's
fundamental goal of ensuring that such unneeded capacity would be
reallocated to the person who values it the most. The Commission found
that such ``capacity reallocation will promote efficient load
management by the pipeline and its customers and, therefore, efficient
use of pipeline capacity on a firm basis throughout the year.''\77\ The
Commission thus developed its capacity release policies and regulations
based on the assumption that shippers would handle their own gas
purchase and transportation arrangements and release their capacity
only when they were not using the capacity to serve their own needs.
---------------------------------------------------------------------------

    \76\ Order No. 636, Pipeline Service Obligations and Revisions
to Regulations Governing Self-Implementing Transportation; and
Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, FERC Stats. & Regs. ] 30,939 at p. 30,418.
    \77\ Id.
---------------------------------------------------------------------------

    70. Based on industry comments, however, it became clear that this
basic assumption underlying the capacity release program does not hold
true in the context of AMAs. As the Commission found in Order No. 712,
a distinguishing factor between standard capacity releases and AMAs is
that in the AMA context, the releasing shipper is not releasing
unneeded capacity but capacity that it needs to serve its own supply
function. Releasing shippers in the AMA context are releasing capacity
for the primary purpose of transferring the capacity to entities that
they perceive have greater skill and expertise both in purchasing low
cost gas supplies, and in maximizing the value of the capacity when it
is not needed to meet the releasing shipper's gas supply needs. In
short, AMAs entail the releasing shipper transferring its capacity to a
third party expert who will perform the functions the Commission
expected releasing shippers would do for themselves--purchasing their
own gas supplies and releasing capacity or making bundled sales when
the releasing shipper does not need the capacity to satisfy its own
needs. The goal of the changes adopted by the Commission in Order No.
712 was to make the capacity release program more efficient by bringing
it in line with these developments in today's secondary gas markets.
    71. In Order No. 712 the Commission agreed with the industry-wide
view that AMAs provide significant benefits to a variety of
participants in the natural gas and electric marketplaces and to the
secondary natural gas market itself. One of the most important aspects
of AMAs is that they provide broad benefits to the marketplace in
general. By permitting capacity holders to use third party experts to
manage their gas supply arrangements and their pipeline capacity, AMAs
can lower gas supply costs for releasing shippers and provide for more
efficient use of the pipeline grid. AMAs also bring diversity to the
mix of capacity holders and customers that are served through the
capacity release program, thus enhancing liquidity and diversity for
natural gas products and services. AMAs result in an overall increase
in the use of interstate pipeline capacity, as well as facilitating the
use of capacity by different types of customers in addition to LDCs.
AMAs benefit the natural gas market by creating efficiencies as a
result of more load-responsive gas supply, and an increased utilization
of transportation capacity. AMAs also 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.\78\
---------------------------------------------------------------------------

    \78\ The Commission noted in Order No. 712 that these benefits
have been recognized by state commissions and the National
Regulatory Research Institute. Order No. 712 at P 126 and n. 122.
---------------------------------------------------------------------------

    72. As noted above, in light of these substantial benefits provided
by AMAs, the Commission in Order No. 712 modified its capacity release
regulations and policies to exempt pre-arranged capacity releases meant
to implement AMAs from the prohibition against tying and from the
bidding requirements of section 284.8 of the Commission's regulations.
The decision to modify the Commission's policies and regulations to
facilitate the use of AMAs is widely supported and not challenged by
those parties filing for clarification or rehearing or Order No. 712.
In general, those parties seek minor modifications to the Commission's
method for implementing AMAs or seek to expand

the flexibility and/or authority granted to parties desiring to enter
into AMAs.

