[Federal Register: June 16, 2005 (Volume 70, Number 115)]
[Rules and Regulations]
[Page 35011-35027]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jn05-5]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 157
[Docket No. RM05-1-001; Order No. 2005-A]
Regulations Governing the Conduct of Open Seasons for Alaska
Natural Gas Transportation Projects
Issued June 1, 2005.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Final rule; order on rehearing.
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SUMMARY: The Federal Energy Regulatory Commission (Commission)
generally reaffirms its determinations in Order No. 2005. Order No.
2005 establishes requirements governing the conduct of open seasons for
proposals to construct Alaska natural gas transportation projects,
including procedures for allocation of capacity. Pursuant to the
directive of section 103(e)(2) of the Alaska Natural Gas Pipeline Act,
enacted on October 13, 2004, the regulations promulgated in Order No.
2005 include the criteria for and timing of any open season, promote
competition in the exploration, development, and production of Alaska
natural gas, and for any open seasons for capacity exceeding the
initial capacity, provide for the opportunity for the transportation of
natural gas other than from the Prudhoe Bay and Point Thomson units.
In this order, the Commission addresses the requests for rehearing
and/or clarification of Order No. 2005. Here, we grant rehearing in
part, deny rehearing in part, and provide clarification of Order No.
2005. In specific, we: Clarify that the Commission may require design
changes necessary to ensure that some portion of a proposed voluntary
expansion will be allocated to new shippers or shippers seeking to
transport gas from areas other than Prudhoe Bay or Point Thomson,
provided such shippers are willing to sign qualifying long-term firm
transportation agreements; codify the expanded criteria for evaluating
late bids for capacity and the requirement that any late bid contain a
good faith showing; in the case of the mandatory pre-review, codify
that the plan to be filed by the Commission must contain the open
season notice, and eliminates the 30-day prior notice requirement;
discuss how the open season rules may apply to jurisdictional gas
treatment plants; clarify that capacity bid for the open season is
exempt from allocation only in a case where there is also presubscribed
capacity, and that in the event there are more than one pre-
subscription agreement, bidders in the open season may not cherry-pick
among the provisions of the several agreements; clarify the project
applicant's obligation to establish a separate entity to conduct the
open season; and further codify the requirements of the catchall
provision regarding information to be included in an open season
notice.
DATES: Effective Date: Revisions in this order on rehearing will become
effective on June 16, 2005.
FOR FURTHER INFORMATION CONTACT: Whit Holden, Office of the General
Counsel, (202) 502-8089, edwin.holden@ferc.gov; Richard Foley, Office
of Energy Projects, (202) 502-8955, richard.foley@ferc.gov; Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, DC
20426.
SUPLEMENTARY INFORMATION:
Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell,
Joseph T. Kelliher, and Suedeen G. Kelly.
Order on Rehearing and Clarification
1. On February 9, 2005, the Federal Energy Regulatory Commission
(Commission) issued a Final Rule, Order No. 2005,\1\ amending its
regulations by adding Subpart B to Part 157 to establish requirements
governing the conduct of open seasons for capacity on proposals to
construct Alaska natural gas transportation projects. Order No. 2005
fulfilled the Commission's responsibilities to issue open season
regulations under section 103 of the Alaska Natural Gas Pipeline Act
(ANGPA or the Act), enacted on October 13, 2004. Section 103(e)(1) of
the Act directs the Commission, within 120 days from enactment of the
Act, to promulgate regulations governing the conduct of open seasons
for Alaska natural gas transportation projects, including procedures
for allocation of capacity. As required by section 103(e)(2) of the
Act, the regulations promulgated in Order No. 2005 (1) include the
criteria for and timing of any open season, (2) promote competition in
the exploration, development, and production of Alaska
[[Page 35012]]
natural gas, and (3) for any open seasons for capacity exceeding the
initial capacity, provide for the opportunity for the transportation of
natural gas other than from the Prudhoe Bay and Point Thomson units.
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\1\ Regulations Governing the Conduct of Open Seasons for Alaska
Natural Gas Transportation Projects, RM05-1-000, Order No. 2005,
FERC Stats. and Regs. ] 31,174 (2005).
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2. The Commission affirms here the legal and policy conclusions on
which Order No. 2005 was based. As stated in Order No. 2005, the goal
of the open season regulations is to design an open season process that
provides non-discriminatory access to capacity on any Alaska natural
gas transportation project and, at the same time, allows sufficient
economic certainty to support the construction of the pipeline and
thereby provide a stimulus for exploration, development, and production
of Alaska natural gas. We find that Order No. 2005's open season rules
as revised and clarified herein, satisfy that goal and, therefore, are
in the public interest.
Background
3. ANGPA mandates the expedited processing by the Commission of any
application for an Alaska natural gas transportation project. To this
end, as stated above, section 103(e)(1) of the Act specifically directs
the Commission to prescribe the rules which shall apply to any open
season held for the purpose of soliciting interest in, or making
binding commitments to the acquisition of capacity on, any Alaska
natural gas transportation project, including the criteria for
allocating capacity among competing bidders. In this regard, Congress
instructed the Commission to include in its regulations the criteria
for, and timing of, any open season, and to design its open season
regulations to promote competition in the exploration, development, and
production of Alaska natural gas and, as to any open season for the
voluntary expansion \2\ of the initial capacity of any Alaska natural
gas transportation project, to specifically provide the opportunity for
gas other than Prudhoe Bay and Point Thomson production to have access
to the pipeline.
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\2\ Excluded from the scope of the open season rules are
expansions compelled by the Commission pursuant to section 105 of
the Act. Section 105 authorizes the Commission to order these
``involuntary'' expansions upon the request of one or more persons,
and upon the satisfaction of certain statutory criteria.
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4. In response to the Act's directive, on November 15, 2004, the
Commission issued in Docket No. RM05-1-000 a Notice of Proposed
Rulemaking (NOPR) in this proceeding containing the Commission's
proposed Alaska natural gas transportation project open season
regulations. Also, the Commission held a public technical conference in
Anchorage, Alaska on December 3, 2004 to develop a record in this
proceeding. The Commission received 25 comments in response to the
NOPR.
5. On February 9, 2005, the Commission issued Order No. 2005. The
open season regulations contained in Order No. 2005 apply to any
application for a certificate or other Commission authorization for an
Alaska natural gas transportation project, whether filed pursuant to
the NGA, the Alaska Natural Gas Transportation Act of 1976, or ANGPA,
as well as to any voluntary applications for expansions of such a
project.
6. The Final Rule adopted the NOPR's proposed requirements that the
applicant provide a 30-day prior public notice containing extensive
information intended to allow all interested persons to decide whether
to participate in the open season, followed by an actual open season
period of at least 90 days. The regulations in the Final Rule also
adopted the NOPR's approach of allowing prospective applicants to
develop and state in detail the methodologies for determining the value
of bids and for allocating capacity, subject to the requirement that
all capacity be awarded without undue discrimination or preference of
any kind. In addition, the Final Rule required that at least 90 days
prior to providing the open season notice, the prospective applicant
must file its open season plan with the Commission for approval, and
that the Commission will act on the plan within 60 days of its filing.
7. The Final Rule provided that prospective applicants must conduct
or adopt a study of Alaska's in-state needs, and use the study results
to design capacity needs for use within the state, and design in-state
delivery points and in-state transportation rates as part of an open
season. Moreover, bidding on in-state capacity must be conducted
independent of out-of-state deliveries during a prospective applicant's
open season.
8. In order to further the Commission's goal of a non-
discriminatory open season, the Final Rule applied certain of the
Standards of Conduct requirements of Order No. 2004, including the
establishment of an independent, functionally-separate unit to conduct
the open season. In addition, the open season notice must identify the
prospective applicant's affiliates involved in the production of
natural gas in the state of Alaska, and all information about the open
season disclosed to any potential shippers must be made available to
all potential shippers.
9. The Final Rule permitted pre-subscription by anchor shippers,
limited to initial capacity only, in order to facilitate the
development of an Alaska pipeline project. However, to ensure that all
other potential shippers have an equal opportunity to obtain access to
capacity on the project in the open season, all pre-subscription
agreements must be made public within ten days of their execution, and
capacity on the proposed project must be offered to all prospective
qualifying shippers under the same terms and conditions and at the same
rates as the pre-subscription agreements. In addition, if capacity is
oversubscribed in the open season and it is not feasible to redesign
the proposed project to meet both the pre-subscription shippers' and
the open season shippers' capacity needs, then capacity bid for in the
open season will not be reduced, but all capacity subject to the terms
and conditions of pre-subscription agreements will be allocated pro
rata.
10. In an effort to allow as many potential shippers as possible
the opportunity to acquire capacity in the initial open season, the
Final Rule required that the project sponsor must consider any
qualifying bids tendered after the expiration of the open season, and
reject them only if they cannot be accommodated due to economic,
engineering, or operational constraints.
11. The Final Rule stated that, within ten days after precedent
agreements have been executed for capacity acquired in the open season,
the prospective applicant shall make public the results of the open
season, including the names of the prospective shippers, amount of
capacity awarded, and the terms of the agreements. Within 20 days after
precedent agreements have been executed, copies of all precedent
agreements, as well as copies of any correspondence with bidders whose
bids were not accepted, must be filed with the Commission.
12. In another provision, the Final Rule stated that, as a part of
the Commission's review of any application for an Alaska natural gas
transportation project, it will consider the extent to which the
proposed project has been designed to accommodate the needs of shippers
who have made conforming bids during an open season, as well as the
extent to which the project can accommodate low-cost expansion, and the
Commission may require changes in the project's design necessary to
promote competition and offer a reasonable opportunity for access to
the project.
13. Finally, to provide guidance to interested parties on the
important
[[Page 35013]]
subject of expansion rate treatment, the Final Rule establishes a
presumption in favor of rolled-in pricing for expansions up to the
point that it would cause there to be a subsidy of expansion shippers
by initial shippers.
14. Requests for rehearing and/or clarification were filed jointly
by BP Exploration (Alaska), Inc., ConocoPhillips Company and Exxon
Mobile Corporation (the North Slope Producers), by Enbridge, Inc.
(Enbridge), by ChevronTexaco Natural Gas, a division of Chevron U.S.A.
Inc. (ChevronTexaco), and by the State of Alaska. In addition, Anadarko
Petroleum Corporation (Anadarko) and the Legislative Budget and Audit
Committee of the Alaska State Legislature (Alaska Legislators) filed
responses to the rehearing requests.\3\
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\3\ Under Rule 213 of the Commission's Rules of Practice and
Procedure, answers to rehearing requests are not permitted. However,
the Commission has discretion to waive this rule when it finds that
the answers will help provide a complete record in the proceeding or
allow a better understanding of the issues. This proceeding involves
the establishment of open season rules for capacity on an Alaska
natural gas transportation project, and is critical to the
development of Alaska's vast natural gas resources to meet
anticipated national demand for natural gas, thereby enhancing
national security. The Commission finds that the answers will
provide necessary information to provide a full and complete record,
which will assist the Commission in addressing the issues on
rehearing pertaining to the complex and unique circumstances
surrounding the development of an Alaska natural gas transportation
project. Therefore, Anadarko's and the State of Alaska's answers to
the rehearing requests are accepted. See 18 CFR 385.213 (2004).
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Discussion
I. Mandating Pipeline Design
A. The Final Rule--Sec. Sec. 157.36 and 157.37
15. Section 157.36 requires that any open season for expansion
capacity of an Alaska natural gas transportation project must provide
the opportunity for the transportation of gas other than Prudhoe Bay or
Point Thomson production, and that the Commission, in considering any
proposed voluntary expansion of an Alaska natural gas pipeline project,
``may require design changes to ensure that all who are willing to sign
long-term firm transportation contracts that some portion of the
expansion capacity be allocated to new shippers or shippers seeking to
transport natural gas from areas other than Prudhoe Bay and Point
Thomson.'' Section 157.37 states that, in reviewing any application for
an Alaska natural gas pipeline project, the Commission ``may require
changes in the project design necess[ary] to promote competition and
offer a reasonable opportunity for access to the project, taking into
account the extent to which the proposed project design accommodates
the open season's conforming bids as well as low-cost expansion.'' \4\
These provisions were included in the Final Rule in response to
concerns of non-North Slope producers that they have access to capacity
on an Alaska natural gas transportation project when their potential
gas reserves are commercially developed.
