Secondary Market Transactions on Interstate Natural Gas Pipelines

DEPARTMENT OF ENERGY

[Docket No. RM96-14-001]

Secondary Market Transactions on Interstate Natural Gas Pipelines

Issued July 31, 1996.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Proposed Experimental Pilot Program to Relax the Price Cap for

Secondary Market Transactions, and Request for Office of Management and

Budget Emergency Processing of Submission of Collection of Information

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SUMMARY: The Federal Energy Regulatory Commission is issuing an order

establishing a proposed pilot program to release the price cap for

releases of capacity and sales of interruptible and short-term firm

transportation in certain geographic areas.

Because the Commission anticipates implementing the pilot program

for the 1996-97 winter heating season, the Commission, pursuant to 5

CFR 1320.13, is providing notice of its request to the Office of

Management and Budget (OMB) for emergency processing of the proposed

collection of information relating to the pilot program.

DATES: The Commission requests applications for the pilot program by

August 30, 1996. Comments on the applications will be due 15 days after

filing of applications to participate. Applications and comments on the

applications should be filed with the Office of the Secretary and

should refer to Docket No. RM96-14-001.

Because the Commission has requested OMB to process the proposed

collection of information in Docket No. RM96-14-001 on an emergency

basis, comments on this collection of information should be filed with

OMB, attention Desk Officer FERC, as soon as possible.

ADDRESSES: Federal Energy Regulatory Commission, 888 First Street, NE,

Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT: Michael Goldenberg, Office of the

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General Counsel, Federal Energy Regulatory Commission, 888 First

Street, NE, Washington, DC 20426, (202) 208-2294.

For information relating to the data template, contact:

Marvin Rosenberg, Office of Economic Policy, Federal Energy Regulatory

Commission, 888 First Street, NE, Washington, DC 20426, (202) 208-1283.

Elizabeth A. Taylor, Office of Pipeline Rates, Federal Energy

Regulatory Commission, 888 First Street, NE., Washington, DC 20426,

(202) 208-0826.

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of

this document in the Federal Register, the Commission provides all

interested persons an opportunity to inspect or copy the contents of

this document during normal business hours in Room 2A, 888 First

Street, N.E., Washington D.C. 20426.

The Commission Issuance Posting System (CIPS), an electronic

bulletin board service, provides access to the texts of formal

documents issued by the Commission. CIPS is available at no charge to

the user and may be accessed using a personal computer with a modem by

dialing 202-208-1397 if dialing locally or 1-800-856-3920 if dialing

long distance. To access CIPS, set your communications software to

19200, 14400, 12000, 9600, 7200, 4800, 2400, 1200bps, full duplex, no

parity, 8 data bits, and 1 stop bit. The full text of this document

will be available on CIPS indefinitely in ASCII and WordPerfect 5.1

format for one year. The complete text on diskette in WordPerfect

format may also be purchased from the Commission's copy contractor, La

Dorn Systems Corporation, also located in Room 2A, 888 First Street,

NE., Washington, DC 20426.

The Commission's bulletin board system also can be accessed through

the FedWorld system directly by modem or through the Internet. To

access the FedWorld system by modem:

Dial (703) 321-3339 and logon to the FedWorld system.

After logging on, type: /go FERC

To access the FedWorld system, through the Internet:

Telnet to: fedworld.gov

Select the option: [1] FedWorld

Logon to the FedWorld system

Type: /go FERC

Or:

Point your Web Browser to: http://www.fedworld.gov

Scroll down the page to select FedWorld Telnet Site

Select the option: [1] FedWorld

Logon to the FedWorld system

Type: /go FERC

Secondary Market Transactions on Interstate Natural Gas Pipelines

Docket No. RM96-14-001

Proposed Experimental Pilot Program To Relax the Price Cap for

Secondary Market Transactions

Issued July 31, 1996.

Before Commissioners: Elizabeth Anne Moler, Chair; Vicky A.

Bailey, James J. Hoecker, William L. Massey, and Donald F. Santa,

Jr.

In a Notice of Proposed Rulemaking (NOPR) issued in this docket and

published in the Federal Register of August 7, 1996, the Federal Energy

Regulatory Commission (Commission) proposes to permit shippers

releasing capacity, and pipelines selling interruptible transportation,

to sell at rates above the pipeline's maximum tariff rate when they can

demonstrate they do not possess market power in the secondary market.

The Commission further intends to hold a technical conference to

explore issues related to the proposal and the methods for measuring

market power. To complement the NOPR and provide additional record

evidence for evaluating the criteria for evaluating market power, the

Commission is proposing an experimental pilot program to remove the

price ceiling for releases of capacity and pipeline sales of

interruptible and short-term firm transportation into qualifying

markets.

