[Federal Register: April 29, 2004 (Volume 69, Number 83)]
[Rules and Regulations]
[Page 23561-23595]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ap04-7]
[[Page 23561]]
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Part II
Department of Energy
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Federal Energy Regulatory Commission
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18 CFR Part 358
Standards of Conduct for Transmission Providers; Final Rule
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 358
[Docket Number RM01-10-001; Order No. 2004-A]
Standards of Conduct for Transmission Providers
Issued April 16, 2004.
AGENCY: Federal Energy Regulatory Commission, DoE.
ACTION: Final rule; order on rehearing.
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SUMMARY: The Federal Energy Regulatory Commission (Commission)
generally reaffirms its determinations in Order No. 2004 and grants
rehearing and clarifies certain provisions. Order No. 2004 requires all
natural gas and public utility Transmission Providers to comply with
Standards of Conduct that govern the relationship between the natural
gas and public utility Transmission Providers and all of their Energy
Affiliates.
In this order, the Commission addresses the requests for rehearing
and/or clarification of Order No. 2004. The Commission grants
rehearing, in part, denies rehearing, in part, and provides
clarification of Order No. 2004. This order (1) clarifies the
definition of Energy Affiliate; (2) further codifies the definition of
``Marketing Affiliate;'' (3) clarifies which Field and Maintenance
employees a Transmission Provider may share with its Energy Affiliates;
(4) clarifies that a Transmission Provider may share with its Energy
Affiliates information necessary to maintain the operations of the
transmission system; (5) codifies the exception that permits a
Transmission Provider to share senior officers and directors with its
Marketing and Energy Affiliates; (6) codifies the exception that
permits a Transmission Provider to share the risk management function
with its Marketing and Energy Affiliates; (7) codifies that a
Transmission Provider may share information with certain employees it
shares with its Marketing and Energy Affiliates; and (8) defers the
implementation date to September 1, 2004.
DATES: Effective Date: Revisions in this order on rehearing will be
effective June 1, 2004.
FOR FURTHER INFORMATION CONTACT: Demetra Anas, Office of Market
Oversight and Investigations, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426, (202) 502-8178.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Need for the Rule
III. Analysis of Requests for Rehearing and/or Clarification
A. Applicability of the Standards of Conduct
B. Definition of a Transmission Provider
C. Definition of an Energy Affiliate
i. Defining the Phrase ``Engages in or is Involved in
Transmission Transactions''
ii. LDCs as Energy Affiliates
iii. Producers, Gatherers, and Processors
iv. Intrastate and Hinshaw Pipelines
v. Affiliated and Foreign Transmission Providers
vi. Holding or Parent Companies
vii. Service Companies
viii. Affiliates Buying Power for Themselves
D. Definition of Marketing, Sales or Brokering
i. Treatment of Retail Sales Employees
ii. Treatment of Electricity Provider of Last Resort Service
(POLR)
E. Definition of Transmission Function Employee
F. Definition of Marketing Affiliate
G. Independent Functioning
i. Sharing of Senior Officers and Directors
ii. Sharing of Field and Maintenance Personnel
iii. Risk Management Employees
iv. Lawyers as Transmission Function Employees
H. Identification of Affiliates on Internet
i. Posting Organizational Charts
ii. Posting of Merger Information
iii. Transfer of Employees
iv. Posting Standards of Conduct Procedures
v. Training
vi. Chief Compliance Officer
I. Information Access and Disclosure Prohibitions
i. No Conduit Rule
ii. Crucial Operating Information Exemption
iii. Transaction Specific Exemption
iv. Voluntary Consent Exemption
v. Posting of Shared Information Requirement
J. Discounts
K. Accounting Treatment for Compliance Costs
L. Request for Extension of Time
M. Typographical Corrections
N. Applicability of the Standards of Conduct to Newly Formed
Providers
IV. Document Availability
V. Effective Date
Order on Rehearing and Clarification
Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell,
Joseph T. Kelliher, and Suedeen G. Kelly.
1. On November 25, 2003, the Federal Energy Regulatory Commission
issued a Final Rule adopting Standards of Conduct for Transmission
Providers (Order No. 2004 or Final Rule) \1\ which added Part 358 and
revised Parts 37 and 161 of the Commission's regulations.\2\ The
Commission adopted Standards of Conduct that apply uniformly to
interstate natural gas pipelines and public utilities (jointly referred
to as Transmission Providers) that were subject to the former gas
Standards of Conduct in Part 161 of the Commission's regulations or the
former electric Standards of Conduct in Part 37 of the Commission's
regulations.\3\ Under Order No. 2004, the Standards of Conduct govern
the relationships between Transmission Providers and all of their
Marketing and Energy Affiliates. The Commission affirms here the legal
and policy conclusions on which Order No. 2004 is based. The goal of
the Standards of Conduct for Transmission Providers is to prevent undue
discrimination. In this order, the Commission addresses the requests
for rehearing and/or clarification of Order No. 2004. As discussed
below, the Commission grants rehearing, in part, denies rehearing, in
part, and provides clarification of Order No. 2004. This order (1)
clarifies the definition of Energy Affiliate; (2) further codifies the
definition of ``Marketing Affiliate;'' (3) clarifies which Field and
Maintenance employees a Transmission Provider may share with its Energy
Affiliates; (4) clarifies that a Transmission Provider may share with
its Energy Affiliates information necessary to maintain the operations
of the transmission system; (5) codifies the exception that permits a
Transmission Provider to share senior officers and directors with its
Marketing and Energy Affiliates; (6) codifies the exception that
permits a Transmission Provider to share the risk management function
with its Marketing and Energy Affiliates; (7) codifies that a
Transmission Provider may share information with certain employees it
shares with its Marketing and Energy Affiliates; and (8) defers the
implementation date to September 1, 2004.
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\1\ Standards of Conduct for Transmission Providers, 68 FR 69134
(Dec. 11, 2003), III FERC Stats. & Regs., ] 31,155 (Nov. 25, 2003).
\2\ The Commission also made minor conforming changes in Parts
250 and 284.
\3\ The gas standards of conduct were codified at Part 161 of
the Commission's regulations, 18 CFR part 161 (2003), and the
electric standards of conduct were codified at 18 CFR 37.4 (2003).
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I. Background
2. Following issuance of Order No. 637,\4\ the Commission hosted a
public
[[Page 23563]]
conference on March 15, 2001, to discuss how the changes in the natural
gas market affect the way in which the Commission should regulate
transactions between pipelines and their affiliates, capacity managers
and agents. Industry representatives urged the Commission to: (1) Apply
the standards of conduct to all affiliates; (2) prohibit affiliates
from holding capacity on affiliated pipelines; (3) limit an affiliate's
capacity market share; or (4) take no action vis-[agrave]-vis affiliate
relationships. Several industry representatives expressed a fear of
retaliation for filing a complaint or inadequate resources to pursue
complaints that result only prospective remedies.\5\ Commenters also
expressed concern that regulated entities can transfer all the benefits
of their regulated (monopolistic) status to their unregulated
affiliates, which can then use these benefits to reap unregulated
profits from the public.\6\
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\4\ Regulation of Short-Term Natural Gas Transportation
Services, Order No. 637, Final Rule, 65 FR 10156 (Feb. 25, 2000),
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ]
31,091 (Feb. 9, 2000), Order No. 637-A, order on reh'g, 65 FR 35705
(June 5, 2000), FERC Stats. & Regs., Regulations Preambles July
1996-December 2000 ] 31,099 (May 19, 2000).
\5\ See, e.g., January 5, 2001 comments of Dynegy, Inc. and
National Association of State Utility Consumer Advocates in PL00-1-
000.
\6\ See, e.g., January 5, 2001 comments of Dynegy, Inc. and
Amoco Production Company and BP Energy in PL00-1-000.
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3. On September 27, 2001, the Commission issued a Notice of
Proposed Rulemaking (NOPR) in this proceeding.\7\ Following review of
the comments, in April 2002, the Commission published an ``Analysis of
the Major Issues Raised in the Comments'' (Major Issues Analysis). At
the request of commenters, the Commission also hosted a full-day
technical conference in May 2002 giving interested persons the
opportunity to discuss issues raised in the NOPR and the Major Issues
Analysis. Panelists, interested persons and Commission staff discussed
a variety of issues including: the impact of requiring the independent
functioning between Transmission Providers and their Energy Affiliates;
whether there were other ways to prevent discriminatory behavior;
information disclosure issues; and proposed revisions to regulatory
text and the definition of Energy Affiliate. About 100 interested
persons submitted additional comments and/or draft regulatory text. On
November 25, 2003, the Commission issued Order No. 2004, which became
effective on February 9, 2004. Sixty-eight requests for rehearing and
clarification and comments have been filed.\8\
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\7\ Standards of Conduct for Transmission Providers, 66 FR 50919
(Oct. 5, 2001), IV FERC Stats. & Regs. ] 32,555 (Sept. 27, 2001).
\8\ Appendix A contains a list of each person that requested
rehearing or clarification of Order No. 2004 or submitted additional
comments regarding Order No. 2004. The abbreviations for the
participants are identified in Appendix A.
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II. Need for the Rule
Final Rule
4. The Final Rule identified a number of changes in the energy,
natural gas, power and transmission markets that supported the need for
enhancing the Standards of Conduct, including, but not limited to,
open-access transmission, unbundling, changing commodity markets,
increased mergers, convergence of gas and electric industries, asset
management, electronic commodity trading and an increase in power
marketers or entities with market-based rate authority. The gas
industry also experienced consolidations in every sector--pipelines,
producers, marketers and local distribution companies (LDCs)/utilities.
5. The Commission noted that a Transmission Provider could transfer
its market power to its affiliated businesses because the former
standards of conduct did not cover all affiliate relationships. Non-
marketing affiliates of Transmission Providers compete against non-
affiliates for transmission services, in capacity release transactions,
in commodity and futures markets, in power sales, and in siting new
generation. In addition, in the natural gas industry, non-marketing
affiliates of interstate natural gas pipelines, such as asset managers,
control large amounts of capacity on their affiliated pipelines, yet
they were not covered by the former standards of conduct because they
do not actually hold pipeline capacity. Non-marketing affiliates can
also abuse preferential access to information about the Transmission
Provider either as shippers or traders in the transmission or commodity
marketplace.
6. The Standards of Conduct under former parts 37 and 161 did not
address the sharing of information by Transmission Providers with
Energy Affiliates. The Final Rule found that the preferential sharing
of information between Transmission Providers and Energy Affiliates
undermines and frustrates the efforts of independent businesses to buy,
sell, build, grow and provide competitive alternatives. The Commission
was concerned, for example, that an interstate natural gas pipeline
could inform its affiliated asset manager about a proposed pipeline
expansion or upcoming curtailment before the Transmission Provider
revealed that information to the asset manager's competition. The
Commission stated that Transmission Providers' unduly preferential
behavior towards their Energy Affiliates violates the statutory
prohibitions against undue discrimination or preferences in the
provision of interstate transmission services,\9\ and adopted the
regulations in Final Rule to prevent such violations.
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\9\ Sections 4 and 5 of the Natural Gas Act (NGA), 15 U.S.C.
717c and 717e (2000), state that no natural gas company shall make
or grant an undue preference or advantage with respect to any
transportation or sale of natural gas subject to the Commission's
jurisdiction. Similarly, under sections 205 and 206 of the Federal
Power Act (FPA), 16 U.S.C. 824d and 824e (2000), no public utility
shall make or grant an undue preference with respect to any
transmission or sale subject to the Commission's jurisdiction.
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7. Given the need to maintain the reliability of the electric
transmission and natural gas pipeline systems throughout the United
States, the Commission noted that the Final Rule does not obstruct the
free flow of information from any affiliated or non-affiliated customer
to the transmission system operator. The Final Rule did not limit the
ability of transmission system operators or pipeline system operators
to work together with each other and affiliated or non-affiliated
customers to reserve and schedule transmission or pipeline capacity
usage on a non-discriminatory basis, nor did it limit the ability of
system operators to issue any and all service-related directives to any
customer, as necessary. And, during system emergencies, the Final Rule
relaxed limitations on the flow of transmission information from the
Transmission Provider to its Marketing or Energy Affiliates to
facilitate any necessary reliability-related communications.
8. Many petitioners support the Final Rule and state that it is
necessary. For example, Dominion states that the new regulations
appropriately addressed changes in the industry and appropriately
balanced the potential misuse of a Transmission Provider's market power
against losing efficiencies of integrated operations. NiSource called
Order No. 2004 a ``substantial improvement'' over the NOPR. Similarly
APGA, APPA, CAPP, IPAA, IOGA-WV, NASUCA, NGSA, PGC and Transmission
Dependent Utilities Systems welcomed the Final Rule and urged the
Commission to refrain from taking any action that would diminish this
important initiative. They claim that their silence on rehearing
reflects satisfaction with the direction of Order No. 2004. NASUCA
states that the reason there have been very few
[[Page 23564]]
complaints about anti-competitive behavior favoring affiliates other
than Marketing Affiliates is because such behavior would not have
violated the former standards of conduct.
Requests for Rehearing and/or Clarification and Commission Conclusions
9. El Paso, INGAA, Questar and Williams argue on rehearing that the
Final Rule is overbroad and unsupported by substantial evidence. INGAA
also argues that the industry changes cited by the Commission have been
pro-competitive and do not justify the rule. Further, INGAA claims that
the new services described in the Final Rule, such as capacity release,
e-commerce and asset management are not new phenomena.
10. The Commission finds that the Final Rule is needed. The FPA and
NGA require the Commission to prevent unduly discriminatory
transmission service. For the Commission to meet that goal, the
Standards of Conduct must guide the relationships between Transmission
Providers and their affiliates that would use transmission information
to compete unfairly with non-affiliates. As the identity of affiliates
that engage in such competition has changed over time, the Standards of
Conduct have had to change as well. Thus, the former standards of
conduct focused on preventing the Transmission Provider from giving its
merchant affiliate undue preferences by restricting the behavior
between the Transmission Provider and its marketing affiliate or
wholesale merchant function or affiliated power marketer.\10\ The 1988
natural gas Standards of Conduct in Order No. 497 \11\ reflected market
changes in the natural gas industry during the last half of the 1980s,
as the natural gas industry reacted to natural gas wellhead price
decontrol, long-term contract reformation, and open-access
transportation. The 1996 electric Standards of Conduct in Order No. 889
\12\ were a companion to Order No. 888, which required public utilities
to offer open access transmission service.
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\10\ Many marketing affiliates were originally created to help
interstate natural gas pipelines that had historically offered
bundled sales and transportation services, move towards
transportation-only services, and sell gas supply committed under
long-term take-or-pay contracts.
\11\ Order No. 497, 53 FR 22139 (June 14, 1988), FERC Stats. &
Regs., Regulations Preambles 1986-1990 ] 30,820 (June 1, 1988);
Order No. 497-A, order on reh'g, 54 FR 52781 (Dec. 22, 1989), FERC
Stats. & Regs., Regulations Preambles 1986-1990 ] 30,868 (Dec. 15,
1989); Order No. 497-B, order extending sunset date, 55 FR 53291
(Dec. 28, 1990), FERC Stats. & Regs., Regulations Preambles 1986-
1990 ] 30,908 (Dec. 13, 1990); Order No. 497-C, order extending
sunset date, 57 FR 9 (Jan. 2, 1992), FERC Stats. & Regs.,
Regulations Preambles 1991-1996 ] 30,934 (Dec. 20, 1991), reh'g
denied, 57 FR 5815 (Feb. 18, 1992), 58 FERC ] 61,139 (Feb. 10,
1992); Tenneco Gas v. FERC (affirmed in part and remanded in part),
969 F.2d 1187 (DC Cir. 1992); Order No. 497-D, order on remand and
extending sunset date, 57 FR 58978 (Dec. 14, 1992), FERC Stats. &
Regs., Regulations Preambles 1991-1996 ] 30,958 (Dec. 4, 1992);
Order No. 497-E, order on reh'g and extending sunset date, 59 FR 243
(Jan. 4, 1994), FERC Stats. & Regs., Regulations Preambles 1991-1996
] 30,987 (Dec. 23, 1993); Order No. 497-F, order denying reh'g and
granting clarification, 59 FR 15336 (Apr. 1, 1994), 66 FERC ] 61,347
(Mar. 24, 1994); and Order No. 497-G, order extending sunset date,
59 FR 32884 (June 27, 1994), FERC Stats. & Regs., Regulations
Preambles 1991-1996 ] 30,996 (June 17, 1994). See also Standards of
Conduct and Reporting Requirements for Transportation and Affiliate
Transactions, Order No. 566, 59 FR 32885 (June 27, 1994), FERC
Stats. & Regs., Regulations Preambles 1991-1996 ] 30,997 (June 17,
1994); Order No. 566-A, order on reh'g, 59 FR 52896 (Oct. 20, 1994),
69 FERC ] 61,044 (Oct. 14, 1994); Order No. 566-B, order on reh'g,
59 FR 65707 (Dec. 21, 1994), 69 FERC ] 61,334 (Dec. 14, 1994); and
Reporting Interstate Natural Gas Pipeline Marketing Affiliates on
the Internet, Order No. 599, 63 FR 43075 (Aug. 12, 1998), FERC
Stats. & Regs., Regulations Preambles 1996-2000 ] 31,064 (July 30,
1998).
\12\ Open Access Same-Time Information System (Formerly Real-
Time Information Network) and Standards of Conduct, 61 FR 21737 (May
10, 1996), FERC Stats. & Regs., Regulations Preambles 1991-1996 ]
31,035 (Apr. 24, 1996); Order No. 889-A, order on reh'g, 62 FR 12484
(Mar. 14, 1997), FERC Stats. & Regs., Regulations Preambles 1996-
2000 ] 31,049 (Mar. 4, 1997); Order No. 889-B, reh'g denied, 62 FR
64715 (Dec. 9, 1997), FERC Stats. & Regs., Regulations Preambles
1996-2000 ] 31,253 (Nov. 25, 1997). See also Promoting Wholesale
Competition Through Open Access Non-Discrimination Transmission
Services by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities, Order No. 888, 61 FR 21540
(May 10, 1996), FERC Stats. & Regs., Regulations Preambles 1991-1996
] 31,036 (Apr. 24, 1996) at 31,692; order on reh'g, Order No. 888-A,
62 FR 12274 (Mar. 14, 1997), FERC Stats. & Regs., Regulations
Preambles 1991-1996 ] 31,048 (Mar. 4, 1997); order on reh'g, Order
No. 888-B, 81 FERC ] 61,248 (1997); order on reh'g, Order No. 888-C,
82 FERC ] 61,046 (1998), aff'd in relevant part sub nom.,
Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C.
Cir. 2000), cert. granted, 69 U.S.L.W. 3574 (Nos. 00-568 (in part)
and 00-809), cert. denied (No. 00-800) (U.S. Feb. 26, 2001).
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11. For example, Transmission Providers have economic incentives to
unduly prefer agents or asset managers. Specifically, the introduction
of a natural gas futures market by NYMEX in 1990, and the evolution of
the use of these financial markets to hedge has prompted customers to
use agents or asset managers to manage price risk. This allows those
affiliates to aggregate, manage and control significant volumes of
interstate pipeline capacity.
12. In the past, agency arrangements have been abused. For example,
when Transcontinental Gas Pipeline Company authorized Williams Energy
Marketing and Trading (WEM&T), its marketing affiliate, to act as agent
for its merchant functions sales, it also gave WEM&T access to its
nonaffiliated customers' contract data, invoice data, and
transportation data. That information was not made available to non-
affiliated customers.\13\ Agency agreements were also a factor in the
violations where an affiliated power marketer was acting as agent for
Cleco Power LLC (Cleco) and its affiliated electric wholesale
generators (EWGs). Through the agency agreements, the affiliated power
marketer performed for Cleco and its affiliated EWGs a variety of
services, including: resource coordination, commodity trading, retail
and wholesale marketing, monitoring energy management, transmission
scheduling services, optimizing the use of transmission paths to
decrease transmission needed from outside the control area and market
test power. Because the agency agreements empowered the affiliated
power marketer, it had superior access to customer and transmission
information, and shared employees with the Transmission Provider.\14\
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\13\ Transcontinental Gas Pipe Line Corporation, et al., 102
FERC ] 61,302 (2003).
\14\ Cleco Corp., 104 FERC ] 61,125 (2003).
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13. The guidance provided by the Final Rule will compel
Transmission Providers to provide no more information to affiliated
agents and asset managers than the Transmission Providers provide to
non-affiliates. Such requirements need to be spelled out in the
Standards of Conduct to give Transmission Providers a clear
understanding of their obligations to provide non-discriminatory
service, as required by the NGA and the FPA.
14. The Final Rule also properly takes into account the convergence
of the gas and electric industries.\15\ Over the past decade, newly
constructed electric generation has chosen natural gas as the fuel of
choice. Mergers of electric utilities with natural gas companies have
created corporate families with business activities across both
industries.\16\ Transmission Providers have economic incentives to
favor any affiliate that is involved in transmission on their systems,
not only those that directly market natural gas or power. Indeed, in
some regions, notably California and the Northeast, the interdependence
of natural gas and wholesale electric markets has raised concerns about
reliability and prices of converging supply and demand forces
[[Page 23565]]
in the two industries.\17\ As a result, the Standards of Conduct
properly apply to Energy Affiliates across industries. INGAA argues
that there is no harm to the market from Transmission Providers'
interaction with their Energy Affiliates, particularly with natural gas
producers, gas processors, gatherers and intrastate pipelines. The
Commission disagrees.
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\15\ Final Rule at P 8.
\16\ For example, NiSource, Inc. merged with Columbia Energy
Group, Dominion Resources, Inc. merged with Consolidated Natural Gas
Company, Duke Energy merged with the Coastal Companies, and Enron
Corporation merged with Portland General Electric.
\17\ See e.g., ``New England Maintains Deliveries Despite Record
Demand, Bitter Cold,'' Natural Gas Intelligence, January 19, 2004,
p. 1.
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15. For example, under the Final Rule, producer affiliates are
Energy Affiliates, which reflects their significant control over
pipeline capacity. Historically, in the late 1980s, producers and
producer affiliates held very little capacity on natural gas
Transmission Providers. But, as the role of marketers in the industry
has decreased, producers have increased significantly the amount of
capacity they hold on interstate natural gas pipelines. In 1998, only
three producers were among the top 20 marketers.\18\ However, by the
fourth quarter of 2003, 14 of the top 20 marketers were producers.\19\
Of the 14 producer/marketers, nine of them are affiliated with natural
gas Transmission Providers.
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\18\ Inside F.E.R.C. Gas Market Report, June 25, 1999, p. 12.