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\4\ ``Necessity'' in section 157.37 is revised to read
``necessary.''
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B. Rehearing/Clarification Requests
16. The North Slope Producers and ChevronTexaco object to the
provisions contained in sections 157.36 and 157.37 to the extent that
they authorize the Commission to require changes in the design of an
Alaska natural gas transportation project. The North Slope Producers
object to these provisions on a number of grounds. First, they contend
that it is beyond the Commission's NGA authority to mandate changes in
the design of a pipeline, either to provide additional capacity or to
enhance future expandability. The North Slope Producers contend that,
in either case, the result is a mandatory expansion of the project,
which according to section 7(a) of the NGA, is outside the Commission's
authority to require.\5\ The North Slope Producers maintain that this
limitation on the Commission's authority is reflected in the
Commission's regulations providing that open access pipelines are ``not
required to provide any requested transportation service for which
capacity is not available or that would require the construction or
acquisition of any new facilities,'' \6\ and in judicial precedent.\7\
According to the North Slope Producers, the Commission has acted
unreasonably in ``morphing'' ANGPA's vague and undefined open season
requirements pertaining to competition in the exploration, development,
and production of Alaska gas and sufficient opportunity for future
access for the transportation of non-Prudhoe Bay/Point Thomson gas into
factors to be considered by the Commission in its NGA section 7 review
of certificate applications for Alaska natural gas transportation
projects.
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\5\ Section 7(a) of the NGA provides ``[t]hat the Commission
shall have no authority to compel the enlargement of transportation
facilities * * *'' 15 U.S.C. 717f(a).
\6\ 18 CFR 284.7(f).
\7\ The North Slope Producers cite Panhandle Eastern Pipe Line
Co., 204 F.2d 675 (3rd Cir. 1953) in which the court stated that
``[i]n light of section 7(a) we are compelled to conclude that
Congress meant to leave the question whether to employ additional
capital in the enlargement of its pipeline facilities to the
unfettered judgment of the stockholders and directors of each
natural gas company involved.'' 204 F.2d at 680.
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17. Second, the North Slope Producers assert that ANGPA section 105
further limits the Commission's authority to require an expansion of an
Alaska natural gas transportation project sections. The North Slope
Producers state that before an involuntary expansion can be ordered by
the Commission, section 105 lists a number of statutory requirements
that must be met which are designed to balance potential future
shippers' interests with the need to protect the pipeline and existing
shippers and to protect against uneconomic overbuilding. The North
Slope Producers state that none of these statutory requirements are
referenced in or satisfied by section 157.36 or 157.37.
18. Third, the North Slope Producers argue that the Commission
appears to mistakenly ``assume that a pipeline can, in all
circumstances, be efficiently designed to accommodate all qualifying
bids.'' The North Slope Producers assert that the most efficient and
economic pipeline design might not be one which can accommodate 100
percent of the capacity bid for in the open season. In fact, according
to the North Slope Producers, it is possible that a pipeline designed
to accommodate all the capacity bid in the open season ``could result
in a design that is inefficient and/or negatively impacts future
expansion design alternatives.''
19. Fourth, the North Slope Producers maintain that to the extent
that it authorizes a set-aside of capacity, section 157.36 violates the
Order No. 636's goal of eliminating impediments to the transmission of
proper pricing signals between producers and consumers, as well as the
Commission's non-discrimination policies. The North Slope Producers
point to the second sentence of section 157.36, which states:
``In considering a proposed voluntary expansion of an Alaska natural
gas pipeline project, the Commission will consider the extent to
which the expansion will be utilized by shippers other than those
who are the initial shippers on the project, and in order to promote
competition and open access on the project, may require design
changes to ensure that all who are willing to sign long-term firm
transportation contracts to some portion of the expansion capacity
be allocated to new shippers or shippers seeking to transport
natural gas from areas other than Prudhoe Bay and Point Thomson.''
(Emphasis added).
The North Slope Producers assert that if this ``indecipherable''
language is intended to set aside capacity for new
[[Page 35014]]
shippers or shippers of gas from areas other than Prudhoe Bay and Point
Thomson, then the Commission is favoring one shipper's bid over another
bid that otherwise meets all of the bid criteria. The North Slope
Producers assert that ANGPA's section 103(e)(2)(C) requirement that
open season regulations for voluntary expansions are to ``provide an
opportunity for the transportation of gas other than Prudhoe Bay and
Point Thomson gas'' does not support section 157.36's apparent set-
aside or preference. The North Slope Producers state that not only is
such a preference inconsistent with the Commission's open access
policies, it is patently discriminatory and anti-competitive and
unlawful under the NGA. The North Slope Producers contend that
allocating pipeline capacity in an open season to customers who value
it most, i.e., through the use of the Commission-favored net present
value capacity allocation methodology, ensures pipelines and shippers
that capacity will be allocated in a non-discriminatory and
economically efficient manner. The North Slope Producers also assert
that development of multi-owner fields could be delayed or hampered if
one group of shipper/owners had a competitive advantage over another
shipper/owner group due to a capacity allocation advantage or
preference.
20. Finally, the North Slope Producers maintain that sections
157.36 and 157.37 are contrary to the Commission's reliance on market
forces, on which its existing policies are based. Specifically, the
North Slope Producers claim that Order No. 2005 fails to reconcile
Subparts 157.36 and 157.37 with current Commission policies in favor of
``facilitate[ing] the unimpeded operation of market forces to stimulate
the production of natural gas,''\8\ and against the subsidization of
new services by existing shippers. The North Slope Producers state that
it would be unreasonable to expect that the pipeline sponsors would
simply assume the financial risk for significant amounts of
uncontracted capacity on such an enormous project, yet Order No. 2005
fails to address cost recovery issues associated with any mandated
design changes that might be ordered.
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\8\ Order No. 636, FERC Stats. and Regs. ] 30,939 at 30,393
(1992), quoting S.Rep. No. 30 9, 101st Cong., 1st Sess. at p. 2
(1989).
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21. ChevronTexaco claims that the regulations promulgated in Order
No. 2005 apply to open seasons for initial or voluntary expansion
capacity; therefore, the idea of post-open season Commission-mandated
design changes is inconsistent with and outside the scope of this
rulemaking. Moreover, ChevronTexaco asserts that the design change
provisions of sections 157.36 and 157.37 should be deleted from the
open season regulations because the subject was not included in the
Notice of Proposed Rulemaking. ChevronTexaco states that absent
removing sections 157.36 and 157.37 from the open season regulations,
the Commission should provide that it would not require project design
changes if doing so would negatively impact the rates, terms or
conditions of service for initial shippers or otherwise adversely
affect pipeline operations of efficiency.
22. In its response to the rehearing requests, Anadarko argues that
ANGPA and the NGA provide the Commission with ample authority to
require changes in the design of an initial or expanded Alaska natural
gas transportation project necessary to meet the statutory objectives
of promoting competition and provide a reasonable opportunity for
access to all shippers who have made conforming bids during the open
season. Anadarko states that clearly there is interplay between the NGA
and ANGPA. Specifically, states Anadarko, section 7(e) of the NGA
provides that a ``certificate shall be issued * * * if it is found that
proposed service, sale, operation, construction * * * to the extent
authorized by the certificate, is or will be required by the present or
future public convenience and necessity.'' Anadarko states that the
Commission considers many factors in making this public convenience and
necessity finding, and, in the case of an Alaska natural gas
transportation project, should consider the requirements of ANGPA.
23. Anadarko asserts that the Commission often imposes conditions
to its certificates requiring routing or design modifications in order
to support a finding that a particular project is in the public
convenience and necessity. In any event, sections 157.36 and 157.37 do
not mandate an expansion, according to Anadarko, because the applicant
may choose not to accept a certificate that requires that the project
be redesigned. Anadarko states that the regulations merely put the
applicant on notice that its proposed project design might be rejected
as failing to meet the objectives of ANGPA, and consequently, not being
required by the public convenience and necessity.
24. In response to the North Slope Producers' charge that section
157.36 provides for discriminatory reallocation of capacity contrary to
existing Commission policy, Anadarko contends that the Commission is
merely following the mandate of ANGPA section 103(e)(2)(C). Anadarko
states that under section 103(e)(2)(C), the Commission's regulations
must ensure that any open season for expansion capacity provides the
opportunity for the transportation of natural gas other than from
Prudhoe Bay/Point Thomson, and section 157.36 seeks to do just that.
25. Anadarko also disputes the North Slope Producers' claim that
parties were not adequately notified in the NOPR that pipeline design
would be a subject of the rulemaking. Anadarko maintains that the
regulations contained in sections 157.36 and 157.37 reasonably respond
to many concerns expressed throughout the rulemaking process.\9\
Anadarko contends that under the Administrative Procedure Act (APA),
the Commission was required in this informal rulemaking proceeding to
provide either the terms or substance of the proposed rule or a
description of the subjects and issues involved.\10\ Moreover, Anadarko
points out that the courts have held that ``even if the final rule
deviates from the proposed rule,'[s]o long as the final rule
promulgated by the agency is a ``logical outgrowth'' of the proposed
rule'' the purposes of the notice and comment have been adequately
served.'' \11\ Anadarko states that Order No. 2005's pipeline design
provisions were a ``logical outgrowth'' of the NOPR and the issues
discussed therein, e.g., the major goals of ANGPA, concerns over
potential discrimination, producer/sponsor preferences, the role of
pre-subscriptions, and tensions between ANGPA's goals and the
application of existing policies to an Alaska project.
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\9\ Anadarko identifies comments addressing pipeline size both
at the technical conference and written. See Anadarko's March 29,
2005 response at 15-16.
\10\ See 5 U.S.C.A. 553(b)(3).
\11\ Appalachian Power Co. v. EPA, 135 F.3d 791, 804 n.22 (DC
Cir. 1998).
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26. Lastly, Anadarko contends that the Commission provided ample
support for not following current Commission policies that favor
reliance on market forces. Anadarko states that the rulemaking record
in Order No. 2005 thoroughly discusses the conditions and circumstances
in Alaska that are much different than those found in the lower 48
states, requiring the appropriate regulatory action taken in sections
157.36 and 157.37. In conclusion, Anadarko disagrees that 157.36 is
``indecipherable'' as claimed by the North Slope Producers.
27. The Alaska Legislators maintain that sections 157.36 and 157.37
are well within the Commission's broad power
[[Page 35015]]
to attach to certificates any conditions that may be found to be
required by the public convenience and necessity. They claim that the
``forced expansion'' argument fails to acknowledge that ANGPA has
injected into the public convenience and necessity standard of the NGA
a new statutory standard, i.e., the promotion of competition in the
exploration, development and production of Alaska natural gas with
respect to Alaska natural gas transportation projects. Moreover, the
Alaska legislators contend that the Commission's pipeline design
concerns are required not only by the mandate of ANGPA, but also by the
economic realities in Alaska, where virtually all of the proven
reserves are held by the North Slope Producers. The Alaska legislators
state that the Commission is simply announcing in sections 157.36 and
157.37 that it may condition the approval of the certificate upon the
applicant's making necessary design changes required to satisfy the
public convenience and necessity standard, including the ``promote
competition'' standard, which is uniquely applicable to an Alaska
natural gas transportation project.
28. Addressing the North Slope Producers' claim that section 157.36
provides for an unduly discriminatory set aside of capacity for non-
North Slope shippers, the Alaska legislators agree with Anadarko that
ANGPA mandates that in the case of an expansion of an Alaska natural
gas transportation project, the Commission must provide an opportunity
for the transportation of natural gas other than from Prudhoe Bay and
Point Thomson units in its open season rules. Alaska legislators state
that section 157.36 is consistent with that mandate.