Background

Under Commission policy, price ceilings can be removed when

pipelines and shippers do not possess market power, because, without

the ability to control price or output, shippers are unable to exact

charges above the competitive level and hence their rates are just and

reasonable under the Natural Gas Act (NGA).1 The NOPR proposes to

require pipelines and shippers seeking to sell capacity above the cap

to make filings to demonstrate that they do not possess market power.

These filings could be based on the criteria for assessing market power

in the Commission's Policy Statement on Alternatives to Cost-of-Service

Ratemaking or on modifications to that policy that the Commission

adopts after consideration of the comments on the NOPR.

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\1\ Policy Statement on Alternatives to Cost-of-Service

Ratemaking, 74 FERC para. 61,076 (1996).

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In the NOPR, the Commission also identifies certain additional

prerequisites that must be present for pipelines and LDCs to establish

that they lack market power. In order to ensure that capacity release

is fully competitive with pipeline services, pipelines would have to

implement tariff provisions ensuring that they treat capacity release

transactions comparably to their own interruptible and short-term

services. Without comparability, pipeline services may, in many

respects, be superior to capacity release and have a competitive

advantage in the marketplace.

For LDCs, the necessary prerequisite would be a showing that they

provide an acceptable open access transportation service on their own

facilities. In the absence of a viable open access program, LDCs may

well be able to exercise market power over customers behind their city-

gates. The LDC may be able to structure its intrastate service so that

the end-user's ability to obtain released interstate capacity from

shippers other than its own LDC is limited. An LDC's control over

primary delivery points also may give rise to market power over the

LDC's customers.

To deal with issues of market power over customers behind the city-

gate, the NOPR proposes that an LDC must provide customers with

identical open access transportation service on the LDC's system,

regardless of whether the customer purchases interstate capacity from

the LDC or another shipper. In addition, open access service would need

to include a right for customers behind the city-gate to use the LDC's

city-gate as a primary delivery point, regardless of whether they

purchase interstate capacity from the LDC. As explained in the NOPR, if

a customer cannot use the LDC's city-gate as a primary delivery point,

it may not have available adequate alternative sources of capacity,

because the purchase of interstate capacity from a shipper other than

its own LDC (with the resulting use of the city-gate delivery point on

a secondary basis) may not be the equivalent of purchasing primary

point capacity from its own LDC.

Proposed Pilot Program

In conjunction with the NOPR, the Commission is proposing this

pilot program to help assess whether compliance with the criteria

identified in the NOPR is indicative of a lack of market power. Under

this program, the price cap will be lifted for released capacity and

pipeline interruptible and short-term firm capacity in a designated

geographic area. Specifically, the cap will be released for capacity

released by an LDC to delivery points in its delivery area, for

interruptible and short-term

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firm transportation sold by the pipeline into the same area, and for

capacity released by other shippers into the area. The cap would be

released only for the duration of the experiment.2 Because prices

for released capacity generally approach the maximum rate only during

peak periods, the Commission anticipates the pilot program needs to

last at least through the 1996-1997 winter heating season, if not

longer.

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\2\ Thus, if shippers entered into a long-term capacity release

transaction, the ability to release above the cap would not extend

beyond the end of the experiment.

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Applications to participate in the program should include

information showing why the pipelines and the LDCs cannot exercise

market power in the relevant area, although this showing need not

constitute the detailed market power analysis set out in the

Commission's Policy Statement on Alternatives to Cost-Of-Service

Ratemaking. One item of information that should be included in the

application is the name of each shipper on the pipeline, together with

the amount of its firm capacity that could be used to effect deliveries

to the LDC's delivery area.3

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\3\ For example, such data might include all firm capacity in

the same zone as the LDC and any downstream zone.

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In addition to this information, LDCs need to meet the NOPR's

requirement for open access service. LDCs with state-approved pilot

open access programs meet the requirement. For instance, it appears

from the information available to the Commission that New York and

California may have open access tariffs that would qualify, since these

states provide for open access transportation to non-core industrial

customers as well as to core or residential customers that aggregate

their demand.

However, special discounting programs limited to industrials will

not be sufficient. An LDC that does not meet the open access

requirement still may apply, but it will have to bear a greater burden

of establishing that it lacks market power and, therefore, must present

a more comprehensive analysis of market power.