B. Definition of AMAs

    73. In Order No. 712 the Commission established a definition of
AMAs that was intended to strike a balance between facilitating
flexible and innovative AMAs and drawing a clear line between AMAs and
standard capacity releases. The definition established in Order No. 712
is as follows:

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

    74. The Commission imposed a delivery and/or purchase obligation on
the replacement shipper in order to distinguish between bona fide AMAs
that would qualify for the exemptions provided to AMAs and standard
capacity releases. Thus, as shown, the definition of AMA requires that
to qualify a pre-arranged release must contain a condition that ``the
releasing shipper may, on any day during a minimum period of five
months out of each twelve month period of the release, call upon the
replacement shipper to (i) deliver to the releasing shipper a volume of
gas up to one-hundred percent of the daily contract demand of the
released transportation capacity or (ii) purchase a volume of gas up to
the daily contract demand of the released transportation capacity.''
\79\ The Commission also explained that, by requiring that the asset
manager's delivery or purchase obligation in AMAs with terms less than
a year apply for the lesser of five months or the term of the release,
the definition effectively required that the delivery/purchase
obligation for any AMA between five months and a year would be for five
months of the release, and that the delivery/purchase obligation would
apply to the entire term of any AMA of less than five months.
---------------------------------------------------------------------------

    \79\ Order No. 712 at P 153.
---------------------------------------------------------------------------

    75. The Commission reasoned that the definition of AMA established
in Order No. 712 would further its goal of delineating AMAs from
standard capacity releases by placing a significant delivery/purchase
obligation, applicable during at least five months out of each 12 month
period of the release, on the asset manager. The Commission further
explained that under the definition the releasing shipper will have the
right to call upon the asset manager to deliver the full contract
volume on every day of the five month minimum, though it need not
actually do so. Thus the definition also furthers the Commission's goal
of defining AMAs in such a way that they will be flexible enough to
allow diverse parties to enter into AMAs and for those parties to be
able to maximize the value of pipeline capacity within the context of
an AMA. The definition only requires a delivery obligation on behalf of
the replacement shipper for a portion of each twelve month period, thus
giving the asset manager additional assurance it can utilize the
capacity during non-peak periods. The definition adopted in Order No.
712 also allows for releasing shippers to only release a portion of
their capacity, places no limitations on the asset manager that would
require it to use the released capacity to make its deliveries to the
releasing shipper, and does not limit the type of party that can enter
into an AMA.
    76. Numerous parties seek clarification and reconsideration of
several aspects of the definition. First, Marketer Petitioners assert
that the ``five-month'' delivery/purchase obligation is ``out of
proportion'' in the context of releases of less than a year because it
would require an asset manager to have a delivery purchase obligation
almost every day during an AMA with a six month term. Marketer
Petitioners claim such an obligation would substantially reduce the
incentives for asset managers and may create market inefficiencies.\80\
They also note that it is unclear what the delivery purchase obligation
would be for a 13-month term under Order No. 712. The NGSA agrees with
the Marketer Petitioners that the five month delivery/purchase
obligation is too stringent. Both parties thus request that the
Commission adopt a ``five-twelfths'' rule for the delivery/purchase
obligation for capacity releases to implement AMAs, whereby the
obligation of the asset manager would be revised to five-twelfths of
the days in the term of the AMA, regardless of the term of the
agreement. Those parties also request that the Commission clarify that
the five-month obligation does not require that the months (or days) be
consecutive.\81\
---------------------------------------------------------------------------

    \80\ Marketer Petitioners at 4.
    \81\ Marketer Petitioners at 4, NGSA at 6.
---------------------------------------------------------------------------

    77. The Commission will not adopt an outright ``five-twelfths''
rule to replace the five month delivery purchase obligation for AMAs.
The Commission established the exemptions for AMAs as opposed to
standard capacity releases on the premise that the capacity released to
implement an AMA was not excess capacity of the releasing shipper but
capacity that the releasing shipper needed to serve its own needs.\82\
In Order No. 712, the Commission determined that a delivery/purchase
obligation of at least five months out of each twelve month period of
the release would appropriately distinguish bona fide AMAs from
standard capacity releases. The Commission arrived at the five month
minimum requirement based on the fact that, at least in cold weather
markets, the period of peak use is generally regarded as being the five
months from November through March. Thus, a five-month delivery/
purchase obligation in a twelve month release would roughly correspond
to a releasing shipper's need to call upon the capacity to serve its
peak requirements, while giving the asset manager assurance it can
utilize the capacity during non-peak periods.
---------------------------------------------------------------------------

    \82\ See e.g. Order No. 712 at P 121 (stating that the
distinguishing factor between a bona fide AMA and a standard
capacity release ``is that in the AMA context, the releasing shipper
is not releasing unneeded capacity, but capacity that it needs to
serve its own supply function.'')
---------------------------------------------------------------------------

