[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Notices]
[Page 4362-4364]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-44]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL02-6-001]
Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly; Natural Gas Pipeline Negotiated Rate
Policies and Practices; Order on Rehearing and Clarification
Issued January 19, 2006.
1. Several parties \1\ request rehearing and or clarification of
the Commission's July 9, 2003 Order in the captioned docket.\2\ In that
order, the Commission modified its negotiated rate policies so that
pipelines would no longer be permitted to enter into negotiated rate
agreements that utilize basis differentials as a transportation pricing
mechanism.
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\1\ Parties requesting rehearing or clarification are: Illinois
Municipal Gas Agency; Natural Gas Pipeline Company of America and
Kinder Morgan Interstate Gas Transmission, LLC; CenterPoint Energy
Gas Transmission Company; Northern Natural Gas Company; MidAmerican
Energy Company; BP America Production Company and BP Energy Company;
American Public Gas Association; Williston Basin Interstate Pipeline
Company; ANR Pipeline Company and Tennessee Gas Pipeline Company;
American Gas Association; and Interstate Natural Gas Association of
America.
\2\ Natural Gas Pipeline Negotiated Rates Policies and
Practices, 104 FERC ] 61,134 (2003)(July 2003 Order).
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Background
2. In 1996, the Commission permitted pipelines the opportunity to
use negotiated rates as an alternative to cost-of-service
ratemaking.\3\ Under the negotiated rate program, the pipeline and a
shipper may negotiate rates that vary from a pipeline's otherwise
applicable cost-of-service tariff rate. However, a cost-based recourse
rate must be maintained by the pipeline for customers that prefer
traditional cost-of-service rates and to mitigate market power if the
pipeline unilaterally demands excess prices or withholds service. The
Commission determined that the availability of the recourse rate would
prevent pipelines from exercising market power by assuring that the
customer always has the option of purchasing capacity at the just and
reasonable tariff rate if the pipeline unilaterally demands excessive
prices.\4\
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In order to implement a negotiated rate transaction, a pipeline must
file either the negotiated rate agreement itself or a tariff sheet
describing the agreement, since, unlike a discount, a negotiated rate
is a material deviation from the pipeline's tariff.\5\ Until the
issuance of the modification of the policy statement, the Commission
permitted pipelines to use price indices in pricing their negotiated
rate transactions.\6\ However, on July 9, 2003, the Commission issued a
policy statement, revising its negotiated rate policies so that the use
of gas basis differentials would no longer be permitted.\7\
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\3\ The Commission's negotiated rate policies were originally
established in Alternatives to Traditional Cost-of-Service
Ratemaking for Natural Gas Pipelines, Regulation of Negotiated
Transportation Services, 74 FERC ] 61,076, order on clarification,
74 FERC ] 61,194, order on reh'g, 75 FERC ] 61,024 (1996).
\4\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 74 FERC ] 61,076 at 61,238-242, order on
clarification, 74 FERC ] 61,194, order on reh'g, 75 FERC ] 61,024
(1996).
\5\ NorAm Gas Transmission Co., 75 FERC ] 61,091 at 61,309,
order on reh'g, 77 FERC ] 61,011 at 61,037 (1996).
\6\ Before the modification of the Commission's negotiated rate
policies, pipelines were permitted to negotiate pricing mechanisms
for transportation based upon the difference between gas commodity
price indices at different points (referred to here as the ``basis
differential''). These gas commodity price indices, when used as a
negotiated pricing mechanism, usually reflect gas prices at
different points such as at gas basins or certain receipt and
delivery points and citygates. The pricing mechanism is based upon
the difference between the gas price indices at the two points. The
foundation for this pricing mechanism is that the difference in
price between two points, as shown by the respective price indices,
reflects the value of transportation between the two points.
\7\ In its July 9, 2003 Order, the Commission also clarified its
filing requirements for negotiated rates, particularly where the
negotiated agreement contained material deviations from the form of
service agreement. July 2003 Order, 104 FERC at P 31-34.
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3. In its modification of the original negotiated rate policy
statement, the Commission stated that it was concerned that the use of
basis differentials could provide pipelines with an incentive to
withhold capacity in an attempt to manipulate the gas commodity market
to widen the differences between the relevant price indices. The
Commission explained that the manner in which it regulated
transportation rates would ordinarily minimize any incentive for a
pipeline to withhold capacity. That was because even if a pipeline
created scarcity, it could not charge rates above the maximum just and
reasonable rate based upon the pipeline's cost of service. Therefore,
if a pipeline withheld capacity, its revenues would not increase.\8\
However, because the negotiated rate policy permits a pipeline to
charge a rate above the maximum cost of service rate, a pipeline
charging negotiated rates tied to basis differentials could increase
its revenues by withholding capacity in order to increase the relevant
basis differentials.\9\ The Commission concluded that pricing
mechanisms that invest pipelines with an incentive to use market power
to manipulate the commodity price of gas would hinder the Commission's
attempt to maintain and improve the competitive natural gas market.
