Standards for Business Practices of Interstate Natural Gas Pipelines

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM96-1-007; Order No. 587-G]

Standards for Business Practices of Interstate Natural Gas

Pipelines

April 16, 1998.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is

amending Sec. 284.10 of its regulations governing standards for

conducting business practices and electronic communication with

interstate natural gas pipelines. The Commission is incorporating by

reference, in Sec. 284.10(b), the most recent version (Version 1.2) of

standards promulgated by the Gas Industry Standards Board (GISB). The

Commission also is adopting, in new Sec. 284.10(c), regulations, not

developed by GISB, governing intra-day nominations, operational

balancing agreements (OBAs), netting and trading of imbalances,

standardization of communications over the public Internet, and notices

of operational flow orders. These business practices and communication

standards supplement standards adopted by the Commission in Order Nos.

587, 587-B, and 587-C. 61 FR 39053 (Jul. 26, 1996) 62 FR 5521 (Feb. 6,

1997), 62 FR 10684 (Mar. 10, 1997).

DATES: Effective May 26, 1998. On August 1, 1998 pipelines must

implement Sec. 284.10(b), which incorporates by reference Version 1.2

of the GISB standards, and the regulations, in Secs. 284.10(c)(3)(ii)

through (v), relating to the standards for information posted on

pipeline web sites, the content of information provided electronically,

the use of numeric designations, and retention of electronic

information.

The implementation date for the regulations regarding intra-day

nominations, Sec. 284.10(c)(1)(i), operational balancing agreements,

Sec. 284.10(c)(2)(i), trading of imbalances, Sec. 284.10(c)(2), and

Internet notification of critical notices, Sec. 284.10(c)(3)(vi), will

be established when the Commission adopts standards relating to these

activities.

ADDRESSES: Federal Energy Regulatory Commission, 888 First Street,

N.E., Washington DC, 20426.

FOR FURTHER INFORMATION CONTACT:

Michael Goldenberg, Office of the General Counsel, Federal Energy

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

(202) 208-2294

Marvin Rosenberg, Office of Economic Policy, Federal Energy Regulatory

Commission, 888 First Street, N.E., Washington, DC 20426, (202) 208-

1283

Kay Morice, Office of Pipeline Regulation, Federal Energy Regulatory

Commission, 888 First Street, N.E., Washington, DC 20426, (202) 208-

0507

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 complete text on diskette in

WordPerfect format may be purchased from the Commission's copy

contractor, La Dorn Systems Corporation. La Dorn Systems Corporation is

located in the Public Reference Room at 888 First Street, N.E.,

Washington, D.C. 20426.

The Commission Issuance Posting System (CIPS), an electronic

bulletin board service, also provides access to the texts of formal

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

the user. CIPS can be accessed over the Internet by pointing your

browser to the URL address: http://www.ferc.fed.us. Select the link to

CIPS. The full text of this document can be obtained in ASCII or

WordPerfect format. CIPS also 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, or 1200 bps,

full duplex, no parity, 8 data bits and 1 stop bit. The full text of

this order will be available on CIPS in ASCII and WordPerfect 6.1

format. CIPS user assistance is available at 202-208-2474.

Standards for Business Practices of Interstate Natural Gas

Pipelines

TABLE OF CONTENTS

I. Background

II. Discussion

A. Introduction

B. Regulations Adopted by this Rule

1. Version 1.2 of the Standards

2. Regulations Establishing Priority of Intra-Day Nominations

3. Regulation Requiring Pipelines to Enter into Operational

Balancing Agreements

4. Regulation Requiring Pipelines to Net Imbalances and Permit

Imbalance Trading

5. Electronic Communication Using the Internet

C. Issues on which the Commission Determined Not to Adopt

Requested Regulations

1. Title Transfer Tracking

2. Cross-Contract Ranking

3. Multi-Tiered Allocations

4. Paper Pooling

5. Reimbursement for Compressor Fuel

6. Penalty Determinations

D. Market-Based Rates for Pipeline Services

E. Implementation Schedule and Schedule for Submission of

Additional Standards

III. Information Collection Statement

IV. Environmental Analysis

V. Regulatory Flexibility Act Certification

VI. Effective Date

Before Commissioners: James J. Hoecker, Chairman; Vicky A. Bailey,

William L. Massey, Linda Breathitt, and Curt Heert, Jr.

The Federal Energy Regulatory Commission (Commission) is amending

Sec. 284.10 of its regulations governing standards for conducting

business practices and electronic communication with interstate natural

gas pipelines. The Commission is incorporating by reference, in

Sec. 284.10(b) of its regulations, the most recent version (Version

1.2) of standards promulgated by the Gas Industry Standards Board

(GISB). The Commission also is adopting regulations, in new

Sec. 284.10(c) of its regulations, governing intra-day nominations,

operational balancing agreements (OBAs), netting and trading of

imbalances, standardization of communications over the public Internet,

and notices of operational flow orders.