    78. However, AMAs may also be for a term of less than a year. In
these circumstances, the release is less likely to encompass any
seasonal variations in the releasing shipper's need for the capacity to
be used on its behalf. Therefore, the shorter the term of the release,
the less reason there is to exempt some portion of the release term
from the AMA delivery/purchase obligation. Thus, the Commission
concludes that, in order to assure that releases of less than a year
are part of a bona fide AMA in which the capacity will be used on
behalf of the releasing shipper, the asset manager's delivery/purchase
obligation should be increasingly stringent the shorter the term of the
release. The AMA definition adopted by Order No. 712 accomplishes this
by requiring that the asset manager's delivery/purchase obligation
apply to the entire term of any AMA of less than five months and apply
to at least five months of any release of

between five and twelve months. Accordingly, the Commission will retain
the current minimum five month obligation for AMAs of one year or less.
    79. The Commission recognizes, however, that the asset manager's
obligation under the ``five month'' rule may be unclear for a release
that is more than one year and not an exact number of years, for
example a 13-month term, as pointed out by the Marketer Petitioners.
Thus, the Commission is revising the definition of AMA established in
Order No. 712 to provide that the delivery/purchase obligation for a
release of more than one year will be five months (or 155 days) of each
12 month period of the release and five-twelfths of the days of any
additional period of the release not equal to 12 months.\83\ The
delivery/purchase obligation for a 13 month AMA therefore, would be a
minimum of five months out of the first 12 month period and five-
twelfths of the thirteenth month of the agreement. The concerns
discussed above about the need for a more stringent purchase/delivery
obligation in short term releases of less than a year do not apply to
releases with terms of more than a year, because such releases will
encompass any seasonal variations in the releasing shipper's need for
the capacity to be used for its own purposes. The Commission
accordingly concludes that the revised definition will balance its
goals of ensuring that there is a significant obligation on the asset
manager to distinguish AMAs from standard capacity releases while also
allowing sufficient flexibility for parties to negotiate beneficial
AMAs.
---------------------------------------------------------------------------

    \83\ The Commission is making conforming changes to section
284.8 of its regulations.
---------------------------------------------------------------------------

    80. Parties also seek clarification that the five month delivery
purchase obligation, or a daily obligation if accepted by the
Commission, does not require the obligation to be for a single
consecutive period. Marketer Petitioners for example, request that the
Commission clarify that the ``delivery/purchase obligation of section
284.8(h)(3) does not require the months to be consecutive'' and would
be satisfied by the use of any five months.\84\ The NGSA contends that
the Commission should clarify that the five month obligation need not
be on consecutive days but can be ``satisfied by an AMA that imposes a
delivery obligation on nonconsecutive days as long as those
nonconsecutive days amount to a total of five twelfths of the term of
the AMA.'' \85\
---------------------------------------------------------------------------

    \84\ Marketer Petitioners at 5.
    \85\ NGSA at 5.
---------------------------------------------------------------------------