29. The Alaska legislators also defend the Commission's
``proactive'' approach through which it fashioned the open season rules
in recognition of the recognized differences between competitive forces
in the lower 48 states and the lack of competition in Alaska. Given
these differences, the Alaska legislators maintain that the Commission
was right to depart from existing Commission policy. They assert that
the fact that Congress required the Commission to promulgate the Alaska
open season rules in place of the Commission's long-standing policy of
evaluating open seasons on a case-by-case, after-the-fact basis, is an
illustration of the need for a different approach based on the unique
circumstances surrounding an Alaska pipeline. The Alaska Legislators
conclude that, unlike the situation in the lower 48 states, there is no
existing or foreseeable competitive environment in Alaska, where the
North Slope Produces not only control all the known gas reserves, but
also may become the sponsors of the Alaska pipeline. Therefore, the
Commission was right to not rely on market forces in Alaska to ensure
the development, routing, sizing and timing of an Alaska pipeline.
30. Finally, the state of Alaska suggests that section 157.36 be
expanded to better reflect its intent. According to the State of
Alaska, section 157.36 should read:
In considering a proposed voluntary expansion of an Alaska
natural gas transportation project, the Commission will consider the
extent to which the expansion will be utilized by shippers other
than those who are the initial shippers on the project and, in order
to promote competition and open access to the project, may require
design changes to ensure that new shippers willing to sign long-term
firm transportation contracts or shippers seeking to transport
natural gas from areas other than Prudhoe Bay or Point Thomson who
are willing to sign long-term contracts can have access to some
portion of the expansion capacity.
C. Commission Response
31. The North Slope Producers' assertion that the Commission has no
authority under the NGA to require changes in the design of a proposed
Alaska natural gas transportation project in connection with an
application for authorization either to construct the project, or to
expand the project is inconsistent with law and precedent. At the
outset, we reject the notion that any design change that might be
required under either section 157.36 or 157.37 would constitute a
mandatory expansion of the project. First, in every case in which the
section 7(a) limitation has been addressed, the facilities involved
were existing facilities subject to existing certificate authorization.
The reasoning behind this limitation is clear. Once a natural gas
company accepts a certificate and in reliance thereof expends resources
to construct the facilities authorized therein, the pipeline and its
customers should have the right to rely on the authorizations contained
in that certificate. It is quite another thing where the Commission
tells a certificate applicant that unless it agrees to certain changes
(including cost allocations and the design of initial service rates),
its proposal will not be found to be in the public convenience and
necessity. In such case, if the applicant does not want to change its
proposed project design, it is not required to accept the certificate.
Furthermore, because design changes under either 157.36 or 157.37 would
not constitute a mandatory project expansion, the statutory
requirements of ANGPA section 105 have no application.
32. In considering an application for a certificate of public
convenience and necessity under section 7 of the NGA, the Commission
has the authority to consider all factors bearing on the public
interest,\12\ and in particular, the Commission ``certainly has the
right to consider a congressional expression of fundamental national
policy as bearing upon the question whether a particular certificate is
required by the public convenience and necessity.'' \13\ In the case of
an Alaska natural gas transportation project, these factors would
properly include the requirements of ANGPA, including the statutory
objectives of promoting competition and provide a reasonable
opportunity for access to all shippers who have made conforming bids
during the open season.
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\12\ See, e.g., FPC v. Transcontinental Gas Pipe Line
Corporation, 365 U.S. 1, 81 S.Ct. 435 (1961); Office of Consumers'
Counsel v. FERC, 655 F.2d 1132, 210 U.S. App. D.C. 315 (1980).
\13\ City of Pittsburgh v. FPC, 237 F.2d 741 at 754 (D.C. Cir.
1965).
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33. The Commission has authority under NGA section 7(e) to attach
to a certificate of public convenience and necessity any conditions it
deems necessary to meet the public interest.\14\ The Commission has
exercised this conditioning authority to require routing or design
modifications in order to support a finding that a particular project
is in the public convenience and necessity.\15\ Sections 157.36 and
157.37 merely codify our existing authority and practice.
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\14\ See, e.g., FPC v. Hunt, 376 U.S. 515, 525-527, 84 S.Ct. 861
(1964); Atlantic Refining Co. v. Public Service Commission of New
York, 360 U.S. 378 (1959).
\15\ See, e.g., Vector Pipeline, L.P., 87 FERC ] 61,225 at
61,892-893 (1999); Maritimes & Northeast Pipelines, L.L.C., 80 FERC
] 61,345 (1997); NE Hub Partners, L.P., 83 FERC ] 61,043 (1998); see
also, Transcontinental Gas Pipe Line Corp v. FERC, 589 F.2d 186 (5th
Cir.), cert. denied, 445 U.S. 915 (1979).
---------------------------------------------------------------------------
34. The North Slope Producers' claim that sections 157.36 and
157.37 are predicated on the Commission's erroneous assumption ``that a
pipeline can, in all circumstances, be efficiently designed to
accommodate all qualifying bids.'' This is inaccurate. We noted in
Order No. 2005 that both the North Slope Producers and Enbridge
maintained that an Alaska pipeline could be designed and built with
sufficient capacity to accommodate the needs of every qualified
shipper.\16\ Our expectation is that an Alaska natural gas
transportation project will be designed and built, to the extent
possible, to
[[Page 35016]]
accommodate all qualified shippers who are ready to sign firm
transportation agreements. Nonetheless, in Order No. 2005 we certainly
did not rule out the possibility that a project, with or without pre-
subscription agreements, might be oversubscribed.\17\ On this note, we
should emphasize that in our review of any application for initial
Alaska project or any expansion thereof, our consideration of the
project design will be driven by our need to find that the proposal is
in the public convenience and necessity. Any conditions we impose must
be required by the public interest, and be based on substantial
evidence.
---------------------------------------------------------------------------
\16\ See, e.g., Order No. 2005 at P 29, 37, and 88.
\17\ See id. at P 37; see also Sec. 157.34(c)(15).
---------------------------------------------------------------------------
35. The North Slope Producers' claim that section 157.36 provides
for an unduly discriminatory set-aside of capacity for non-North Slope
shippers discounts, if not ignores, the Congressional mandate of ANGPA
section 103(e)(2)(C) that requires our open season regulations to
ensure that any open season for expansion capacity provides the
opportunity for the transportation of natural gas other than from
Prudhoe Bay/Point Thomson. Section 157.36 does so in a reasonable
manner. In any event, our regulations do not require that an expansion
proposal must, regardless of economic and technical considerations,
provide transportation of gas other than Prudhoe Bay/Point Thomson
volumes. The regulations simply require that an opportunity for such
transportation be provided.
36. As pointed out elsewhere in this order, and throughout Order
No. 2005, a number of existing Commission policies predicated on
competitive conditions in the lower 48 states are ill-suited for
application in the case of an Alaska natural gas transportation
project, particularly in view of ANGPA's directives. As we stated in
Order No. 2005, a successful Alaska natural gas transportation project
will have to overcome a variety of significant obstacles, including
unique and complex competitive conditions. Those competitive
conditions, we said, are intensified by the generally agreed-upon fact
that there will be only one such Alaska pipeline for the foreseeable
future.\18\ Against that backdrop, we affirm the conclusions of Order
No. 2005, which serve as the underpinnings of the Final Rule's
regulations, including the need in certain instances to accommodate
existing Commission policy to the unique circumstances surrounding the
exploration, production, development, and transportation to market of
Alaska natural gas.
---------------------------------------------------------------------------
\18\ The North Slope Producers, in their rehearing request,
claim that it is too early to conclude that only one Alaska pipeline
will ever be built. We find nothing in the record to support a
contrary conclusion.
---------------------------------------------------------------------------
37. Finally, while due process and the APA impose an obligation on
agencies to provide adequate notice of issues to be considered,\19\
that obligation is satisfied in this informal rulemaking by providing
either the terms or substance of the proposed rule or a description of
the subjects and issues involved.\20\ Order No. 2005's pipeline design
provisions were a logical outgrowth of the NOPR and the issues
discussed therein, e.g., major goals of ANGPA, concerns over potential
discrimination, producer/sponsor preferences, potential role of pre-
subscriptions, tensions between ANGPA's goals, and application of
existing policies to the circumstances of an Alaska project. Indeed,
the critical importance of properly sizing the pipeline was a recurring
theme throughout this proceeding, and was raised by several parties at
the technical conference, and in later comments and reply comments.\21\
Thus, Order No. 2005 does not unduly change the scope of this
proceeding. In any event, the parties' ability to seek rehearing
resolves any due process issues.
---------------------------------------------------------------------------
\19\ Public Service Commission of the Commonwealth of Kentucky
v. FERC, 397 F.3d 1004 (DC Cir. 2005), citing Williston Basin
Interstate Pipeline Co. v. FERC, 165 F.3d 54 (DC Cir. 1999); see 5
U.S.C. 554(b)(3).
\20\ See 5 U.S.C. 553(b)(3).
\21\ See n. 8, supra.
---------------------------------------------------------------------------
38. Although the North Slope Producers describe section 157.36 to
be ``indecipherable,'' their comments demonstrate that they understand
its intent. Section 157.36 is intended to provide that the Commission
may require design changes necessary to ensure that some portion of a
proposed voluntary expansion will be allocated to new shippers or
shippers seeking to transport gas from areas other than Prudhoe Bay or
Point Thomson, provided such shippers are willing to sign qualifying
long-term firm transportation agreements. To ensure clarity, we will
revise section 157.36 to read as follows:
``In considering a proposed voluntary expansion of an Alaska
natural gas transportation project, the Commission will consider the
extent to which the expansion will be utilized by shippers other
than those who are the initial shippers on the project and, in order
to promote competition and open access to the project, may require
design changes to ensure that some portion of the expansion capacity
will be allocated to new shippers willing to sign qualifying long-
term firm transportation contracts, including shippers seeking to
transport natural gas from areas other than Prudhoe Bay or Point
Thomson.''
II. Presumption of Rolled-in Rates for Expansions
A. Final Rule--Sec. 157.39
39. Section 157.39 states that ``[t]here shall be a rebuttable
presumption that rates for any expansion of an Alaska natural gas
transportation project shall be determined on a rolled-in basis.'' The
Commission stated in Order No. 2005 that by providing for this
presumption, the Commission is advising potential shippers, in advance
of any initial Alaska natural gas transportation project open season,
of its intention to harmonize the objective of rate predictability for
initial shippers with the objective of reducing barriers to future
exploration and production in designing rates for future expansions of
any Alaska natural gas transportation project. The Commission concluded
in Order No. 2005 that section 157.39 is consistent with ``our guiding
principle that competition favors all of the Commission's customers, as
well as with the objectives of the Act, to adopt rolled-in rate
treatment up to the point that would cause there to be a subsidy of
expansion shippers by initial shippers, if any subsidy were to be
found.''
B. Rehearing/Clarification Requests
40. The North Slope Producers, Enbridge, and ChevronTexaco assert
that the presumption in favor of rolled-in rates for voluntary
expansions established in section 157.39 creates uncertainty for
shippers and project sponsors, and, therefore, section 157.39 should be
eliminated from the regulations or substantially revised. The North
Slope Producers and Enbridge claim that prospective initial shippers,
fearing that in the future their rates may be increased to subsidize
the cost of expansion facilities, will be less willing to make the
long-term commitments necessary to support an Alaska project. This
uncertainty, they predict, will discourage rather than advance the
development of an Alaska pipeline or any voluntary expansion thereof--a
result clearly inconsistent with ANGPA's primary goal. Moreover, the
North Slope Producers and Enbridge suggest that mandatory expansions
pursuant to ANGPA section 105 will become more attractive than
voluntary expansions because of the explicit rate protection for
existing shippers in section 105.