I. Background

In Order Nos. 587, 587-B, and 587-C 1 the Commission

adopted regulations

[[Page 20073]]

to standardize the business practices and communication methodologies

of interstate pipelines in order to create a more integrated and

efficient pipeline grid. In those orders, the Commission incorporated

by reference consensus standards developed by GISB, a private,

consensus standards developer composed of members from all segments of

the natural gas industry. The standards established uniform

requirements for conducting critical industry business practices--

Nominations, Flowing Gas, Invoicing, and Capacity Release. The

standards also required pipelines to use the Internet as the means of

conducting business transactions electronically as well as for

providing customers with general information.

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\1\ Standards For Business Practices Of Interstate Natural Gas

Pipelines, Order No. 587, 61 FR 39053 (Jul. 26, 1996), III FERC

Stats. & Regs. Regulations Preambles para. 31,038 (Jul. 17, 1996),

Order No. 587-B, 62 FR 5521 (Feb. 6, 1997), III FERC Stats. & Regs.

Regulations Preambles para. 31,046 (Jan. 30, 1997), Order No. 587-C,

62 FR 10684 (Mar. 10, 1997), III FERC Stats. & Regs. Regulations

Preambles para. 31,050 (Mar. 4, 1997).

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In Order No. 587-C, however, the Commission did not adopt standards

approved by GISB concerning intra-day nominations, operational

balancing agreements, and imbalances. The Commission found that those

standards did not clearly outline the pipelines' obligations. The

Commission gave GISB and the industry until September 1, 1997 to

propose additional standards in these areas.

In addition, throughout its deliberations in 1996, GISB had been

unable to reach consensus on whether standards are needed in several

areas--title transfer tracking, ranking of gas packages, treatment of

compressor fuel, operational balancing agreements, imbalance

resolution, operational flow orders, multi-tiered allocations, and

additional pooling standards. The Commission staff held a technical

conference on December 12-13, 1996, to consider these issues.

Subsequently, on September 2, 1997, GISB filed with the Commission

its latest revisions to the consensus standards, Version 1.2. It also

filed a report on its progress in attempting to resolve the issues

reserved for further consideration by Order No. 587-C and some of the

disputed issues considered at the technical conference.

In the Notice of Proposed Rulemaking (NOPR) issued on November 12,

1997,2 the Commission proposed to adopt Version 1.2 of the

GISB standards. The Commission also considered the issues left

unresolved by GISB and proposed regulations that would require

pipelines to:

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\2\ Standards For Business Practices Of Interstate Natural Gas

Pipelines, Notice of Proposed Rulemaking, 62 FR 61459 (Nov. 18,

1997), IV FERC Stats. & Regs. Proposed Regulations para. 32,527

(Nov. 12, 1997).

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Give firm intra-day nominations priority over already

nominated and scheduled interruptible transportation (thus permitting

firm shippers to change their nomination quantities during the day and

bump scheduled interruptible service);

Enter into operational balancing agreements at all

pipeline to pipeline interconnects;

Permit shippers to offset imbalances across contracts and

trade imbalances amongst themselves when such imbalances have similar

operational impact on the pipeline's systems;

Post all information and conduct all business transactions

using the public Internet and internet protocols by June 1, 1999 and

comply with other standards regarding communication over the Internet.

Comments on the NOPR were due by December 18, 1997. Fifty-five comments

were filed.3

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\3\ The commenters, and the abbreviations used in this order,

are listed in the Appendix.

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In addition, in several areas where the Commission did not propose

regulations, the Commission provided guidance in the NOPR on its

policies to aid GISB's development of standards in these areas. The

Commission asked for comment from GISB and the industry on the

development of standards in these areas by March 31, 1998. On March 23,

1998, GISB filed with the Commission a report containing its approved

intra-day nomination standards and a progress report on its process for

developing standards in the other areas discussed in the NOPR.

II. Discussion

A. Introduction

Through GISB's consensus process, the gas industry has been able to

work together to pass a set of mutually-agreed upon standards that have

greatly contributed to providing a more efficient and reliable

transportation and communication system. In previous orders, the

Commission has recognized this contribution and incorporated the GISB

standards into the Commission regulations. But it is only to be

expected that a standards organization composed of representatives from

every facet of the gas industry would disagree over the need for

standards in certain areas, particularly when the disputes center on

regulatory policy decisions. Although some commenters take issue with

aspects of the regulations proposed in the NOPR, they virtually all

support the Commission's determination to resolve the divisive policy

disputes that are impeding GISB's standards development efforts.

In this rule, therefore, the Commission is addressing the disputed

policy issues so that the industry can move forward and develop the

standards needed to further integrate the pipeline grid. The Commission

is adopting regulations establishing the scheduling priority of intra-

day nominations for firm service and requiring pipelines to enter into

operational balancing agreements (OBAs) and to permit imbalance

trading. It also is standardizing communications by requiring that, by

June 1, 1999, all transactions between pipelines and their customers

will be transacted using the public Internet.