    81. The Commission grants clarification that the delivery purchase
obligation for an AMA need not be for a single consecutive period. The
Commission did not intend by the definition established in Order No.
712, and the definition as written does not require, that the
obligation must be for five consecutive months. To provide flexibility
in fashioning AMAs the Commission is aware that parties may want to
divide the delivery/purchase obligation in a manner that corresponds to
whatever variations exist in the releasing shipper's need to use the
capacity over the course of a year. Thus, under the revised rule
established in this order, the minimum delivery/purchase obligation may
be satisfied by use of any combination of months and/or days during the
term of the release that equals the requisite obligation for that
release. In this regard, the parties need not use calendar months for
purposes of complying with the requirement that the delivery/purchase
obligation equal at least five months out of each twelve month period
of the release. The parties may spread the obligation over days, rather
than months, so long as the total obligation equals five months,
treating 31 days as equal to one month.
    82. The AGA, Marketer Petitioners and Scana request that the
Commission provide clarification and consistency in the regulatory
language to describe the delivery/purchase obligation in the
transportation capacity and storage injection and withdrawal context.
They note that Order No. 712 adopted a standard for the replacement
shipper in an AMA to deliver and/or purchase ``up to one-hundred
percent of the daily contract demand of the released transportation
capacity'' but that the standard for releases of storage capacity is
for ``one-hundred percent of the daily contract demand under the
release for storage injection and withdrawals.'' The parties contend
that the same ``up to'' language should apply to releases of both
storage and transportation capacity meant to implement an AMA and that
the Commission did not intend in Order No. 712 to impose different
obligations on asset managers depending on type of capacity released.
    83. The Commission agrees. The Commission intended in Order No. 712
to establish the same obligation on releasers of transportation and
storage capacity, i.e., that they need to be obligated to deliver and/
or purchase up to 100 percent of the daily contract demand of the
applicable agreement. The Commission is therefore revising section
284.8 of its regulations accordingly.
    84. The AGA, the Marketer Petitioners and Scana state that often
pipeline tariffs contain ratchet provisions that limit the ability of a
storage customer to make injections and withdrawals from storage at
maximum contract levels. Consequently, the maximum amount of gas a
storage customer may be able to withdraw may fluctuate. These parties
seek clarification that the delivery/purchase obligation under a
storage AMA incorporates or is intended to reflect any limitations on
the customers' injection or withdrawal rights contained in the service
provider's tariff.
    85. The Commission grants the requested clarification. The
Commission's goal in Order No. 712 was to facilitate efficient and
beneficial AMAs. This goal would not be advanced by disqualifying an
AMA because of an operational limit imposed by the service provider's
tariff on a customer's injection or withdrawal rights. All AMA
agreements are subject to the tariff provisions of the service
provider. Storage ratchet provisions limit the customer's contractual
right to demand service. The delivery/purchase obligation under a
storage AMA was intended to reflect such limits on the customer's
contract demand and thus is satisfied if the releasing shipper has the
right to call upon the asset manager to deliver or purchase gas
consistent with the withdrawal or injection rights available under the
tariff to the asset manager at the time the releasing shipper requires
performance.
    86. Scana requests clarification that in a situation where parties
include released capacity on both an upstream and downstream pipeline
in an AMA, the delivery obligation only applies to the capacity
released on the downstream pipeline that directly connects to the
releasing shipper's delivery point.\86\ Scana contends that when a
shipper acquires capacity on several interconnected pipelines to create
a seamless transportation path from a supply access point to the
shipper's delivery point, the capacity released on each pipeline will
not be the same because the shipper typically needs more capacity on
the upstream pipeline in order to account for additional fuel
retention. Scana points to an example in the Commission's November 15,
2007 Notice of Proposed Rulemaking, showing that an asset manger's
delivery obligation is not cumulative where an AMA involves separate
releases, as support for its request that the Commission clarify that
the delivery obligation for a multi-pipeline AMA need only be satisfied
on

the downstream pipeline connected to the delivery point.\87\
---------------------------------------------------------------------------

    \86\ Scana at 5.
    \87\ Scana at 5 and n. 5 (citing Promotion of a More Efficient
Capacity Release Market, Notice of Proposed Rulemaking, 72 FR 65,916
(November 27, 2007), FERC Stats. & Reg. ] 32.625 at P 9 and n. 92
(2007)).
---------------------------------------------------------------------------

    87. The Commission denies Scana's request. Scana states that in an
AMA where capacity is released on an upstream and a downstream
pipeline, the amount of capacity released will be greater on the
upstream pipeline. It provides no reasons, however, as to why the
delivery/purchase obligation under such an AMA should be limited to the
furthermost downstream pipeline that is connected to the delivery
point. As discussed previously, the purpose of the minimum delivery/
purchase obligation is to ensure that each release to an asset manager
is part of a bona fide AMA, i.e., that the capacity included in the
release is not simply unneeded capacity, but is capacity which the
releasing shipper has a continuing need to use for its own business
purposes. However, if the delivery/purchase obligation in Scana's
example did not apply to the full amount of the upstream released
capacity, the releasing shipper could include in the upstream capacity
release capacity that it does not need for its own legitimate business
purposes during the term of the release. It is the Commission's
position that the asset manager's delivery/purchase obligation must
apply to the full contract demand under each capacity release in the
transportation chain. Thus, while Scana is correct that the delivery/
purchase obligation is not cumulative of the capacity in a released
chain of contracts that constitute a single capacity path, there is
still a delivery/purchase obligation up to the contract demand of each
specific contract.
    88. Scana and BP also seek clarification that where both storage
capacity and transportation capacity are combined in an AMA that the
storage and transportation obligations are not cumulative. As with
upstream and downstream transportation capacity on several pipelines,
the delivery obligation of the AMA is not cumulative of the storage
capacity and the transportation capacity used to transport the gas to
or from storage, but to qualify for the exemptions the asset manager
must meet the necessary obligation under each separate agreement.