\19\ There are no Marketing Affiliates in the list of the top 20
marketers for the fourth quarter of 2003. Gas Daily, March 23, 2004,
p. 6.
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16. Contrary to INGAA's argument, the Commission need not wait
until there have been many adjudicated cases of unduly discriminatory
conduct between producers or asset managers, on the one hand, and their
affiliated Transmission Providers on the other hand before the
Commission can issue Standards of Conduct that prevent them from
straying into violations. The economic incentives for Transmission
Providers to favor their Energy Affiliates are real.
17. While the Commission's actions have encouraged competition,
competition has not eliminated the economic incentives that encourage a
Transmission Provider to give its affiliates unduly preferential
treatment. Rather, the evolution of wholesale energy markets has
created new commercial methods of doing business, and along with them,
new opportunities for Transmission Provider affiliates to profit from
unduly preferential information or transmission access. Given the
increased competition, a Transmission Provider may have more incentive
to give its affiliate preferential service or preferential access to
information to benefit the corporate family. Moreover, those who
operate the transmission infrastructure continue to face limited
competition and in most parts of the country, continue to hold
significant market power. Now the Commission is concerned that
Transmission Providers may be giving Energy Affiliates other than
Marketing Affiliates unduly preferential treatment.
18. Unduly preferential behavior can and does harm customers.
Although harm to the market is difficult to quantify,\20\ the
Commission has been able to quantify harm resulting from unduly
preferential treatment in some cases. For example, Idaho Power Company
gave its marketing affiliate unduly preferential access to its
transmission system by treating the marketing affiliate's transmission
requests as if the service was needed for native load. This unduly
preferential behavior in favor of Idaho Power Company's merchant
affiliate harmed the retail customers of Idaho in the amount of $5.8
million.\21\ In another example, the retail customers of Louisiana were
harmed approximately $2.1 million when Cleco Power favored its
affiliates.\22\ The Commission is ensuring that Transmission Providers
do not give their Energy Affiliates similar unduly preferential
treatment.
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\20\ For example, the Commission could not quantify the harm
when the Public Service Company of New Mexico failed to comply with
the independent functioning requirement of the standards of conduct;
when Ameren Corporation's transmission employees engaged in non-
public, off-OASIS communications with wholesale merchant function
employees and other customers; or when PacifiCorp allowed its
wholesale merchant function employees to participate in bi-weekly
meetings with transmission employees regarding reliability. See
April 25, 2000 Letter from John Delaware, Deputy Director and Chief
Accountant, to Public Service Company of New Mexico in Docket No.
FA99-9-000; September 27, 2002 Letter from John Delaware, Deputy
Director and Chief Accountant to Ameren Corporation in Docket Nos.
FA01-5-000, FA01-6-000 and FA01-7-000; See December 18, 2003 Letter
from William Hederman, Director of the Office of Market Oversight
and Investigations, to PacifiCorp in Docket No. PA04-5-000.
\21\ Idaho Power Co., IDACORP Energy, L.P., and IDACORP, Inc.,
103 FERC ] 61,182 (2003).
\22\ Cleco Corp., 104 FERC ] 61,125 (2003).
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19. INGAA and the New York State Department also argue that the
Commission failed to adequately consider the costs of compliance and
did not conduct an extensive cost-benefit analysis. Contrary to these
assertions, the Commission did consider the costs of compliance, and
revised some of the proposals originally included in the NOPR, in part,
to appropriately balance the costs of complying with the Standards of
Conduct. The Commission reduced the costs of compliance by permitting
integrated activities wherever possible without compromising the goals
of the Final Rule. For example, the Commission permitted Transmission
Providers and their Marketing and Energy Affiliates to share field and
maintenance employees and support employees with appropriate
safeguards. The Commission also permitted Transmission Providers and
their Marketing and Energy Affiliates to share computer systems, Energy
Management System (EMS) and Supervisory Control and Data Acquisition
(SCADA) as long as transmission and customer information itself is not
shared.
20. The Commission has given interested persons the opportunity to
identify their estimated costs to comply with the Standards of Conduct.
Transmission Providers claimed that it would cost them between $75,000
to $300 million to comply with the Standards of Conduct as originally
proposed in the NOPR.\23\ The Commission also encouraged Transmission
Providers to submit estimates of costs in the Notice soliciting
comments after the May 21, 2002 Conference,\24\ and the Final Rule
encouraged Transmission Providers to include in their Informational
Filings estimates of the costs associated with complying with the Final
Rule. A review of comments and Informational Filings confirms that
changes incorporated in the Final Rule have decreased the Transmission
Providers' costs of complying with the Standards of Conduct.\25\ For
example, Cinergy, which originally anticipated annual costs of
$36,000,000-$39,000,000,\26\ now estimates its annual costs at
approximately $225,000.\27\ Similarly, Alliance, which originally
anticipated one-time compliance costs of $20-$30
[[Page 23566]]
million,\28\ now estimates its compliance cost at $250,000.\29\
Finally, Kinder Morgan Pipelines, which originally anticipated an
increase of $22,600,000 annually and $5.8 million in a one-time cost to
comply,\30\ now estimates that it will cost approximately $200,000 for
all four Kinder Morgan Pipelines if their rehearing requests are
granted and $400,000-$500,000 if their rehearing requests are
denied.\31\ As discussed in the NOPR, the Major Issues Analysis and the
Final Rule, the Commission has considered the costs of compliance with
the revised Standards of Conduct, and finds, on balance, that the costs
are reasonable to achieve the Commission's goal of preventing unduly
discriminatory behavior in a competitive market. Further,
clarifications made in this order will further reduce some of the
compliance costs.
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\23\ Major Issues Analysis at pp. 13-15 and Final Rule at P 114.
\24\ April 25, 2002 Notice of Staff Conference in Docket No.
RM01-10-000.
\25\ Review of the Transmission Providers' Informational Filings
in their respective ``TS'' dockets reveals the following estimated
costs to comply with the Standards of Conduct: (a) 5 Transmission
Providers stated that the costs would be ``minimal,'' but did not
give dollar figures; (b) 27 Transmission Providers stated it would
cost them less than $50,000; (c) 29 Transmission Providers stated it
would cost them between $50,000-$100,000; (d) 69 Transmission
Providers stated it would cost them between $100,000-$500,000; (e)
11 Transmission Providers stated it would cost them between
$500,000-$1,000,000; and (f) 12 Transmission Providers stated it
would cost them more than $1,000,000. These include Questar
Pipeline, which alone claimed higher costs from the Final Rule than
from the NOPR.
\26\ June 2, 2002 Supplemental Comments of Cinergy Services,
Inc. in Docket No. RM01-10-000.
\27\ February 9, 2004 Informational Filing by Cinergy Services,
Inc. in Docket No. TS04-43-000.
\28\ June 14, 2002 Post-Technical Conference Comments of
Alliance Pipeline L.P. in Docket No. RM01-10-000.
\29\ February 9, 2004 Informational Filing of Alliance Pipeline
L.P. in Docket No. TS04-84-000.
\30\ June 28, 2002 Comments of Kinder Morgan, Inc. in Docket No.
RM01-10-000.
\31\ February 9, 2004 Informational Filing of Kinder Morgan
Interstate Gas Transmission, L.L.C in Docket No. TS04-88-000.
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21. INGAA also challenges the Commission's review and analysis of
the Index of Customers data \32\ listed in the Final Rule.\33\ These
data identify the amount of capacity affiliates held on their
affiliated gas pipelines. INGAA argues that the Commission should have
calculated the total amount of the capacity held by affiliates compared
to the total amount of pipeline capacity on an aggregate basis, rather
than calculating the percentage of capacity held by an affiliate on its
affiliated Transmission Provider. INGAA also use a volume-weighted
average, rather than a simple average.
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\32\ Although INGAA also urges the Commission to publish its
analysis of the Index of Customers data, it was able to duplicate
the Commission's calculations and make its own calculations and
analysis from the publicly available information in the October 2003
Index of Customers. At INGAA's urging, the Commission is attaching
its updated analysis to the Order on Rehearing.
\33\ Final Rule at P 10 and 67.
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22. Evaluating the amount of capacity held by an affiliate on its
affiliated Transmission Provider is a more accurate indication of the
natural gas Transmission Provider's incentives to give its affiliate an
undue preference. In some instances, a volume-weighted average
minimizes the apparent incentives of Transmission Providers to favor
their Energy Affiliates.\34\ And the impact of Energy Affiliates other
than Marketing Affiliates is pronounced. Producers' roles have evolved
and, now, Gas Daily reported that producers have solidified their hold
on marketer rankings as traditional marketers have vanished.\35\
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\34\ For example, under INGAA's analysis using a volume-weighted
calculation, production affiliates held only 1.6 percent of the
capacity on all 87 gas Transmission Providers. However, using a
simple average calculation, 16 production affiliates held 37 percent
of the capacity on their affiliate gas Transmission Providers with
production affiliates.
\35\ Gas Daily, ``Producers solidify hold on marketer
rankings,'' March 23, 2004.
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23. Consideration of INGAA's concerns caused the Commission to look
closer at the shipper data from the October 2003 Index of Customers
information. The Commission found that of 87 pipelines examined, 58 had
contracts with their affiliates for firm transportation, firm storage
or both types of services. Of the 18 pipelines with LDC affiliate
contracts, the affiliated LDCs held about 46 percent of the contracted
capacity on those 18 pipelines and 48 percent of the pipelines'
contracted storage capacity.\36\ On nine of these 18 pipelines, LDC
affiliates held in excess of 50 percent of the contracted firm
transmission capacity. Of the 16 natural gas pipelines affiliated with
natural gas producers, producer affiliates held about 37 percent of the
firm transportation capacity.\37\ On six of these pipelines, producer
affiliates held more than 60 percent of the firm transportation
capacity. These data paint a very different picture than the aggregate,
volume-weighted data produced by INGAA. The Commission's analysis more
accurately reflects the relationship between an individual Transmission
Provider and its Marketing or Energy Affiliates.
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\36\ Carnegie Interstate Pipeline Company, CenterPoint Energy
Gas Transmission, Columbia Gas Transmission Corporation, Columbia
Gulf Transmission Company, Dominion Transmission, Inc., Eastern
Shore Natural Gas Company, Equitrans, L.P., Granite State Gas
Transmission Inc., Guardian Pipeline L.L.C., Kinder Morgan
Interstate Gas Transmission Company, Mississippi River Transmission
Corp., National Fuel Gas Supply Corp., Paiute Pipeline Company,
Panhandle Eastern Pipeline Company, Questar Pipeline Company, Vector
Pipeline, L.P., Westgas Interstate Inc., and Williston Basin
Interstate Pipeline.
\37\ CenterPoint Energy Gas Transmission, Chandeleur Pipe Line
Company, Columbia Gas Transmission Corporation, Dauphin Island
Gathering Partners, Destin Pipeline Company, L.L.C., Equitrans L.P.,
Garden Banks Gas Pipeline, L.L.C., Maritimes & Northeast Pipeline
L.L.C., Mississippi Canyon Gas Pipeline, L.L.C., National Fuel Gas
Supply Corporation, Northwest Pipeline Corporation, Nautilus
Pipeline Company, L.L.C., Sabine Pipe Line L.L.C., TransColorado Gas
Transmission Company, Venice Gathering System, L.L.C., and Wyoming
Interstate Company, Ltd.
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24. Moreover, the Index of Customer data does not always identify
the level of an affiliate's involvement, either as an asset manager or
agent or as a replacement shipper. For example, review of Texas Eastern
Transmission Company's Capacity Release information from January 1,
2002 through July 31, 2003, shows that Duke Energy Trading Company, an
affiliated marketer, released capacity to Energy Plus, another
marketing affiliate, on 141 occasions and Energy Plus released capacity
to Duke Energy Trading Company on 47 occasions, yet a comparable review
of Texas Eastern's Index of Customers does not identify Energy Plus as
an affiliate holding firm pipeline capacity.
25. BP argues that the Final Rule did not impose sufficient
restrictions or prohibitions on Transmission Providers. Specifically,
BP argues that the Commission should have adopted pipeline allocation
procedures for affiliates holding capacity on affiliated gas pipeline
Transmission Providers. The Commission denies rehearing. While the
Commission considered additional measures, such as those recommended by
BP, it decided not to adopt them on a generic basis. However, the
Commission will consider additional remedies on a case-by-case basis if
a Transmission Provider violates the Standards of Conduct.
III. Analysis of Requests for Rehearing and/or Clarification
26. The Commission has received many requests for rehearing or
clarification with alternative requests for waiver, partial waiver or
exemption with respect to individual Transmission Providers' specific
circumstances. Many petitioners also filed requests for waiver, partial
waiver or exemption in their individual ``TS'' filings on the same
issues.\38\ The Commission will address the individual requests for
exemption, waiver or partial waiver in orders in the individual ``TS''
filings, and in this order will address the generic issues.
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\38\ On January 16, 2004, the Commission issued a notice that it
had created the docket prefix ``TS'' or Transmission Standards for
all Informational Filings and requests for waiver or exemption under
Order No. 2004.
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A. Applicability of the Standards of Conduct
Final Rule
27. Pursuant to Sec. Sec. 358.1(a), (b) and (c), the Standards of
Conduct apply to Transmission Providers, but not to Commission-approved
Independent System Operators (ISOs) or Regional Transmission
Organizations (RTOs). Section 358.1(c) also provides that a public
utility transmission owner that participates in a Commission-approved
[[Page 23567]]
RTO or ISO and does not operate or control its transmission facilities
and has no access to transmission, customer or market information
covered by Sec. 358.5(b) may request an exemption from the Standards
of Conduct.\39\ The Final Rule also states that the Standards of
Conduct also apply to non-public utility Transmission Providers \40\
through the reciprocity provisions of Order No. 888.\41\ Generation and
transmission cooperatives (G&T) are not subject to the Standards of
Conduct consistent with the policies established under Order No.
888.\42\
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\39\ This approach, rather than a codified exemption, recognizes
that:
If a Transmission Provider operates transmission facilities,
regardless of whether it belongs to an RTO/ISO, it has the ability
to provide an undue preference to an affiliate and has access to
valuable transmission information. Unless the ISO or RTO has a
control center and field employees dedicated to the operation and
maintenance of all transmission facilities under its operation, a
Transmission Provider may be responsible for the operation of the
transmission assets (under the direction of the ISO or RTO) and,
more importantly, have direct access to transmission information.
Participation in an ISO or RTO does not necessarily prevent a
Transmission Provider from sharing information with its affiliates
preferentially or preferentially operating facilities for the
benefit of its Energy Affiliates.
Final Rule at P 20. No petitioner sought rehearing on this
point.
\40\ See Final Rule at P 28.
\41\ Promoting Wholesale Competition Through Open Access Non-
Discrimination Transmission Service by Public Utilities and Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, FERC Stats. & Regs., Regulations Preambles January
1991-June 1996 ] 31,036 (1996), order on reh'g, Order No. 888-A,
FERC Stats. & Regs., Regulations Preambles July 1996-Dec. 2000 ]
31,048 (1997), order on reh'g, Order No. 888-B, 81 FERC ] 61,248
(1997), order on reh'g, Order No. 888-C, 82 FERC ] 61,046 (1998),
aff'd in relevant part sub nom. Transmission Access Policy Group, et
al. v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York,
et al. v. FERC, 535 U.S. 1 (2002).
\42\ Order No. 888-A, FERC Stats. & Regs., Regulations Preambles
July 1996-December 2000 ] 31,048 at 30,366. In Order No. 888-A, the
Commission clarified that if a distribution cooperative sought open
access transmission service from a Transmission Provider, only the
distribution cooperative (not its member distribution cooperatives)
would be required to offer transmission service. The Commission
excluded from the definition of affiliate distribution cooperative
members of a generation and transmission cooperative.
---------------------------------------------------------------------------
28. In the Final Rule, the Commission continues the exemptions and
partial waivers of the Standards of Conduct for the entities that
previously received exemptions or partial waivers under Order No. 889
or Order No. 497, and states that Transmission Providers may request
waivers or exemptions from all or some of the requirements of Part 358
for good cause. See 18 CFR 358.1(d).
Requests for Rehearing and/or Clarification and Commission Conclusions
29. BP requests clarification that the Commission will grant
exemptions only for good cause. The Commission grants the request for
clarification. As discussed in the Final Rule, the Commission will
review the merits of each exemption request to determine whether a
Transmission Provider qualifies for a full or partial waiver of the
Standards of Conduct. See Final Rule at P 27.
30. USG and B-R request rehearing of the Commission's decision not
to categorically exempt small pipelines, for example, those less than
25 miles long, with limited operations that serve one or a few
affiliated and/or non-affiliated customers. The Commission grants
rehearing. The Commission will exempt small pipelines, based on the
size of the company, the number of employees and level of interest in
transportation on the pipeline, and where appropriate, whether the
company has separated to the maximum extent practicable from its
Marketing or Energy Affiliates. These are the criteria the Commission
used in determining whether small pipelines qualified for partial
exemptions from the requirements of Order No. 497.\43\
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\43\ See e.g., Ringwood Gathering Company, 55 FERC ] 61,300
(1991), Caprock Pipeline Company, et al., 58 FERC ] 61,141 (1992).
---------------------------------------------------------------------------
31. Applying these criteria to the circumstances on USG and B-R,
the Commission finds that partial exemptions are appropriate. The
information in B-R's request for exemption in Docket No. TS04-183-000
indicates that B-R is 17-mile pipeline, is managed by U.S. Gypsum (its
affiliate) and does not have any employees, is a free-flow, delivery
only pipeline that is not interconnected with any other pipeline.
Similarly, the information in USG's request for exemption in Docket No.
TS04-103-000 indicates that USG is a 13-mile pipeline, is also managed
by U.S. Gypsum and does not have any employees, is a free-flow,
delivery only pipeline that is not interconnected with any other
pipeline. USG and B-R are exempt from the Independent Functioning
requirements of Sec. 358.4 and the information disclosure prohibitions
in Sec. 358.5(a) and (b). They are not exempt from the remainder of
the Standards of Conduct.
32. WPSC and UPPC request clarification that Order No. 2004 does
not prohibit a future request for an exemption from the Standards of
Conduct. The Commission so clarifies. Order No. 2004 does not limit the
time for filing requests for exemptions or waivers.
B. Definition of a Transmission Provider
Final Rule
33. Section 358.3(a) defines a Transmission Provider as: ``(1) Any
public utility that owns, operates or controls facilities used for the
transmission of electric energy in interstate commerce; or (2) Any
interstate natural gas pipeline that transports gas for others pursuant
to Subpart A of Part 157 or Subparts B or G of Part 284 of this
chapter.''
34. The Final Rule codified two general principles concerning
Transmission Providers' behavior. The first requires Transmission
Providers' employees engaged in transmission system operations to
function independently from the employees of the Transmission
Providers' Marketing or Energy Affiliates. The second, in essence, the
golden rule, is that a Transmission Provider must treat all
transmission customers, affiliated and non-affiliated, on a non-
discriminatory basis, and cannot operate its transmission system to
benefit preferentially a Marketing or Energy Affiliate. See Final Rule
at P 30.
Requests for Rehearing and/or Clarification and Commission Conclusions
35. NASUCA requests reconsideration of the Commission's decision
not to classify Hinshaw \44\ or intrastate pipelines as Transmission
Providers under the Standards of Conduct. NASUCA argues that section
311 of the Natural Gas Policy Act of 1978 (NGPA) \45\ authorizes the
Commission to condition the certificates that authorize these pipelines
to engage in transmission transactions. NASUCA claims that intrastate
pipelines have the same incentives to transfer market power to their
Energy Affiliates as do other Transmission Providers. NASUCA argues
that requiring the independent functioning of employees would limit the
opportunities for intrastate pipelines to give preferential treatment
to marketing affiliates that compete with non-affiliated shippers on
intrastate pipelines. NASUCA claims that discriminatory intrastate
transactions have the potential to distort wholesale
[[Page 23568]]
markets, and may fall between the cracks of Federal and State
regulation.
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\44\ Hinshaw pipelines are exempt from Commission regulation
under the NGA, but they may have limited jurisdiction certificates
to provide interstate transportation services like an intrastate
pipeline under the Natural Gas Policy Act of 1978. See Order No. 63,
FERC Stats. & Regs., Regulations Preambles 1977-1981 ] 30,118
(1980).
\45\ 15 U.S.C. 3371 (2000).
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36. The Commission denies rehearing requested by NASUCA and will
not classify intrastate and Hinshaws pipelines as Transmission
Providers under the Standards of Conduct. As will be discussed further
below, Hinshaws are State-regulated entities and are also frequently
local distribution companies (LDCs). Not including Hinshaws in the
definition of Transmission Provider is consistent with our treatment of
LDCs. Both are regulated by States, which have jurisdiction to prevent
undue discrimination on such facilities. Similarly, intrastate
pipelines are regulated by the States and States may require them to
observe separation of functions and non-disclosure requirements with
respect to intrastate transactions. As discussed further below, both
intrastate and Hinshaw pipelines may be classified as Energy Affiliates
if they engage in Energy Affiliate activities described in Sec.
358.3(d), and Transmission Providers subject to the Commission's
jurisdiction must observe the separation of functions and disclosure
requirements of the Standards of Conduct with respect to them.
Consequently, no compelling purpose will be served by defining Hinshaws
and intrastate pipelines as Transmission Providers.
37. WPSC and UPPC request clarification that ownership of a
financial interest in transmission facilities, by an entity that does
not directly own, operate or control transmission facilities does not
make the entity a Transmission Provider.\46\ The Commission clarifies
that an entity that owns a financial interest in transmission
facilities, but does not otherwise own, operate or control transmission
facilities, is not a Transmission Provider, as defined. Although,
owning a financial interest or controlling 10 percent or more of the
voting interest \47\ would make WPSC and UPPC an Affiliate of the
Transmission Provider.
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\46\ Based on the pleading, it appears that WPSC and UPPC own
financial interests in ATCLLC, a Transmission Provider, which is a
transmission-owning member of Midwestern Independent System Operator
(MISO), but they do not directly own any transmission facilities.
WPSC's and UPPC's request to withdraw their previous standards of
conduct under Order No. 889 is pending before the Commission in
Docket No. TS04-130-000, and will be addressed in a separate order
on the merits of the request.
\47\ Control is defined at 18 CFR 358.3(c) and Affiliate is
defined at 18 CFR 358.3(b).
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38. Encana argues on rehearing that Transmission Providers with no
market power should be exempt from the requirements of Order No. 2004,
particularly independent storage providers that are not interconnected
with the facilities of affiliated pipelines. Encana argues that such
storage providers cannot exercise market power, having: No market power
(as found by Commission order); no exclusive franchise area; no captive
ratepayers; no cost-of service; no guaranteed rate of return; no
ability to cross-subsidize at-risk business with ratepayer
contributions; and no affiliation with any Transmission Provider to
which it interconnects.