The business practices regulations adopted here will enable

shippers to move gas more easily across multiple pipelines.

Establishing one rule governing the priority of intra-day nominations

will permit firm shippers to coordinate nomination changes across

multiple pipelines without having a different priority regime on one

pipeline break the nomination chain. The OBA and imbalance trading

regulations will increase the reliability of shipments crossing

multiple pipeline by reducing the business and financial risks of

imbalances and the associated penalties.

The Commission's requirement that pipelines conduct all business

transactions over the public Internet represents the culmination of the

Commission's efforts to replace the current individual, and

idiosyncratic electronic bulletin board system of each pipeline, with a

standardized method of conducting business electronically across all

the pipelines. Although GISB's standards have moved much information

and many electronic transactions to the Internet, those standards are

incomplete and do not eliminate the need for shippers to use the

individual pipeline electronic bulletin boards. The adoption of this

regulation will fulfill the original vision of creating a system in

which all electronic communications and transactions will take place in

a standardized format.

Creation of a standardized communication system promises to

markedly increase the efficiency of transactions. As just one small

example, in the past, shippers would have to log-on to each pipeline's

private bulletin board seriatim to obtain information on available

capacity on the pipeline. With the use of the Internet, shippers can

now easily use one Internet connection to go to GISB's homepage, click

on a pipeline's hypertext link, obtain the

[[Page 20074]]

information they want, and then return and find the information from

another pipeline, without having to log-off or change computers or

programs. Those shippers using GISB's standardized datasets can realize

even more efficiency because they can download the same information

from multiple pipelines in a standardized format and, if they choose,

directly import that information into their gas management systems or

other software programs where the information can be manipulated to

show the available capacity along a proposed path.

The regulations adopted in this rule are not the final riff of the

standardization set.4 There is still much work to be done.

With the policy questions resolved, the Commission is looking to GISB

and the industry to develop the technical standards needed to implement

these policies in the most uniform and efficient manner possible. In

addition, in other areas, the Commission has outlined the need for the

development of additional standards and is establishing a timetable for

submission of standards in these areas.

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\4\ See Order No. 587, 61 FR at 39057, III FERC Stats. & Regs.

Regulations Preambles, at 30,060 (standards development is like a

jazz musician who takes a theme and constantly revises, enhances,

and reworks it).

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Specifically, in this rule, the Commission is amending

Sec. 284.10(b) of its regulations to incorporate by reference the most

recent version of GISB's standards, Version 1.2. Pipelines must

implement the new version on the first day of the month following 90

days after the publication of this order in the Federal Register.

Further, the Commission is establishing its own business practices

and communications standards in new Sec. 284.10(c) of its regulations.

The business practices standards will require pipelines to:

Give firm intra-day nominations priority over already

nominated and scheduled interruptible transportation service and permit

firm intra-day nominations submitted on the day prior to gas flow to go

into effect at the start of the gas day;

Enter into operational balancing agreements at all

interstate and intrastate pipeline to pipeline interconnects; and

Permit shippers to offset imbalance across contracts and

trade imbalances amongst themselves when such imbalances have similar

operational impact on the pipeline's systems.

The electronic communication standards will require pipelines to:

Post all information and conduct all business transactions

using the public Internet and internet protocols by June 1, 1999;

Adhere to standards governing the provision of information

on pipeline web sites and retention of electronic records of

transactions;

Notify shippers of critical events affecting the system,

such as operational flow orders, by posting the information on pipeline

web sites and by direct notice either through Internet E-Mail or

notification to the shipper's Internet address.

With respect to implementation of the requirements in

Sec. 284.10(c), the Commission is heeding the commenters who argue that

the Commission should defer implementation of some of the regulations

until GISB has developed the associated standards needed to implement

the requirements.5 The Commission agrees that implementation

of the intra-day nomination, OBA, imbalance trading, and critical

notice notification regulations would be more effective if they

occurred only once, after GISB and the industry have the opportunity to

develop appropriate standards. The Commission, therefore, will defer

implementation of these regulations to coincide with the implementation

of standards to implement these regulations.

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\5\ See comments by ANR/CIG, Enron, INGAA, NGPL, NGC, NWIGU,

(intra-day standards), Altra (OBA and imbalance trading),

TransCapacity (imbalance trading), ECT, NGC, NGSA (critical

notices).

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A consensus of the industry supports GISB's Annual Plan for 1998

under which intra-day standards will be developed by the first quarter

of 1998 and OBA and imbalance trading standards by the second quarter

of 1998.6 GISB has already filed its completed intra-day

standards with the Commission, and the Commission will be issuing a

NOPR contemporaneous with this rule proposing to adopt the intra-day

standards. The Commission will establish a timetable for the filing of

proposed standards for OBA and imbalance trading that follows the

industry consensus in GISB's Annual Plan, with standards in these areas

due by June 30, 1998. Since GISB has not established a schedule for

developing standards for critical notices, the Commission is setting a

deadline of December 31, 1998, for submission of such standards. While

some commenters suggest that implementation of Internet communications

be delayed to coincide with GISB's development of

standards,7 the June 1, 1999 deadline already seems to build

in sufficient time for GISB and the industry to develop the necessary

standards, and the Commission will not change this date.