[[Page 35017]]
41. The North Slope Producers contend that section 157.39 is
unjustifiably inconsistent with the Commission's current policy
regarding rate treatment of expansions, which is to discourage
uneconomic expansions and assure that expansions will not be subsidized
by existing shippers. They assert that even if, as claimed by the
Commission, only one pipeline will be built in Alaska, that distinction
does not justify deviating from the Commission's current policy.
42. The North Slope Producers charge that the Commission acted
arbitrarily and capriciously in relying on ANGPA section 103(e) to
justify its conclusion to provide for a presumption of rolled-in rates
for expansions. Although the North Slope Producers concede that the
Commission clearly has the authority under ANGPA and the NGA to approve
rates for Alaska natural gas transportation projects, they claim that
ANGPA section 103(e) has nothing to do with rate regulation.
Furthermore, state the North Slope Producers, even if section 103 could
be read to give the Commission authority to include rate regulations in
its open season rules, the proper course would be to remove section
157.39 from the open season rules and instead address rate policy
issues only after the parties have the opportunity of developing a
complete factual record. Failing this, the North Slope Producers state
that the Commission should revise section 157.39 to provide that the
Commission's current rate policies will apply to Alaska projects.
43. Enbridge also argues that the Commission acted arbitrarily and
capriciously by imposing a rebuttable rolled-in presumption, even where
rolled-in pricing would increase existing shippers' rates. According to
Enbridge, Order No. 2005 identifies two considerations, namely the
Commission's disfavor of existing shippers subsidizing the rates of new
shippers, and the Commission's reluctance to authorize an expansion
rate that would have an unduly negative impact on the exploration and
development of Alaska reserves. Enbridge contends that the presumption
should be ``scaled back'' to apply only to cases where expansion rates
are no higher than pre-existing rates. Enbridge points to the
Commission's acknowledgement in Order No. 2005 that it ``cannot at this
point, without a specific project proposal or the facts surrounding a
proposed expansion before us, define exactly what will be required to
overcome the presumption.'' Enbridge contends that the Commission's
inability to explain how the presumption can be rebutted renders
rolled-in pricing mandatory, leaving the question of whether a rolled-
in expansion rate that is higher than original rates is a subsidy to be
resolved in a future NGA section 7 filing.
44. ChevronTexaco stresses that because the text of Order No. 2005
recognizes that ``without a specific project proposal or the facts
surrounding a proposed expansion'' the Commission cannot determine what
is needed to overcome the presumption favoring rolled-in rates, the
Commission should defer any determination of rate treatment for
expansions until a record can be developed after a specific proposal is
made. According to ChevronTexaco, this inability to articulate when the
presumption will be applied creates uncertainty that inhibits the
development of any Alaska project.
45. ChevronTexaco states that inconsistency between the text of
order and the text of the regulations creates further uncertainty.
ChevronTexaco states that while the regulations state that the
presumption applies to ``any expansion,'' Order No. 2005's text, at
paragraphs 124 and 125, suggests that rolled-in rates are appropriate
only if there is no increase in rates for existing shippers.
ChevronTexaco urges the Commission to clarify section 157.39 to state
that no cross-subsidy is intended. Otherwise, the Commission should
consider issuing, in lieu of a regulation, a policy statement which
outlines the general direction that the Commission intends to take.
46. The Alaska Legislators and Anadarko contend that rolled-in
pricing is essential and justified. Anadarko asserts that the
Commission clearly has the statutory authority to establish a
presumption of rolled-in pricing for future expansions in the open
season regulations. Both Anadarko and the Alaska Legislators contend
that the significant differences identified in the record between an
Alaskan pipeline project and a pipeline in the lower 48 states provide
ample justification for departing from the current pricing policy. The
Alaska Legislators contend that even if there were some factual reason
for applying the current policy, that policy cannot be reconciled with
the policy considerations stated in ANGPA. Both Anadarko and the Alaska
Legislators state that incremental pricing of expansions cannot be
reconciled with ANGPA's goals of promoting competition in the
exploration, development, and production of Alaska natural gas, and
providing for the transportation of natural gas other than from the
Prudhoe Bay and Point Thomson units in any expansions of the Alaska
pipeline facilities. The Alaska Legislators estimate that expanding a
pipeline, through looping, to a capacity of 7 billion cubic feet (Bcf),
would result in an expansion rate 50 percent higher than existing rates
if incrementally priced. Anadarko predicts that incremental pricing of
expansions of an Alaskan pipeline beyond 6 Bcf would cause the pipeline
to be capped at 6 Bcf.
C. Commission Response
47. ANGPA section 103(i) gives the Commission broad authority to
establish ``such regulations as are necessary'' for the conduct of open
seasons. In this regard, the Commission believes that it is appropriate
to establish rate criteria that will assist potential shippers to make
informed open season bids, and will promote competition, as required by
ANGPA. As discussed in detail in Order No. 2005, these criteria include
projected rates for in-state deliveries of gas, as well as a
presumption for rolled-in rate treatment for future pipeline
expansions.
48. In adopting the presumption for rolled-in rate treatment, the
Commission balanced rate predictability for initial shippers with the
objective of reducing barriers to future exploration, development and
production of Alaska natural gas. The Commission was concerned that the
prospect of high incremental transportation rates might increase risks
to Alaskan producers and serve as a disincentive to future exploration
and development of potentially valuable natural gas resources. On the
other hand, the Commission does not wish to discourage voluntary
capacity expansions.
49. The rolled-in rate presumption was not an abandonment of our
current policy of not favoring rate subsidization by existing customers
of capacity expansions as suggested in the requests for rehearing. The
Commission did, however, suggest that because of the likelihood of a
single Alaskan pipeline project, it would consider alternatives to our
current policy on how to define or quantify subsidization by current
customers. Current policy primarily considers whether the expansion
project will result in a rate higher than the existing transportation
rate for existing customers. An alternative consideration or definition
of subsidization could be whether the expansion rate is no higher than
the actual initial rate or of an initial rate without built-in
subsidies. The Commission believed and continues to believe that the
appropriate place to review this issue is in the context of a future
NGA section 7 filing.
[[Page 35018]]
In such a proceeding, if the pipeline owners can show that the initial
pipeline was sized appropriately, i.e., it was uneconomic or
inefficient to build a larger capacity pipeline, the Commission would
consider this in overcoming the rolled-in rate presumption.
50. The text of Order No. 2005 referred to by ChevronTexaco does
not simply state that rolled-in rates are appropriate only if there is
no increase in rates for existing shippers; it suggests that a rolled-
in expansion rate that is higher than the original rate is not
necessarily a subsidy. As noted above, we will determine whether a
particular rate amounts to a subsidy when the issue is presented to us.
51. Nothing in the requests for rehearing causes us to question our
conclusion that a rebuttal presumption of rolled-in treatment for the
expansion of an Alaska Project is a reasonable approach to the
difficult issues we, and prospective pipeline proponents and shippers,
may face on the future. We think that the signal we are sending is a
positive one that will help spur natural gas exploration and
development in Alaska. At the same time, we have not prejudged how we
will resolve future proceedings, and all parties will have the
opportunity to convince us of appropriate rate treatment if and when
expansion proposals for an Alaska project are developed. We therefore
will not change the rule on this matter.
III. Late Bids
A. The Final Rule--Sec. 157.34(d)(2)
52. Order No. 2005 added a new provision in the Final Rule, section
157.34(d)(2), that a project sponsor must consider any bids tendered
after the expiration of the open season by qualified bidders, and may
reject them only if they cannot be accommodated due to economic,
engineering, or operational constraints, in which case the project
sponsor must provide a detailed explanation for the rejection. The
Commission explained that this requirement is designed to allow
reasonable access to those shippers who may not be ready to participate
during the established open season period, and at the same time provide
the sponsor with flexibility in the timing of its open season.
B. Rehearing/Clarification Requests
53. The North Slope Producers and Enbridge contend that it is
important for the timely development of any project that the project
sponsors be able to rely on an open season that has a definite term.
They state that the open season results are needed to permit the
project sponsor to gauge demand and in turn finalize pipeline design.
They assert that the late bid provisions of section 157.34(d)(2) will
result in unreasonable risks and costs to the project sponsor by
creating a never-ending, open-ended open season in which the project
sponsor will be required, for each and every late bid received, to
divert resources and incur additional costs to evaluate whether bid can
be accommodated. In addition, they state that there is tremendous
potential for delay at each step of the development of the project, if
the project sponsor must stop and make design changes at every stage to
accommodate a late bid. Thus, they state, section 157.34(d)(2) would
frustrate the Commission's stated goal of adopting open season
regulations that ensure sufficient economic certainty to support the
construction of a pipeline.
54. The North Slope Producers add that financing cannot be secured
until pipeline design and development costs are known and precedent
agreements are in place. Consequently, they claim, the prospect of
having to make changes to key project components to accommodate late
bids jeopardizes the project sponsor's ability to obtain financing in a
timely manner.
55. Both Enbridge and the North Slope Producers also state that
section 157.34(d)(2) fails to provide a clear standard under which the
project sponsor must evaluate late bids. This failure, they claim,
presents another risk of uncertainty and delay. Enbridge argues that,
even if it is necessary to significantly re-design a project in order
to satisfy a late bid, the regulation would require that such a bid be
accepted if the re-designed project remains feasible from an
``economic, engineering or operational'' perspective.
56. The North Slope Producers state that another effect of the late
bid provision is that potential shippers will be discouraged from
participating in an open season if they can submit a late bid. They
worry that this would diminish the open season's ability to accurately
demonstrate the demand for pipeline capacity. Enbridge also claims
that, absent a good faith requirement in connection with submitting
late bids, section 157.34(d)(2) permits such gamesmanship. Enbridge
states that at a minimum, section 157.34(d)(2) should put ``the burden
on the bidder to demonstrate compelling circumstances that prevented
participation in open season, and that the bid can be accommodated
without changing system design, requiring capacity to be allocated away
from other shippers, or otherwise adversely impacting the project's
development and timing.'' In this regard, the State of Alaska maintains
the Commission should include language in section 157.34(d)(2) that
requires late bidders to provide adequate justification for their late
bids.
57. Additionally, the North Slope Producers assert that, to the
extent a project sponsor would be required to expand the project to
accommodate late bids, the Commission is in effect ordering an
expansion of the pipeline. In such a case, section 157.34(d)(2) raises
the same issues regarding forced expansions as are raised by sections
157.36 and 157.37. The North Slope Producers contend that whereas the
Commission may require an expansion under section 105, that section
places the burden on the party seeking such expansion to establish that
specific conditions are met, section 157.34(d)(2) appears to place the
burden on the pipeline to justify why it cannot expand the project to
accommodate a late bid.
58. Enbridge states that in any event there is little or no reason
for section 157.34(d)(2) ``given the other measures instituted by Order
No. 2005 to protect the interests of late developing shippers.''
Specifically, Enbridge refers to the unprecedented level of information
required in the open season notice on which bidders will be able to
base their long-term capacity decisions, Order No. 2005's emphasis on
requiring that the project's design demonstrate a capability for low-
cost expansion, and, finally, the mandatory expansion provisions of
ANGPA 105. Enbridge contends that to the extent late bids can be
accommodated without adversely impacting the project's development, it
is in the project sponsor's economic interests to do so.
59. ChevronTexaco requests that the Commission clarify that project
sponsors will be required to consider late bids only if there is excess
capacity after capacity is allocated to those open who bid in the open
season. ChevronTexaco states that one of the major purposes of the open
season is provide a level playing field for all participants, thereby
eliminating the advantages of possessing superior or advance
information. ChevronTexaco cannot understand the Commission's reasoning
in giving special consideration to one specific parameter of a
conforming bid, namely, the timing of the bid. According to
ChevronTexaco, late bidders should not be allowed to put new burdens on
the project or to adversely affect timely open season bidders.