In order to qualify, pipelines would have to implement tariff

revisions to assure comparability between interruptible service and

capacity release. In the Business Practices Rule in Docket No. RM96-1-

000, the Commission adopted, by reference, a standard timeline for

capacity release transactions established by the Gas Industry Standards

Board. This timeline, in general, provides that, so long as a pipeline

is notified of a non-biddable capacity release 2\1/2\ hours prior to

its nomination deadline, the replacement shipper can nominate under the

deal. 4 Pipelines are to implement these standards by the spring

of 1997. Pipelines seeking to participate in the pilot program can

comply with the comparability requirement by implementing the standard

capacity release timeline early. 5

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\4\ For biddable short-term deals, the timeline requires

notification to the pipeline the day prior to nomination.

\5\ While the NOPR in this docket proposes the elimination of

the competitive bidding requirement, pipelines need not seek to

implement this recommendation for the pilot program. However, if

they do, they would need to file a separate tariff provision limited

to the LDC or LDCs participating in the program.

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Pipelines and LDCs may file joint or concurrent applications to

participate. LDCs, however, may file individual applications so long as

the application provides enough information to establish a lack of

market power in the relevant area for both the LDC and the pipeline. If

an LDC files individually, the Commission must obtain, prior to the

Commission's approval of the application, a commitment from the

pipeline to participate in the pilot program by implementing the

comparability requirements and providing the reporting data (outlined

below). After receipt of the applications, the Commission will provide

an opportunity for comment on which applications to accept and on the

design of the program.

Reporting Requirements

To judge whether the market, under these conditions, provides

adequate consumer protection against market power abuses, the

Commission will require the pipelines and LDCs participating in the

program to submit periodic data reports for the period of the

experiment. Additionally, to provide a basis for comparing the use of

capacity and prices, the same data also will be needed for the year

prior to the experiment. Pipelines and LDCs will not be required to

provide these data (including the prior year's data) until after the

Commission has accepted applications to participate in the program

according to a schedule to be established. This information will be

made available to the public to assist in the assessment of the

experiment.

The Commission needs sufficient information to evaluate whether

capacity is being allocated efficiently and whether consumers--options

for buying and selling gas have been expanded. These data will help in

analyzing changes in the number and concentration of market

participants (buyers and sellers) relative to the pre-experimental base

period, as well as the concentration of buyers and sellers

participating in the market each day and the volumes traded by each.

These data further will reveal changes in the use of capacity relative

to the pre-experimental base period. For example, these data will show

any changes in the mix of interruptible, firm, release capacity, and

bundled sales and any changes in the use of storage. These data also

will permit analysis of how daily prices vary depending on the

availability of capacity, which may be suggestive of whether market

power is being exercised.

For pipelines, the information that is needed would include for the

period of the experiment and for one year prior to the start of the

experiment, the following information for all transactions that

potentially could be used to make deliveries to the LDC's delivery

area:

1. For each capacity release and firm transaction into which

parties have entered that affects the relevant area, the name of the

shipper; the contract number; the rate schedule; the rate charged

(including all terms and conditions of the rate); 6 the maximum

rate; the contractual quantity; the beginning and end date of the

transaction; the date on which the parties to a capacity release

transaction posted the transaction to the pipeline; the receipt and

delivery points of the transaction; an identification of any changes

to different primary or secondary receipt or delivery points made by

the replacement shipper; an identification of whether a capacity

release transaction is a segmented release; 7 and an

identification of an affiliate relationship with the pipeline;

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\6\ Terms and conditions would include, for example, a rate that

varied depending on the volume shipped.

\7\ In a segmented release, the releasing shipper divides its

capacity into one or more segments and either separately releases

multiple segments or releases one or more segments while retaining

some capacity for its own use.

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2. For each capacity release, interruptible, and firm shipment

made on its system that affects the relevant area, for each day, the

name of the shipper, the contract number, the daily quantity of gas

scheduled, and the daily total revenue derived.

3. The available capacity on the mainline and for receipt and

delivery points, for each day, and any operational flow orders that

are in effect for each day that would affect the relevant area.

For LDCs, the required information would include a map of the LDC's

system, showing its capacity at city-gate delivery points and the

following information for the period of the experiment and for one year

prior to the start of the experiment the following:

1. For its interstate capacity, by pipeline, by rate schedule,

by day, the total quantity of its interstate capacity and the amount

used

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for traditional on-system retail sales at WACOG, for capacity

release, for off-system bundled gas/transportation sales, and for

on-system bundled gas/transportation sales at other than WACOG;

2. For each off-system or on-system bundled gas/transportation

sale at other than WACOG, the name of the shipper, the rate charged

(including all terms and conditions of the rate), the maximum rate

(if applicable), the daily quantity of gas sold, the daily revenue

derived, the receipt and delivery points, and the beginning and end

date of the transaction.