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\6\ December 18, 1997 letter from INGAA, AGA, and NGSA to James

J. Hoecker (filed in Docket No. RM96-1-007).

\7\ Comments by ANR/CIG, Columbia Gas/Columbia Gulf, Enron,

Koch, NGPL, NGSA, Southern.

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In addition, in the November 12, 1997 NOPR, the Commission found no

need to propose regulations in other disputed areas--title transfer

tracking, cross-contract ranking, multi-tiered allocations, fuel

reimbursement, and penalty calculations. The Commission, however, did

provide guidance on its policy in these areas to remove obstacles to

the development of standards. The Commission requested comments from

GISB and the industry by March 31, 1998, proposing standards based on

the Commission guidance with respect to title transfer tracking and

cross-contract ranking.

A consensus of the industry, as reflected in the GISB 1998 Annual

Plan, has recommended that due to resource commitments and the

difficulty of developing standards for title transfer tracking and

cross-contract ranking, the schedule for development of final standards

in these areas should be postponed until the fourth quarter of 1998.

The Commission will accept the industry consensus and delay the

deadline for submission of standards for title transfer tracking and

cross-contract ranking.

The Commission will first address the regulations adopted by this

rule. The Commission will then discuss those areas in which it is not

adopting regulations requested by commenters, but instead is providing

policy guidance as to the direction of future standardization efforts.

B. Regulations Adopted by This Rule

1. Version 1.2 of the Standards

a. Adoption of version 1.2. The Commission is adopting Version 1.2

of the GISB standards. Version 1.2 principally revises the datasets

used to conduct business transactions with the pipelines.8

Version 1.2 also contains interpretations of the standards. The

Commission proposed to adopt the interpretations, because, although

they would not be determinative, they would help to provide reliable

guides to the industry's understanding of the standards in the event

disputes arise.

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\8\ The datasets are essentially a uniform template that

shippers can use to conduct business with multiple pipelines.

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No commenter has objected to adoption of Version 1.2 of the GISB

[[Page 20075]]

standards. TransCapacity and El Paso contend the Commission should give

great weight to the interpretations. Koch, SGPC, and ANR/CIG, while not

objecting to the adoption of the interpretations, maintain that

pipelines should not be required to modify their tariffs to incorporate

them. ANR/CIG also contend there is no need for pipelines to modify

their tariffs to incorporate the Version 1.2 standards by reference

unless their tariffs are inconsistent with the new standards.

Version 1.2 improves the datasets to better reflect pipeline

business practices. The Commission will adopt Version 1.2 to be

implemented on the first day of the month following 90 days after the

publication of this order in the Federal Register. Pipelines need not

modify their tariffs to incorporate the interpretations, just as they

did not have to incorporate the GISB principles in their

tariffs.9 Pipelines, however, will need to make compliance

filings to adopt Version 1.2 of the standards into their tariffs since

their tariffs reflect an older version number.10 Pipelines

also will need to make any other tariff changes to conform their

tariffs to the new standards.11 The tariff changes must be

filed not less than 30 days prior to the date for implementing Version

1.2 of the standards.12

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\9\ Order No. 587 at 61 FR 39060, III FERC Stats. & Regs.

Regulations Preambles at 30,066.

\10\ See Texas Eastern Transmission Corporation, 77 FERC para.

61,175, at 61,646 (1996) (pipelines incorporating standards by

reference in their tariffs must include number and version).

\11\In filing to implement Version 1.2, pipelines need to change

all references to GISB standards in their tariffs to Version 1.2.

The version number applies to all standards contained in GISB's

Version 1.2 Standards Manuals, including standards that have not

changed from prior versions.

\12\ 18 CFR 154.207.

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b. Hiatus in implementing new versions and waivers. The NOPR also

requested comment on two issues: Whether the Commission should refrain

from adopting further dataset changes for a period of a year or more

and whether the Commission should continue to grant pipelines waivers

that permit them to deviate from the standardized datasets. Many

commenters support the concept of a hiatus of about a year in order to

give pipelines and shippers a chance to implement the

standards.13 But even some of those supporting a hiatus

contend the hiatus could not be absolute, because there will be a need

to adjust the standards to clean-up errors 14 or to address

other compliance issues.15 Others urge that the current

schedule of issuing standards every six months or so is appropriate for

the start-up phase of software development in which errors need to be

corrected.16 Some also point out that new standards need to

be developed for new needs.17 In its March 23, 1998 filing,

GISB anticipates completion of Version 1.3 of the standards by July

1998. It then projects updates of various portions of the standards

occurring on an annual basis, with Version 2 (update of Flowing Gas and

Invoicing) by July 1999 and Version 2 (update of Nominations and

Capacity Release) by July 2000.