60. Anadarko states that section 157.34(d)(2) is a reasonable
compromise
[[Page 35019]]
balancing concerns that the open season could be held prematurely with
a project sponsor's desire to control open season timing. Anadarko also
states that it is possible to accommodate all qualified bidders up to
the time the pipeline design is finalized.
C. Commission Response
61. Under the Commission's open access policy and rules, all
operating interstate pipelines have an obligation to receive and
respond to new requests for service, even if no capacity is available.
All operating pipelines have provisions in their FERC tariffs governing
the procedures that the pipeline will use in evaluating requests for
service. Absent an expansion,\22\ capacity could still be made
available to a prospective shipper via capacity release or the capacity
turnback provisions of an interstate pipeline's FERC tariff. During the
several years between the time that the open season ends and an Alaskan
pipeline goes into service, there will be no tariff with provisions
like those described above in effect for that pipeline. Without the
late bidder provisions of section 157.34(d), late-developing
prospective shippers would have no formal way of seeking capacity on
the pipeline after the open season ends. As revised herein, the
Commission believes that the late bidder provision is a fair and
necessary addition to the open season process for an Alaska natural gas
transportation project.
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\22\ Interstate pipelines, other than an Alaska pipeline, cannot
be required to expand their systems, but pipelines are required to
respond to those who request service, even when none is available.
---------------------------------------------------------------------------
62. The project sponsor's obligation under section 157.34(d)(2) is
not ``unbounded'' or ``open-ended,'' as North Slope Producers contend.
We added this requirement in recognition of the possibility that an
appreciable amount of time might pass between the close of the open
season and the project sponsor's finalizing the details of the proposed
pipeline design and associated development costs, given the size and
scope of an Alaska natural gas pipeline project. During that time, it
is possible that producers of Alaska natural gas who were not in a
position to commit to long-term capacity commitments during the open
season, might then be in a position to request capacity consistent with
the open season notice (except, of course, that the bid is tendered out
of time). We felt it proper to require the project sponsor to consider
such a request. At the same time, we appreciated that at some point in
time, either before or after the proposed pipeline design is finalized,
the project sponsor might not be able to accommodate reasonably a late
request. For that reason, we provided that late requests could be
rejected on the basis of ``economic, engineering or operational
constraints.'' This is far from an unbounded, open-ended obligation.
Indeed, as noted above, Enbridge points out that to the extent that
late bids can be accommodated without adversely impacting the project's
development, it is in the project sponsor's economic interest to do so.
We see no harm in requiring that result.
63. We will however, revise the requirements of section
157.34(d)(2) in response to the complaints that the ``economic,
engineering or operational constraints'' standard for rejecting late
bids is too vague. Specifically, we are clarifying the criteria for
rejecting late bids in section 157.34(d)(2) to be ``economic,
engineering, design, capacity or operational constraints, or
accommodating the request would otherwise adversely impact the timely
development of the project.'' \23\ Additionally, we are adding a
provision to the section which will enable the project sponsor, at the
appropriate time in the development of its project and subject to
Commission approval, to determine, based on the above criteria, that no
further bids can be accepted. We will also revise section 157.34(d)(2)
to provide that any bid tendered after the expiration of an open season
must contain a good faith showing, including a statement of the
circumstances which prevented the bidder from tendering a timely bid,
and how those circumstances have changed. This requirement is
consistent with the underlying premise of section 157.34(d)(2) in the
Final Rule, and should serve to protect against ``gamesmanship.'' With
these revisions and clarifications, we believe that the late bid
provision will permit late-developing shippers to obtain capacity after
the expiration of the open season, while also providing the prospective
applicant the assurance that it will be able to design and develop its
project according to its own schedule.
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\23\ We are retaining the requirement that the prospective
applicant must provide a detailed explanation for its rejection, at
least until such time as it has determined, subject to Commission
approval, that no further late bids can be accepted. We find that,
based on the prospective applicant's position, it is easier for it
to evaluate why a late bid cannot be accepted, than it is for a
later bidder to explain why its bid can be accommodated.
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IV. Mandatory Pre-Approval
A. The Final Rule--Sec. 157.38
64. Section 157.38 requires that, at least 90 days prior to
providing its notice of open season, an applicant must file, for
Commission approval, a detailed plan for conducting the open season in
conformance with the regulations. The Commission will establish a date
by which comments on the request for approval are due, and the
Commission, unless it directs otherwise, will act on the request within
60 days of its filing. The Commission concluded in Order No. 2005 that
this requirement would allow for the resolution of disputes or
dissatisfaction with an open season at the earliest possible time,
thereby reducing the risk of having to require a second remedial open
season because the first one did not conform to the regulations.
B. Rehearing/Clarification Requests
65. The North Slope Producers and Enbridge urge the Commission to
eliminate the mandatory pre-review process set out in section 157.38,
calculating that with the addition of this mandatory review, the open
season process will take at least 210 days, instead of the 120-day open
season period proposed in the NOPR and established in section 157.34.
They state that this additional 90 days does not include further delays
that could result from disputes arising during the pre-review process,
including the need to consider requests for rehearing of any orders
pre-approving an open season or the Commission's inability to adhere to
its 90-day window. The result, they claim, is that the open season
process will be delayed, not expedited. Enbridge states that the 210-
day period is longer than the 180-day open season period which the
Commission rejected as inconsistent with Congress' sense of urgency, as
well as the Commission's conclusion in Order No. 2005 that ``timing is
of the essence.''
66. The North Slope Producers maintain that the Commission's
justification for this requirement is that a successful open season is
more likely to occur if issues are identified and resolved at the
earliest time. The North Slope Producers disagree, claiming that,
instead of reducing the chance of post-bid disputes, this layer of
review will provide those who would gain commercial leverage by
delaying the open season process ``with an additional bite at the
apple, first by objecting to the bid package, then by objecting to the
results of the open season.''
67. Both the North Slope Producers and Enbridge contend that the
[[Page 35020]]
mandatory pre-review process is unnecessary and duplicative of other
protections provided in Order No. 2005, including the transparency and
specificity of the open season information, the 30-day prior notice
requirement, the prohibition against undue discrimination or preference
in rates, terms or conditions of service, and the imposition of Order
No. 2004 standards of conduct. They contend that the effects of any
delay of the open season can be profound, due to narrow, seasonal
windows for environmental studies and preliminary field work, which
cannot take place until the open season has been held. These risks,
they claim, far outweigh any utility of a mandatory pre-review. In
conclusion, the North Slope Producers contend that any pre-review of
the open season notice should be voluntary, shortened, and that the
Commission decision on the sufficiency should be deemed a pre-
decisional, non-reviewable determination, similar to the Commission's
action in rejecting a deficient certificate application under section
157.8 of the Commission's regulations.
68. Anadarko defends the mandatory pre-review requirement as
striking an ``appropriate balance between granting project sponsors
flexibility in designing open seasons and providing regulatory
supervision to potential bidders by requiring project sponsors to file
and obtain approval of the open season plan.'' Anadarko and the Alaska
Legislators state that pre-approval will reduce any risk of having to
hold a second open season to correct one done improperly. Anadarko
states that this will, as the Commission believes, promote rather than
hinder a timely and successful open season. The Alaska Legislators
agree with this assessment, contending that adding 90 days to the front
end of the open season process, even with the prospect of a rehearing,
is better than having an open season called back by an order on
rehearing or on appeal from the results of an open season, and then
having to hold another open season. Moreover, they state that once the
open season is approved, parties may rely on those terms being
controlling throughout the bidding and contracting process.
C. Commission Response
69. The North Slope Producers and Enbridge correctly state that, by
virtue of the mandatory pre-approval established in section 157.38, the
minimum duration of the whole open season process would be 210 days.
However, the concept of a mandatory pre-approval and the attendant
additional time that such review will add is not inconsistent with our
concern that ``time is of the essence'' that caused us to reject a 180-
day open season period, and instead provide for a 120-day open
season.\24\ Our focus in establishing this 120-day period was to arrive
at a time period such that all prospective bidders reasonably could
review the open season information and evaluate whether to make multi-
year capacity commitments, thereby leveling the playing field.
---------------------------------------------------------------------------
\24\ The 120 days consists of the 30-day prior notice period
(section 157.34(a)), followed by a 90-day open season (section
157.34(d)(1)).
---------------------------------------------------------------------------
70. When discussing the duration of the whole ``open season
process,'' we must consider the potential for delays due to disputes
arising during the open season. In this regard, we found in Order No.
2005 that pre-approval of open season procedures would ``allow issues
to be identified and resolved at the earliest possible time and,
ideally, reduce the possibility of dissatisfaction with open seasons,
as well as the risk that the Commission will have to require that
deficient open seasons be conducted again.'' \25\ The North Slope
Producers' and Enbridge's disagreement with this assessment is based on
arguments that the transparency and specificity of the information
required in the open season and other protections provided in the open
season rules render pre-approval unnecessary, and that the pre-approval
process itself invites delay.
---------------------------------------------------------------------------
\25\ Order No. 2005 at P 109.
---------------------------------------------------------------------------
71. We are not as optimistic as the North Slope Producers and
Enbridge that there is little likelihood that disputes might arise over
the conduct of an open season and its conformance with the open season
rules. While the transparency and specificity of the open season rules
might lead to a clearer identification of any issues in dispute, they
do not change the fact that in any open season there will be a universe
of potential bidders with starkly different, competing needs and
interests, and the potential for dispute is real. We continue to
believe that getting it right the first time is the best approach.
72. Nonetheless, in revisiting the requirement for mandatory pre-
approval as a result of these rehearing requests, we find that it is
appropriate to make some changes. First, we are revising section 157.38
to make clear that the plan to be filed by a prospective applicant
shall include the information required in a notice of open season under
section 157.34. Second, we are eliminating the 30-day prior notice
requirement in section 157.34(a). Since the public will have actual
notice of a prospective applicant proposed open season notice at least
90 days prior to the open season, there is no reason to provide for an
additional prior notice period. By this change, we are reducing the
210-day period to 180 days. It also is our conclusion that, given the
fact that participants in an open season will have the opportunity to
object to the conduct of the open season after a certificate
application is filed, as is our current practice, as well as the
ability to seek rehearing and obtain appellate review of any Commission
certificate orders, orders approving open season procedures will be
interlocutory and not subject to rehearing.
V. In-State Study
A. The Final Rule--Sec. 157.34(b)
73. In response to concerns expressed by Alaska entities and in
recognition of Congress's mandate that Alaska in-state needs be given
due consideration, the Final Rule added in section 157.34(b) a
requirement not contained in the proposed regulations that the open
season information include an assessment of Alaska's in-state needs and
prospective points of delivery within the State of Alaska, based to the
extent possible on any available study performed or otherwise approved
by an appropriate Alaska governmental entity.
B. Rehearing/Clarification Requests
74. While the North Slope Producers find reasonable a requirement
that a study of in-state needs be completed prior to any open season,
they object to section 157.34(b)'s requirement that the contents of the
open season notice rely on an in-state study, if practicable. They
assert that ANGPA does not require a pipeline sponsor's study to
``include or consist'' of a state-sanctioned study. The North Slope
Producers contend that this requirement invites disputes as to whether
it is ``practicable'' to include a state study, or whether
``appropriate'' state officials were involved. Consequently, the North
Slope Producers request that the Commission revise section 157.34(b) to
require that a project sponsor consult with the State regarding the
study for in-state needs.
75. The Alaska Legislators state that the Commission has avoided
the problem of ``dueling studies'' by deferring the study to the State
of Alaska. In this regard, the Alaska legislators advise the Commission
that the State of Alaska has undertaken to designate an appropriate
agency to conduct or sanction the required study, and the Alaska House
of Representatives has passed a resolution urging the
[[Page 35021]]
Administration to conduct, approve, or sanction the required study
prior to the effective date of the opens season rules.