39. The Commission grants Encana's request to generically exempt
from the definition of Transmission Provider natural gas storage
providers authorized to charge market-based rates that are not
interconnected with the jurisdictional facilities of any affiliated
interstate natural gas pipeline, have no exclusive franchise area, no
captive ratepayers and no market power. Such storage providers will be
treated as Energy Affiliates if they are affiliated with any
Transmission Providers.
40. NW Natural and Kelso Beaver request rehearing of the definition
of Transmission Provider to the extent that it covers non-open access
natural gas pipelines that transport gas for others solely under
subpart A of part 157 of the Commission's regulations. These entities
were not previously subject to the former standards of conduct, and
petitioners argue that the original notice did not propose to expand
the Standards of Conduct to cover entities that had not previously been
subject to the rule. They also argue that the majority of pipelines
certificated under part 157 are small and serve one or few
customers.\48\
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\48\ NW Natural and Kelso Beaver also filed a joint request for
exemption in Docket No. TS04-2-000, which the Commission will
address by separate order.
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41. The Commission denies rehearing. Contrary to petitioners'
assertion, the regulatory text in the NOPR gave notice that the
Commission proposed that the Standards of Conduct would govern the
behavior of natural gas pipelines providing transmission service under
part 157 of the Commission's regulations.\49\ Such pipelines may seek
an exemption or waiver on a case-by-case basis.
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\49\ FERC Stats. & Regs., Proposed Regulations 1999-2003 at
34,093.
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C. Definition of an Energy Affiliate
Final Rule
42. The Final Rule defined Energy Affiliate in Sec. 358.3(d) as an
affiliate that:
(1) Engages in or is involved in transmission transactions in U.S.
energy or transmission markets; or
(2) Manages or controls transmission capacity of a Transmission
Provider in U.S. energy or transmission markets; or
(3) Buys, sells, trades or administers natural gas or electric
energy in U.S. energy or transmission markets; or
(4) Engages in financial transactions relating to the sale or
transmission of natural gas or electric energy in U.S. energy or
transmission markets.
(5) An energy affiliate does not include:
(i) A foreign affiliate that does not participate in U.S. energy
markets;
(ii) An affiliated Transmission Provider; or
(iii) A holding, parent or service company that does not engage in
energy or natural gas commodity markets or is not involved in
transmission transactions in U.S. energy markets; or
(iv) An affiliate that purchases natural gas or energy solely for
its own consumption and does not use an affiliated Transmission
Provider for transmission of natural gas or energy; or
(v) A state-regulated local distribution company that does not make
any off-system sales.
i. Defining the Phrase ``Engages in or Is Involved in Transmission
Transactions''
Requests for Rehearing and/or Clarification and Commission Conclusions
43. INGAA, Cinergy, Dominion and Entergy urge the Commission to
provide additional clarification on the meaning of Sec. 358.3(d)(1)
because the Commission did not define the meaning of the terms
``engages in'' or ``is involved in.'' INGAA argues that those phrases
do not sufficiently describe the activities that would make an
Affiliate an Energy Affiliate.
44. The Commission grants petitioners' clarification request. The
term ``engages in'' transmission transactions means the Affiliate holds
(or is requesting) transmission capacity on a Transmission Provider as
a shipper or customer or buys or sells transmission capacity in the
secondary capacity market. When the Commission uses the phrase
``involved in'' it means acting as agent, asset manager, broker or in
some fashion managing, controlling or aggregating capacity on behalf of
transmission customers or shippers. Other transmission-related
interactions between a Transmission Provider and its interconnected
Affiliate, such as confirming nominations and schedules with upstream
producers and gathering facilities, exchanging operational data
[[Page 23569]]
relating to interconnection points, and communications relating to
maintenance of interconnected facilities are not included in the
definition of the terms ``engaged in'' or ``involved in.'' This
clarification has the practical effect of addressing many of the
concerns raised by interconnected gatherers, processors or intrastate
pipelines. The majority of gatherers, processors and intrastate
pipelines do not participate in the activities described in Sec.
358.3(d) and, thus, they will no longer be treated as Energy
Affiliates. As discussed further below, this clarification will reduce
the number of gatherers, processors, intrastate pipelines and Hinshaw
pipelines that are Energy Affiliates under the rule.
ii. LDCs as Energy Affiliates
Requests for Rehearing and/or Clarification and Commission Conclusions
45. INGAA argues that the expanded definition of Energy Affiliate
in Order No. 2004 applies to entities that are not subject to the
Commission's jurisdiction. Similarly, New York State Department argues
that the imposition of Standards of Conduct on LDCs' employees not
engaged in sales for resale is an unlawful exercise of jurisdiction,
contrary to section 1(c) of the NGA and section 201 of the FPA. New
York State Department reads the Final Rule as subjecting the entire
retail distribution unit to Federal regulation if the electric
distribution unit sells excess energy through the New York Independent
System Operator (NYISO).
46. The Commission disagrees with INGAA's and New York State
Department's assertions that the Commission is attempting to exercise
jurisdiction over non-jurisdictional activities. The Standards of
Conduct are imposed only on Transmission Providers, not Marketing or
Energy Affiliates. The Commission has very clear statutory mandates to
ensure that interstate commerce in natural gas and electricity takes
place at rates and terms and conditions of service that are just and
reasonable and not unduly discriminatory or preferential.\50\
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\50\ See section 4 of the NGA and section 205 of the FPA.
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47. The Standards of Conduct apply to a Transmission Provider's
relationship with an affiliated LDC (gas and/or electric) that makes
off-system sales. In response to the New York State Department, the
Commission finds that if a retail sales function also engages in off-
system sales of excess electric power in the wholesale market, the
Transmission Provider must observe the Standards of Conduct vis-
[agrave]-vis the retail sales function.\51\ However, that retail sales
function itself does not become subject to Federal jurisdiction.
Further, the Commission sees no conflict between the Standards of
Conduct and New York's State-imposed standards of conduct which govern
the behavior of New York's LDCs. In our view, these Standards of
Conduct will complement each other rather than conflict.
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\51\ A Transmission Provider that is a member of the NYISO,
relinquishes control over its operations to the NYISO and does not
have access to transmission or customer information may request an
exemption from the Standards of Conduct.
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48. This rule does not regulate--directly or indirectly--the
provision of rates, terms and conditions of service for local
distribution, production, gathering, processing or intrastate
transmission. The Standards of Conduct provide rules that help define
activities that would be unduly discriminatory or preferential in a
Transmission Provider's conduct towards affiliates that are also
involved in interstate natural gas and wholesale electricity markets.
Preventing such violations is at the heart of the Commission's
statutory mandate, and the Commission has not exceeded this mandate in
limiting Transmission Providers' interactions with other Energy
Affiliates.
a. Regulatory Text of the LDC Exemption
49. The preamble discussion in the Final Rule, which exempts from
the definition of Energy Affiliate State-regulated LDCs that solely
engage in retail service and make no off-system sales (Final Rule at P
44) does not exactly track the regulatory text in Sec. 358.3(d)(5)(v),
which exempts from the definition of Energy Affiliate State-regulated
LDCs that do not engage in off-system sales. CenterPoint notes this
inconsistency and argues that LDCs should be allowed to participate in
wholesale energy market activities other than off-system sales, such as
asset management.\52\
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\52\ See February 9, 2004 Informational Filing of CenterPoint
Energy Gas Transmission Company in Docket No. TS04-2-000.
---------------------------------------------------------------------------
50. For example, under CenterPoint's proposal, a State-regulated
affiliated LDC that does not engage in off-system sales, but manages or
controls transmission capacity of another, buys, sells, trades, or
administers natural gas or electric energy, or engages in financial
transactions relating to the sale or transmission of natural gas or
electricity would be exempt from the definition of Energy Affiliate.
51. The Commission will not extend the LDC exemption to include an
LDC that engages in Energy Affiliate activities that are not directly
related to its State-regulated retail sales functions. Such Energy
Affiliate activities include, acting as a merchant, agent, or asset-
manager for others. Moreover the Commission will amend the regulation
at Sec. 358.3(d)(5)(v) to clarify that a State-regulated LDC is exempt
from the definition of Energy Affiliate if it provides solely retail
service and engages in no off-system or other Energy Affiliate
activities. This is consistent with the discussion in the preamble of
the Final Rule at P 44. The new regulatory text will exempt: ``A State-
regulated local distribution company that acquires interstate
transmission capacity to purchase and resell gas only for on-system
customers, and otherwise does not engage in the activities described in
Sec. Sec. 358.3(d)(1), (2), (3) or (4) * * *.''
b. Retention of the LDC Exemption
52. IOGA-WV argues that the Commission erred in exempting any LDCs
from the definition of Energy Affiliate. IOGA-WV argues that in
Appalachia, integrated natural gas companies utilize their affiliated
LDCs to share information and dominate the interstate natural gas
market. IOGA-WV argues that LDCs can easily avoid the constraints of
the Final Rule, without making off-system sales. IOGA-WV argues that
LDCs can create marketing affiliates which make off-system sales while
allowing their parent LDCs to continue to qualify for the exemption in
the definition of Energy Affiliate, and thereby circumvent the
Standards of Conduct. IOGA-WV argues that Sec. 358.3(d)(5)(v) should
be amended to eliminate this loophole.
53. The Commission denies rehearing on this issue. The Commission
does not find that this is a realistic concern. And, any sales from the
LDC to its marketing affiliate would be off-system sales and void the
LDC's exemption from the Standards of Conduct.
Any marketing affiliate of the LDC would also be the affiliated
Transmission Provider's Marketing or Energy Affiliate. In either case,
an exemption from the definition of Energy Affiliate would not apply.
c. Scope of the LDC Exemption
54. Questar supports the exemption granted to State-regulated LDCs
provided they do not make off-system sales.
55. On the other hand, AGA, Dominion, INGAA, National Fuel-
Distribution, National Fuel-Supply, New York State Department, NICOR,
NiSource, NW Natural and Kelso
[[Page 23570]]
Beaver, ONEOK, PA-OCA, PS&EG, and Xcel argue that the Commission erred
in exempting from the definition of Energy Affiliate only LDCs that
make no off-system sales. They argue that to the extent LDCs make off-
system sales on non-affiliated Transmission Providers, there is no
threat of affiliate abuse. AGA and PA-OCA argue that prohibiting LDCs
from making off-system sales will increase costs to the LDCs' retail
customers or impose additional compliance costs on LDCs. AGA also
argues that ``this formulation of the exemption is contrary to the way
in which the Commission applied the exemption for local distribution
companies in Order No. 497.'' (footnote omitted.) AGA also cites to
National Fuel Gas Supply Corp., 64 FERC ] 61,192 at 62,582 (1993),
where under the previous rules, the Commission did not treat National
Fuel-Distribution (an affiliated LDC) as a marketing affiliate to the
extent its off-system sales were not transported by its affiliated
pipeline, National Fuel-Supply. AGA argues that LDCs, faced with State-
mandated obligations to serve, must stand ready to meet peak load
requirements. Off-peak, AGA argues, LDCs need the flexibility to make
off-system sales (and capacity releases) to minimize their costs.
56. Dominion argues that ``it is difficult to envision a material
advantage that a pipeline could provide its affiliated LDC with respect
to off-system sales that do not involve that pipeline.'' \53\ Dominion
adds that if a pipeline were to find a way to afford an affiliate an
advantage on another pipeline, ``its action would likely violate the
Commission's open access regulations, the antitrust laws, or other laws
and regulations.''
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\53\ Dominion at p. 12.
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57. National Fuel-Distribution argues that restricting an LDC's
firm participation in off-system sales would reduce market
efficiencies, increase the cost of gas to the LDC's customers, and
reduce price transparency. National Fuel-Distribution states that 99
percent of its off-system sales are conducted in the daily gas market
and argues that the probability of its affiliated pipeline, National
Fuel-Supply, having any information that could affect the market, if
divulged, is remote. In addition, National Fuel-Distribution claims the
affiliated LDC will gain no advantage over a non-affiliated LDC with
affiliated pipeline information.
58. NW Natural and Kelso Beaver argue that it is arbitrary and
capricious to subject it to compliance with the Standards of Conduct if
it chooses to make off-system sales, while non-affiliated LDCs face no
such burden.
59. The Commission denies rehearing requested by those who seek to
expand the LDC exception to include those LDCs that make off-system
sales which are not transported on an affiliated Transmission Provider.
The Commission does not agree that in these circumstances there can be
no harm.
60. Under the expansion of the LDC exemption sought by petitioners,
Transmission Providers would be free to share transmission-related and
customers' market information with their affiliated LDCs. In most
states, large natural gas customers often take advantage of retail
transportation programs by purchasing natural gas from competing
wholesale suppliers; the local LDC also competes for these markets. Any
LDC making off-system wholesale sales has a powerful incentive to
maximize its revenues in those sales regardless of whether the sales
take place on its affiliated Transmission Provider's system or off-
system.\54\ An LDC which makes off-system sales would be in a position
to benefit from preferential information as would any other marketer.
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\54\ To the extent an LDC can reduce its costs of purchasing
natural gas through off-system sales, this may reduce cost to retail
ratepayers--a laudable goal--to the extent those cost savings are
passed through the retail rates. However, some states permit the
revenues from off-system sales to be shared with stockholders. Under
these circumstances, the benefits of off-system sales to retail
ratepayers claimed by petitioners is overstated because these
benefits are shared with the LDC's stockholders.
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61. The Commission recognizes that an LDC serving only its on-
system customers must comply with pipeline balancing requirements and
may be required to buy or sell de minimus quantities of natural gas in
the wholesale commodity market, purchase short-term park and loan and
storage services, buy or sell imbalances in the pipeline's cash out
mechanism, or take other steps to meet pipeline tariff balancing
tolerances on a daily or monthly basis. LDCs with limited participation
in wholesale markets to satisfy these needs will continue to be exempt
from the definition of Energy Affiliate as long as they are not
participating in the other activities described in Sec. 358.3(d).
62. The Commission also notes that the level of LDCs' off-system
sales varies significantly. For example, National Fuel-Distribution,
the affiliated LDC of National Gas-Supply, makes off-system sales of
approximately $63,000,000.\55\
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\55\ National Fuel Gas Company, 2002 Annual Report and Form 10-
K.
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63. In some circumstances transmission activities on the affiliated
Transmission Provider will have a large and direct impact on the prices
of natural gas and wholesale electricity on points upstream or
downstream of the affiliated Transmission Provider's system.\56\ For
example, an operational flow order (OFO) on one of the three large
interstate natural gas pipelines serving New York City-area markets or
on one of the regional storage fields could have a direct and
significant effect on the price of gas in that market. In today's spot
markets, advance information of an OFO would allow an LDC to use that
knowledge to position itself at the expense of other market
participants.
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\56\ Energy Information Administration, ``Northeast Pipeline
Restrictions Ease Following Weather Reprieve,'' Natural Gas Weekly
Update (January 22, 2004). (``Operational Flow Orders (OFOs), which
can vary significantly in severity, were issued by a variety of
pipelines last week during the record cold snap in the Northeast.
When these restrictions are in place, customers without firm
contracted capacity on the pipeline generally are interrupted and
cannot access Gulf supplies because transportation through the
pipeline grid is not available. Thus, prices in the Northeast and
Gulf region become disconnected as customers in the Northeast
without firm contracted capacity seek incremental supplies only in
local market areas. The result last week was that prices at some
Northeast trading locations spiked to $45 per MMBtu or more for gas
deliveries the following day.'') See also Energy NewsData, Western
Price Survey, ``Spring Housekeeping Stymies Some Shipping'' (April
12, 2002). (``Gas prices were skewed by a host of maintenance on
pipelines and storage facilities coming out of the Rocky Mountains.
Aside from some maintenance on El Paso's San Juan lateral the
temporary closure of the big Clay Basin storage facility in
northeast Utah meant that shippers without firm capacity on West-
bound pipelines had no place to put their supplies. The San Juan
Basin index price plummeted to $0.99/MMBtu Tuesday and pipelines
were ordering their customers to follow their reservations or face
penalties.'')
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64. It would be difficult for an LDC whose shared employees
operated both the Transmission Provider and LDC systems not to have
advance notice of a Transmission Provider's OFO. An affiliated LDC
would have a head start in responding to an OFO, and would have a first
shot at the spot market to sell off stranded supply or purchase needed
make-up supply. Any advantage afforded by transmission information not
available to non-affiliates would come at the expense of other
wholesale market competitors. When the LDC does not make off-system
sales, this degree of vertical integration does not harm wholesale
markets or non-affiliated competitors.
65. Contrary to National Fuel-Distribution's argument, early
knowledge of events or circumstances on an affiliated pipeline system
has value. As noted by National Fuel-
[[Page 23571]]
Distribution, daily trading occurs over a compressed time period. Other
market participants have little time to obtain rapidly breaking news
that can affect spot prices. Yet the affiliated LDC, were it not
considered an Energy Affiliate, would have the ability to get the
relevant news first, and act on it before other market participants had
access to the information. Contrary to National Fuel-Distribution's
assertion, this would be an unduly preferential advantage.
66. As to NW Natural's and Kelso Beaver's assertions that they are
placed at a competitive disadvantage relative to non-affiliated LDCs
making off-system sales, the Commission disagrees. The Standards of
Conduct do not put affiliated LDCs at a disadvantage with respect to
non-affiliated LDCs. Rather, affiliates and non-affiliates are on an
equal footing because all market participants will have the same access
to transmission information and transmission services. Non-affiliated
market participants do not have access to the Transmission Providers'
transmission or customer information. The petitioners have not provided
any explanation why an affiliated LDC that is participating in the
wholesale sales market or is providing asset management services for a
customer is entitled to unduly preferential access to the Transmission
Providers' transmission or customer information.
67. The Commission wishes to make clear that it is not the purpose
or the effect of this Final Rule to prohibit LDCs from making off-
system sales. Rather, if an LDC chooses to make off-system sales, its
affiliated Transmission Provider must comply with the Standards of
Conduct vis-[agrave]-vis its affiliated LDC as an Energy Affiliate. The
Transmission Provider's compliance with the Standards of Conduct places
all wholesale market participants, affiliated and non-affiliated, on an
equal footing.
d. Treatment of LDC Divisions
68. AGA requests clarification whether the LDC division of an
electric Transmission Provider would be considered an Energy Affiliate
because the division does not meet the definition of ``Affiliate'' in
Sec. 358.3(b). The Commission clarifies that an LDC division of an
electric Transmission Provider shall be considered the functional
equivalent of an Energy Affiliate if it engages in the activities
described in Sec. Sec. 358.3(d)(1), (2), (3) or (4), and codifies this
at Sec. 353.3(d)(5). Although the division is not technically an
``affiliate,'' it is functionally equivalent to an affiliate. This is
consistent with Sec. 284.286, where the Commission treats a pipeline's
sales operating unit as if it were a marketing affiliate for purposes
of the Standards of Conduct.
69. PSEG makes a similar request for rehearing arguing that the
Hinshaw pipeline division of an electric Transmission Provider is not
an ``Affiliate'' and thus the relationship between an electric
Transmission Provider and its Hinshaw pipeline division \57\ should not
be governed by the Standards of Conduct. PSEG claims that the
Commission should not be concerned about the relationship between an
electric Transmission Provider and its Hinshaw pipeline division
because there is no potential for abuse. Further, PSEG argues that it
would be unduly burdensome citing its joint operations between its
wires and pipes divisions in storm restoration efforts, customer
operations/call centers and applicance service operations.
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\57\ PSEG claims that its Hinshaw pipeline division possesses a
limited-jurisdiction certificate from the Commission under Order No.
63.
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70. The Commission denies PSEG's request to categorically exclude
an electric Transmission Provider's Hinshaw gas pipeline division from
the definition of Energy Affiliate. There are instances in which the
Commission is concerned about the relationship between the electric
Transmission Providers and gas divisions. For example, to the extent a
combined electric/gas utility's Hinshaw pipeline affiliate provided
transportation services delivering natural gas to third-party
independent generators which compete in the same wholesale markets for
electricity, either directly, or indirectly, through the release of
interstate transmission capacity on an upstream pipeline, the events of
its day-to-day operation,\58\ would have an impact on the competitors
and markets for wholesale electricity in that region. The Hinshaw
pipeline also collects information about the natural gas scheduled to
flow to the competing generators, and to the natural gas-fired
generation operated and self-scheduled by the combination utility's
electric Transmission Provider. Knowledge of sudden changes in the
availability of natural gas transmission capacity could be of
competitive value to the electric Transmission Provider (in the
wholesale real-time markets), the Hinshaw pipeline (the NYMEX futures
exchange and spot markets), and to each of its Energy Affiliates (in
all three areas) if it could be acquired shortly before such knowledge
became publicly available. However, in the example of shared services
that PSEG raises, employees who provide storm restoration efforts,
staff customer operations/retail call centers and appliance service
operations would be the types of support or field and maintenance
employees that could be shared under Sec. 358.4(a)(4).
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\58\ These events might include capacity constraints caused by
competing demands, scheduled maintenance, unscheduled equipment
breakdowns, and unexpected significant fluctuations in demand or
supply.
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71. The Commission will revise the definition of Affiliate at Sec.
358.3(b) to incorporate this clarification as follows: ``[a]n Affiliate
includes a division that operates as a functional unit.''
e. Applicability of the Standards of Conduct to Special Purpose
Certificated Interstate Service
72. National Fuel-Distribution raises the issue of its status as a
holder of limited-jurisdictional certificates authorizing interstate
exchanges and NGA section 7(f) authorizations. Specifically, National
Fuel-Distribution also raises the issue of whether its status under its
special purpose interstate exchange certificate or NGA section 7(f)
service area determinations subject it to being considered as either a
Transmission Provider or an Energy Affiliate. National Fuel-
Distribution asks the Commission to clarify that this is not the case.
The Commission clarifies that National Fuel-Distribution's special
purpose interstate exchange certificate and NGA section 7(f) service
area determinations do not make it either a Transmission Provider or an
Energy Affiliate.
iii. Producers, Gatherers, and Processors
Final Rule
73. In the Final Rule, the Commission defines Energy Affiliate to
include any affiliate of a Transmission Provider that conducts any of
the following activities in U.S. energy markets: Engages in or is
involved in transmission transactions; manages or controls transmission
capacity; buys, sells, trades, or administers natural gas or electric
energy; or engages in financial transactions relating to the sale or
transmission of natural gas or electric energy (collectively Energy
Affiliate activities).\59\ Producers, gatherers and processors that
perform such activities are Energy Affiliates as defined in the Final
Rule.