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\13\ Comments by Columbia Gas/Columbia Gulf (one year), Duke

Energy Interstate Pipelines, Engage, Koch, Latitude (every two

years) MGE, NGC, NGSA, Nicor Gas, PG&E, ProEnergy, Williston Basin.

\14\ See comments by Duke Energy Interstate Pipelines and Koch.

\15\ See comment by NGSA and PG&E.

\16\ Comments by Altra, ECT, Enron, INGAA, SoCal Gas/SDG&E,

TransCapacity.

\17\ See comment by SoCal Gas/SDG&E.

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Because the regulations adopted in this proceeding require changes

to the existing standards, granting a significant hiatus on adoption of

revised datasets at this time is inappropriate. To ensure that shippers

can fully take advantage of the benefits from the regulations, the

appropriate standards need to be implemented as soon as feasible. As

reflected in GISB's projected schedule, a longer time period between

adoption of revised versions may be more appropriate once the initial

phase of standardization is complete and the focus turns to maintenance

and improvement of the datasets.

In implementing Order No. 587, the Commission granted pipelines two

types of waivers. It granted some, generally smaller, pipelines, whose

computer systems were not yet ready to implement the standards,

extensions of time to comply with the electronic communication

requirements.18 It also granted waivers permitting some

major pipelines to use non-standardized data elements to accommodate

specific business practices while their requests for changes to the

datasets were pending at GISB.19

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\18\See Gulf States Transmission Corporation, 79 FERC para.

61,102 (1997).

\19\See Texas Eastern Transmission Corporation, 79 FERC para.

61,223 (1997).

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In the NOPR, the Commission asked whether the time for permitting

these waivers had ended and whether all pipelines should be required to

adhere to the Version 1.2 standards. The pipelines contend the

Commission should continue to grant waivers on a case-by-case basis if

a need is shown, although the comments did not differentiate between

the extensions of time for small pipelines to implement the standards

and the waivers for larger pipelines of dataset

compliance.20 Koch claims that Version 1.2 may still contain

errors that need to be corrected. Other commenters contend the need for

waivers has ended, and pipelines now need to conform to the

standardized data elements.21

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\20\ See Comments of Duke Energy Interstate Pipelines, INGAA,

Koch, NGPL, Williston Basin.

\21\ See Comments of Altra, ECT, Engage, MGE, NGC, NGSA, PG&E,

SoCal Gas/SDG&E, TransCapacity.

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The Commission will examine requests for extensions of waivers on a

case-by-case basis. However, because waivers are antithetical to the

concept of standardization, such extensions will be disfavored. Non-

uniform implementation of the datasets on major pipeline systems, in

particular, creates burdens for shippers because they have to maintain

unique sets of data elements to conduct business solely on those

pipelines with waivers. Pipelines, therefore, will have a heavy burden

of justifying any request for a waiver of the data elements.

2. Regulations Establishing Priority of Intra-Day Nominations

The Commission is adopting regulations in Sec. 284.10(c)(1)(i)

establishing the scheduling priority for intra-day nominations. The

regulations require pipelines to accord an intra-day nomination

submitted by a firm shipper scheduling priority over nominated and

scheduled volumes for interruptible shippers. Pipelines are to provide

an interruptible shipper with advance notice that its scheduled volumes

are to be reduced as well as notice of whether penalties will apply on

the day its scheduled volumes are reduced. In addition, the regulation

requires that an intra-day nomination submitted on the day prior to gas

flow will take effect at the start of the gas day at 9 a.m. CCT.

a. Background. (1) Commission policy on service priority. Under the

GISB standards, shippers submit initial nominations at 11:30 a.m. for

gas to flow on the next gas day (starting at 9 a.m.).22 An

intra-day nomination is any nomination submitted after the initial

nomination.23 An intra-day nomination can be made either on

the day prior to gas flow (after 11:30 a.m.) or on the day of gas

flow.24 The current standards require a pipeline to permit

one intra-

[[Page 20076]]

day nomination four hours prior to gas flow.25

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\22\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.3.1 and 1.3.2.

\23\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.2.4.

\24\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.2.7.

\25\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.3.10.

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The Commission's policy since Order No. 636 has been that firm

shippers, who pay reservation charges, are entitled to service superior

to that of interruptible shippers. Interruptible shippers, by

definition, take the risk that their service will be interrupted if

firm shippers choose to use their capacity.

In Order No. 636, the Commission did not require pipelines to

provide intra-day nomination opportunities and, therefore, did not

address the intra-day priority issue in that rule. In the Order No. 636

restructuring proceedings, some pipelines were continuing or proposing

to add intra-day nomination opportunities. The Commission allowed them

to do so and also permitted those pipelines to continue tariff

provisions under which scheduled interruptible nominations would not be

bumped by firm intra-day nominations.