C. Commission Response
76. Section 157.34(b) does not mandate the use of a particular
study but rather is premised on the common-sense notion that
information provided by the State of Alaska likely will be valuable to
potential shippers. We trust that the State and prospective pipeline
applicants can agree on the manner in which such information can be
provided. If questions arise as to the extent to which it is possible
to include a state study, we will resolve them. Our regulations offer
several options that the prospective applicant and the State of Alaska
could take to ensure the adequate involvement of the State.
Accordingly, we will not revise section 157.34(b).
VI. In-State Rates
A. The Final Rule--Sec. 157.34(c)(8)
77. In addition to the requirement that in-state gas needs be
addressed in the open season, the Commission also required, in section
157.34(c)(8), that, based on in-state needs and the delivery points
identified in the study, open season information includes a proposed
in-state transportation rate, based on the costs of providing that
service.
B. Rehearing/Clarification Requests
78. The North Slope Producers ask the Commission to clarify that
estimating rates for in-state service does not create a requirement to
offer such a service at that rate (or at all) if the open season does
not yield firm commitments for in-State deliveries. They assert that
the ultimate indicator of any market for in-state service is the
willingness of shippers to make firm commitments to purchase capacity
for in-state use during the open season, not a study. They also request
that the Commission clarify that the estimated in-state service rates
are merely illustrative and subject to adjustment.
79. Enbridge requests that the Commission make clear that the
``estimated transportation rate'' referred to in section 157.34(c)(8)
is one based on project sponsor's estimated costs to make in-state
deliveries, not upon any rates assumed by the study. Additionally,
Enbridge states that the Commission clarify that bids for in-state
service should be subjected to the same requirements for
creditworthiness, collateral and execution of binding contractual
commitments as apply to any other open season bidder.
80. The State of Alaska asks the Commission to clearly state that
the in-state rates are to be distance-sensitive in order to ensure that
the cost of in-state service is calculated properly.
C. Commission Response
81. During the open season process, qualified bidders must
successfully bid upon and arrange to consummate service agreements for
transportation service. Projected rates for in-state deliveries must be
based on estimates of costs for providing service to the in-state
delivery points. While prospective applicants will estimate rates
during an open season, the Commission's review of proposed rates will
be guided by section 284.10(c)(3) of our regulations, which states in
part that ``[a]ny rate filed for service * * * must reasonably reflect
any material variation in the cost of providing the service due to * *
* the distance over which the transportation is provided.''
82. All shippers on any new interstate pipeline have a right to pay
only the initial rate on file as approved in the NGA section 7
certificate of public convenience and necessity. Those initial rates,
approved under section 7 as part of the certificate, would be paid
unless changed under section 4 or 5 of the NGA after appropriate
regulatory proceedings and upon the Commission's order. However, under
the Commission's negotiated rate policy,\26\ pipelines and shippers are
free to make an agreement to ``dispense with cost-of-service
regulation'' and agree to any mutually agreeable rate. A recourse rate
found in the pipeline's tariff would be available for those shippers
preferring traditional cost-of-service rates. Thus, if an in-state
service is successfully bid upon, filed for and approved, an in-state
cost-of-service recourse rate would be set in an Alaskan pipeline's
tariff, but in-state shippers would also be free to seek a negotiated
in-state rate with an Alaskan pipeline. Negotiated rates can be used to
lock in transportation costs and pipeline revenues to the mutual
benefit of both the shippers and the pipeline, without the risks of
later changes to rates and revenues under the NGA.
---------------------------------------------------------------------------
\26\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, Docket No. RM95-6-000, Regulation of
Negotiated Transportation Services of Natural Gas Pipelines, Docket
No. RM96-7-000, 74 FERC ] 61,076, (Jan. 31, 1996).
---------------------------------------------------------------------------
83. If there are no successful bids for in-state service, the
prospective applicant would nonetheless have to include the in-state
service as part of its proposed initial tariff. An opportunity to have
in-state service might arise if the pipeline voluntarily accepts a
request for it at a later time, or if the Commission acts under section
103(h) of ANGPA and section 5 of the NGA to require the pipeline to
make such in-state deliveries. The actual in-state rate for in-state
service would be an issue for such future proceedings. Based on the
foregoing, we see no need to further clarify the regulations.
VII. Tying Arrangements
A. The Final Rule--Sec. Sec. 157.34(c)(6), 157.34(c)(10), and
157.35(a)
84. The Commission addressed the matter of tying access to pipeline
capacity on an Alaska project to ancillary services in two sections of
the Final Rule. First, section 157.34(c)(6) requires that the open
season notice must contain an unbundled transportation rate. Second,
section 157.34 (c)(10) prohibits a prospective applicant from requiring
prospective shippers to process or treat their gas at any designated
facility. We explained elsewhere in Order No. 2005 ``that [we] can
address any other discriminatory conduct in connection with gas quality
requirements or other ancillary services through the provisions of
section 157.35 in conjunction with existing Commission policies and
procedures.'' Relevant to this explanation, section 157.35(a) provides
that ``[a]ll binding open seasons shall be conducted without undue
discrimination or preference in the rates, terms, or conditions of
service and all capacity awarded as a result of any open season shall
be awarded without undue discrimination or preference of any kind.''
B. Rehearing/Clarification Requests
85. The State of Alaska states that the Commission should more
explicitly explain the prohibition against tying arrangements, and
explain how the open season rules will apply to gas treatment plants.
The State believes that the open season rules should do more than
require an applicant to use an unbundled transportation rate, prohibit
tying of capacity on the pipeline to the use of a designated plant or
facility, and merely refer to the existing regulations and policies
prohibiting undue discrimination or preference. Rather, Alaska states
that the open season rules should make clear that any tying
arrangements will be subject to an exacting inquiry by the Commission
and will require a compelling justification, and even offers
recommended language to this end.
86. Alaska also states that since ANGPA includes gas treatment
plants in its definition of an Alaska natural gas
[[Page 35022]]
transportation project,\27\ treatment plants should be subject to the
open season regulations. Alaska points out that the effect of the
unbundling requirement of section 157.34(c)(6) is to exclude gas
treatment plants from the requirements of the open season. As a
possible solution, Alaska suggests that the open season rules be
clarified to provide that the applicant must separately offer gas
treatment plant capacity and pipeline capacity in the open season
notice, and give bidders an opportunity to bid on either or both, as
they choose. ChevronTexaco contends that because gas treatment plants
are jurisdictional facilities,\28\ Order No. 2005's approach of
deferring consideration of any discriminatory conduct as to necessary
such ancillary facilities and services to a later day does not satisfy
the requirements of the ANGPA. Chevron Texaco maintains that it is
particularly important that access to treatment facilities be subject
to the same open season, non-discriminatory requirement as the pipeline
because pipeline capacity without access to gas treatment facilities
that maybe a part of the pipeline system is meaningless.
---------------------------------------------------------------------------
\27\ ANGPA Section 102(2) defines the term `Alaska natural gas
transportation project' as ``any natural gas pipeline system that
carries Alaska natural gas to the border between Alaska and Canada
(including related facilities subject to the jurisdiction of the
Commission) * * *''
\28\ See Venice Gathering Co., 97 FERC ] 61,045 at 61,255 (2001)
(Treatment of gas to enhance its safe and efficient transportation
is subject to Commission jurisdiction).
---------------------------------------------------------------------------
C. Commission Response
87. The Commission did not intend to preclude the inclusion of
jurisdictional natural gas conditioning facilities from the open
season. If, pursuant to ANGPA section 103, a project sponsor intends to
file an application under section 7 of the NGA for authorization of a
project that includes a jurisdictional natural gas conditioning
service, we will review the open season plan and notice to ensure that
such service is offered in its open season notice, subject to the same
requirements as apply to transportation service. However, the
prospective applicant must offer a separate rate for the gas treatment
service and separate rate for the transportation service. Furthermore,
the prospective applicant can neither require bidders to bid on both
services, nor evaluate the bids based on whether bidders requested one
or both services. Moreover, while the prospective applicant can require
specific natural gas quality specifications such as would be met by
using the conditioning services offered, it cannot reject an otherwise
qualified bidder that states that it will deliver to the pipeline
facilities gas that meets the stated quality specifications.
88. On the other hand, if a prospective applicant is proposing to
apply to revise the Alaska Natural Gas Transportation System (ANGTS)
application now held in abeyance, then a conditioning service will have
to be included as a part of the open season but again, with all
services offered priced separately. Specifically, in 1981, President
Reagan submitted a Waiver of Law to Congress for the purpose of
clearing away certain government-imposed obstacles to the private
financing of the ANGTS. The Commission implemented that portion of the
Presidential waiver that required the Commission to include within the
ANGTS the gas conditioning plant at Prudhoe Bay.\29\
---------------------------------------------------------------------------
\29\ See Alaskan Northwest Natural Gas Transportation Co., 18
FERC ] 61,002 (1982).
---------------------------------------------------------------------------
VIII. Pre-Subscribed Capacity
A. The Final Rule--Sec. Sec. 157.33(b) and 157.34(c)(15)
89. Under section 157.33(b), pre-subscription agreements for
initial capacity on a proposed Alaska natural gas transportation
project are permitted, provided that capacity is offered to all open
season prospective bidders at the same rates and on the same terms and
conditions as contained in the pre-subscription agreements. In
addition, if there is more than one pre-subscription agreement, open
season prospective bidders are given the option of selecting the rates,
terms and conditions contained in any one of the several agreements.
However, section 157.34(c)(15) states that ``[i]f capacity is
oversubscribed and the prospective applicant does not redesign the
project to accommodate all capacity requests, only capacity that has
been acquired through pre-subscription shall be subject to allocation
on a pro rata basis; no capacity acquired through the open season shall
be allocated.''
B. Rehearing/Clarification Requests
90. The North Slope Producers assert that the provision in section
157.34(c)(15) subjecting only presubscribed capacity to pro rata
allocation, will dissuade any shippers from signing up for the
presubscribed capacity, thereby ``wholly negating'' the recognized
benefits of allowing pre-subscription agreements to facilitate the
development of an Alaska natural gas transportation project. They
predict that prospective shippers would rather wait for the open season
than risk proration. The North Slope Producers maintain that this
selective proration unduly discriminates against those shippers who are
willing to make early commitments for firm capacity in order to support
the project, in violation of the NGA and Commission policy. They add
that since section 157.33(b) allows all open season participants to
enjoy the same benefits as contained in the pre-subscription
agreements, such discrimination is particularly unjustified. The North
Slope Producers add that this is another example where the Commission
is attempting to compel the project sponsor to make design changes in
order to accommodate all bids.
91. The North Slope Producers also state that the final clause of
section 157.34(c)(15) is not consistent with the Commission's presumed
intent not to foreclose proration among open season bidders where there
is no presubscribed capacity. They suggest that the final clause of
that provision, which states ``no capacity acquired through the open
season shall be allocated,'' should be clarified.
92. In addition to agreeing that proration renders pre-subscription
an unattractive option for prospective shippers, Enbridge adds that the
additional requirement that the terms and conditions of any pre-
subscription agreements be made public prior to the open season notice
renders pre-subscription even less desirable because it put anchors
shippers at a competitive disadvantage to open season bidders who would
have prior knowledge of the pre-subscription bids. At the same time,
Enbridge concedes that it would be highly unlikely that project would
not be re-designed to accommodate capacity of all qualified bids at the
incipient, open season stage.
93. Enbridge raises again the claim that the ``numerous and
overlapping protections'' of Order No. 2005, in particular the level of
information provided in open season notice and measures provided to
ensure against discrimination, are sufficient to ensure a fair, open
and non-discriminatory open season process. Enbridge also states that
the Commission should clarify that open season shippers who in the open
season elect to select the terms and conditions of a pre-subscription
agreement may not ``cherry-pick'' terms and conditions from several
agreements but must accept any one agreement in its entirety.
94. The State of Alaska seeks clarification that, in the case of
capacity allocation on an oversubscribed pipeline that cannot
reasonably be redesigned, both presubscribed capacity and capacity
later acquired on the same rates, terms and conditions will be
[[Page 35023]]
subject to allocation, for the reason that the final words of section
157.34(c)(15) stating that ``no capacity acquired through the open
season shall be allocated,'' suggests otherwise.