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\59\ These are the characteristics of an Energy Affiliate, as
defined in 18 CFR 358.3(d).
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[[Page 23572]]
Requests for Rehearing and/or Clarification and Commission Conclusions
Gatherers and Processors
74. Petitioners \60\ assert that gatherers and processors
performing their traditional functions do not hold transmission
capacity on affiliated pipelines and, similar to the LDCs, should not
be considered Energy Affiliates. Several petitioners argue that it is
inconsistent for the Commission to treat gatherers and processors
differently than LDCs. Questar argues that gatherers and processors
should not be defined as Energy Affiliates if they do not sell natural
gas for resale, buy natural gas only for consumption of their own
processing operational needs and do not ship natural gas on their
affiliated interstate pipelines.
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\60\ CenterPoint, El Paso, Questar, Shell Transmission,
Williston Basin and Williams.
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75. Shell Transmission and others argue that elimination of the
prior exception from the Standards of Conduct issued under Order No.
497 for producers, gatherers, and processors will lead to significant
duplication of costs for multiple offshore pipeline and gathering lines
that are currently operated from one common operations center with
consolidated staff (e.g., contract administrators, engineers, gas
control operators).
76. INGAA, CenterPoint, Dominion, Duke Energy and El Paso argue
that it is important to allow affiliated pipelines, gatherers,
producers, and processors to share information during planning and
financing of new infrastructure to ensure that needed supplies are
brought efficiently and promptly to market, especially during periods
of tight supply. Duke, Shell Transmission and Shell Offshore argue that
separation of gathering functions from transmission functions, and the
associated restrictions on communications, will impede pipeline
operations. A number of small independent producers request that the
Commission allow gatherers to buy the gas that the independent
producers sell without converting the gatherers into Energy
Affiliates.\61\
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\61\ Letters were addressed to Chairman Pat Wood from Mr. Bruce
Morain, INOK Investments, L.L.C. (dated February 18, 2004); Mr.
Jerry G. Kerr, Plymouth Resources, Inc. (dated February 24, 2004);
Mr. Web Carr, C and E Operators, Inc. (dated February 27, 2004); Mr.
Carlos Barton ``Scooter'' Griffin, Jr.--President, GeoVest
Incorporated (February 20, 2004), Mr. Robert T. Wilson, AGS Oil and
Gas Ventures, Inc. (dated February 12, 2004); and C & L Oil and Gas
Corp (dated March 9, 2004). Each of these letters has been placed in
the public record in Docket No. RM01-10-000.
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77. The Commission clarifies that gatherers and processors that are
not involved in or engage in transmission transactions; do not manage
or control transmission capacity; do not buy, sell, trade or administer
natural gas or electric energy; and do not engage in financial
transactions relating to the sale or transmission or natural gas or
electric energy are not Energy Affiliates. If a gatherer or processor
merely provides a gathering or processing service and only purchases
natural gas to supply operational needs (such as compression fuel), and
does not engage in any of the other activities described above, it is
not an Energy Affiliate. In these roles, gatherers and processors
provide services to wholesale market participants but do not compete
with them. When their operations are limited to this service-provider
role, they are not defined as Energy Affiliates and do not become
subject to the separation of functions requirement and information
disclosure prohibitions of the Standards of Conduct. However, gatherers
or processors that buy gas for resale or hold or manage transmission
capacity are Energy Affiliates as defined in Sec. 358.3(d)(3).
78. Further, the Final Rule neither prohibits nor hinders the kinds
of cooperation and communications Shell Transmission notes among its
producing and gathering affiliates, such as producer personnel at
platforms routinely performing field maintenance and operation
activities, such as launching pigs on behalf of gathering affiliates or
sharing operational status information. Many of the petitioners'
concerns regarding defining producers, gatherers and processors as
Energy Affiliates focus on the sharing of field and maintenance
personnel and the sharing of operational information. As discussed in
more detail below, the Commission is providing additional
clarifications that address the petitioners' concerns regarding the
sharing of information and field and maintenance employees between a
Transmission Provider and its Marketing or Energy Affiliates.\62\
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\62\ See also the discussions of the Sharing of Field and
Maintenance Personnel, and Critical Operating Information
Exceptions, below.
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79. The Commission will not, however, grant a blanket exemption
from the Standards of Conduct for gatherers or processors.
80. Specifically, CenterPoint argues that:
Although a trading or financial affiliate might benefit from
preferential access to information about the interstate pipeline's
operations (by trading in natural gas or a related financial
instrument whose value may be affected by a constraint on the
pipeline), a similar benefit is unlikely to be conferred on a
traditional gatherer.\63\
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\63\ CenterPoint at pp. 8-9.
The Commission agrees with CenterPoint in both aspects of its
argument: Trading and financial affiliates might benefit from
preferential access to information about an interstate pipeline's
operations; and a gatherer that does not conduct Energy Affiliate
activities is unlikely to benefit from such information in the
wholesale energy marketplace.
81. Accordingly, the Commission will continue to include producers,
gatherers and processors in the definition of Energy Affiliate to the
extent they engage in Energy Affiliate activities. A gatherer or
processor is in a position to profit from preferential information if
it engages in Energy Affiliate activities. Under the Commission's
regulations, a gatherer or processor is not limited to selling at the
terminus of its own physical facilities. Similarly, any entity,
including a gatherer or processor, may also buy and sell energy futures
traded on the NYMEX. Allowing preferential access to information about
transmission capacity or third party customers would confer an undue
competitive advantage on such an entity. A gatherer or processor which
also participates in Energy Affiliate activities is indistinguishable
from any other Energy Affiliate in this regard.
82. Furthermore, preferential access to market information gives
Transmission Provider affiliates fuller, more complete, and more timely
information about market conditions, potentially contestable markets
and the prices other market participants will be willing to accept.\64\
The Commission finds that such preferential access to information is
contrary to the Commission's statutory mandate to prevent undue
discrimination or preferences.
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\64\ In addition, this information will be available to the
Transmission Provider affiliates at little or no cost. Transmission
Providers acquire market-relevant information in the normal course
of operating transmission facilities, with the expenses of this
information collection generally recovered through their regulated
cost-based rates. In contrast, independent wholesale market
participants incur significant costs to gather market intelligence
of inferior scope and completeness. Absent Commission-mandated
disclosure of transmission information, much of this market
information will not be available to independent wholesale market
participants at any price. And under the Commission's requirements,
sensitive information is often protected from disclosure, or subject
to delays in disclosure to protect shippers from competitive harm.
For independent wholesale market participants, the market is opaque,
blurry and constantly changing, but for affiliates allowed to share
employees or information with a Transmission Provider, the market
will be transparent and relatively clear.
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[[Page 23573]]
83. The Commission's ruling here does not prohibit gatherers or
processors from buying or selling natural gas. The Standards of Conduct
do not prohibit those activities. Rather, a Transmission Provider must
observe the Standards of Conduct vis-[agrave]-vis gatherers and
processors that choose to participate in wholesale commodity markets or
engage in Energy Affiliate activities to ensure that the Transmission
Provider treats its affiliated entities the same way it treats non-
affiliated entities.
Producers
84. The Commission denies rehearing to the extent petitioners argue
that producers should be exempt from definition as Energy Affiliates.
Natural gas producers affiliated with Transmission Providers are Energy
Affiliates as defined in Sec. 358.3(d). Producers are perhaps the
largest marketers of natural gas.\65\ First sales of natural gas are
fully deregulated.\66\ In addition, like any other willing entity in
the natural gas industry, producers are authorized to make sales for
resale.\67\ These sales take place at points throughout the interstate
natural gas delivery network, not just at the point of production in
the producing fields. Affiliated producers, because they have the same
opportunities to exploit Transmission Provider information for undue
advantage, are Energy Affiliates under the Final Rule.
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\65\ Gas Daily, ``Producers solidify hold on marketer
rankings,'' March 23, 2004, p. 1 and p. 12. See also, Gas Daily,
``Midtier players dominate Q3 marketer rankings,'' December 9, 2003.
(Producers BP, Shell and ConocoPhillips were ranked first, third and
fourth, representing nearly 40 percent of the total reported volumes
used in the rankings of 22 marketers. Thirteen of the top 22
marketers listed were producers.)
\66\ Natural Gas Wellhead Decontrol Act of 1989, Pub L. 101-60,
103 Stat. 157 (1989).
\67\ 18 CFR 284.402 (2003).
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85. Contrary to the concerns of petitioners, defining producers as
Energy Affiliates will not subject them to inappropriate public release
of competitively-sensitive information under the Standards of Conduct.
An affiliated producer seeking information about the potential
expansion of infrastructure necessary to secure connections to new
production is afforded the same confidential treatment as any other
shipper seeking new service under the transaction-specific protections
of the Final Rule.\68\ To the extent an affiliated producer is neither
a potential shipper nor supporting the request of a potential shipper,
its access to information on capacity or the availability of service to
transport new supplies will be appropriately limited to the same
information available to any other party.
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\68\ See 18 CFR 358.5(b)(5) (``A Transmission Provider is not
required to contemporaneously disclose to all transmission customers
or potential transmission customers information covered by Sec.
358.5(b)(1) if it relates solely to a Marketing or Energy
Affiliate's specific request for transmission service.'')
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86. Open access interstate natural gas pipelines are required to
post on their Internet websites timely and accurate information about
available capacity and services.\69\ Those who believe that posted
information does not meet the requirements of the Commission's
regulations requiring disclosure of available capacity \70\ may contact
the Commission's Enforcement Hotline or file a formal complaint. The
Commission does not believe that the equitable treatment afforded
transmission information will hinder the development of new
infrastructure.\71\
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\69\ See 18 CFR 284.13 (2003).
\70\ Id.
\71\ To the extent posted information is not sufficient for
producers' needs, this concern is appropriately addressed to the
Transmission Providers, affiliated and otherwise, who may wish to
consider the needs of their customers and other industry
stakeholders for timely and adequate information about available
capacity and system capabilities on their Internet website postings.
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87. Dominion requests the Commission to exclude from the definition
of an Energy Affiliate a producer that sells its own production to
another affiliated company. The Commission denies Dominion's request.
Dominion has not provided any justification why a Transmission Provider
should be allowed to share employees and transportation or customer
information with its affiliated producer. Specifically, the Commission
is concerned that a Transmission Provider's non-affiliated customers
could be harmed if a Transmission Provider could freely share customer
information with affiliated producers. Nor has Dominion explained why
the producer's sale to an affiliate eliminates the Commission's
concerns about affiliate abuse.
iv. Intrastate and Hinshaw Pipelines
The Final Rule
88. Intrastate and Hinshaw pipelines are included in the definition
of Energy Affiliate to the extent that they engage in or are involved
in transmission transactions in U.S. energy markets or participate in
the other activities described in Sec. 358.3(d). Allowing such
intrastate pipeline or Hinshaw pipeline to have preferential access to
a transmission system or information would be inconsistent with the
prohibitions against undue preferences or discrimination in section 4
of the NGA in the provision of interstate transportation service.
Requests for Rehearing and/or Clarification and Commission Conclusions
89. Several petitioners \72\ request clarification that LDCs which
are also Hinshaw pipelines will nonetheless continue to qualify for the
LDC exemption from Energy Affiliate status. They argue that Hinshaws
are State-regulated and nearly always are LDCs. Empire argues that a
Hinshaw pipeline, by definition, must be regulated by a State to
qualify for the Hinshaw exemption.
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\72\ See, e.g., AGA, Dominion, Duke Energy, Empire, INGAA,
Kinder Morgan Pipelines, National Fuel-Distribution, National Fuel-
Supply, NICOR, Questar, Southwest Gas, and Xcel.
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90. Saltville and SCG argue that there is no difference between a
Hinshaw pipeline and an LDC in terms of their relationship with
jurisdictional pipelines, and therefore there is no basis for this
asymmetrical regulation. Questar argues that Hinshaw pipelines which
are also State-regulated LDCs should not be counted as Energy
Affiliates under the Standards of Conduct. To do so, Questar argues,
would destroy vertical integration efficiencies, increase costs,\73\
reduce service reliability, reduce firm transportation capacity by
105,000 Dth per day, or more, and reduce the service flexibility
available to all shippers.
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\73\ Questar argues that full separation of functions would
require the construction of new pipeline facilities costing $44
million, which would increase Questar's annual cost-of-service by
$14.4 million.
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91. Kinder Morgan Pipelines argue that even Hinshaw pipelines which
are not LDCs should be exempt because they are State regulated and
analogous to affiliated Transmission Providers, which are not defined
as Energy Affiliates.
92. Kinder Morgan Pipelines argue that intrastate pipelines,
including Hinshaw pipelines, which provide State-regulated intrastate
transportation, bundled commodity sales, and interstate transportation
pursuant to section 311 of the NGPA, but do not make any off-system
sales should be excluded from the definition of Energy Affiliate.\74\
The Texas Pipeline Association, an association of nineteen intrastate
natural gas pipelines operating in Texas, and Williams also object to
categorizing intrastate pipelines and Hinshaw pipelines as Energy
Affiliates.
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\74\ Kinder Morgan Pipelines also filed a request for exemption
in Docket No. TS04-249-000, which the Commission will consider by
separate order.
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93. The Commission agrees generally with the requests that an LDC's
status as
[[Page 23574]]
a Hinshaw pipeline does not invalidate its treatment as an LDC under
the Standards of Conduct. Hinshaw pipelines are typically LDCs,
regulated by State commissions, and primarily focused on providing
retail service within their States. To the extent Hinshaw pipelines are
state-regulated LDCs, make no off-system sales and do not engage in any
of the activities described in Sec. 358.3(d), they are not Energy
Affiliates. However, as is the case for LDCs, Hinshaw pipelines which
make off-system sales or participate in Energy Affiliate activities
will continue to be defined as Energy Affiliates.
94. The Commission clarifies that intrastate pipelines that do not
engage in Energy Affiliate activities described in Sec. 358.3(d) are
not defined as Energy Affiliates. To the extent that an intrastate
pipeline makes sales or hold interstate transmission capacity or
engages in Energy Affiliate activities, they are Energy Affiliates.
v. Affiliated and Foreign Transmission Providers
Final Rule
95. Section 358.3(d)(5)(ii) excludes affiliated Transmission
Providers from the definition of Energy Affiliate because they are
already subject to the requirements of the Standards of Conduct.
Section 358.3(d)(5)(i) excludes foreign affiliates that do not
participate in U.S. energy markets. In the Final Rule, the Commission
also stated that affiliated gas pipeline Transmission Providers that
cross the United States international border will not be treated as
Energy Affiliates as long as neither the Transmission Provider nor the
affiliated international pipeline shares employees or information with
its Marketing or Energy Affiliate.\75\ However, this was not codified
in the regulatory text for Sec. 358.3(d)(5)(i).
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\75\ Final Rule at P 60.
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Requests for Rehearing and/or Clarification and Commission Conclusion
96. INGAA requests clarification because foreign affiliated
Transmission Providers do not fit within the definition of a
``Transmission Provider,'' which transmits energy or gas in U.S.
interstate commerce under parts 157 or 284 of the Commission's
regulations. See 18 CFR 358.3(a). INGAA and Enbridge also argue that
the Commission cannot regulate the behavior of foreign affiliated
pipelines.
97. The Commission is granting rehearing and revising the
regulatory text to better reflect our intent that foreign affiliates
that engage in transmission activities that cross the U.S.
international border, which activities are regulated by the state,
province or national regulatory board of the foreign country in which
the facilities are located, will not be treated as Energy Affiliates.
Nonetheless, a Transmission Provider cannot use a foreign affiliate as
a conduit to circumvent the independent functioning requirement or
information sharing prohibitions of the Standards of Conduct. Contrary
to petitioners' assertions, the Commission is not regulating the
behavior of a foreign corporation, but merely regulating the behavior
of the jurisdictional Transmission Provider. The Commission does not
prohibit Canadian pipelines from sharing Canadian transmission
information or employees with its Canadian Affiliates. However, a
Transmission Provider may not share information and employees with its
Canadian-affiliated Transmission Provider if it is a conduit for
sharing information with an Energy Affiliate doing business in the U.S.
commodity or transmission markets. A Canadian Energy Affiliate that
does business in the U.S. commodity and transmission markets should not
be afforded undue preferences or services.
vi. Holding or Parent Companies
Final Rule
98. Section 358.3(d)(5)(iii) excludes from the definition of Energy
Affiliate, a holding, parent or service company that does not engage in
energy or natural gas commodity markets or is not involved in
transmission transactions in U.S. energy markets.\76\
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\76\ Generally, a holding company is registered with the
Securities and Exchange Commission under the Public Utility Holding
Company Act of 1935. A parent company or corporation is a company or
corporation with multiple subsidiaries and/or controls other
companies. A service company is usually a subsidiary of a holding or
parent company/corporation that generally provides shared services
to the parent or holding company's subsidiaries and/or affiliates
and/or serves as a mechanism to employ all corporate employees.
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Requests for Rehearing and/or Clarification and Commission Conclusion
99. NiSource, Dominion, EEI, INGAA and AGA request clarification
that a parent or holding company does not become an Energy Affiliate of
a Transmission Provider by acting as a guarantor on a contract or
approving financial expenditures for the subsidiary Transmission
Provider. EEI states that if such parent or holding companies providing
financial security are deemed to be Energy Affiliates, few entities
will qualify for the exemption. The petitioners argue that the parent/
holding company is not engaged in a financial transaction and thus
should not become an Energy Affiliate. Similarly, National Fuel-
Distribution and Duke Energy request clarification that the performance
of corporate functions by a parent or holding company will not make the
parent or holding company an Energy Affiliate. On the other hand,
NASUCA argues that service companies that engage in financial
transactions should be included in the definition of Energy Affiliate.
100. One of the roles of a parent or holding company is to act as
guarantor or provide financial security for its subsidiaries.
Generally, when a parent or holding company acts as guarantor for a
Transmission Provider or its Marketing or Energy Affiliate, the parent
or holding company is not engaging in any transmission transactions or
in energy or natural gas commodity markets. Thus, the Commission
clarifies that it is permissible for a parent or holding company to act
as guarantor or to provide financial security for its subsidiaries
without becoming an Energy Affiliate. A parent or holding company may
also approve the financial expenditures for its affiliated Transmission
Provider. But, as discussed later, when a parent or holding company
engages in financial transactions that are the functional equivalent of
physical transactions in the commodity market, it acts as an Energy
Affiliate under the Standards of Conduct.
101. Duke Energy, INGAA and Kinder Morgan Pipelines request
rehearing of the Commission's decision to exclude only parent or
holding companies that are not involved in energy or natural gas
markets or transmission transactions. They argue that a parent or
holding company should not be considered an Energy Affiliate if it is
involved in energy or transmission transactions. The Commission rejects
this request for a categorical exemption because parent or holding
companies could then be used to circumvent the Standards of Conduct.
However, on a case-by-case basis, the Commission will consider specific
requests.
Requests for Clarification Regarding Parent Companies
102. CenterPoint requests clarification that certain divisions of a
parent company could be Energy Affiliates while the remainder of the
parent company would not be considered an Energy Affiliate. The
Commission cannot answer this question generically. The Commission will
review this issue on a case-by-case basis after evaluating
[[Page 23575]]
the individual structure of the Transmission Provider and its parent
company.
103. Duke Energy requests that the Commission clarify how it will
treat a parent company that is also a Transmission Provider. At Duke
Energy, the electric utility Transmission Provider, which engages in
retail and wholesale sales, is a division of the parent company, which
is also the parent company for several natural gas Transmission
Providers. Because the parent company is also the electric public
utility that engages in wholesale sales of power, Duke Energy is
concerned that its parent company does not qualify for the parent
company exemption. Duke Energy proposes that the Commission treat its
parent company as an affiliated Transmission Provider. Under this
scenario, Duke Energy pipeline subsidiaries will be permitted to
provide non-public information to Duke Energy management for corporate
governance purposes; but Duke Energy will be prohibited from sharing
such information with the sales or marketing unit of Duke Energy or of
any other Energy Affiliate. Duke Energy argues that this is also
consistent with the codification at Sec. 358.4(a)(5) that allows a
Transmission Provider to share senior officers and directors with their
Marketing and Energy Affiliates.
104. Duke Energy's proposal is an acceptable means to comply with
the Standards of Conduct. As a parent company/Transmission Provider,
Duke Energy is subject to the independent functioning requirements and
information sharing prohibitions of the Standards of Conduct. It is
already required to put in place mechanisms to ensure that the unit/
division that engages in wholesale sales of power functions
independently and does not have access to transmission or customer
information.
105. Kinder Morgan Pipelines also ask for clarification that its
parent company, which has LDC assets, qualifies for the parent company
exemption. The fact that the LDC is a parent company is no reason to
exempt it from its status as an Energy Affiliate. Unlike the situation
at Duke Energy, where the parent company/Transmission Provider is
responsible for implementing all of the Standards of Conduct, Kinder
Morgan Pipelines on the other hand are seeking an exemption from the
Standards of Conduct. As an LDC making off-system sales, it falls
squarely within the definition of Energy Affiliate. Therefore, the
Commission denies Kinder Morgan Pipelines' request. However, the
Commission will consider individual requests if the parent company/LDC
can demonstrate an acceptable level of independent functioning for the
LDC division and ensure that there are adequate safeguards to restrict
the sharing of transmission and customer information.
106. Finally, Enbridge urges the Commission to clarify that a
foreign parent company can use the parent company exemption if it
otherwise qualifies. The Commission so clarifies.
vii. Service Companies
Final Rule
107. The Final Rule excludes from the definition of Energy
Affiliate service companies that do not engage in energy or natural gas
commodity markets or are not involved in transmission transactions in
U.S. energy markets. See 18 CFR 358.3(d)(5)(iii). The Final Rule also
states that if a Transmission Provider utilizes a service corporation
or other subsidiary as the mechanism for employment, all the employees
assigned, dedicated or working on behalf of a particular entity, such
as a Transmission Provider or Energy Affiliate, are subject to the
Standards of Conduct requirements as if they were directly employed by
the Transmission Provider or Energy Affiliate.\77\
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\77\ Final Rule at P 57.
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Requests for Rehearing and/or Clarification and Commission Conclusions
108. SCG requests that the Standards of Conduct not apply to
service company employees. In addition, Dominion requests clarification
that only service company employees who devote all or nearly all of
their time to a Transmission Provider or Energy Affiliate will be
subject to the Standards of Conduct.
109. NASUCA, on the other hand, wants clarification that all
employees of the Transmission Provider, Marketing or Energy Affiliate
will be covered by the definition of Energy Affiliate. NASUCA also
argues that service (or parent or holding) companies that engage in
financial transactions relating to the sale or transmission of natural
gas or electric energy should not be exempt from the definition of
Energy Affiliate. NASUCA expresses concern that financial transactions
that are the functional equivalent of physical transactions are not
subject to the Standards of Conduct and could enable transmission or
customer information about counterparties to a transaction to be passed
among Energy Affiliates.