Therefore, the Commission prohibited the use of natural gas indices in
pricing negotiated rate transactions.\10\
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\8\ Id. at P 17-18.
\9\ Id. at P 19-20.
\10\ Id. at P 23-24.
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4. In reaching this determination, the Commission recognized that
these basis differential pricing mechanisms are useful in permitting
parties to the negotiated agreement to engage in various hedging
programs and gas supply cost-management programs, but the Commission
found that such flexibility could not justify the increased risk of
market manipulation faced by market participants. The Commission
determined that this limitation of flexibility was offset by the fact
that negotiated rates may still be based upon a virtually unlimited
number of indices or other mechanisms that have no relationship with
the commodity price of gas, and are, therefore, not as subject to
manipulation through the withholding of pipeline capacity.
5. Subsequent to its modification of the negotiated rate policy
statement, the Commission modified its selective discounting policies
which had prohibited the use of formulas in discounted rates. On remand
from the court in Northern Natural Gas Company, the Commission
determined that it would permit the use of formulas, including those
tied to basis differentials in discounted rate transactions.\11\ In
reaching this determination, the Commission stated that its concerns
about the use of basis differentials in negotiated rates were not
present to the same degree in the context of discounted rates. The
Commission reasoned that because discounted rates, unlike negotiated
rates, were capped by the pipeline's maximum cost-of-service rate, use
of pricing differentials in discounted rates did not present the
pipeline with an incentive to withhold capacity in order to achieve
higher revenues. Given this fact, the Commission found that the
benefits of allowing the use of basis differentials to price
transportation service in discounted rate agreements outweighed any
potential harm.
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\11\ Northern Natural Gas Co., 105 FERC ] 61,299 (2003).
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Discussion
6. A number of parties have filed requests for rehearing of the
revised policy statement, objecting not only to the revised policy
concerning the use of pricing differentials in negotiated rates but
also to other aspects of the revised policy statement. The revised
policy statement is not a final action of the Commission but an
expression of policy intent. As the U.S. Court of Appeals for the
District of Columbia Circuit has held, a statement of policy ``is not
finally determinative of the issues or rights to which it is
addressed''; rather, it only ``announces the agency's tentative
intentions for the future.'' \12\ Therefore, the parties are not
aggrieved by the revised policy statement, and rehearing does not
lie.\13\ The Commission accordingly dismisses the requests for
rehearing.
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\12\ Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 38 (D.C.
Cir. 1974).
\13\ See Alternatives to Traditional Cost-of-Service Ratemaking
for Natural Gas Pipelines, 75 FERC ] 61,024 at 61,076, citing,
American Gas Association v. FERC, 888 F.2d 136 (1989); Interstate
Natural Gas Pipeline Rate Design, 47 FERC ] 61,295 (1985), order on
reh'g, 48 FERC ] 61,122 at 61,442 (1989).
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7. Nevertheless, the Commission has further considered the basis
differential issue, and has determined to modify its negotiated rate
policy to again permit the use of gas commodity basis differentials in
negotiated rate transactions without regard to the existence of a
revenue cap. The Commission finds that a generic policy against the use
of gas basis differentials in negotiated rate transactions is overly
restrictive, given the benefits such pricing mechanisms yield and the
fact that there are other less restrictive means to ensure that the
pipelines do not utilize market power to influence the gas commodity
market.
8. The Commission has long recognized that the ``commodity and
transportation markets are closely interdependent in the natural gas
business with changes in one market affecting the other.'' \14\
Further, the Commission itself has stated that the market conditions it
has fostered create a ``market-driven value for transportation * * *
the implicit value of transportation between two such points is the
spot price of gas at the delivery point minus the spot price of gas at
the receipt point.'' \15\ Thus, the
[[Page 4364]]
use of basis differentials to price transportation services enables the
pipeline to negotiate market sensitive transportation rates, consistent
with the Commission's goal of encouraging competition in the
transportation capacity market. Such market sensitive rates provide
greater efficiency in the production and distribution of gas across the
pipeline grid. For example, such rates minimize the distorting effect
of transportation costs on producer decisions concerning exploration
and production. They also help the pipeline to more accurately assess
when new construction is needed, because a high basis differential
indicates a need for more capacity between the points.\16\
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\14\ Order No. 637 at 31,258.