C. Exemption From Bidding for AMAs

    89. In Order No. 712, the Commission exempted pre-arranged releases
to implement AMAs from the bidding requirements of section 284.8 of its
regulations. The Commission concluded that, in the AMA context, the
bidding requirement creates an unwarranted obstacle to the efficient
management of pipeline capacity and supply assets. The Commission noted
that 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.
The Commission determined that because the asset manager will manage
the releasing shipper's gas supply operations on an ongoing basis, it
is critical that the releasing shipper be able to release the capacity
to its chosen asset manager. Requiring releases made in order to
implement an AMA to be posted for bidding would thus interfere with the
negotiation of beneficial AMAs by potentially preventing the releasing
shipper from releasing the capacity to its chosen asset manager.
Moreover, AMAs at their core entail a bundling of commodity sales with
capacity release. As a result, it is difficult to have meaningful
bidding on the released capacity as a stand-alone component of the
arrangement because the values of the commodity and capacity components
of the arrangement are not easily separated. The Commission thus
concluded that the benefits of facilitating AMAs outweigh any
disadvantages in exempting such releases from bidding.
    90. The final rule provided that the exemption from bidding will
apply to all releases to asset managers made for the purpose of
implementing an AMA, regardless of the term of the AMA and whether the
release is subject to the price ceiling. The rule also provided that
the exemption from bidding for AMAs applies to all releases to an asset
manager, including those made for the purpose of extending a short-term
AMA. The Commission determined that the rationale for exempting
releases to an asset manager from bidding applies equally to releases
made for the purpose of extending a short-term AMA as to any other
release to an asset manager. In all such releases, the identity of the
asset manager is critical to the releasing shipper, because the
releasing shipper will be relying on the asset manager to obtain its
gas supplies. The Commission concluded that as with any other release
to an asset manager, requiring releases made for the purpose of
extending a short-term AMA to be posted for bidding could interfere
with the negotiation of beneficial AMAs by potentially preventing such
releases to be made to the releasing shipper's chosen asset manager.
The final rule also extended the blanket exemption from bidding granted
to AMAs to capacity releases made to a marketer participating in a
state approved retail access program.
    91. No party requests rehearing of the Commission's decision to
exempt all releases to asset managers or marketers participating in
retail unbundling programs from bidding. However, several parties filed
requests for rehearing/clarification of the revised regulations the
Commission adopted in order to implement that decision. Under Order No.
712, section 284.8(h)(1) exempts from the notification and bidding
requirements in paragraphs 284.8(c) through (e): ``a release of
capacity by a firm shipper to a replacement shipper for any period of
31 days or less, a release of capacity for more than one year at the
maximum tariff rate, a release to an asset manager as defined in (h)(3)
of this section, or a release to a marketer participating in a state-
regulated retail access program as defined in (h)(4) of this section.''
Section (h)(2) provides that ``When a release of capacity for 31 days
or less is exempt from bidding requirements under paragraph (h)(1) of
this section a firm shipper may not roll-over, extend, or in any way
continue the release without complying with the requirements of
paragraphs (c) though (e) of this section, and may not re-release to
the same replacement shipper under this paragraph at less than the
maximum tariff rate until 28 days after the first release period has
ended.''
    92. The AGA, INGAA and Spectra request that the Commission clarify
that the prohibition contained in section 284.8(h)(2) of the
regulations against rollovers and re-releases without bidding to the
same party within 28 days does not apply to AMAs or to releases
pursuant to state mandated retail access programs.\88\ They contend
that while the rule generally exempts releases to implement AMAs and
releases for retail choice marketers from bidding under section
284.8(h)(1), it is unclear whether the prohibition on rollovers in
section 284.8(h)(2) applies to such releases that are for a term of 31
days or less. AGA notes that AMAs or retail choice releases may in many
instances be for 31 days or less, and that