110. The Commission rejects SCG's rehearing request. Service
company employees are properly subject to the Standards of Conduct if
they are working on behalf of the Transmission Provider or Energy
Affiliates. Otherwise, such service companies would become mechanisms
by which to circumvent the Standards of Conduct. Employees working on
behalf of a Transmission Provider or its Marketing or Energy Affiliates
are subject to the Standards of Conduct as if those individuals were
directly employed by the respective companies. If service company
employees only provide support services, they can be shared. But, if
they have any energy-affiliated or transmission-related functions, they
cannot be shared.
111. With respect to NASUCA's concerns, service (or parent/holding)
companies may engage in certain types of financial activities that
include capital funding, creditworthiness and risk management type
activities, as discussed herein. However, when a service company (or
parent/holding company) engages in financial transactions that may be
functionally equivalent to physical transactions in the commodity and
transmission markets, it will be treated as an Energy Affiliate. For
example, the purchase or sale of financial transmission rights in an
RTO or trading in NYMEX natural gas or electric futures will give a
service company a stake in wholesale energy markets because they are
engaging in wholesale commodity activities. Whenever the service
company has such a stake, it will be treated as an Energy Affiliate
under the Standards of Conduct.
112. Cinergy, Enbridge, Entergy, NiSource, Southern and Xcel raise
a concern that when employees of a service company are assigned to an
Energy Affiliate, the service company could be deemed to be
``involved'' or ``engaged'' in transmission transactions on behalf of
an affiliate. Xcel claims that service companies regularly employ
transmission and marketing employees, but segregate employees to comply
with the Standards of Conduct, which is consistent with the preamble
language of the Final Rule at Paragraph 57, but not the service company
exemption included in the regulatory text at Sec. 358.3(d)(5)(iii).
Cinergy requests clarification that only those service company
employees who are assigned, dedicated or working on behalf of the
Transmission Provider or Energy Affiliate, and not the entire service
company will be subject to the Standards of Conduct.
113. EEI requests clarification on the functions that can be shared
in a service company. Similarly, Enbridge, INGAA,
[[Page 23576]]
NICOR, NiSource and Southern request clarification that service
companies, such as those with operating control centers that conduct
operations on behalf of Transmission Providers or which have a
substantial number of employees assigned to perform Energy Affiliate
functions, are not themselves Energy Affiliates.
114. The Commission clarifies that a service company will not
become an Energy Affiliate merely by providing Transmission or
Marketing or Energy Affiliate employees. However, the service company
must segregate those employees if they are assigned to those functions.
Service companies use an assortment of mechanisms to assign employees
to their affiliates, such as work orders, loans, and agency agreements.
While the service company does not necessarily become an Energy
Affiliate, the Transmission Provider is ultimately responsible to
ensure that all employees assigned or dedicated to it observe the
independent functioning and information sharing prohibitions of the
Standards of Conduct.
115. EEI requests clarification that, when a service company acts
as agent for a Transmission Provider, it is not involved in energy
markets or transmission transactions. In several investigations of
entities that violated the former standards of conduct, the Commission
discovered that agency agreements resulted in improper sharing of
information or abusing native load preferences.\78\ Agency agreements
can also be used to aggregate control over transmission capacity.
Therefore, the Commission clarifies that a service company may act as
agent for its affiliated Transmission Provider, Marketing or Energy
Affiliate without becoming an Energy Affiliate so long as the service
company is involved in only non-energy related activities, e.g., acting
as an agent to lease office space or to obtain cleaning service.
However, if the service company/agent is involved in energy-related
activities, it is an Energy Affiliate.
---------------------------------------------------------------------------
\78\ See Transcontinental Gas Pipe Line Corp., 102 FERC ] 61,302
(2003) (Transco); Idaho Power Corp., 103 FERC ] 61,182 (2003) (Idaho
Power); and Cleco Corp., 104 FERC ] 61,125 (2003) (Cleco).
---------------------------------------------------------------------------
viii. Affiliates Buying Power for Themselves
Final Rule
116. Section 358.3(d)(5)(iv) excludes from the definition of Energy
Affiliate, ``an affiliate that purchases natural gas or energy solely
for its own consumption and does not use an affiliated Transmission
Provider for transmission of that natural gas or energy.''
Requests for Rehearing and/or Clarification and Commission Conclusions
117. EEI argues that an affiliate should not be prohibited from
using its affiliated Transmission Provider if it is buying power or gas
for its own consumption. EEI argues that the term ``using'' is unclear
and should be revised to reflect the Commission's concern with the
affiliate ``arranging'' transmission on the affiliated Transmission
Provider.
118. The Commission clarifies that the affiliate may use an
affiliated Transmission Provider to buy power or gas for its own
consumption. However, to ensure that the Transmission Provider does not
provide undue preferences to an affiliate, the Transmission Provider
must treat the affiliate as an Energy Affiliate unless the gas or power
is for its own consumption. Therefore, an electric generator that is
using electric energy or natural gas transported on the affiliated
Transmission Provider for the subsequent generation of electricity will
not be exempt from the definition of Energy Affiliate.
D. Definition of Marketing, Sales or Brokering
Final Rule
119. Section 358.3(e) defines marketing, sales or brokering as ``a
sale for resale of natural gas or electric energy in interstate
commerce.'' A sales and marketing employee or unit includes: (1) An
interstate natural gas pipeline's sales operating unit, to the extent
provided in Sec. 284.286 of this chapter,\79\ and (2) a public utility
Transmission Provider's energy sales unit, unless such unit engages
solely in bundled retail sales.\80\ See 18 CFR Sec. Sec. 358.3(e)(1)
and (2).
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\79\ Section 284.286 of the Commission's regulations currently
requires an interstate natural gas pipeline to separate its
interstate transmission function from its unbundled sales service,
essentially treating the pipeline's sales business as the equivalent
of an affiliated marketing company. See 18 CFR 284.286 (2003).
\80\ The term bundled retail sales employees means those
employees of the public utility Transmission Provider or its
affiliates who market or sell the bundled electric energy product
(including generation, transmission, and distribution) delivered to
the transmission provider's firm and non-firm retail customers.
---------------------------------------------------------------------------
120. The Final Rule retains the exemption of Order No. 889, which
permits sharing between the bundled retail sales function and the
public utility Transmission Provider's interstate transmission
function. However, the Final Rule emphasizes, that the Standards of
Conduct will apply to merchant employees who are engaged in sales or
purchase of power that will be resold at retail pursuant to state
retail access programs.\81\ In the Final Rule, the Commission also
emphasizes that if a retail sales function employee engages in any
wholesale sales, such as selling excess generation to a non-retail
customer, the retail function will be treated as a wholesale merchant
function.\82\ It is not appropriate for an entity that participates in
the wholesale market to obtain an undue preference when competing with
non-affiliates for transmission capacity. When a wholesale merchant
function does take advantage of its affiliate status, customers,
competitors and the market are harmed. Therefore, as stated in the
Final Rule, if a retail sales unit engages in any wholesale sales, the
separation of functions requirement will apply.\83\
i. Treatment of Retail Sales Employees
---------------------------------------------------------------------------
\81\ In Order No. 888-A, ``if unbundled retail transmission in
interstate commerce occurs voluntarily by a public utility or as a
result of a state retail access program, the Commission has
exclusive jurisdiction over the rates, terms and conditions of such
transmission.'' FERC Stats. & Regs., Regulation Preambles January
1991-June 1996 ] 31,036 at 31,781. See also, American Electric Power
Service Corporation, 81 FERC ] 61,332 (1997), order on reh'g, 82
FERC ] 61,131 (1998), order on reh'g, 82 FERC ] 31,357 (1998). See
also, New York et al. v. FERC et al., 535 U.S. 1 (2002).
\82\ See Final Rule at P 78-79.
\83\ The Commission wants to prevent an employee that is shared
between the bundled retail sales function and the wholesale merchant
function from taking advantage of the preferences afforded retail
service or utilizing information that may be shared with the retail
function but not the wholesale function.
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Requests for Rehearing and/or Clarification and Commission Conclusions
121. Calpine and TAPS request rehearing of the Commission's
decision to retain the exemption of Order Nos. 888 and 889. Calpine
claims that the Commission failed to carry out its statutory duties
under section 205 of the FPA by allowing the Transmission Provider to
use the same employees for its interstate transmission business and
bundled retail business. Similarly, TAPS argues that the Commission
identified discrimination and failed to remedy it. TAPS argues that the
Commission has the jurisdiction to eliminate the loophole and should do
so.
122. Calpine also urges the Commission to limit retail sales
function employees from getting any undue preferences when they go into
the wholesale market to buy power to
[[Page 23577]]
satisfy native load. Calpine claims that when retail sales function
employees buy power to serve native load, they have an incentive to
favor their own generation or to grant a preference to affiliated
wholesale suppliers over competitive suppliers.
123. The Commission rejects petitioners' request for rehearing. An
electric public utility Transmission Provider engaging in bundled
retail sales is providing a service that is somewhat similar to the
service provided by an LDC when it makes on-system sales. Where an
electric public utility Transmission Provider's wholesale merchant
function solely engages in bundled retail sales, the Transmission
Provider is not required to treat its merchant function as a Marketing
Affiliate. Similarly, if a natural gas Transmission Provider's
affiliated LDC solely makes on-system sales, the Transmission Provider
is not required to treat the LDC as an Energy Affiliate. As stated in
the Final Rule, a public utility Transmission Provider is permitted to
use the same employees for its interstate transmission business and its
bundled retail sales business.\84\ However, when the merchant function
of an electric public utility Transmission Provider participates in the
wholesale market, the Transmission Provider must treat the merchant
function as a Marketing Affiliate.
---------------------------------------------------------------------------
\84\ Final Rule at P 78.
---------------------------------------------------------------------------
ii. Treatment of Electricity Provider of Last Resort Service (POLR)
Requests for Clarification and Commission Conclusion
124. Cinergy seeks clarification that a Transmission Provider
serving as the Provider of Last Resort (POLR) in a State that has
adopted a retail choice program is permitted to continue to serve
retail customers as it had prior to the introduction of competitive
retail electric service. Essentially, Cinergy wants POLR employees to
fall outside the definition of marketing or sales unit personnel under
Order No. 2004 because, in Cinergy's view, POLR service is essentially
the same as the bundled retail sales service for which Order No. 2004
provides an exemption.\85\
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\85\ Section 358.3(e)(2) states ``sales and marketing employee
or unit includes * * * [a] public utility Transmission Provider's
energy sales unit, unless such unit engages solely in bundled retail
sales.''
---------------------------------------------------------------------------
125. Cinergy claims that CG&E, its affiliate located in Ohio,
provides unbundled electric transmission service with the prices of
electric generation supply, transmission and distribution separately
stated and regulated pursuant to Ohio's electric retail competition
program. Cinergy suggests that, other than the Ohio requirement to
allow retail customers to purchase electric generation from an
alternative supplier, CG&E's POLR service is a ``package'' of electric
generation, transmission and distribution service virtually identical
to the bundled retail service offered by another Cinergy affiliate,
PSI, in Indiana, which has not adopted a retail choice program.
126. Cinergy contends further that CG&E's Account Representatives,
who support Cinergy's retail customers, are subject to the independent
functioning requirement of the Standards of Conduct because they
provide services related to POLR generation, regulated distribution and
transmission services. Cinergy also states that in Ohio, the
competitive retail electric affiliates must be separate from the
Transmission Function and Ohio has promulgated a code of conduct to
prevent competitive advantages to affiliates.\86\ Cinergy claims that
CG&E's POLR employees do not reserve or schedule transmission service;
these functions are handled by Cinergy's marketing unit, which observes
the Standards of Conduct.
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\86\ See Cinergy at p. 9, referencing Ohio Rev. Code Ann.
section 4928.17 (Anderson 2003) and Ohio Admin Code section 5901; 1-
20-16.
---------------------------------------------------------------------------
127. The Commission is not prepared to adopt Cinergy's proposed
rule change and amendment to the definition of ``marketing, sales or
brokering'' to accord POLR service the same treatment, on a generic
basis, as the Commission has accorded bundled retail sales. Since the
details surrounding CG&E's POLR service or the POLR services of other
Transmission Providers are not available, the Commission will not
modify the definition of ``marketing, sales or brokering'' to allow
automatic exemptions in all cases. Nonetheless, the Commission does not
rule out the possibility that a particular POLR service deserves
treatment equivalent to that accorded bundled retail sales treatment.
Accordingly, the Commission will entertain case-by-case requests
for exemption of a POLR service based on the relevant facts and
circumstances.
E. Definition of a Transmission Function Employee
Final Rule
128. Section 358.3(j) defines the term ``Transmission Function
Employee'' as an employee, contractor, consultant or agent of a
Transmission Provider who conducts transmission system operations or
reliability functions, including, but not limited to, those who are
engaged in day-to-day duties and responsibilities for planning,
directing, organizing or carrying out transmission-related operations.
Requests for Rehearing and/or Clarification and Commission Conclusions
129. INGAA and Dominion request clarification on whether the
Commission intended that the term ``operating employee'' (at P 112) of
the Final Rule have the same meaning as by the term ``Transmission
Function Employee.'' Similarly, INGAA is also concerned that Paragraph
120 of Final Rule states that a Transmission Function Employee is
``participating in directing, organizing or executing transmission
system or reliability functions of a Transmission Provider,'' but that
phrase is not identical to the language contained in the definition of
Transmission Function Employee in Sec. 358.3(j). LG&E/KU urge the
Commission to replace the phrase ``including day-to-day duties and
activities * * *'' in the definition of Transmission Function Employee
with ``defined as the * * *'' LG&E states that by using the phrase
``including day-to-day'' there is still some doubt as to whether
certain employees, specifically officers and directors, would be
considered Transmission Function Employees because the term
``including'' implies that this is not an exhaustive list of the types
of activities that could be considered transmission functions.
130. Order No. 2004 replaced the term ``operating employee,'' which
was originally defined in Order Nos. 497-E and 497-F, with the term
``Transmission Function Employee.'' The term ``operating employee'' and
``Transmission Function Employee'' are not identical. In Order No. 497-
E, the Commission defined ``operating employee'' as ``an individual who
has day-to-day duties and responsibilities for planning, directing,
organizing, or carrying out gas-related operations, including gas
transportation, gas sales or gas marketing activities.'' \87\
``Operating employee'' was used in discussions for both a Transmission
Provider as well as its Marketing Affiliate, hence the references to
gas sales or gas marketing activities. Whereas the term ``Transmission
Function Employee'' is defined as ``an employee, contractor, consultant
or agent of a Transmission Provider who conducts transmission
[[Page 23578]]
system operations or reliability functions, including, but not limited
to, those who are engaged in day-to-day duties and responsibilities for
planning, directing organizing or carrying out transmission-related
operations.'' See 18 CFR 358.3(j). Consequently, the term ``operating
employee'' also covered employees engaged in gas sales or marketing
functions whereas the term Transmission Function employees does not.
---------------------------------------------------------------------------
\87\ Order No. 497-E, FERC Stats. & Regs., Regulations Preambles
January 1991-June 1996 ] 30,987 at 30,996.
---------------------------------------------------------------------------
131. With respect to LG&E/KU's specific question, the discussion at
Paragraph 120 of the Final Rule was intended to provide additional
guidance on the definition of the term Transmission Function Employee,
which uses the phrase ``including, but not limited to.'' There is no
real distinction between the preamble discussion and the regulatory
text because the regulatory text did not attempt to capture every
activity of a Transmission Function Employee. As the Commission stated
in the preamble of the Final Rule, and in a series of cases
interpreting the term ``operating employee,'' this definition includes,
but is not limited to, employees engaged in ``day-to-day'' activities.
There may be ``Transmission Function Employees'' who do not engage in
``day-to-day'' activities, but are performing, on less frequent, but
equally as significant basis, transmission functions, such as
organizing expansion of capacity or deciding on whether to construct an
interconnection. In the past, the Commission looked at the actual
duties and responsibilities of the individuals. For example, when
considering the responsibilities of a particular officer, the
Commission evaluated whether he participated in directing, organizing
or executing transmission or wholesale merchant functions, including
whether he had direct access to transmission or reliability information
on the EMS or other databases and whether he approved contracts or
transactions.\88\
---------------------------------------------------------------------------
\88\ See Ameren Services Company, 87 FERC ] 61,145 at 61,600
(1999).
---------------------------------------------------------------------------
F. Definition of Marketing Affiliate
132. Several petitioners, including Dominion, state on rehearing
that the Commission did not define the term ``Marketing Affiliate,''
although it is used in the Final Rule and in the regulatory text.
Dominion urges the Commission to adopt a formal definition of the term
Marketing Affiliate to promote understanding.
133. The Final Rule defines marketing at 18 CFR 358.3(e) and
affiliate at 18 CFR 358.3(b). However, since the Commission uses the
term Marketing Affiliate throughout the Final Rule and regulatory text,
the Commission is adopting Dominion's request and will codify a
definition of Marketing Affiliate at Sec. 358.3(k): ``Marketing
Affiliate means an Affiliate as that term is defined in Sec. 358.3(b)
or a unit that engages in marketing, sales or brokering activities as
that term is defined in Sec. 358.3(e).''
G. Independent Functioning
134. One of the most significant elements of the Standards of
Conduct is the requirement that the Transmission Provider function
independent of its Marketing and Energy Affiliates. The independent
functioning of the Transmission Provider limits its ability to give its
Marketing and Energy Affiliates unduly preferential service or access
to information. However, the Commission also recognizes that a
Transmission Provider and its Marketing and Energy Affiliate should be
permitted to share employees to conduct corporate governance functions,
to take advantage of the efficiencies of corporate integration and to
respond to emergency circumstances. As a result, the Commission has
permitted the sharing of officers and directors, support service
employees, and field and maintenance employees between a Transmission
Provider and its Marketing/Energy Affiliates in most circumstances.
Although the Commission has permitted sharing for the categories of
employees noted above, the Commission will evaluate in compliance
audits and investigations, employees' actual functions and duties to
determine whether the Transmission Provider is appropriately applying
this exemption.
i. Sharing of Senior Officers and Directors
Final Rule
135. In the Final Rule, the Commission stated that it would allow
senior officers and directors who do not engage in transmission
functions, or have day-to-day duties and responsibilities for planning,
directing, organizing or carrying out transmission-related operations
to maintain such positions with the Transmission Provider and its
Marketing or Energy Affiliates. The Commission, however, cautioned that
shared executives may not serve as conduits for sharing transmission,
customer or market information with a Marketing or Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
136. On rehearing, AGA, Cinergy, Dominion, Duke Energy, EEI,
Entergy, INGAA, NICOR, NiSource and Shell Offshore request that the
Commission codify the exemption for senior officers and directors in
the regulatory text. The Commission agrees with this request and will
codify the exception at Sec. 358.4(a)(5) as follows: Transmission
Providers are permitted to share with their Marketing and Energy
Affiliates senior officers and directors who are not ``Transmission
Function Employees'' as that term is defined in Sec. 358.3(j).
137. LG&E/KU argue that the codification for the senior officers
and directors exemption should be broader in scope. They argue that
certain executives may have dual supervisory responsibility for the
company's transmission and merchant functions with a fiduciary
obligation to manage both functions.
138. The Commission denies LG&E/KU's request. An executive who has
day-to-day transmission-related responsibilities should not have a role
in Marketing or Energy Affiliates. The Final Rule has taken into
account the fiduciary obligation of high-level officers and directors
(who may be shared) by adopting the more flexible ``no conduit'' rule
regarding the sharing of information rather than the more stringent
``automatic imputation'' rule. See Discussion in Final Rule at P 144-
150. This enables the limited number of shared officers and directors
to oversee all functions of the company without violating the Standards
of Conduct. If LG&E/KU or any Transmission Provider has a specific
concern about the roles of its executive employees, the Transmission
Provider can seek clarification from the Commission as to whether
sharing is permitted under this Final Rule.
139. Duke Energy also requests that when the Commission codify the
officers and directors section, it also clarify that the information
sharing prohibitions do not limit officers' and directors' ability
obtain information necessary to engage in corporate governance
functions. The Commission also incorporates regulatory text in Sec.
358.4(a)(5) to better reflect that the Commission does not intend to
restrict corporate governance functions as follows: ``A Transmission
Provider may share transmission information covered by Sec. Sec.
358.5(a) and (b) with its senior officers and directors provided that
they do not (1) participate in directing, organizing or executing
transmission
[[Page 23579]]
system operations or marketing functions; or (2) act as a conduit to
share such information with a Marketing or Energy Affiliate.
140. Williams filed a motion for clarification that incorporates a
proposal to revise the Final Rule to create a two-tier exemption for
senior officers and directors to facilitate corporate governance
functions. Under Williams' proposal, the ``Group A'' category would
include directors of the parent company, the Chief Executive Officer
(CEO), the Chief Finance Officer (CFO) and the General Counsel, who
would have unfettered access to information to discharge their
corporate governance duties. Williams proposes that these individuals
never be considered Transmission Function employees even if they
occasionally engage in some Transmission Functions, such as approving a
significant transaction for a particular business unit. Williams
proposes that ``Group B'' would include a small group of senior
officers who are involved in the day-to-day operations of their
respective business units, including Gas Pipelines (transmission),
Midstream, Exploration and Production and Power. Williams argues that
the Group A officers need input and advice from the Group B officers
and should jointly constitute an ``Executive Officer Team.'' Williams
proposes seven ``protections'' for the Group B officers that it argues
are consistent with the Commission's goals of Order No. 2004.
Allegheny, Cinergy, Duquesne, KCPL and PGE filed motions in support of
Williams' request. However, INGAA and El Paso urged the Commission to
avoid imposing Williams' suggested approach on a generic basis to other
companies. INGAA and El Paso caution the Commission not to assume that
the approach proposed by Williams is appropriate or workable for all
companies. Similarly, EEI similarly states while that the Williams
approach may address corporate governance concerns at Williams, the
Commission should not assume that the Williams' approach is appropriate
for all companies.
141. The Commission denies Williams' proposal for revision. As
discussed in the Final Rule, the Commission has already taken into
account the need for the CEO and CFO to comply with the certification
requirements of section 302 and section 906 of the Sarbanes-Oxley Act
of 2002 (Sarbanes-Oxley Act) by adopting the no-conduit rule. The
Commission clarifies that in most circumstances, the ``Group A''
executives Williams identifies would not be Transmission Function
Employees, as that term is defined. The CEO, CFO or General Counsel of
a company would not become a ``Transmission Function Employee'' by
approving major capital expenditures for the company. The Commission
will not approve the creation of an ``Executive Officer Team'' that
includes ``Transmission Function Employees'' and employees of a
Marketing or Energy Affiliate that do not qualify for shared treatment.