However, as intra-day nominations became more prevalent, the

Commission's policy changed and it began to require that intra-day

nominations conform to its general policy giving firm service priority

over interruptible service.26 Thus, the Commission found

that firm service intra-day nominations should be entitled to bump

scheduled interruptible service. The Commission, however, concluded

that interruptible shippers should receive notice of their rescheduled

quantities and an opportunity to renominate.27 The

Commission also determined that bumped interruptible shippers should

not be subject to penalties directly related to the bump on the day on

which the bump takes place.28

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\26\ See Tennessee Gas Pipeline Company, 73 FERC para. 61,158,

at 61,456 (1995).

\27\ Id.

\28\Id. (daily variance charge waived, but only for the day on

which the bump takes place).

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When Order No. 587 required all pipelines to implement at least one

intra-day nomination, the Commission determined that those pipelines

filing to institute intra-day nominations on their systems had to

follow the general policy on service priority and permit firm intra-day

nominations to bump scheduled interruptible service upon reasonable

notice.29 On those pipelines with pre-Order No. 587 tariff

provisions that prohibited bumping of interruptible service, the

Commission permitted the no-bump provisions to stand, because the

pipeline filings were strictly compliance filings, and the Order No.

587 standards did not address the priority issue for intra-day

nominations.30

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\29\ See El Paso Natural Gas Company, 77 FERC para. 61,176

(1996); Alabama-Tennessee Natural Gas Company, 79 FERC para. 61,117

(1997); Algonquin Gas Transmission Company, 78 FERC para. 61,281

(1997); ANR Pipeline Company, 78 FERC para. 61,142 (1997); Arkansas-

Western Pipeline Company, 78 FERC para. 61,250 (1997); Canyon Creek

Compression Company, 78 FERC para. 61,003 (1997); CNG Transmission

Corporation, 78 FERC para. 61,131 (1997); Great Lakes Gas

Transmission Limited Partnership, 79 FERC para. 61,194 (1997);

Iroquois Gas Transmission System, L.P., 79 FERC para. 61,196 (1997);

K N Interstate Gas Transmission Company, 79 FERC para. 61,208

(1997); Mojave Pipeline Company, 78 FERC para. 61,153 (1997);

National Fuel Gas Supply Corporation, 78 FERC para. 61,332 (1997);

NorAm Gas Transmission Company, 79 FERC para. 61,069 (1997);

Overthrust Pipeline Company, 78 FERC para. 61,285 (1997); Questar

Pipeline Company, 78 FERC para. 61,305 (1997); Southern Natural Gas

Company, 78 FERC para. 61,125 (1997); Texas Gas Transmission

Corporation, 79 FERC para. 61,175 (1997); Trailblazer Pipeline

Company, 77 FERC para. 61,328 (1996); Viking Gas Transmission

Company, 78 FERC para. 61,243 (1997); Young Gas Storage Company,

Ltd., 79 FERC para. 61,030 (1997).

\30\ See Transwestern Pipeline Company, 78 FERC para. 61,146

(1997); Florida Gas Transmission Company, 77 FERC para. 61,177

(1996).

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(2) GISB deliberations on intra-day nominations. In Order No. 587-

C, the Commission recognized that the divergent ways in which pipelines

had implemented the intra-day nomination requirements prevented

shippers from coordinating their intra-day nominations across

interconnecting pipelines. The Commission requested that GISB provide

recommendations as to standards for coordinating intra-day nominations

by September 1, 1997.

In its September 2, 1997 filing, GISB reported that it had been

able to reach certain agreements on intra-day issues; for example, it

submitted a proposed schedule establishing three synchronization times

when shippers could coordinate their intra-day nominations: 6 p.m. (to

take effect on the next gas day), and 10 a.m. and 5 p.m. to take effect

on the same gas day.

[GRAPHIC] [TIFF OMITTED] TR23AP98.004

GISB reported, however, that it had been unable to resolve certain

policy issues, principally whether, and under what circumstances,

intra-day nominations by firm shippers could bump or displace

previously scheduled interruptible service. Interruptible shippers did

not want their service to be disrupted, while firm shippers argued that

their payment of reservation charges entitled them to nomination

priority over interruptible service.

According to GISB's March 23, 1998 filing, it has approved the

intra-day synchronization schedule and, in addition, has passed 18 new

or revised intra-day nomination standards. The approved standards,

however, do not resolve the bumping question. If the Commission

determines to require bumping in this rule, the standards do not

resolve the question of when a firm intra-day nomination submitted on

the day prior to gas flow (6 p.m.) and which bumps interruptible

service would take effect. The standards leave that date to be

determined by the Commission in this rule.

(3) NOPR proposals. In the November 12, 1997 NOPR, the Commission

agreed

[[Page 20077]]

that the three intra-day nomination times established by GISB would

significantly improve shippers' ability to coordinate intra-day

nominations. The Commission sought to achieve greater coordination in

intra-day scheduling by resolving the dispute within GISB over bumping

of interruptible service. The Commission proposed to follow its current

policy and require pipelines to provide for firm intra-day nominations

to bump scheduled interruptible service. The Commission also required

that an interruptible shipper be given notice that its scheduled

volumes would be reduced.