In addition, where applicable, LDCs must provide a statement of the

amount of interstate pipeline capacity held by an affiliated marketer,

and for the period of the experiment and one year prior to the

experiment, a list of any capacity release transactions with an

affiliate.

The Commission will require pipelines and LDCs to file these data

in electronic form. The template for reporting the information will be

made available to those making applications, upon request, so they can

comment on the format. Those filing proposals and comments should

discuss the design of the program, including, but not limited to, how

long the experiment should run, the period for filing the year-before

data and the periodic reports (monthly, quarterly).

Application and Comment Procedures

The Commission hopes to be able to begin the pilot program in the

1996-97 winter heating season. LDCs or pipelines, therefore, should

file their applications by August 30, 1996, although later applications

also will be considered. After receiving the requests to participate,

the Commission will provide 15 days for comment on which applications

should be granted as well as on the design of the experiment and

possible improvements. In addition, at the end of the pilot program,

the Commission intends to solicit comments from both buyers and sellers

providing their assessment of the results.

Applications and comments should be submitted to the Office of the

Secretary, Federal Energy Regulatory Commission, 888 First Street, NE,

Washington, DC 20426, and should refer to Docket No. RM96-14-001.

Additionally, the Commission strongly encourages applicants and

commenters to submit a computer diskette of their comments in

WordPerfect version 6.1 format or lower or in ASCII format, with the

name of the filer and Docket No. RM96-14-001 on the outside of the

diskette. Those providing files in ASCII format should take care to

examine the form of an ASCII conversion to ensure, for instance, that

it includes footnotes, headers, and footers, as these have often been

left out in past electronic filings. All written comments will be

placed in the Commission's public files and will be available for

inspection in the Commission's Public Reference Room at 888 First

Street, NE, Washington, DC 20426, during regular business hours.

Information Collection

The Paperwork Reduction Act of 1995, 44 U.S.C. 3507, and Office of

Management and Budget (OMB) implementing regulations at 5 CFR 1320.10

require OMB to approve certain reporting and recordkeeping requirements

(collections of information) imposed by a federal agency. Upon approval

of a collection of information, OMB will assign an OMB control number

and an expiration date.

The proposed pilot program will be done under two new temporary

data collections, FERC-549AP, Gas Pipeline Certificates: Application

for Capacity Release/Pilot Program), (OMB Control No. (to be assigned

by OMB)) (FERC-549AP), and FERC-549P, Gas Pipeline Rates: Capacity

Release/Pilot Program (OMB Control No. (to be assigned by OMB)) (FERC-

549-P). The respondents will be local distribution companies and

interstate natural gas pipelines. Because participation in the program

is voluntary, the Commission is unable to estimate the total number of

applicants, nor can the Commission determine the number of applications

it will approve until after it receives the applications.

The Commission estimates that the average time per respondent for

reviewing the requirements to participate in the program, searching

existing data sources, and preparing the application will be 40 hours,

with a total cost per respondent of about $2,000. For those applicants

chosen to participate in the program, the estimate for extracting and

reporting the year-before and periodic data in the required format will

average 60 hours per respondent, with an estimated cost of about $6,000

per respondent. Participation in this program is purely voluntary, and

the costs are one-time costs that will not be incurred on an annual

basis.

The proposed collection of information is being submitted to OMB

for review. Because the Commission hopes to approve certain

applications to participate in the pilot program in time for the 1996-

97 winter heating season, the Commission has requested applications

within 30 days of this order. Accordingly, the Commission has requested

the Office of Management and Budget (OMB) to provide for emergency

processing of this proposed collection of information by August 15,

1996. Comments on the collection of information, therefore, should be

filed with the Office of Management and Budget as soon as possible to

provide OMB sufficient time for its review. For copies of the OMB

submission, contact Michael Miller at (202)208-1415. Interested persons

may send comments regarding these burden estimates or any other aspect

of these collections of information, including suggestions for

reductions of burden, to the Desk Officer FERC, Office of Management

and Budget, Room 3019 NEOB, Washington, D.C. 20503, phone 202-395-3087

or via the Internet at [email protected]. Comments should be filed

with the Office of Management and Budget. A copy of any comments filed

with the Office of Management and Budget also should be sent to the

following address at the Commission: Federal Energy Regulatory

Commission, Information Services Division, Room 41-17, Washington, DC

20426, Attention: Michael Miller.

By the Commission.

Lois D. Cashell,

Secretary.

[FR Doc. 96-20179 Filed 8-7-96; 8:45 am]

BILLING CODE 6717-01-P