The goals of Order No. 2004 cannot be achieved if Group B employees who
are involved in the day-to-day operations of the Marketing or Energy
Affiliates had access to the Transmission Providers' transmission and
customer information.
ii. Sharing of Field and Maintenance Personnel
Final Rule
142. Section 358.4(a)(4) codifies the Commission's historical
policy of allowing Transmission Providers to share field and
maintenance personnel with their Marketing and Energy Affiliates.
Requests for Rehearing and Clarification and Commission Conclusions
143. INGAA, Dominion, NiSource and Shell Gas seek clarification
that a ``field supervisor'' who has the ability to restrict or shut
down the operation of a particular section of a pipeline will not be
treated as an operating employee, despite the language of Order No.
497-F.\89\ INGAA claims that virtually any field employee may restrict
or shut down the operation of a particular stretch of pipeline in a
particular set of circumstances, and that this function alone should
not render those field personnel ``Transmission Function Employees.''
In lieu of controlling the flow on the pipeline, INGAA and Dominion
urge the Commission to adopt a definition that would be limited to
those supervisory employees who may plan to shut down a pipeline in
advance or may choose to shut down based on economic factors.
---------------------------------------------------------------------------
\89\ In Order No 497-F, the Commission stated, ``to the extent
that supervisory field personnel have the ability to control a
pipeline's gas operations, they would be considered operating
employees.'' Order No. 497-F, 66 FERC ] 61,347 at 62,167.
---------------------------------------------------------------------------
144. In addition, Dominion urges the Commission to clarify that the
exception for field and maintenance employees also applies to
technicians, mechanics and their immediate supervisors who are
responsible for electric transmission activities.
145. The Commission clarifies that shared field personnel may
include field supervisors who do not take part in advance planning for
facility shut downs or are involved in shutting down facilities based
on economic reasons.
146. The Commission also clarifies that the field and maintenance
employees exception also applies to technicians, mechanics and their
immediate supervisors who are responsible for electric transmission
activities.
iii. Risk Management Employees
Final Rule
147. The Final Rule prohibits the sharing of risk management
employees who are operating employees of either the Transmission
Providers or their Marketing or Energy Affiliates.\90\ The Final Rule
also prohibits risk management employees from being a conduit for
improperly sharing information because they are in a position to use
transmission, customer and market information to give Marketing and
Energy Affiliates undue advantages.
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\90\ Final Rule at P 112.
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Requests for Rehearing and/or Clarification and Commission Conclusions
148. SCG and its affiliate SCE&G request rehearing of the
prohibition against sharing risk management employees who are also
operating employees of the Transmission Provider or Marketing or Energy
Affiliate.
149. Cinergy, NiSource, Dominion, Duke Energy, EEI and Entergy
request that the Commission codify that risk management employees can
be shared so long as they are not operating employees of the
Transmission Provider or Marketing or Energy Affiliate.
150. Dominion, INGAA and NiSource urge the Commission to clarify
that the types of risk management functions described in the Final Rule
do not constitute transmission functions.\91\ INGAA also urges that
risk management employees should be permitted to make general
appraisals of creditworthiness of particular counterparties (governed
by business standards and not tariffs) and set appropriate exposure
limits to which corporations are willing to be exposed. Similarly,
Dominion argues that managing corporate-wide risk and investment,
approving expansions and establishing spending limits should not
[[Page 23580]]
be considered risk management functions. Dominion and INGAA also urge
the Commission to permit the management of corporate exposure including
financial transactions for the sole purpose of hedging risks.
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\91\ In the Final Rule, the Commission identified various
examples of risk management functions, including: (1) Managing
corporate-wide business risk exposure of the corporation and/or its
affiliates; (2) business risk exposure for third parties; (3)
managing overall corporate investment for the entire corporation;
(4) assessing credit risk for counter-parties; (5) approving
expansion projects; and (6) establishing spending, trading and
capital authorities for each business unit. Final Rule at P 109.
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151. The Commission rejects the rehearing requests of SCG and
SCE&G. Risk management employees will have access to valuable
transmission, customer and market information that can be used to the
detriment of third parties.
152. As per the request of several petitioners, the Commission will
codify the exception that permits Transmission Providers to share risk
management employees with their Marketing and Energy Affiliates at
Sec. 358.4(a)(6).
153. With respect to the petitioners' requests to identify certain
risk management activities that can be shared between a Transmission
Provider and its Marketing and Energy Affiliates, the Commission finds
that it is permissible for the risk management function to: (1) Manage
corporate-wide business risk exposure of the corporation and/or its
affiliates; (2) evaluate business risk exposure for third parties on an
aggregate basis; (3) manage overall corporate investment for the entire
corporation; (4) approve expansion projects; and (5) establish
spending, trading and capital authorities for each business unit.
However, the risk management function is not permitted to assess
creditworthiness of a particular customer under a pipeline's tariff.
This is consistent with the Commission's previously articulated policy,
in which the Commission held that the ``act of deciding whether a
potential shipper can become an actual shipper by satisfying the
creditworthiness requirements under [a pipeline's] tariff is a
transportation function.'' \92\
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\92\ See Vector Pipeline, L.P., 97 FERC ] 61,085 (2001).
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154. While risk management function employees are permitted to
engage in the types of activities identified in the preceding
paragraphs, the employee must pay particular attention to
communications with Marketing and Energy Affiliates. Certainly,
transmission and customer information are not a part of setting
corporate-wide limits or managing corporate investment. A risk
management function employee cannot share transmission or customer
information obtained from the Transmission Provider with its Marketing
or Energy Affiliates. For example, the risk management function
employee can communicate to the Marketing or Energy Affiliate that
Company X has reached or exceeded its corporate-wide credit limit or
its credit rating has been downgraded by non-affiliated financial
rating entities, but the risk management function employee is
prohibited from telling the Marketing or Energy Affiliate that Company
X has reached or exceeded its corporate-wide credit limit because it
had not paid its transmission fees. The distinction is subtle, but
important. The Commission will not permit the risk management function
employee to be used as a vehicle to share information with the
Marketing or Energy Affiliates that the Transmission Provider is
prohibited from sharing under Sec. 358.5(a).
iv. Lawyers as Transmission Function Employees
Final Rule
155. The Final Rule does not prohibit a Transmission Provider from
sharing support employees with its Marketing and Energy Affiliates.
But, if employees, such as lawyers, are engaging in transmission
functions, they are not ``support'' staff; rather, they are
Transmission Function Employees who are subject to the Standards of
Conduct. The Commission will not permit a Transmission Provider to
label individuals or categories of employees as ``support'' to
circumvent the independent functioning requirement.
Requests for Rehearing and/or Clarification and Commission Response
156. Dominion, INGAA, Entergy and SCE&G requested clarification on
when lawyers become Transmission Function Employees. Entergy argues
that when lawyers provide legal or regulatory advice or set policy they
should not become Transmission Function Employees. Dominion urges the
Commission to clarify that lawyers can be considered shared support
employees, and only if they engage in transmission functions would they
be considered Transmission Function Employees and could not be shared.
157. The Commission clarifies that if lawyers participate in
transmission policy decisions on behalf of a Transmission Provider, the
Commission considers that activity as a Transmission Function and the
lawyer is a Transmission Function Employee. For example, a lawyer who
participates in a decision on whether the Transmission Provider should
seek a contract with a customer is acting as a Transmission Function
Employee. If, however, the lawyer is asked to implement the
Transmission Provider's business decision and negotiate a contract with
that customer, the lawyer would not be a Transmission Function
Employee.
H. Identification of Affiliates on Internet
i. Posting Organizational Charts.
Final Rule
158. Section 358.4(b) requires all Transmission Providers to post
information, including organizational charts and job descriptions, with
respect to Marketing and Energy Affiliates on their OASIS or Internet
websites.
159. Specifically, Sec. 358.4(b)(3) requires Transmission
Providers to post organizational charts and job descriptions on their
respective Internet websites or OASIS. The Transmission Provider is
also required to update the organizational charts and job descriptions
within seven business days of a change. In addition, where a
Transmission Provider shares clerical, field or maintenance employees
with its Marketing or Energy Affiliates, the Transmission Provider must
clearly identify the business units for the shared employees and
provide a description of the shared services functions or
responsibilities; but it is not required to provide names or job
descriptions for the clerical or field or maintenance employees. See 18
CFR 358.4(b)(3)(ii).
Requests for Rehearing and/or Clarification and Commission Conclusions
160. Shell Gas requests that the Commission reconsider the website
postings and argues that the complexity of organizational charts for
affiliates is an unjustified burden.
161. On the other hand, Calpine urges the Commission to require
Transmission Providers to post full identification of all affiliates
with a statement of each affiliate's activities and a designation of
which affiliates are considered by the Transmission Provider to be
Marketing Affiliate or providing wholesale merchant functions. Calpine
further urges the Commission to require the Transmission Provider to
post, for each affiliate it claims to be exempt from the definition of
Energy Affiliate, a full and complete explanation for the basis of the
determination.
162. Duke Energy requests that the Commission clarify that the
requirement to post Transmission Provider job titles applies only to
employees involved in transmission or wholesale sales functions and
their managers. Dominion notes that the Final Rule contemplated (at P
125) a Transmission Provider posting organizational charts and job
descriptions for business units that are shared between a Transmission
Provider
[[Page 23581]]
and its affiliated Marketing or Energy Affiliates and urges the
Commission to codify this requirement.
163. The purpose of posting organizational charts and job
descriptions is to provide a mechanism for the Commission and market
participants to determine whether the Transmission Provider is
functioning independently of its Marketing and Energy Affiliates. This
transparency is an integral component of the independent functioning
requirement. Hence, the requirement to post an organizational chart
that identifies the parent corporation with the relative position in
the corporate structure of the Transmission Provider, Marketing and
Energy Affiliates. See 18 CFR 358.4(b)(3)(i). When posting the business
unit for the Transmission Provider as required by Sec.
358.4(b)(3)(ii), it must identify whether any of those business units
are shared with the Marketing or Energy Affiliates. If a corporation
uses a service company as the employment mechanism for the Transmission
Provider and its Marketing or Energy Affiliates, the organizational
charts should clearly specify those circumstances. Similarly, if a
corporation uses both functional and structural organizational charts
for its management, the organizational charts must accurately reflect
its operations. Support units that are shared between a Transmission
Provider and its Marketing or Energy Affiliates must be clearly
identified.
164. Several petitioners, including EEI, argue that the Commission
should eliminate the requirement of Sec. 358.4(b)(3)(ii) to post
employees that are shared between the Transmission Provider and Energy
or Marketing Affiliates since Transmission Providers are not permitted
to share employees. The Commission rejects petitioners' request. There
may be circumstances where a Transmission Provider will be permitted to
share employees with its Marketing or Energy Affiliates, such as when
officers and directors are shared or when a Transmission Provider
obtains a partial waiver. Therefore, the Commission will retain the
requirement to post shared employees.
165. In addition, the organizational charts should accurately
reflect when Transmission Providers use service company employees to
staff the Transmission Provider or its Marketing or Energy Affiliates.
The organizational charts should be well organized and self-explanatory
and company specific acronyms should be explained in a legend. In
several recent investigations, the Commission found that organizational
charts and job descriptions were incomplete, inaccurate or difficult to
understand, and in some instances, did not include all the required job
titles, names of managers and job descriptions.\93\
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\93\ See Transco supra note 86. See also National Fuel Gas
Supply Corporation, 103 FERC ] 61,192 (2003).
---------------------------------------------------------------------------
166. EEI also urges the Commission to reconsider the time when
information should be posted and recommends that the Commission require
the information to be updated within 14 days, rather than the seven
days in the Final Rule. The Commission already considered EEI's request
in the comments to the NOPR. Originally, the Commission proposed that
the OASIS and Internet websites be updated within three days. However,
upon consideration of the petitioners' requests for additional time to
update the information, the Commission balanced the need for
transparency and updated information with the Transmission Providers'
ability to actually update the information and determined that updating
the information within seven days was the appropriate balance.
167. Southwest Gas also requests clarification whether the posting
requirements apply to a Transmission Provider that has no Marketing or
Energy Affiliate. The Commission clarifies that the Transmission
Provider should still post the information (as well as develop
procedures and designate a Chief Compliance Officer).
ii. Posting of Merger Information
Final Rule
168. Section 358.4(b) requires the Transmission Provider to post
the name(s) and address(es) of potential merger partner(s) and Energy
Affiliates on the OASIS or Internet website. This is consistent with
the Commission's current policy, which treats potential merger partners
as affiliates.\94\
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\94\ Revised Filing Requirements Under Part 33 of the
Commission's Regulations, Order No. 642, 65 FR 70983 (Nov. 28,
2000), FERC Stats. & Regs., Regulations Preambles 1996-2000 ] 31,111
at 31,887 (Nov. 15, 2000), reh'g denied, Order No. 642-A, 94 FERC ]
61,289 (2001).
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Requests for Clarification and Commission Conclusion
169. Several petitioners query whether it is acceptable to put a
link to potential merger partners' websites in lieu of posting all the
required information on its own website. The Commission finds that it
is acceptable, so long as the link sends the user directly to the
appropriate location and is kept up to date.
170. Dominion also requests clarification regarding the timing of
the posting of merger information because the regulatory text at Sec.
358.4(b)(3)(iv) requires the posting within seven days of when the
merger is announced, but the preamble discussion stated that the merger
information should be posted within seven days after a potential merger
is announced. See Final Rule at P 127. The Commission clarifies that
the information should be posted within seven days of when a potential
merger is announced and will revise the regulatory text to reflect the
discussion in the preamble of the Final Rule and herein.
iii. Transfer of Employees
Final Rule
171. Section 358.4(c) requires a Transmission Provider to post
notices of employee transfers on the OASIS or Internet website.
Requests for Rehearing and/or Clarification and Commission Conclusions
172. Dominion requests clarification on whether the Transmission
Provider is also required to post the transfers between the Marketing
and Energy Affiliates. Dominion argues that the regulatory text at
Sec. 358.4(c) does not accurately reflect the discussion in the Final
Rule at P 128.
173. The Commission so clarifies. The Final Rule is intended to
capture the transfers between a Transmission Provider on the one hand
and its Marketing or Energy Affiliates on the other. The first line of
regulatory text at Sec. 358.4(c) is, therefore, revised, as follows:
``Employees of the Transmission Provider, Marketing or Energy
Affiliates are not precluded from transferring among such functions as
long as such transfer is not used as a means to circumvent the
Standards of Conduct. Notices of any employee transfers between the
Transmission Provider, on the one hand, and the Marketing or Energy
Affiliates, on the other, must be posted on the OASIS or Internet
website, as applicable.'' \95\
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\95\ The remainder of the regulatory text at 18 CFR 358.4(c)
remains the same.
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iv. Posting Standards of Conduct Procedures
Final Rule
174. Section 358.4(e) requires Transmission Providers to post
written procedures implementing the Standards of Conduct on their OASIS
or Internet websites in lieu of filing them with the Commission.
[[Page 23582]]
Requests for Rehearing and/or Clarification and Commission Conclusions
175. Shell Offshore and Xcel request rehearing and would require
Transmission Providers to submit their compliance procedures to the
Commission for review and approval. Petitioners argue that there is no
assurance that the Transmission Providers' Standards of Conduct
procedures will conform to the Commission's intent in Order No. 2004.
They ask that the Commission provide a formal review procedure under
which the Commission will review and approve each Transmission
Provider's compliance procedures. Shell Offshore claims that, over the
years, the Commission often required several ``rounds'' of compliance
filings before it approved a Transmission Provider's Standards of
Conduct procedures.
176. The Commission denies rehearing. Previously, the Commission
gave little generic guidance on acceptable implementation of the
Standards of Conduct. In the Final Rule, the Commission identified the
types of information that should be included in the compliance
procedures,\96\ and we provide more guidance herein.\97\
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\96\ Final Rule at P 36.
\97\ A Transmission Provider is required to prepare written
procedures explaining how it will comply with each of the Standards
of Conduct and distribute the procedures to its employees. At a
minimum, the Standards of Conduct procedures should: (1) Identify
and explain the measures the Transmission Provider uses to keep
secure transmission information and confidential customer
information, such as locked file rooms, card-key access to control
center and/or password restricted databases (more extensive
information should be included where the Transmission Provider also
shares facilities, including computer facilities, with its Marketing
or Energy Affiliates); (2) identify the Chief Compliance Officer,
describe his or her general duties and functions, and provide
contact information; (3) identify any categories of employees shared
between the Transmission Provider and its Marketing or Energy
Affiliates (it is not necessary to identify the names of the shared
support employees); (4) identify procedures that will be used to
make sure that the names and addresses of its Marketing and Energy
Affiliates, organizational charts and job descriptions, merger,
transfer, tariff waiver and discount information are kept up-to-date
on the OASIS or Internet website, and are archived consistent with
the requirements of Parts 37 and 284 of the Commission's
regulations; and (5) identify procedures to ensure that information,
including documents and communications, are retained to demonstrate
that the Transmission Provider is in compliance with the Standards
of Conduct.
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177. Moreover, posting the written procedures on the OASIS or
Internet website gives users immediate access to the information and
does not create additional administrative burdens for the Commission.
Commission staff will be monitoring Standards of Conduct compliance
closely. Although some petitioners expressed concern that the Hotline
may not provide consistent advice or adequate mechanisms to respond to
inquiries regarding the Standards of Conduct, the Commission finds that
the Hotline is experienced in providing advice on and interpreting the
Standards of Conduct.
178. NiSource requests clarification on where an electric utility
Transmission Provider that no longer has an OASIS, presumably because
it participates in an RTO or ISO with an OASIS, should post the
required information. The Commission clarifies that the Transmission
Provider should make arrangements, as is the current practice for some,
to have the OASIS provider, e.g., the RTO or ISO, include a link to the
Transmission Provider's information. The link should be directly to the
information postings, so the user does not have to search the website
for the relevant information.
v. Training
Final Rule
179. At the request of petitioners, the Final Rule included a
provision, at Sec. 358.4(e)(5), that formalizes the requirement to
train employees in the Standards of Conduct as follows: ``Transmission
Providers shall require all their employees to attend training and sign
an affidavit certifying that they have been trained regarding the
Standards of Conduct requirements.''
Requests for Rehearing and/or Clarification and Commission Conclusions
180. Petitioners that request rehearing and clarification focus on
two issues with regard to training: (1) Who should be trained; and (2)
what types of training and certification are acceptable. INGAA and
Alliance argue that a Transmission Provider should not be required to
distribute the Standards of Conduct to the employees of its Marketing
and Energy Affiliates because the Transmission Provider may not know
the names of all those employees.
181. Some petitioners, including Alliance, BP, Cinergy, Dominion,
Duke Energy, EEI, Entergy and INGAA, argue that training all employees
would include employees who have no involvement in energy, gas, power
or transmission functions and/or do not have access to information
related to those functions. The Commission clarifies that it is the
Transmission Provider's responsibility to ensure that all Transmission
Provider employees and Marketing and Energy Affiliate employees with
access to information about transmission, energy, power or marketing
receive a copy of the Standards of Conduct and training.
182. EEI notes that the regulatory text requires training of all
employees while the preamble identified several categories of employees
who should be trained, such as shared support employees and risk
management employees. EEI urges that training cover: (1) Transmission
Function employees (and not all employees of the Transmission
Provider); (2) Marketing Affiliate Employees; (3) shared support
employees; (4) risk management employees who support the Marketing and
Energy Affiliates; and (5) shared management employees. EEI also claims
that some union contracts contain provisions restricting the ability to
require the signing of affidavits by union employees. Also, according
to EEI, for some workers, training does not seem appropriate, e.g.,
cafeteria, building maintenance and field workers.
183. One of the goals of training of a broad group of employees is
to ensure that employees with access to information about transmission,
energy, power, gas or marketing functions understand the restrictions
on sharing information and the prohibition on acting as a conduit for
sharing information. For those employees without access to information
about transmission, energy, or natural gas functions, however, training
will not be required.
184. The purpose of distributing the Standards of Conduct and
training is to ensure that employees are knowledgeable about their
obligations under the Standards of Conduct. The Transmission Provider
may implement this requirement by ensuring that the Marketing and
Energy Affiliates distribute the Standards of Conduct to their
employees, either in paper copy or electronically. As suggested by
INGAA, this can be accomplished by sending a copy of the written
procedures to the person designated to receive service at each of the
Marketing and Energy Affiliates. The Chief Compliance Officer will be
responsible for following up with the Marketing and Energy Affiliates
to ensure that the Standards of Conduct were actually distributed to
the appropriate employees.
185. Computer-based or electronic training is an acceptable method
of training, as is a computer-generated certificate of training, in
lieu of an affidavit from the employee certifying she or he has been
trained.\98\ The Chief Compliance Officer will be responsible
[[Page 23583]]
for ensuring that employees participate in the Standards of Conduct
training.
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\98\ With some computer-based training programs, a certificate
of completion is generated when the student completes the entire
training program.
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vi. Chief Compliance Officer
Final Rule
186. Section 358.4(e)(6) requires Transmission Providers to
designate Chief Compliance Officers who will be responsible for
Standards of Conduct compliance.
Requests for Clarification and Commission Conclusions
187. Entergy expresses concern that a Chief Compliance Officer, who
may be a lawyer, does not become a Transmission Function Employee
because she or he is involved in directing policy. Rather, Entergy
urges that the Chief Compliance Officer be bound by the no-conduit rule
for information she or he has access to. A Chief Compliance Officer
does not become a Transmission Function Employee when she or he is
involved in organizing a Transmission Provider's policies and
procedures to comply with the Standards of Conduct. She or he will have
access to transmission and customer information and is prohibited from
being a conduit for sharing this information with the Marketing or
Energy Affiliates.
188. NiSource requests clarification that one Chief Compliance
Officer may be appointed for several affiliated Transmission Providers
within the same corporate family. The Commission so clarifies. Several
affiliated Transmission Providers within the same corporate family may
designate the same Chief Compliance Officer who will be responsible for
Standards of Conduct compliance activities.
I. Information Access and Disclosure Prohibitions
189. Section 358.5(a) requires Transmission Providers to ensure
that employees of their Marketing and Energy Affiliates have access
only to that information that is made available to the Transmission
Providers' other transmission customers (i.e., information posted on an
OASIS or Internet website, concerning transmission capability, price,
curtailments, storage, ancillary services, balancing, maintenance
activity, capacity expansion plans or similar information).