While not proposing a regulation, the Commission sought to resolve

the dispute at GISB over the time at which an intra-day nomination

submitted at 6 p.m. (on the day prior to gas flow) which bumps an

interruptible shipper can take effect. The Commission concluded that

the firm intra-day nomination should take effect at the start of gas

flow at 9 a.m., rather than at 5 p.m. the next day, as suggested by

interruptible shippers. The Commission reasoned that firm shippers pay

for their service priority and have the right for their intra-day

nomination to take effect as soon as possible. In addition, in

accordance with the report from the GISB intra-day nomination task

force, the Commission stated that those pipelines permitting three

intra-day nomination opportunities could submit a request to exempt the

last intra-day nomination opportunity from the bumping rule. Providing

a final no-bump opportunity, the Commission reasoned, would provide

stability to the nomination process.

The Commission will first address the comments on its proposal to

permit firm intra-day nominations to bump scheduled interruptible

service. The Commission will then address several related issues: the

imposition of penalties on bumped interruptible shippers, the provision

of an overnight rescheduling opportunity, the relative priority of firm

primary and firm secondary service, and the effect of its intra-day

standards on pipelines employing a rolling or continuous intra-day

process.

b. Bumping. (1) Comments. Most commenters agree with the Commission

that industry-wide coordination of intra-day nominations is

needed,31 although a few contend that issue should be

addressed on a pipeline specific basis.32 And, a large

majority of the commenters support the Commission's decision that firm

intra-day nominations should bump interruptible, at least under some

circumstances.33

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\31\ Comments by AGA, Altra, Burlington, Centra Manitoba,

Columbia Gas/Columbia Gulf, ECT, Indicated End Users, K N Interstate

Group, National Fuel Distribution, NGC, NGSA, Nicor Gas, Pan

Alberta, Peoples/North Shore, PG&E, Piedmont.

\32\ Comments by Koch, NWIGU, Viking, Williston Basin.

\33\ Comments by Burlington, Cascade, Centra Manitoba, Columbia

Gas/Columbia Gulf, ECT, Engage, Florida Cities, FPL, Indicated End

Users, INGAA, MCV, Minnegasco, Mississippi Distributors, MoPSC,

MLGW, National Fuel Distribution, NGC, NGSA, NGPL, Pan Alberta, PGC,

et al., PGT, Peoples/North Shore, PG&E, Piedmont, ProEnergy,

ProLiance, SGPC, SoCal Gas/SDG&E, TVA. But see comments by Enron, K

N Interstate Group, Koch, Viking, Williston Basin (opposing

bumping).

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

The major area of disagreement is how to implement the bumping

requirement given the intra-day schedule proposed by GISB. NGC, NGSA,

ProEnergy, Columbia Gas/Columbia Gulf take issue with the Commission's

determination that a firm shipper should be permitted to submit a

nomination at 6 p.m. (on the day prior to gas flow) to become effective

at 9 a.m. (the beginning of gas flow). They contend that permitting the

6 p.m. bump would decrease the value and certainty of interruptible

service. Since the interruptible shipper will not be notified of the

bump until after normal working hours, they assert, the shipper will

not know it has been bumped until the next morning and will have no

opportunity to renominate. NGSA is concerned that bumping at 9 a.m.,

without a renomination opportunity before the bump takes effect, could

result in an unplanned shut-in of gas.34 Rather than a 9

a.m. effective time, these four parties contend the Commission should

establish that the 6 p.m. intra-day nomination becomes effective at 5

p.m. the next day so that interruptible shippers will have an

opportunity to renominate.

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

\34\ These parties also note that firm shippers wanting greater

flexibility in nominations can subscribe to no-notice service.

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

Taking a different tack, PGT and Pan Alberta do not object to the

timing of the 6 p.m. nomination, but contend that no bumping should be

permitted after gas starts to flow. They argue that permitting bumping

of flowing gas will devalue interruptible service and create logistical

difficulties for market participants by complicating the balancing

process and requiring last minute adjustments to marketing plans. They

further contend that permitting bumping after gas flows is inconsistent

with the Canadian practice, which will cause interconnection problems.

Firm shippers, on the other hand, support the Commission's proposal

that firm intra-day nominations should bump interruptible service both

on the day prior to the gas day and on the gas day itself. They

particularly support the Commission's proposal that a firm intra-day

nomination at 6 p.m. will take effect at 9 a.m.35 They

contend that their payment of reservation charges entitles them to such

priority and that, if they nominate on the day prior to gas flow, that

nomination should be effective at the start of gas flow, rather than

eight hours later. Indicated End Users argue that delaying the bump

from 9 a.m. until 5 p.m. essentially provides interruptible shippers

with eight hours of firm service while degrading the value of firm

service. Such a result, it asserts, is particularly inappropriate since

bumping occurs only on pipelines with no excess capacity, where firm

service is accordingly extremely valuable.