\15\ Id. at 33,436. In this vein, the Commission also added
that, ``The implicit price for transportation represents the most
any shipper purchasing delivered gas at a downstream market would
pay to move gas from the lower priced market to the higher priced
market. For instance, the implicit value of transportation between
the Henry Hub and the Chicago city gate was $.07 in September 1999
(the difference between the $2.67 price for gas in Chicago and the
$2.60 price at Henry Hub).'' Id. at 31,271. The difference between
the downstream delivered gas price and the market price at upstream
market centers in the production area shows the market value of
transportation service between those two points. As the Commission
observed in Order No. 637, ``gas commodity markets now determine the
economic value of pipeline transportation services in many parts of
the country. Thus, even as FERC has sought to isolate pipeline
services from commodity sales, it is within the commodity markets
that one can see revealed the true price for gas transportation.''
Order No. 637 at 31,274 (quoting M. Barcella, How Commodity Markets
Drive Gas Pipeline Values, Public Utilities Fortnightly, February 1,
1998 at 24-25).
\16\ See Policy for Selective Discounting by Natural Gas
Pipelines, 111 FERC ] 61,309 at P 32-37 (2005).
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9. In implementing its policy against the use of gas basis
differentials, the Commission recognized that the use of basis
differential pricing mechanisms yielded significant benefits, but
stated that such increased flexibility could not justify the increased
risk that the pipelines may utilize their market power over
transportation service to manipulate the commodity market to increase
basis differentials.\17\
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\17\ July 2003 Order, 104 FERC at P 23.
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10. However, in the Commission's view, the ability of pipelines to
manipulate the gas commodity market is tempered by several factors.
First, part 284 of the Commission's regulations and its policies
provide that pipelines must sell capacity to maximum rate bidders.\18\
Therefore, pipelines may not hoard desired capacity in an attempt to
widen basis differential without violating the Commission's existing
regulations. Second, pipelines must file all negotiated rate agreements
with the Commission for approval. Those filing negotiated rate
contracts are noticed for comments giving all interested parties an
opportunity to raise whatever concerns they have with the agreement.
Moreover, the Commission has access to information regarding available
pipeline capacity and daily gas basis differentials. This allows it to
monitor the transactions to determine if the pipeline is withholding
capacity in order to increase the gas commodity basis differential.
Moreover, subsequent to the modification of the negotiated rate policy
statement, Congress enacted new legislation designed to prohibit
manipulation of the gas transportation markets. Concurrently with the
issuance of this order, the Commission is approving a final rule in
Docket No. RM06-3-000 implementing new section 4A of the Natural Gas
Act.\19\
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\18\ See Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000),
order on reh'g, 94 FERC ] 61,097 (2001), aff'd, Process Gas
Consumers Group v. FERC, 292 F.3d 831 (D.C. Cir. 2002). Moreover, in
Order No. 637-A, the Commission reaffirmed its position that the
recourse rate effectively mitigates pipeline market power by stating
that ``[T]he requirement that a pipeline sell its capacity at the
regulated maximum rate prevents tacit collusion between the pipeline
and the shipper to withhold capacity to raise price above the
ceiling * * *'' Id. at 31,564.
\19\ Section 315 of the Energy Policy Act of 2005 added the
following provision to the Natural Gas Act:
Prohibition on Market Manipulation
SEC. 4A. It shall be unlawful for any entity, directly or
indirectly, to use or employ, in connection with the purchase or
sale of natural gas or the purchase or sale of transportation
services subject to the jurisdiction of the Commission, any
manipulative or deceptive device or contrivance (as those terms are
used in section 10(b) of the Securities Exchange Act of 1934 (15
U.S.C. 78j(b))) in contravention of such rules and regulations as
the Commission may prescribe as necessary in the public interest or
for the protection of natural gas ratepayers. Nothing in this
section shall be construed to create a private right of action.
Energy Policy Act of 2005, Pub. L. No. 109-58, Sec. 315, 119
Stat. 594, (2005).
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11. Given these facts and the benefits of the use of basis
differential pricing mechanisms, the Commission finds that it is not
necessary to ban the use of such mechanisms in order to mitigate the
potential for manipulation of the market for either transportation or
gas sales. Rather, the Commission will permit the use of gas commodity
basis differentials and will continue to investigate, on a case by case
basis, allegations of market manipulation or attempted market
manipulation by pipelines. In this manner, the flexibility benefits of
this pricing mechanism may be retained while the Commission maintains
the integrity of the marketplace.
The Commission orders:
(A) The requests for rehearing of the Commission's July 9, 2003
Order are dismissed as discussed in the body of this order.
(B) The Commission's July 9, 2003 Order is clarified as discussed
in the body of this order.
By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. E6-941 Filed 1-25-06; 8:45 am]
BILLING CODE 6717-01-P