190. The Final Rule also prohibits a Transmission Provider from
disclosing to the employee of the Transmission Provider's Marketing or
Energy Affiliates any information concerning the transmission system of
the Transmission Provider or the transmission system of another
Transmission Provider.\99\ The Final Rule also prohibits the
Transmission Provider from sharing any information acquired from non-
affiliated transmission customers or potential non-affiliated
transmission customers or developed in the course of responding to
requests for transmission or ancillary services on the OASIS or
Internet website with employees of its Marketing of Energy Affiliates
except to the limited extent information is required to be posted on
the OASIS or Internet website in response to a request for transmission
service or ancillary service.\100\
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\99\ 18 CFR 358.5(b)(1).
\100\ 18 CFR 358.5(b)(2).
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191. The Commission established the following specific exemptions
from the information disclosure prohibitions that permit a Transmission
Provider to communicate with its Marketing or Energy Affiliate: (1)
Information relating to specific transactions (transaction specific
exemption); \101\ (2) crucial operating information (crucial operating
information exemption); \102\ (3) information regarding a customer with
that customer's voluntary consent (voluntary consent exemption); \103\
and (4) certain limited generation information necessary to perform
generation dispatch (generation dispatch exemption).\104\
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\101\ 18 CFR 358.5(b)(5).
\102\ 18 CFR 358.5(b)(8).
\103\ 18 CFR 358.5(b)(4).
\104\ 18 CFR 358.5(b)(6).
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Requests for Rehearing and/or Clarification and Commission Conclusions
192. Duke Energy argues the Commission to clarify that the
Standards of Conduct do not interfere with the ability of co-owners of
jointly-venture gas pipeline Transmission Providers to communicate with
each other regarding the operations of the jointly owned pipeline.\105\
Duke Energy explains that a bar on communication of transmission
information could prevent a pipeline operator from sharing information
with the Transmission Provider's management committee. Duke Energy
argues that if the Final Rule prohibits such communications, then
business partners will not be able to manage their investments, thus
inhibiting additional corporate infrastructure development.
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\105\ Duke Energy explains that many joint-venture pipelines are
operated by a management committee that makes operating decisions
for the pipeline.
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193. The Commission denies Duke Energy's request for rehearing.
Duke Energy seems to be concerned that the rule prohibits pipeline-to-
pipeline information that is necessary for operations. That is not the
case. Transmission Providers may share information with affiliated
Transmission providers (an affiliated Transmission Provider is not
considered an Energy Affiliate) and may share crucial operating
information consistent with Sec. 358.3(b)(8)).
i. No Conduit Rule
Final Rule
194. Section 358.5(b)(7) provides that neither a Transmission
Provider nor an employee of a Transmission Provider is permitted to use
anyone as a conduit for sharing information covered by the prohibitions
of Sec. 358.5(b)(1) and (2) with a Marketing or Energy Affiliate. The
Final Rule also states that the Commission would adopt the ``No-Conduit
Rule'' vis-[agrave]-vis shared employees.\106\
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\106\ See Final Rule at P 145-150. Under a ``no-conduit rule,''
an employee that may be shared by a Transmission Provider and its
Marketing or Energy Affiliate could receive transmission or customer
information as long as the shared employee did not act as a conduit
for sharing the information with the Marketing or Energy Affiliate.
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Requests for Rehearing and/or Clarification and Commission Conclusions
195. Petitioners, including EEI, Entergy, Cinergy and Duke Energy,
argue that, although the discussion in the Final Rule purportedly
adopts the ``no conduit'' rule, the regulatory text for Sec.
358.5(b)(7) operates like an ``automatic imputation'' rule because it
does not expressly permit the disclosure of information to permissibly
shared employees, such as shared officers and directors. See Final Rule
at P 145-150.
196. According to petitioners, the no-conduit rule has two
purposes: (1) To prohibit the Transmission Provider from using anyone
as a conduit to share transmission or customer information with a
Marketing or Energy Affiliate; and (2) to allow certain information to
be shared with shared, non-operating employees, such as officers and
directors, as long as those employees are not a conduit for sharing
transmission or customer information with a Marketing or Energy
Affiliate.
197. The Commission grants petitioners' request. Sections
358.5(b)(1) and (2) expressly prohibit a Transmission Provider from
sharing certain information with its Marketing or Energy Affiliates.
Notwithstanding the prohibitions of Sec. Sec. 358.5(b)(1) and (2), the
Commission intends to allow a Transmission Provider to share such
information with employees that may be
[[Page 23584]]
shared so that they can engage in certain functions, e.g., corporate
governance, risk management or certain ``support-type'' services.
Accordingly, the Commission is adopting additional regulatory text to
reflect its intent to adopt the no-conduit rule in Sec. 358.5(b)(7),
as follows: ``A Transmission Provider may share information covered by
Sec. Sec. 358.5(b)(1) and (2) with employees permitted to be shared
under Sec. Sec. 358.4(a)(4), (5) and (6) provided that such employees
do not act as a conduit to share such information with any Marketing or
Energy Affiliates.''
ii. Crucial Operating Information Exemption
Final Rule
198. In the Final Rule, Sec. 358.5(b)(8) permits a Transmission
Provider to share crucial operating information with its Energy
Affiliates to maintain the reliability of the transmission system.
Requests for Rehearing and/or Clarification and Commission Conclusions
199. Many petitioners, including Shell Gas, Duke Energy, NiSource,
INGAA, and El Paso, challenge the Commission's decision to limit shared
information to crucial operating information and argue that such a
limitation may jeopardize a Transmission Provider's ability to operate
safely by limiting the Transmission Providers' ability to communicate
with interconnected facility operators. They argue that Transmission
Providers should be allowed to share crucial operating information
during circumstances other than those needed to maintain the
reliability of the transmission system for a variety of reasons,
including to confirm nominations. NiSource encourages the Commission to
revise the regulatory text to include information transmitted between
interconnected parties, whether affiliated or not, as needed to
maintain normal operating conditions, to ensure system integrity or to
ensure safe and reliable operations.
200. New York State Department seeks clarification that the general
prohibition of Sec. 358.4(a)(1) which provides that, except in
emergency circumstances affecting system reliability, the Transmission
Function Employees of the Transmission Provider must function
independently of the Transmission Provider's Marketing or Energy
Affiliates' employees, and is not intended to limit the specific
exemption for sharing ``crucial operating information'' with an Energy
Affiliate to maintain the reliability of the transmission system on a
daily basis as provided in Sec. 358.5(b)(8).
201. NiSource and Xcel request the Commission to clarify the types
of operating information that may be shared or, in the alternative,
require Transmission Providers to specify or list the operational
information they intend to share in their respective Standards of
Conduct. El Paso suggests that such a list include operational
information regarding future expansions and how and when capacity will
be available in the future. According to petitioners, the failure to
require such a listing will create uncertainty as to what information
will, or will not, be shared. INGAA and El Paso claim that companies
need to be able to communicate with affiliates about future expansions
and how and when capacity could be made available in the future, and to
have a free exchange of operating information between a pipeline and
its upstream affiliates.
202. NiSource and Shell Offshore challenge the Commission's
suggestion that entities consult the Hotline as a source for guidance
on a permissible communications. They argue that the Hotline may get
inundated with calls and may give inconsistent advice. They question
what a Transmission Provider should do if it does not agree with the
Hotline's advice.
203. It appears that several petitioners have interpreted the
phrase ``crucial operating information to maintain the reliability of
the transmission system'' to mean information only needed during
emergency circumstances to maintain system reliability. That was not
the Commission's intent in the Final Rule. ``Crucial'' operating
information is that information necessary to operate and maintain the
transmission system on a day-to-day basis; it does not include
transmission or marketing information that would give a Transmission
Provider's Marketing or Energy Affiliate undue preference over a
Transmission Provider's nonaffiliated customers in the energy
marketplace. In using the term ``crucial operating information,'' the
Commission intended that Transmission Providers would be permitted to
share day-to-day operational-type information with interconnected
Energy Affiliates necessary to maintain the pipelines' operations; such
information includes confirmations, nominations and schedules with
upstream producers and gathering facilities, operational data relating
to interconnection points, and communications relating to maintenance
of interconnected facilities. The Commission expects that these types
of communications will take place between the operators of the pipeline
or gas control facilities. Those operators are prohibited from being a
conduit for sharing transmission or customer information with other
employees of the Marketing or Energy Affiliates. To better reflect the
Commission's intent, the Commission is revising the regulatory text at
Sec. 358.5(b)(8) as follows: ``A Transmission Provider is permitted to
share information necessary to maintain the operations of the
transmission system with its Energy Affiliates.''
204. The Commission declines to develop a list of the types of
operating information that would be deemed ``crucial'' operating
information. Such a list, whether created by the Commission, or created
and posted by the Transmission Provider, likely would not identify all
types of crucial operating information.
205. The Commission rejects petitioners' challenge to the
Enforcement Hotline's ability to handle questions about crucial
operating information. A Transmission Provider that does not agree with
advice offered by the Enforcement Hotline is free to file a request for
declaratory order or a complaint with the Commission.
206. Finally, Entergy argues that the Final Rule fails to codify a
specific exemption to allow sharing of certain information required to
comply with requirements imposed on operators of nuclear generating
facilities by the Nuclear Regulatory Commission. The Commission
declines to revise the regulatory text of Sec. 358.5(b)(6) as
requested by Entergy. The Commission stated in the Final Rule that a
Transmission Provider will be permitted to share information required
by other regulatory agencies such as NRC with its Energy
Affiliate.\107\ This type of information is covered by the crucial
operating information exemption in Sec. 358.5(b)(8), and further
codification is not necessary.
iii. Transaction Specific Exemption
---------------------------------------------------------------------------
\107\ Final Rule at P 155.
---------------------------------------------------------------------------
Final Rule
207. In the Final Rule, the Commission retained the ``transaction
specific exemption'' by codifying it in Sec. 358.5(b)(5). Under the
exemption, Transmission Providers do not have to contemporaneously
disclose information covered by Sec. 358.5(b)(1) if it relates solely
to a Marketing or Energy Affiliate's specific request for transmission
service.
[[Page 23585]]
Requests for Rehearing and/or Clarification and Commission Conclusions
208. INGAA, National Fuel-Supply and Shell Offshore each request
that the Commission clarify whether the transaction specific exemption
covers requests by the Marketing or Energy Affiliate for the expansion
or extension of the Transmission Provider's existing system,
interconnection requests or discussions about building new
infrastructure. Shell Offshore states that it is concerned about its
ability to discuss available capacity or new capacity solutions for
transportation of gas from reserves that have yet to be discovered or
developed. Shell Offshore is concerned that such general discussions
with a Marketing or Energy Affiliate would have to be disclosed because
they do not fit within the scope of the transaction specific exemption.
Similarly, National Fuel-Supply is concerned that not all requests
seeking the establishment of an interconnection and the construction of
related facilities are associated with a specific request for
transportation service.
209. The Commission addressed a similar concern about the
transaction specific exemption in its recent Order on Rehearing of
Order No. 2003, the Standardization of Generator Interconnection
Agreements and Procedures.\108\ In that proceeding, the Commission
addressed a request for clarification as to whether a Transmission
Provider would violate the Standards of Conduct if it shared technical
information regarding its transmission system with an interconnection
customer that is an affiliate. The Commission noted that the definition
of ``Transmission Service'' under Sec. 358.3(f) includes
interconnection service. Final Rule at P 105.
---------------------------------------------------------------------------
\108\ Standardization of Generator Interconnection Agreements
and Procedures, Order No. 2003, 68 FR 49845 (Aug. 19, 2003), III
FERC Stats. & Regs. ] 31,146 (2003), order on reh'g, 106 FERC ]
61,220 (2004).
---------------------------------------------------------------------------
210. The Commission is balancing its concerns that a Transmission
Provider will abuse its relationship with a Marketing or Energy
Affiliate by providing it unduly preferential access to information
about potential expansion plans or new production areas against the
need to facilitate infrastructure development by allowing the
Transmission Provider to coordinate construction and planning with an
interconnecting gatherer, pipeline or producer. Therefore, the
Commission clarifies that ``Transmission'' also includes an
interconnection to facilitate gas transportation service. Thus,
discussions between a natural gas Transmission Provider and an Energy
Affiliate to provide an interconnection or expansion for the Energy
Affiliate would be covered by the transaction specific exception.
Interconnecting entities may discuss, the location, practicality and
cost of potential interconnections with an affiliated Transmission
Provider. The purpose of this is to encourage the Transmission Provider
and an interconnecting Energy Affiliate to work together to develop
additional infrastructure and facilitate development of production.
211. However, consistent with the requirements of Order No. 2003-A,
the Commission will require the following additional safeguards to
ensure that the Transmission Provider does not give its Energy
Affiliate an undue preference. Specifically, when a Transmission
Provider and an Energy Affiliate participate in scoping meetings or
discussions about capacity expansion or new development, the
Transmission Provider must: (1) Post an advance notice to the public on
its OASIS or Internet website of its intent to conduct a meeting with
its Energy Affiliate; (2) transcribe the meeting in its entirety; and
(3) retain the transcript of the scoping meeting for three years and
make it available to the Commission upon request.
212. Of course, Transmission Providers must provide interconnection
and expansion service in a non-discriminatory fashion to similarly
situated non-affiliated requestors. Moreover, a Transmission Provider
cannot provide advance information to a Marketing or Energy Affiliate
regarding a general expansion project because that would not be
transaction-specific and such information would give the Marketing or
Energy Affiliate an undue competitive advantage.
213. National Fuel-Supply also requests the Commission to ``cure
the ambiguity in the regulatory text'' that limits the exemption to a
Marketing or Energy Affiliate's specific ``request'' for transmission
service in Sec. 358.5(b)(5). National Fuel-Supply states that, in a
narrow sense, a ``request'' for transmission is satisfied when a
pipeline and a shipper enter into a transportation agreement. National
Fuel-Supply suggests that the Commission revise the regulatory text to
include an agreement resulting from a specific request. The Commission
denies National Fuel-Supply's request to revise the regulatory text,
but clarifies that by using the term ``relate'' in the phrase ``if it
relates solely to a Marketing or Energy Affiliate's specific request
for transmission service,'' the Commission intended to include the
corresponding transportation service agreements that result from a
``request.''
iv. Voluntary Consent Exemption
Final Rule
214. Section 358.5(b)(4) provides that a non-affiliated
transmission customer may voluntarily consent, in writing, to allow a
Transmission Provider to share that customer's information with a
Marketing or Energy Affiliate.
Requests for Rehearing and/or Clarification and Commission Conclusions
215. BP argues that the Commission should eliminate the ``voluntary
consent'' exemption because, in the natural gas area, there is no
business reason why a customer would allow the Transmission Provider to
share that customer's information with a Transmission Provider's
Marketing or Energy Affiliate. According to BP, Transmission Providers
could coerce the customer to consent; therefore, such consent is not
truly voluntary. BP proposes that the Commission require Transmission
Providers to post any voluntary consent on their OASIS or Internet
websites along with a statement that no tying arrangement was required
and that no preferences, either operational or rate-related, were
granted for the voluntary consent.
216. The Commission denies BP's request to eliminate the voluntary
consent exemption. As discussed in the Final Rule, the Commission has
permitted customers, in writing, to allow a Transmission Provider to
share the non-affiliate's information with a Marketing Affiliate.\109\
There are circumstances where a customer authorizes the Marketing
Affiliate to act as its agent or asset manager regarding transmission
transactions on the affiliated Transmission Provider. For example, a
municipality may authorize a Marketing Affiliate to perform its
scheduling or nominations on the Transmission Provider. The Commission
does not intend to discourage these types of services. Customers may
use an affiliate to provide it these services. The customer must
provide the Transmission Provider, in writing, permission for that
entity to act on its behalf and/or authorize the Transmission Provider
to share the customer's information with that entity.
---------------------------------------------------------------------------
\109\ Final Rule at P 156.
---------------------------------------------------------------------------
217. However, the Commission will adopt BP's second proposal. If a
transmission customer voluntarily
[[Page 23586]]
authorizes the Transmission Provider to share the customer's
information with a Marketing or Energy Affiliate, the Transmission
Provider is required to post notice on the OASIS or Internet website of
that consent along with a statement that it did not provide any
preferences, either operational or rate-related, in exchange for that
voluntary consent.
218. Finally, customers who feel ``coerced'' can file a complaint
with the Commission or seek informal resolution through the Enforcement
Hotline.
v. Posting of Shared Information Requirement
Final Rule
219. Section 358.5(b)(3) provides that, if a Transmission
Provider's employee discloses information in a manner contrary to the
Standards of Conduct requirements of Sec. Sec. 358.5(b)(1) and (2)
(the information sharing and disclosing prohibitions), the Transmission
Provider must immediately post this information on its OASIS or
Internet website.
Requests for Rehearing and/or Clarification and Commission Conclusions
220. El Paso, INGAA and Shell Gas argue that it will be impractical
for pipelines to post contemporaneously the numerous intra-day
communications and information shared and disclosed between a pipeline
and its Marketing or Energy Affiliates. El Paso argues that operational
information by necessity must be communicated in real-time and
continuously between operators of interconnected natural gas systems.
They argue further that it is inefficient for the Transmission Provider
to post and report each time its gas control personnel communicates
with gatherers. They also argue that this posting requirement will harm
Energy Affiliates by disclosing sensitive information that might reveal
the marketing strategies of the Energy Affiliate. NiSource requests
that the Commission clarify that any public utility that no longer
maintains an OASIS must post the shared information on its website.
221. The petitioners' arguments assume that the crucial operating
exemption does not allow them to share various day-to-day
communications with interconnecting affiliates, and, thus, they are
required to post information relating to those communications on the
OASIS or Internet website under Sec. 358.5(b)(3).
222. As discussed above, the Transmission Provider may share
certain information with its Energy Affiliates covered under Sec.
358.5(b)(8) without triggering the posting requirements under Sec.
358.5(b)(3). The clarification above addresses the petitioners'
concerns about voluminous intra-day communications.
223. The Commission emphasizes that if a Transmission Provider does
disclose information contrary to the Standards of Conduct, it must
immediately post that information on the OASIS or Internet website.
Contemporaneous posting and transparency are one of the most effective
deterrents to favoritism, undue discrimination and anti-competitive
conduct.
224. Finally, we clarify that, in the event a Transmission Provider
does not maintain an OASIS, it must post the shared information on an
Internet website.
J. Discounts
Final Rule
225. Section 358.5(d) requires a Transmission Provider to post on
its OASIS or Internet website, any offer of a discount at the
conclusion of negotiations, ``contemporaneous with the time that the
offer is contractually binding.'' In the Final Rule, the Commission
stated that this result balances the importance of equal and timely
access to discount information with clarity. The Commission noted that
the former requirement to post gas discounts within 24 hours of gas
flow\110\ was too late to afford a non-affiliated competitor the
opportunity to negotiate a comparable deal in today's fast-paced
markets.
---------------------------------------------------------------------------
\110\ Former 18 CFR 161.3(h)(2) of the Commission's regulations.
---------------------------------------------------------------------------
Requests for Rehearing and/or Clarification and Commission Conclusions
226. INGAA, NiSource and National Fuel-Supply separately request
the Commission to clarify that in the context of a precedent agreement,
the requirement to post discounts should not occur until the conditions
in the precedent agreement are satisfied. They argue that to hold
otherwise would place a chilling effect on contract negotiations and
note that a precedent agreement is not binding until all of the
conditions are met.
227. The Commission denies the proposal to delay the posting
requirement for discounts of precedent agreement until all of the terms
and conditions are met. This would be an exemption that would swallow
the rule because the purpose of the timing of the posting requirement
is that it provides time for a non-affiliated competitor to negotiate a
comparable discount. The Commission clarifies that a Transmission
Provider must comply with the discount posting requirement at the time
a precedent agreement containing the discount has been reached.
228. Shell Offshore requests that the Commission clarify whether
``contractually binding'' means legally executed, asserting that the
``conclusion of negotiations'' is not a defined term or term of art.
NiSource requests that the Commission clarify that the posting of
discounts is not required until both parties are bound to the contract.
NiSource argues that the posting should not be made at the time of the
offer and that under contract law it could be argued that that a
Transmission Provider could be bound when it extends the discount
offer.
229. The Commission clarifies that the time the offer is
contractually binding means the time that both parties are bound.
230. NiSource also asks the Commission to clarify that the posting
requirements in Order No. 637 remain applicable to discounts given to
non-affiliated customers. Under Order No. 637, discounts must be posted
prior to the first nomination on a new or amended contract. The
Commission clarifies that the Final Rule does not affect the posting
requirements for non-affiliate discounts under Order No. 637.
K. Accounting Treatment for Compliance Costs
231. The Final Rule was silent on the accounting treatment to be
used for compliance costs.
232. Xcel requests that the Commission allow Transmission Providers
to record their compliance costs as regulatory assets in Account No.
182.3, Other Regulatory Assets, with amortization of the compliance
costs over a period of years in future FERC jurisdictional rates. Xcel
argues that anticipated compliance costs will be substantial and are
not reflected in its currently effective transmission rates. Allowing
such accounting treatment under the Uniform System of Accounts, Xcel
argues, will promote compliance by providing jurisdictional entities a
means to recover the initial and ongoing compliance costs over time.
Xcel notes as support for its position that the Commission allowed
regulatory asset treatment for market start-up costs incurred by the
Midwest Independent System Operator (MISO).
233. The Commission denies rehearing. The Commission will not make
a generic determination that
[[Page 23587]]
regulatory asset accounting treatment is appropriate for the costs
incurred to implement the Standards of Conduct, nor agree to allow the
amortization of those costs over a period of years in a Transmission
Provider's future FERC jurisdictional rates. The Commission's
determination in MISO does not support Xcel's position. In MISO, the
Commission responded to concerns about the ability of member public
utilities to recover costs billed by MISO but incurred by the public
utilities. Here the issue is costs directly incurred by a Transmission
Provider to operate and administer its transmission system. The costs
at issue here are like the costs of implementing business practice
standards, which are not treated as regulatory assets.
L. Request for Extension of Time
234. On March 22, 2004, EEI submitted a motion for an extension of
time for compliance with Order No. 2004. EEI argues that the Commission
should defer the deadline for compliance with Order No. 2004 until
September 1, 2004. Alternatively, EEI urges the Commission to consider
extending the time for training of employees under Sec. 358.4(e)(5)
and the posting requirements under Sec. 358.4(b) until September 1,
2004. EEI argues that if a rehearing order changes the rules after
training has occurred, Transmission Providers would have to revise
their training programs or modules. The Commission grants EEI's request
to extend the deadline for compliance with Order No. 2004. See 18 CFR
358.4(e)(2).