95. ChevronTexaco maintains that the Commission failed to consider
and provide for the various circumstances that could trigger the pro-
rationing of pre-subscribed capacity. ChevronTexaco states that bidders
in the open season could outbid pre-subscribing shippers on the basis
of any of the qualifying conditions: For instance, an open season
bidder might outbid pre-subscribing shippers whose agreements are at
less than maximum rates, or whose agreements are of shorter terms.
ChevronTexaco is concerned that pre-subscribing shippers might lose
their capacity to open season bidders who outbid them because they know
the salient terms of the pre-subscription agreements. Therefore,
ChevronTexaco submits that the Commission should expand the requirement
of pro-rationing by establishing that all bids eligible to be allocated
capacity in an open season where pre-subscribing shippers will be
prorated should be treated as having equal value to the pre-
subscription precedent agreement for purposes of pro-rationing. In this
way, later qualifying bidders would be prevented from outbidding pre-
subscribing shippers.
96. In response to the claims on rehearing that the capacity
allocation provisions of section 157.34(c)(15) are counterproductive
because they will deter potential anchor shippers from entering into
pre-subscription agreements, Anadarko contends that the Commission's
finding that the North Slope Producers' unique position of control over
pipeline design amply justifies putting the consequences of any
decision not to redesign pipeline to accommodate all bidders on them.
Anadarko also questions the importance placed on pre-subscription
agreements in connection with an Alaska pipeline project. According to
Anadarko, the only justification for a pre-subscription agreement is to
facilitate financing and to provide the project sponsor with assurances
that it has the commitments to justify development and construction
expenses. However, states Anadarko, there is little doubt that any
Alaska natural gas transportation project will be fully committed, even
without pre-subscription agreements.
97. The Alaska Legislators support the pre-subscription rules of
Order No. 2005, claiming that the rules make sense given the unique
nature and circumstances of an Alaska natural gas transportation
project and the need to balance concerns ``that pre-subscription is
essential to finance the pipeline with concerns of those who feared
that such arrangements would favor affiliates of the pipeline or
otherwise undermine the objectives of conducting public open seasons
for capacity.''
C. Commission Response
98. Although we allowed pre-subscription agreements in the belief
that they could have utility in facilitating the development of an
Alaska natural gas transportation project, we cannot quantify how
beneficial such arrangements are. Our paramount consideration in
allowing pre-subscription was that it should not impact in any way the
capacity obtained through the open season process. For this reason, we
provided that any capacity acquired by reason of agreements entered
into prior to the open season would have to yield to capacity bid for
in the open season in the case of oversubscription We believe our
reasons for this selective proration, as stated in Order No. 2005 and
reaffirmed here, are sound.
99. The argument that anchor shippers will be dissuaded from
entering into pre-subscription agreements if they risk losing capacity
as a result of open season bidding, and that the ``recognized
benefits'' of pre-subscription will be lost, is unpersuasive. The North
Slope producers and other potential project sponsors have developed a
plethora of information in recent years regarding the viability of an
Alaska project. They are fully capable of deciding whether they wish to
execute pre-subscription agreements. If they do not, capacity will be
allocated in an open season. There has been no showing that an Alaska
project cannot be financed, as are many major projects, based on
commitments made in an open season. While we have concluded that the
public interest permits pre-subscription, under the conditions
established by the rule, we do not find that the public interest
requires pre-subscription. It does require competition and open-access.
We leave it to potential project sponsors and shippers whether pre-
subscription makes sense to them.
100. We will, however, clarify section 157.34(c)(15) in two
respects, first to eliminate confusion over the last sentence of that
section which concludes ``no capacity acquired through the open season
shall be allocated,'' and second to make clear that in the event there
is more than one pre-subscription agreement, bidders in the open season
may not cherry-pick among the provisions of the several agreements. The
North Slope Producers contend that the last clause of section
157.34(c)(15) might be read to provide that proration is foreclosed
among open season bidders even where there is no presubscribed
capacity. We will clarify the language of the rule to avoid such a
misreading. Capacity bid for in the open season is exempt from
allocation only in a case where there is also presubscribed capacity,
as explained in the text of Order No. 2005. The State of Alaska reads
that clause to suggest that capacity acquired by bidders in the open
season who elect to acquire their capacity on the same rates, terms and
conditions as contained in a pre-subscription agreement will not be
subject to pro rata allocation along with the pre-subscription
shippers. Such an interpretation also misreads the intent of section
157.34(c)(15), and we will clarify the language of the rule
accordingly. Finally, we will clarify section 157.33 to make clear that
open season bidders may not cherry pick among the provisions of several
precedent agreements, as was our intent in the Final Rule.
IX. Other Issues
101. The North Slope Producers request that the open season rules
be clarified in certain respects. First, they request that the
Commission clarify the open season regulations by replacing references
to ``prospective points of delivery within the State of Alaska'' or
``delivery points'' in several subsections of the regulation with the
term ``tie-in points.'' \30\ The North Slope Producers assert that the
term ``delivery point'' implies an obligation that the pipeline will be
finally designed to deliver gas all the way to in-State markets and
that ANGPA does not contemplate or impose such an obligation.
---------------------------------------------------------------------------
\30\ These sections include Sec. 157.34(b) and 157.34(c)(1),
(2), (3), (6), (8), and (16).
---------------------------------------------------------------------------
102. The Commission understands the terms ``prospective points of
delivery within the State of Alaska'' or ``delivery points'' to mean
those points on the interstate Alaskan pipeline where custody of the
gas would be transferred to the facilities of an intrastate pipeline,
local distribution company, or end-user whose facilities are not
otherwise under the Commission's jurisdiction, assuming that shippers
on an Alaska pipeline requested such deliveries. The term ``tie-in
points'' as used only once in ANGPA is used in reference to the study
of in-state needs in section 103(g) and as a familiar natural gas
industry phrase is not as familiar to the Commission as
[[Page 35024]]
the terms ``points of delivery'' or ``delivery points.'' \31\
---------------------------------------------------------------------------
\31\ Although tie-in point is used in some Commission documents,
the most common use is to identify the point where a pipeline's loop
ties back into the mainline.
---------------------------------------------------------------------------
103. As part of the open season, the prospective applicant is in
fact obligated to offer to deliver gas at least at certain prospective
in-state delivery points identified in the study of in-state needs.
However, the open season notice's initial design of the pipeline need
only match the prospective applicant's open season business proposal to
deliver at least the amount of gas identified in the study of in-state
needs at those prospective in-state delivery points. Bidders may seek
alternative delivery points (such as ones closer to their market) as
part of their bids, and as part of the open season the prospective
applicant may consider building additional facilities to such alternate
points, but has no obligation to do so as long as it treats similar
requests the same. As discussed above, if the open season ends without
any successful bids for in-state deliveries, then there is a continuing
obligation for the prospective applicant to leave provision for such
in-state service available in its tariff, but it would not have to
voluntarily propose such service as part of its initial application.
Also, as used in section 157.34, the term ``delivery point(s)'' also
refers to the location at the border between Alaska and Canada where
presumably prospective bidders will seek to have their volumes
delivered. It would be much more confusing if the regulations were
revised to refer to ``tie-in points'' for points inside Alaska and
``delivery points'' for locations at the border between Alaska and
Canada. Therefore, we will not clarify the rules as requested by the
North Slope Producers in this regard.
104. Second, the North Slope Producers state that the ``catch-all''
language in section 157.34(c)(18) was not scaled back enough from the
language proposed in the NOPR. Specifically, they state that as
written, the final regulation requires a pipeline applicant to provide
all bidders, not only with information the applicant has provided to
any bidder, but also with information ``in the hands of'' any bidder.
The North Slope Producers claim that the applicant cannot know what
information identified in section 157.34(c)(18) is ``in the hands of a
potential shipper.'' Moreover, they contend that while the text of
Order No. 2005 does not discuss the intent of this subsection, the
Commission's press release and the Commission staff's PowerPoint
presentation at the February 9, 2005 Commission Open Meeting
presentation refer to information that the applicant has in some way
made available to a potential shipper, and the regulations should be
clarified to be consistent with this intent. The North Slope Producers
add that, read literally, this language would call for protected
information. Enbridge, on the other hand, claims that section
15734(c)(18) should be eliminated as unnecessary due to the
transparency assured by the rest of the numbered subsections of section
157.34(c).
105. Anadarko objects to this requested clarification, pointing out
that the North Slope Producers are likely already to possess relevant
project-related information as a result of discussions with other
possible project sponsors, and if the North Slope Producers becomes the
project sponsor, this information is already in their hands and was not
made available to them by an applicant.
106. The ``catchall'' provision addresses the difficult issue of
separation of functions between a prospective applicant and its
affiliates who produce, sell or market Alaska gas, and as such are
potential bidders for capacity on an Alaska natural gas transportation
project. It has been targeted as a problem since it appeared in the
NOPR and it was discussed extensively in the Final Rule.\32\ The North
Slope Producers have undertaken millions of dollars of due diligence
``homework'' on the design, cost, operation and feasibility of an
Alaska pipeline. If they are not affiliated with the prospective
applicant for an Alaska pipeline, then all that knowledge and
information is theirs and, presumably, would give them an informational
advantage in the open season bidding. However, if the North Slope
Producers are affiliated with the prospective applicant, then the
Commission and other potential bidders must be assured that any
relevant information about the design, cost, operation and feasibility
of an Alaska pipeline that the North Slope Producers transfers to an
affiliated prospective applicant is available to everyone. The
Commission desires to make this very important part of the Final Rule
as clear as possible. Thus, we will revise section 157.34(c)(18) to
read as follows:
---------------------------------------------------------------------------
\32\ See Order No. 2005 at P 72-83.
All information that the prospective applicant has in its
possession pertaining to the proposed service to be offered,
projected pipeline capacity and design, proposed tariff provisions,
and cost projections, or that the prospective applicant has made
available to, or obtained from, any potential shipper, including any
affiliates of the project sponsor and any shippers with pre-
subscribed capacity, prior to the issuance of the public notice of
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open season;
The Commission understands that the scope of this information is
extensive. Therefore, we will not require that the contents of the open
season notice to be published by the prospective applicant must contain
copies of all the documents which would be covered under section
157.34(c)(18), but that the notice identify a ``public reading room''
where such information is available, for copying at the reader's
expense. Further, as the North Slope Producers point out, dealing with
potential ``protected information'' will have to be addressed as it is
in any commercial situation. The Commission expects that all parties
will cooperate in dealing with ``protected information,'' but as in all
matters pertaining to the open season process, the Commission and its
staff stand ready to assist in resolving any disputes.
107. Third, the North Slope Producers request that the Commission
clarify the requirement in section 157.35(c) that the project applicant
``create or designate a unit or division to conduct the open season
that must function independent of the other divisions of the project
applicant as well as the applicant's Marketing and Energy affiliates.''
They claim that they intend to create a separate entity to be the
project sponsor and to conduct the open season, and that this section
would require them to establish yet another separate entity to conduct
the opens season, and that section 157.35(c) should be revised to
reflect that this is sufficient. Specifically, the North Slope
Producers propose to delete from the regulations the language requiring
that a project applicant must designate a separate unit or division to
conduct the open season. Anadarko claims that this requested
clarification would largely nullify the purpose of section 157.35(c).
108. The Commission denies the North Slope Producers' proposed
change to section 157.35(c). However, the Commission will amend the
section to take into account situations in which a project applicant is
an entity that has been separately created for the purpose of
conducting an open season. In such cases, the separate entity would
comply with the provisions of section 157.35(c) if that project
applicant functioned and operated independently from the project
applicant's Marketing and Energy Affiliates, as well as the other
divisions of the project applicant. The purpose of section 157.35(c) is
to ensure that the project applicant conducting the open season is
independent of, and does not
[[Page 35025]]
favor, its affiliates. If the project applicant was created to comply
with section 157.35(c) and does, in fact, comply with the regulation,
the project applicant is not required to create a further subdivision
to achieve compliance.