to require competitive bidding to extend such releases would frustrate
the final rule's goal of fostering such arrangements.
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    \88\ AGA at 6, INGAA request for clarification at 1.
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    93. The Commission clarifies that the prohibition in section
284.8(h)(2) on rolling over a 31 day or less release to the same
replacement shipper without bidding does not apply to AMAs or to
releases pursuant to a state approved retail access program.\89\ As
stated in the rule, the regulatory language of section 284.8(h)(2) was
designed so that the prohibition on extending exempt releases without
bidding only applied to the first category of releases exempted from
bidding by section 284.8(h)(1), namely releases of 31 days or less. The
Commission intended by this language that releases pursuant to the
other categories in section 284.8(h)(1), i.e., releases for more than a
year at maximum rate, releases to implement AMAs and releases to
marketers participating in state retail access programs, would not be
subject to the prohibition on extensions without bidding. The
Commission's goal in the rule was to facilitate AMAs and state
unbundling programs that would give retail end-users a greater choice
of suppliers by generally exempting certain releases from its bidding
requirements. The Commission did not intend to require bidding to
extend such releases that are for 31 days or less. Accordingly the
Commission clarifies that AMAs and releases pursuant to state approved
retail access programs are not subject to the section 284.8(h)(2)
prohibitions on extending releases without bidding.
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    \89\ Indeed the Commission expressed this intention for AMAs in
the rule itself, when it stated that the exemption from bidding for
AMAs applies to all releases to an asset manager, ``including those
made for the purpose of extending a short-term AMA.'' Order No. 712
at P 135.
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    94. The Commission is also revising the regulatory text of sections
284.8(h)(1) and (2) so as to more clearly limit the section 284.8(h)(2)
prohibition on rollovers, extensions and re-releases to the same
shipper without bidding to release transactions that were exempt from
bidding solely by virtue of the fact they were for a term of 31 days or
less. As revised, section 284.8(h)(1) separately sets forth each
category of release that qualifies for an exemption from bidding as
follows:

    (h)(1) The following releases need not comply with the bidding
requirements of paragraphs (c) through (e) of this section:
    (i) A release of capacity to an asset manager as defined in
paragraph (h)(4) of this section;
    (ii) A release of capacity to a marketer participating in a
state-regulated retail access program as defined in paragraph (h)(5)
of this section;
    (iii) A release for more than one year at the maximum tariff
rate; and
    (iv) A release for any period of 31 days or less.