M. Typographical Corrections
235. The Commission is also making some corrections to the
regulatory text to reflect the term ``Marketing Affiliate,'' and to
correct typographical errors.
N. Applicability of the Standards of Conduct to Newly Formed
Transmission Providers
236. The Commission will also address the issue of when a newly
created Transmission Provider becomes subject to part 358 Standards of
Conduct. The Commission clarifies that the Standards of Conduct apply
to any Transmission Provider, including those which have not yet begun
operations. The statutory requirement that Transmission Providers act
in a manner that is not unduly discriminatory or preferential applies
before the Transmission Provider begins to provide transmission
services. For example, it has become a common practice for project
sponsors of new interstate natural gas pipeline projects to hold open
seasons to reach the largest economically feasible market for their
enterprises, and to avoid creating perceptions of undue discrimination
during project development. As a general principle, the Commission
believes that new Transmission Providers should take the appropriate
steps to comply with the Standards of Conduct as soon as practicable.
237. A newly-formed company will, of course, take the requirements
of Part 358 into account when establishing its initial corporate
organization. However, the Commission recognizes that some aspects of
the Standards of Conduct may have no meaningful applicability until the
company has been staffed and begins to perform transmission functions,
such as soliciting business, or negotiating contracts. To the extent a
prospective Transmission Provider is unsure of the adequacy of its
compliance with the Standards of Conduct, it may seek specific guidance
from the Commission.
IV. Document Availability
238. In addition to publishing the full text of this document in
the Federal Register, the Commission also provides all interested
persons an opportunity to view and/or print the contents of this
document via the Internet through the Commission's home page http://www.ferc.gov
and in the Commission's Public Reference Room during
normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First
Street, NE., Room 2A, Washington, DC 20426.
239. From the Commission's home page on the Internet, this
information is available in the eLibrary. The full text of this
document is available on eLibrary in PDF and Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
240. User assistance is available for eLibrary and the Commission's
Web site during normal business hours from FERC Online Support (by
phone at (866) 208-3676 (toll free) or for TTY, contact (202) 502-8659,
or by e-mail at FERCOnlineSupport@ferc.gov.
V. Effective Date
241. The revisions in this order on rehearing will be effective
June 1, 2004.
List of Subjects in 18 CFR Part 358
Electric power plants, Electric utilities, Natural gas, Reporting
and recordkeeping requirements.
By the Commission. Commissioners Brownell and Kelliher
dissenting in part with separate statements attached.
Magalie R. Salas,
Secretary.
0
In consideration of the foregoing, the Commission amends Part 358,
Chapter I, Title 18 of the Code of Federal Regulations, as follows:
PART 358--STANDARDS OF CONDUCT
0
1. The authority citation for Part 358 continues to read as follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 791-825r,
2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7352.
0
2. In Sec. 358.1, paragraph (c), the word ``Sec. 385.5(b)'' is
removed and the word ``Sec. 358.5(b)'' is inserted in its place.
0
3. Section 358.2 is revised as follows:
Sec. 358.2 General principles.
(a) A Transmission Provider's employees engaged in transmission
system operations must function independent from the employees of its
Marketing and Energy Affiliates.
(b) A Transmission Provider must treat all transmission customers,
affiliated and non-affiliated, on a non-discriminatory basis, and must
not operate its transmission system to preferentially benefit its
Marketing or Energy Affiliates.
4. In Sec. 358.3, paragraph (a)(3) is added, paragraph (b)(1) is
revised, paragraph (d)(5) is redesignated as (d)(6), a new paragraph
(d)(5) is added, redesignated paragraphs (d)(6)(ii) and (d)(6)(v) are
revised and a new paragraph (k) is added to read as follows:
Sec. 358.3 Definitions.
(a) * * *
(3) A Transmission Provider does not include a natural gas storage
provider authorized to charge market-based rates that is not
interconnected with the jurisdictional facilities of any affiliated
interstate natural gas pipeline, has no exclusive franchise area, no
captive rate payers and no market power.
(b) * * *
(1) Another person which controls, is controlled by or is under
common control with, such person. An Affiliate includes a division that
operates as a functional unit, and
* * * * *
(d) * * *
(5) An LDC division of an electric public utility Transmission
Provider shall be considered the functional equivalent of an Energy
Affiliate.
(6) * * *
[[Page 23588]]
(ii) An affiliated Transmission Provider or an interconnected
foreign affiliated natural gas pipeline that is engaged in natural gas
transmission activities which are regulated by the state, provincial or
national regulatory boards of the foreign country in which such
facilities are located.
* * * * *
(v) A State-regulated local distribution company that acquires
interstate transmission capacity to purchase and resell gas only for
on-system customers, and otherwise does not engage in the activities
described in Sec. Sec. 358.3(d)(1), (2), (3) or (4), except to the
limited extent necessary to support on-system customer sales and to
engage in de minimus sales necessary to remaining in balance under
applicable pipeline tariff requirements.
* * * * *
(k) Marketing Affiliate means an Affiliate as that term is defined
in Sec. 358.3(b) or a unit that engages in marketing, sales or
brokering activities as those terms are defined at Sec. 358.3(e).
5. In Sec. 358.4, paragraphs (a)(5) and (a)(6) are added and
paragraphs (b)(1), (b)(2), (b)(3)(i), (b)(3)(iii), (b)(3)(iv),
(b)(3)(v), (c), (e)(3) and (e)(5) are revised to read as follows:
Sec. 358.4 Independent functioning.
(a) Separation of functions.
* * * * *
(5) Transmission Providers are permitted to share with their
Marketing or Energy Affiliates senior officers and directors who are
not ``Transmission Function Employees'' as that term is defined in
Sec. 358.3(j). A Transmission Provider may share transmission
information covered by Sec. 358.5(a) and (b) with its senior officers
and directors provided that they do not participate in directing,
organizing or executing transmission system operations or marketing
functions; or act as a conduit to share such information with a
Marketing or Energy Affiliate.
(6) Transmission Providers are permitted to share risk management
employees that are not engaged in Transmission Functions or sales or
commodity Functions with their Marketing and Energy Affiliates.
(b) * * *
(1) A Transmission Provider must post the names and addresses of
Marketing and Energy Affiliates on its OASIS or Internet website.
(2) A Transmission Provider must post on its OASIS or Internet
website, as applicable, a complete list of the facilities shared by the
Transmission Provider and its Marketing and Energy Affiliates,
including the types of facilities shared and their addresses.
(3) * * *
(i) The organizational structure of the parent corporation with the
relative position in the corporate structure of the Transmission
Provider, Marketing and Energy Affiliates;
* * * * *
(iii) For all employees who are engaged in transmission functions
for the Transmission Provider and marketing or sales functions or who
are engaged in transmission functions for the Transmission Provider and
are employed by any of the Energy Affiliates, the Transmission Provider
must post the name of the business unit within the marketing or sales
unit or the Energy Affiliate, the organizational structure in which the
employee is located, the employee's name, job title and job description
in the marketing or sales unit or Energy Affiliate, and the employee's
position within the chain of command of the Marketing or Energy
Affiliate.
(iv) The Transmission Provider must update the information on its
OASIS or Internet website, as applicable, required by Sec. Sec.
358.4(b)(1), (2) and (3) within seven business days of any change, and
post the date on which the information was updated.
(v) The Transmission Provider must post information concerning
potential merger partners as affiliates within seven days after the
potential merger is announced.
* * * * *
(c) Transfers. Employees of the Transmission Provider, Marketing or
Energy Affiliates are not precluded from transferring among such
functions as long as such transfer is not used as a means to circumvent
the Standards of Conduct. Notices of any employee transfers between the
Transmission Provider, on the one hand, and the Marketing or Energy
Affiliates, on the other, must be posted on the OASIS or Internet
website, as applicable. The information to be posted must include: the
name of the transferring employee, the respective titles held while
performing each function (i.e., on behalf of the Transmission Provider,
Marketing or Energy Affiliate), and the effective date of the transfer.
The information posted under this section must remain on the OASIS or
Internet website, as applicable, for 90 days.
* * * * *
(e) * * *
(2) Each Transmission Provider must be in full compliance with the
Standards of Conduct by September 1, 2004.
(3) The Transmission Provider must post on the OASIS or Internet
web site, current written procedures implementing the standards of
conduct in such detail as will enable customers and the Commission to
determine that the Transmission Provider is in compliance with the
requirements of this section by September 1, 2004 or within 30 days of
becoming subject to the requirements of part 358.
* * * * *
(5) Transmission Providers shall require all of their employees to
attend training and sign an affidavit certifying that they have been
trained regarding the standards of conduct requirements. Electronic
certification is an acceptable substitute for an affidavit.
* * * * *
6. In Sec. 358.5, paragraphs (a)(1), (a)(2), (b)(1), (b)(2),
(b)(4), (b)(7), (b)(8), (c)(5) and (d) are revised to read as follows:
Sec. 358.5 Non-discrimination requirements.
(a) * * *
(1) The Transmission Provider must ensure that any employee of its
Marketing or Energy Affiliate may only have access to that information
available to the Transmission Provider's transmission customers (i.e.,
the information posted on the OASIS or Internet website, as
applicable), and must not have access to any information about the
Transmission Provider's transmission system that is not available to
all users of an OASIS or Internet website, as applicable.
(2) The Transmission Provider must ensure that any employee of its
Marketing or Energy Affiliate is prohibited from obtaining information
about the Transmission Provider's transmission system (including, but
not limited to, information about available transmission capability,
price, curtailments, storage, ancillary services, balancing,
maintenance activity, capacity expansion plans or similar information)
through access to information not posted on the OASIS or Internet
website or that is not otherwise also available to the general public
without restriction.
(b) * * *
(1) An employee of the Transmission Provider may not disclose to
its Marketing or Energy Affiliates any information concerning the
transmission system of the Transmission Provider or the transmission
system of another (including, but not limited to, information received
from non-affiliates or information about available transmission
capability, price, curtailments, storage, ancillary services,
balancing, maintenance activity, capacity expansion plans, or similar
[[Page 23589]]
information) through non-public communications conducted off the OASIS
or Internet website, through access to information not posted on the
OASIS or Internet website that is not contemporaneously available to
the public, or through information on the OASIS or Internet website
that is not at the same time publicly available.
(2) A Transmission Provider may not share any information, acquired
from non-affiliated transmission customers or potential non-affiliated
transmission customers, or developed in the course of responding to
requests for transmission or ancillary service on the OASIS or Internet
website, with employees of its Marketing or Energy Affiliates, except
to the limited extent information is required to be posted on the OASIS
or Internet website in response to a request for transmission service
or ancillary services.
* * * * *
(4) A non-affiliated transmission customer may voluntarily consent,
in writing, to allow the Transmission Provider to share the non-
affiliated customer's information with a Marketing or Energy Affiliate.
If a non-affiliated customer authorizes the Transmission Provider to
share its information with a Marketing or Energy Affiliate, the
Transmission Provider must post notice on the OASIS or Internet website
of that consent along with a statement that it did not provide any
preferences, either operational or rate-related, in exchange for that
voluntary consent.
* * * * *
(7) Neither a Transmission Provider nor an employee of a
Transmission Provider is permitted to use anyone as a conduit for
sharing information covered by the prohibitions of Sec. Sec.
358.5(b)(1) and (2) with a marketing or Energy Affiliate. A
Transmission Provider may share information covered by Sec. Sec.
358.5(b)(1) and (2) with employees permitted to be shared under
Sec. Sec. 358.4(a)(4), (5) and (6) provided that such employees do not
act as a conduit to share such information with any Marketing or Energy
Affiliates.
(8) A Transmission Provider is permitted to share information
necessary to maintain the operations of the transmission system with
its Energy Affiliates.
(c) * * *
(5) The Transmission Provider may not, through its tariffs or
otherwise, give preference to its Marketing or Energy Affiliate, over
any other wholesale customer in matters relating to the sale or
purchase of transmission service (including, but not limited to, issues
of price, curtailments, scheduling, priority, ancillary services, or
balancing).
(d) Discounts.
Any offer of a discount for any transmission service made by the
Transmission Provider must be posted on the OASIS or Internet website
contemporaneous with the time that the offer is contractually binding.
The posting must include: the name of the customer involved in the
discount and whether it is an affiliate or whether an affiliate is
involved in the transaction, the rate offered; the maximum rate; the
time period for which the discount would apply; the quantity of power
or gas scheduled to be moved; the delivery points under the
transaction; and any conditions or requirements applicable to the
discount. The posting must remain on the OASIS or Internet website for
60 days from the date of posting.
Note: The following Attachments will not be published in the
Code of Federal Regulations.
Attachment A--List of Petitioners Requesting Rehearing or Clarification
or Submitting Comments
AGS Oil and Gas Ventures, Inc. (AGS)
Allegheny Energy, Inc. (Allegheny)
Alliance Pipeline, LP (Alliance)
American Gas Association (AGA)
American Public Gas Association (APGA)
American Public Power Association (APPA)
BP America Production and BP Energy Company (BP)
Canadian Association of Petroleum Producers (CAPP)
C and E Operators, Inc. (C&E)
C and L Oil and Gas Corp (C&L)
Calpine Corporation (Calpine)
CenterPoint Energy Gas Transmission Company (CenterPoint)
Cinergy Services, Inc. (Cinergy)
Dominion Resources, Inc. (Dominion)
Duquesne Light Company (Duquesne)
Duke Energy Corporation (Duke Energy)
Edison Electric Institute (EEI)
El Paso Corporation (El Paso)
Empire District Electric Co. (Empire)
Enbridge, Inc. (Enbridge)
Encana Gas Storage Inc. (Encana)
Entergy Services, Inc. (Entergy)
Fairview Production Co.
Florida Power and Light (FPL)
GeoVest Incorporated (GeoVest)
Independent Oil & Gas Association of West Virginia (IOGA-WV)
Independent Petroleum Association of America (IPAA)
Independent Producers Association (IPA)
INOK Investments (INOK)
Interstate Natural Gas Association of America (INGAA)
Jack Forrester
Kansas City Power and Light (KCPL)
Kinder Morgan Interstate Pipelines (Kinder Morgan Pipelines)
LG&E Energy Corporation and Kentucky Utilities Company (LG&E/KU)
National Association of State Utility Consumer Advocates (NASUCA)
National Fuel Gas Distribution Corporation (National Fuel--
Distribution)
National Fuel Gas Supply Corporation (National Fuel--Supply)
National Grid USA (National Grid)
National Rural Electric Cooperative Association (NRECA)
Natural Gas Supply Association (NGSA)
New York State Public Service Commission (New York State Department)
NICOR Gas (NICOR)
NiSource, Inc. (NiSource)
Northwest Natural Gas Company and Kelso Beaver Pipeline Company (NW
Natural and Kelso Beaver)
ONEOK
Pennsylvania Office of Consumer Advocate (PA-OCA)
Plymouth Resources, Inc. (Plymouth)
Portland General Electric (PGE)
Process Gas Consumers (PGC)
PSEG Companies (PSEG)
Questar Pipeline Co., Questar Gas Co., Questar Regulated Services
Co. (Questar)
Saltville Gas Storage Co., LLC (Saltville)
SCG Pipeline Inc. (SCG)
Shell Gas Transmission, LLC (Shell Transmission)
Shell Offshore, Inc. (Shell Offshore)
South Carolina Electric & Gas Co. (SCE&G)
Southern Company Services, Inc. (Southern)
Southwest Gas Corporation (Southwest Gas)
Texas Pipeline Association (Texas Pipeline Association)
Transmission Access Policy Study Group (TAPS)
Transmission Dependent Utilities Systems
Transmission Group
USG Pipeline Company, B-R Pipeline and U.S. Gypsum Company (USG and
B-R)
Utah Associated Municipal Power Systems (Utah Munis)
Williams Companies (Williams)
Williston Basin Interstate Pipeline Company (Williston Basin)
Wisconsin Public Service Corp. and Upper Peninsula Power Co. (WPSC
and UPPC)
XCEL Energy Services, Inc. (Xcel)
Attachment B--Staff Analysis of Interstate Natural Gas Pipeline Index
of Customers Data
Staff compiled index of customers data from all 87 pipelines for
which it was available for the October 1, 2003 filing.
Staff identified 63 pipelines which had reported affiliated
transactions. Staff noted that 5 of these pipelines had contracts
only with Transmission Provider affiliates and removed these from
the study as a special category. The remaining 58 pipelines were
then examined in more detail.
Staff then identified the type of affiliation, e.g., marketer,
LDC, producer, for each customer from publicly available
information.
The table ``Summary of Natural Gas Pipeline Affiliate
Information'' shows summary affiliate information by pipeline and
type of affiliation. Totals are shown also for all 58 pipelines
examined. The information was derived from the detailed affiliated
customer data as follows:
--Table rows labeled ``Affil Vols (MMBtu)'' are simply total volumes
by affiliation type for individual pipelines or the group of 58
[[Page 23590]]
pipelines aggregated from the data for individual affiliated
customers.
--Table rows for each pipeline labeled ``Pct of P/L Total Vols'' are
the affiliate volumes shown divided by the total contracted volumes
for the pipeline.
--The table row labeled ``Pct of Relevant PL Tot Vols (WA)'' for the
group of 58 pipelines are the affiliate volumes shown divided by the
total contracted volumes only for those pipelines that have
affiliated customers of the type shown in that column of the table.
This is a weighted average.
--The Table row labeled ``Pct of Relevant PL Tot Vols (SA) is the
simple average of the ``% of P/L Total Vols'' figures for each
pipeline with data in that column.
Some pipelines have more than one type of affiliate, and would
be included in the summary information compiled under each affiliate
type.
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Brownell, Commissioner, dissenting in part.
1. For the reasons set forth in my dissent in part to Order No.
2004, Standards of Conduct for Transmission Providers, 68 FR 69134
(Dec 11, 2003), III FERC Stats. & Regs. ]31,155 (Nov. 25, 2003), I
would have retained the existing exemptions under Order No. 497 for
affiliated producers, gatherers, processors, intrastate pipelines,
and Hinshaw pipelines.
2. For these reasons, I respectfully dissent in part.
Nora Mead Brownell,
Commissioner.
Kelliher, Commissioner, dissenting in part:
I am writing separately to explain my reasoning with respect to
the Standards of Conduct Final Rule. I support the Rehearing Order,
but do so with some discomfort, because I believe the rehearing
order improves what is a flawed Final Rule.
In my view, the flaw in the Standards of Conduct Final Rule is
the lack of record evidence to support expanding the scope beyond
Marketing Affiliates. The basis for the rule is the observation that
``significant changes have occurred [in the electricity and gas
industries] since the standards of conduct were first adopted,'' \1\
that there has been a proliferation of energy affiliates,\2\ and a
suspicion that affiliate abuse is occurring in the dealings between
Transmission Providers and Energy Affiliates.
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\1\ Standards of Conduct for Transmission Providers, 68 FR
69,134 (December 11, 2003), III FERC Stats. & Regs., ] 31,155 at ] 6
(Nov. 25, 2003).
\2\ Id.
---------------------------------------------------------------------------
I agree significant changes have occurred in the electricity and
gas industries, and pipelines and utilities do have a wider array of
energy affiliates than previously. However, suspicion is not a
sufficient basis for expanding the scope of Standards of Conduct
beyond Marketing Affiliates.
The Final Rule and the Rehearing Order cite a number of
instances where affiliate abuse has occurred. The cases cited by the
orders all relate to preference in dealings between a Transmission
Provider and a Marketing Affiliate, not other Energy Affiliates. I
do not see how a record of affiliate abuse limited to Marketing
Affiliates argues in favor of expanding the scope of the rule beyond
Marketing Affiliates. To my mind, it argues in favor of keeping the
scope of the rule where it was. Indeed, there appears to be no
factual basis to support expanding the scope beyond Marketing
Affiliates.
With respect to the discrete policy calls made in the rehearing
order, I largely agree with them. I would have gone further in some
areas in limiting application of the Standards of Conduct. In
particular, I would have expanded the scope of the local
distribution company exemption to include local distribution
companies that make no off-system sales on affiliated pipelines. The
prospect of affiliate abuse involving off-system sales on
nonaffiliated pipelines appears remote. Of course, there is no
record of affiliate abuse involving such sales.
Commission policy has promoted off-system sales in order to
encourage greater efficiency and enable local distribution companies
to lower their costs. In my view, expanding the local distribution
company exemption would have been consistent with this policy
direction. The Rehearing Order notes that National Fuel-Distribution
made $63 million in off-system sales. It is worth observing that all
of those sales were made on nonaffiliated pipelines.
In addition, I would have granted an exemption to Part 157
pipelines. These pipelines serve one or few customers, and the
prospect of affiliate abuse appears remote. There certainly is no
record of affiliate abuse to merit applying the Standards of Conduct
to Part 157 pipelines.
Finally, I also would have granted the rehearing request by The
Williams Companies to clarify the role of senior officers and
directors in managing their companies in a manner consistent with
their fiduciary duties and principles of sound corporate governance.
Under the Final Rule, senior officers and directors may be shared
between a transmission business unit and the marketing unit or
energy affiliate only if they ``do not engage in transmission
functions.''\3\ Commission case law suggests that a senior officer
or director who approves even a limited number of transactions or
investments would become an ``operating'' employee of a Transmission
Provider, and could not qualify as a shared employee. Currently,
decisions on large transactions and investments are often reserved
to senior corporate officers and directors. The Final Rule forces
these corporate officers to make a Hobson's choice: either they
continue to make these decisions, and thereby become construed as
operating employees of a Transmission Provider, and are thereby
disqualified to serve as a shared employee, with all the resultant
limitations on information sharing, or they divest themselves of
responsibility to make these decisions. I believe the Final Rule may
impede the ability of corporate management to engage in informed
decisionmaking, and runs counter to principles of sound corporate
governance.
---------------------------------------------------------------------------
\3\ Id. at ] 104.
---------------------------------------------------------------------------
Two years ago, the U.S. Court of Appeals for the District of
Columbia Circuit overturned a Commission order extending application
of Standards of Conduct beyond the marketing affiliates of Dominion
Resources. In part, the Court was concerned that doing so would
``destroy[] * * * [corporate] efficiencies'' without
justification.\4\ I have some of the same concerns about the Final
Rule.
---------------------------------------------------------------------------
\4\ Dominion Resources, Inc. v. FERC, 286 F.3d 586, 593 (DC Cir.
2002).
---------------------------------------------------------------------------
To be clear, I support the goal of the Standard of Conduct Final
Rule, namely the prevention of unduly discriminatory behavior.
However, for the reasons stated above, I do not believe the Final
Rule advances this goal.
Joseph Kelliher.
[FR Doc. 04-9357 Filed 4-28-04; 8:45 am]
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