109. The North Slope Producers identify several other non-
substantive clarifications to the regulatory language that should be
made to avoid confusion.\33\ These corrections will be made.
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\33\ These include typographical errors in section 157.35(d)
(references to sections 258.4(a)(1) and (3) should be to sections
358.4(a)(1) and (3)), Order No. 2005, P 74 (should cite to
Sec. Sec. 358.5(d) and 358.4(e)(3) rather than Sec. Sec. 358.4(d)
and 358.(b)(e)(3)); section 157.34(c)(9) (``proscribed'' should be
changed to ``prescribed''); and section 157.33(b) (``terms, rates,
terms and conditions'' should be changed to ``duration, rates, terms
and conditions''). The North Slope Producers also suggest that the
term ``rate amounts'' in section 157.34(c)(9) should be changed to
``rates'' as the latter term is more commonly used in the industry.
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110. Enbridge argues that since the open season regulations require
that the project design criteria include a requirement that the project
be capable of ``low-cost expansion,'' \34\ the Commission should
explain that the threshold for satisfying the low-cost expansion''
standard is any expansion that does not increase rates to initial
shippers. However, as Enbridge recognizes, any certificate application
for an Alaska natural gas transportation project might provide detail
regarding several expansion scenarios depending on and in response to
the results of the open season. The project design review that the
Commission will undertake focuses on the proposed project's ability to
accommodate the capacity bid for in the open season, as well as the
extent to which the project can accommodate ``low-cost'' expansion. All
expansions will involve cost. Obviously, as recognized by virtually all
stakeholders, capacity that can be gained by compression alone would
typically be the lowest-cost expansion. At the other end of the
spectrum would be a pipeline that has no compression-only expansion
potential, necessitating the need for looping in the first instance.
The operative word in connection with any ``low-cost'' standard in
section 157.37, is the extent of the design's expandability, and that
standard is not tied to the cost impact of a given expansion.
Consequently we will not clarify section 157.37 as requested by
Enbridge.
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\34\ See, e.g., Order No. 2005 at P 82; section 157.37.
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111. ChevronTexaco claims that the Final Rule contains a conflict
about how the contract term might be used by the prospective applicant
in establishing its methodologies for the evaluation of bids and the
allocation of capacity due to oversubscription, should that be
necessary. It states that this confusion is caused because contract
term is not mentioned in section 157.34(c)(14) regarding evaluation of
bids, but is mentioned in section 157.34(c)(15) regarding allocation of
capacity due to oversubscription. ChevronTexaco also complains that the
Commission's stated intention to rely on after the fact enforcement of
issues that might be caused by unusual contract terms, rather than set
a cap on contract term for the purpose of bidding and allocation review
methodologies, does not satisfy ANGPA's mandate that the Commission's
open season rules are fully prescriptive. ChevronTexaco requests that
the Commission clarify the open season regulations to require that open
season notices to include a cap on the contract term for capacity bids.
112. First, our intention to rely on after-the-fact enforcement of
open season issues that might be caused by unusual contract terms, or
by any other aspect of the open season process that is not specifically
enumerated in the open season regulations, completely satisfies the
intent of Congress as stated in ANGPA. Moreover, as explained in Order
No. 2005, it is consistent with our existing policy. However, we do
agree that the discrepancy in language between section 157.34(c)(14)
and section 157.34(c)(15) should be clarified to provide consistency
between the methodologies for the evaluation of bids and the allocation
of capacity due to oversubscription. To be consistent and avoid
confusion, we will delete the phrase ``including price and contract
term'' from section 157.34(c)(15). Furthermore, we will look carefully
at this issue in our review of any open season plan and notice under
section 157.38.
113. ChevronTexaco claims that the only way to assure that an open
season was conducted fairly and in accordance with the open season
rules is by making the precedent agreements publicly available.
Therefore, ChevronTexaco objects to the provision in section
157.34(d)(4) which provides that all precedent agreements and
correspondence with bidders who were not allocated capacity must be
filed with the Commission, but that they may be filed under a request
for confidential treatment pursuant to section 388.112 of the
Commission's regulations. ChevronTexaco claims that since precedent
agreements will become agreements that will appear in a pro forma
tariff or an effective tariff, there is little chance that the
information in the precedent agreements should be confidential for any
prolonged period of time, or that any of the information would fall
under a Freedom of Information Act exemption. ChevronTexaco states that
the precedent agreements could be filed in a public and non-public
version in the event parts of the agreements do contain protected
information.
114. We deny ChevronTexaco's request. Under section 388.112 of the
Commission's regulations, any person submitting a document to the
Commission may request privileged treatment by claiming that some or
all other information is exempt from the Freedom of Information Act's
disclosure requirements. We are nor conferring any special confidential
status to the agreements. The party requesting privileged treatment
must support that claim. It may be, as ChevronTexaco claims, that
precedent agreements are not likely to be exempt from disclosure.
Neither section 157.35(d)(4) nor section 388.112 predetermines whether
privileged treatment will be granted.
Document Availability
115. In addition to publishing the full text of this document in
the Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC'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.
116. From FERC's Home Page on the Internet, this information is
available in the Federal Energy Regulatory Records Information System
(FERRIS). The full text of this document is available on FERRIS in PDF
and Microsoft Word format for viewing, printing, and/or downloading. To
access this document in FERRIS, type the docket number excluding the
last three digits of this document in the docket number field.
117. User assistance is available for FERRIS and the FERC's Web
site during normal business hours from our Help line at (202) 502-8222
or the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-Mail the Public Reference Room at
public.referenceroom@ferc.gov.
Effective Date
118. These regulations are effective as of the date of publication
in the Federal Register.
[[Page 35026]]
List of Subjects in 18 CFR Part 157
Administrative practice and procedure; Natural gas; Reporting and
recordkeeping requirements.
By the Commission.
Linda Mitry,
Deputy Secretary.
0
In consideration of the foregoing, the Commission amends Part 157,
Chapter I, Title 18, Code of Federal Regulations, as follows.
PART 157--APPLICATIONS FOR CERTIFICTES OF PUBLIC CONVENIENCE AND
NECESSITY AND FOR ORDERS PERMITTING AND APPROVING ABANDONMENT UNDER
SECTION 7 OF THE NATURAL GAS ACT
0
1. The authority citation for Part 157 is revised to read as follows:
Authority: 15 U.S.C. 717-717w.
Subpart B--Open Seasons for Alaska Natural Gas Transportion
Projects
0
2. In Sec. 157.33, paragraph (b) is revised to read as follows:
Sec. 157.33 Requirement for open seasons.
(a) * * *
(b) Initial capacity on a proposed Alaska natural gas
transportation project may be acquired prior to an open season through
pre-subscription agreements, provided that in any open season as
required in paragraph (a) of this section, capacity is offered to all
prospective bidders at the same rates and on the same terms and
conditions as contained in the pre-subscription agreements. All pre-
subscription agreements shall be made public by posting on Internet
websites and press releases within ten days of their execution. In the
event there is more than one such agreement, all prospective bidders
shall be allowed the option of selecting among the several agreements
all of the rates, terms and conditions contained in any one such
agreement.
0
3. In Sec. 157.34, paragraphs (a), (c)(9), (c)(15) and (c)(18), and
(d)(2) are revised to read as follows:
Sec. 157.34 Notice of open season.
(a) Notice. A prospective applicant must provide reasonable public
notice of an open season through methods including postings on Internet
Web sites, press releases, direct mail solicitations, and other
advertising. In addition, a prospective applicant must provide actual
notice of an open season to the State of Alaska and to the Federal
Coordinator for Alaska Natural Gas Transportation Projects.
* * * * *
(c) * * *
(9) Negotiated rate and other rate options under consideration,
including any rates and terms of any precedent agreements with
prospective anchor shippers that have been negotiated or agreed to
outside of the open season process prescribed in this section;
* * * * *
(15) The methodology by which capacity will be awarded, in the case
of over-subscription, clearly stating all terms that will be
considered, except that if any capacity is acquired through pre-
subscription agreements as provided in Sec. 157.33(b) and the
prospective applicant does not redesign the project to accommodate all
capacity requests, only that capacity that was acquired through pre-
subscription or was bid in the open season on the same rates, terms,
and conditions as any one of the pre-subscription agreements shall be
allocated on a pro rata basis and no other capacity acquired through
the open season shall be allocated.
* * * * *
(18) All information that the prospective applicant has in its
possession pertaining to the proposed service to be offered, projected
pipeline capacity and design, proposed tariff provisions, and cost
projections, or that the prospective applicant has made available to,
or obtained from, any potential shipper, including any affiliates of
the project sponsor and any shippers with pre-subscribed capacity,
prior to the issuance of the public notice of open season;
* * * * *
(d) * * *
(2) A prospective applicant must consider any bids tendered after
the expiration of the open season by qualifying bidders and may reject
them only if they cannot be accommodated due to economic, engineering,
design, capacity or operational constraints, or accommodating the
request would otherwise adversely impact the timely development of the
project, and a detailed explanation must accompany the rejection. Any
bids tendered after the expiration of the open season must contain a
good faith showing, including a statement of the circumstances which
prevented the late bidder from tendering a timely bid and how those
circumstances have changed. If a prospective applicant determines at
any time that, based on the criteria stated in this paragraph, no
further late bids for capacity can be accommodated, it may request
Commission approval to summarily reject any further requests.
* * * * *
0
4. In Sec. 157.35, paragraph (c) is revised to read as follows and
paragraph (d), the word ``258.4(a)(1)'' is removed and the word
``358.4(a)(1)'' is inserted in its place.
Sec. 157.35 Undue discrimination or preference.
(a) * * *
(b) * * *
(c) Each prospective applicant conducting an open season under this
subpart must function independent of the other divisions of the
prospective applicant as well as the prospective applicant's Marketing
and Energy affiliates as those terms are defined in Sec. 358.3(d) and
(k) of the Commission's regulations. In instances in which the
prospective applicant is not an entity created specifically to conduct
an open season under this subpart, the prospective applicant must
create or designate a unit or division to conduct the open season that
must function independent of the other divisions of the project
applicant as well as the project applicant's Marketing and Energy
affiliates as those terms are defined in Sec. 358.3(d) and (k) of the
Commission's regulations.
* * * * *
0
5. Section 157.36 is revised to read as follows:
Sec. 157.36 Open seasons for expansions.
Any open season for capacity exceeding the initial capacity of an
Alaska natural gas transportation project must provide the opportunity
for the transportation of gas other than Prudhoe Bay or Point Thomson
production. In considering a proposed voluntary expansion of an Alaska
natural gas pipeline project, the Commission will consider the extent
to which the expansion will be utilized by shippers other than those
who are the initial shippers on the project and, in order to promote
competition and open access to the project, may require design changes
to ensure that some portion of the expansion capacity be allocated to
new shippers willing to sign long-term firm transportation contracts,
including shippers seeking to transport natural gas from areas other
than Prudhoe Bay and Point Thomson.
0
6. Section 157.38 is revised to read as follows:
Sec. 157.38 Pre-approval procedures.
No later than 90 days prior to providing the notice of open season
required by Sec. 157.34(a), a prospective
[[Page 35027]]
applicant must file, for Commission approval, a detailed plan for
conducting an open season in conformance with this subpart. The
prospective applicant's plan shall include the proposed notice of open
season. Upon receipt of a request for such a determination, the
Secretary of the Commission shall issue a notice of the request, which
will then be published in the Federal Register. The notice shall
establish a date on which comments from interested persons are due and
a date, which shall be within 60 days of receipt of the prospective
applicant's request unless otherwise directed by the Commission, by
which the Commission will act on the proposed plan.
[FR Doc. 05-11658 Filed 6-15-05; 8:45 am]
BILLING CODE 6717-01-P