    As revised, the section 284.8(h)(2) prohibition on re-releases to
the same shipper without bidding will only apply: ``When a release of
capacity is exempt from bidding under paragraph (h)(1)(iv) of this
section.'' (i.e. is for 31 days or less).
    95. Several parties also seek two clarifications with regard to
section 284.8(h)(2) as it applies to releases of 31 days or less that
do not qualify for the AMA or retail unbundling exemptions from
bidding.\90\ Their concerns focus on the language in section
284.8(h)(2) prohibiting re-releases ``to the same replacement shipper
under this paragraph at less than the maximum tariff rate until 28 days
after the first release period has ended.'' First, BP seeks
clarification that this language does not prevent a releasing shipper
from releasing the same capacity to the same replacement shipper for
another consecutive period of 31 days or less if the releasing shipper
subjects that capacity to the Commission's posting and bidding
requirements.
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    \90\ See e.g., INGAA clarification request at 2, Spectra at 37,
NGSA and EPSA at 10, and BP at 8.
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    96. The Commission grants this clarification. Order No. 712 did not
change the language of section 284.8(h)(2) concerning the prohibition
on re-releases to the same replacement shipper, which was originally
adopted in Order No. 636-A. By its terms, that prohibition only applies
to re-releases ``under this paragraph,'' namely to re-releases pursuant
to the exemption from bidding for 31-day or less releases contained in
paragraph (h) of section 284.8. Therefore, the prohibition on re-
releases to the same replacement shipper does not apply to re-releases
made pursuant to the notice and bidding requirements in paragraphs (c)
through (e) of section 284.8. As Order No. 636-B explained, the purpose
of the prohibition on re-releases to the same shipper until 28 days
after the first release was ``to protect the integrity and allocative
efficiency of the capacity release mechanism by preventing parties from
avoiding the bidding requirement by extending short-term releases.''
\91\ That purpose is satisfied so long as the re-release to the same
replacement shipper is subject to bidding.
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    \91\ Order No. 636-B, 61 FERC ] 61,272 at 61,995.
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    97. Second, INGAA, Spectra, Williston, NGSA and EPSA note that
Order No. 712 retained the existing language of section 284.8(h)(2)
that limits the 28-day prohibition on re-releases to the same shipper
without bidding to re-releases ``at less than the maximum tariff
rate.'' Those seeking clarification assert that the retention of this
language is potentially inconsistent with the Commission's decision to
remove the price ceiling on short term capacity releases of a year or
less. They state that the language limiting the 28-day prohibition on
rolling over releases of 31 days or less without bidding to re-releases
``at less than the maximum tariff rate'' could be read to permit re-
releases to the same replacement shipper without bidding for periods of
a year or less if the release rate is at or higher than the pipeline's
maximum recourse rate. Therefore, they seek clarification that all re-
releases for a period of a year or less, which are no longer subject to
a maximum ceiling rate, must be subject to bidding, regardless of the
release rate. INGAA and Spectra also seek clarification that the ``at
less than maximum tariff rate'' language now applies only in the
context of re-releases for more than one year to which the maximum rate
ceiling still applies.
    98. The Commission grants clarification. Because Order No. 712
removed the maximum rate ceiling for all releases of one year or less,
all such releases must be subject to bidding, unless they qualify for
exemptions from bidding for: (1) Releases of 31 days or less, (2)
releases to asset managers, or (3) releases to marketers participating
in a state regulated retail access program. The exemption from bidding
for releases at the maximum tariff rate is only applicable to releases
of more than a year, because only those releases are subject to a
maximum tariff rate. Therefore, a capacity release that was not subject
to bidding pursuant to the exemption for releases of 31 days or less
may not be rolled over to the same replacement shipper without bidding
until 28 days after the end of the first release period, unless the re-
release is for more than a year at the maximum rate and thus qualifies
for the exemption from bidding for maximum rate releases.
    99. Consistent with the revisions to section 284.8(h)(1) set forth
above, and the various clarifications discussed above, the Commission
has determined to modify section 284.8(h)(2) so as to more clearly
state its intent. As revised, section 284.8(h)(2) reads as follows:

    (h)(2) When a release of capacity is exempt from bidding under
paragraph (h)(1)(iv) of this section, a firm shipper may not roll
over, extend or in any way continue the release to the same
replacement shipper using the 31

days or less bidding exemption until 28 days after the first release
period has ended. The 28-day hiatus does not apply to any re-release
to the same replacement shipper that is posted for bidding or that
qualifies for any of the other exemptions from bidding in paragraph
(h)(1).

    100. This revised language ensures that a release of 31 days or
less, which was exempt from bidding solely pursuant to the exemption
for short term transactions, may not be rolled over to the same
replacement shipper until at least 28 days after the first release
period has ended, unless (1) the releasing shipper posts the new
release for bidding or (2) the new release qualifies for one of the
three other exemptions from bidding. In order to qualify for the
maximum rate exemption from bidding, the re-release must be for a term
of more than a year. The releasing shipper could release the capacity
to another shipper under the bidding exemption for releases of 31 days
or less, as stated in Order No. 636-B.\92\
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    \92\ Order No. 636-B, 61 FERC at 61,995.
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D. Posting and Reporting Requirements

    101. In Order No. 712, the Commission revised its regulations to
include new posting requirements for capacity releases to implement
AMAs. Specifically, the Commission determined that any posting under
section 284.13(b) that relates to a release to implement an AMA should
include (1) the fact that the release is to an asset manager and (2)
the delivery or purchase obligation of the AMA, in addition to the
information required to be posted for all capacity releases. The