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

\35\ Comments by Indicated End Users, Mississippi Distributors,

National Fuel Distribution, PGC, et al., SoCal Gas/SDG&E, TVA.

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

(2) Commission determination. The Commission has determined that

intra-day nominations for firm capacity should be given scheduling

priority over scheduled and flowing interruptible service. The vast

majority of the comments support this regulation, and the regulation is

consistent with the priority rights to which firm shippers are

legitimately entitled. This issue cannot be left to individual

determinations on a pipeline specific basis, as suggested by Koch,

NWIGU, Viking, and Williston Basin. Continuation of the current

bifurcated system is inconsistent with the creation of an integrated

pipeline grid and would effectively reduce the effectiveness of firm

shippers' intra-day nominations on the majority of pipelines that

permit bumping. A firm shipper nominating gas across multiple pipelines

needs to be able to coordinate its intra-day nominations. Under the

present system, if even one pipeline in its nomination chain has a no-

bump rule, the shipper may be unable to have its entire chain of intra-

day nominations confirmed. Thus, a single approach to bumping is

necessary to integrate the pipeline grid.

With respect to the principal disputed issue--the effective time of

an intra-day nomination submitted on the day prior to gas flow (the 6

p.m. intra-day nomination under the GISB schedule)--the Commission

finds that the intra-day nomination should become effective at the

start of the gas day at 9 a.m., and will amend its regulations to make

clear that an intra-day nomination submitted on the day prior to gas

flow will take effect at the start of the gas day.

Firm shippers are paying reservation charges for priority rights

and those

[[Page 20078]]

rights should include the right to have a nomination become effective

as early as possible on the gas day following the nomination.

Interruptible shippers voluntarily take the risk that their service

will be interrupted and while they are entitled to advance notice of

such interruption, they should not be able to prevent firm shippers

from having their nominations take effect at the earliest possible

time. Gas flows on the interstate grid 24-hours a day, and is consumed

throughout the day, so interruptible shippers need to be prepared to

adjust gas volumes even during non-business hours. The interruptible

shippers will receive sufficient advance notice (approximately 11

hours) to reduce flows if necessary. They will still have the two

additional intra-day opportunities during the gas day (the 10 a.m. and

5 p.m. intra-day opportunities) to reschedule their gas. And,

interruptible shippers have the tools, such as pooling, gas package

identifiers, and ranking, that they can use to manage their gas

supplies in the event of bump.36 If interruptible shippers

still find the bumping risk unacceptable, they have the opportunity to

obtain firm capacity either from the pipeline or through the capacity

release system.

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\36\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.3.18, 1.3.23, 1.3.24. See text accompanying notes 100

and 93, infra. Pooling together with ranking permit shippers to

designate which supplies or markets should be cut first in the event

scheduled volumes are reduced. Thus, producers can rank those supply

sources where volumes can be changed most easily as the first to be

cut in the event of a bump.

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

While the commenters contend that bumping creates the risk that gas

will be shut-in without an opportunity to reschedule, that could occur

under the existing system as well. During the regular scheduling

process, an interruptible shipper takes a risk that a firm nomination

may result in a reduction in or termination of its flow from one day to

the next, a change that must take effect at 9 a.m. in the morning.

Prior to Order No. 587, many pipelines provided no opportunity for the

interruptible shipper to reschedule that gas prior to having to

implement the reduced flow. Even after Order No. 587, many pipelines do

not provide an intra-day scheduling opportunity prior to the start of

the gas day in which case the interruptible shippers are unable to

reschedule gas prior to the beginning of gas flow. Indeed,

interruptible shippers are better off in many ways under the new

regulation, than they were prior to the expansion of the intra-day

nomination process. Before adoption of multiple intra-day nominations,

interruptible shippers could have their volumes reduced with no

opportunity to renominate that gas, while under the multiple intra-day

nomination schedule, interruptible shippers bumped by a 6 p.m. intra-

day nomination will still have two opportunities to reschedule gas on

an industry-wide basis (the 10 a.m. and 5 p.m. intra-day

opportunities).

The Commission will follow the GISB consensus and permit pipelines

with three intra-day nomination opportunities to exempt the last intra-

day opportunity from bumping. Both firm and interruptible shippers

support GISB's and the Commission's proposal that no bumping should

take place at the third intra-day nomination opportunity.\37\ Local

distribution companies (LDCs) contend that allowing bumping at the

third opportunity would interfere with their efforts to manage their

own systems. A few commenters contend that making the third intra-day

opportunity non-bumping is inconsistent with the priority to which firm

service is entitled.\38\ The Commission, however, agrees with the

consensus of the GISB members that making the third intra-day

nomination non-bumping creates a fair balance between firm shippers,

who will have had two opportunities to reschedule their gas, and

interruptible shippers and will provide some necessary stability in the

nomination system, so that shippers can be confident by mid-afternoon

that they will receive their scheduled flows.

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

\37\ Comments by Burlington, Engage, INGAA, NGSA, Nicor Gas

Peoples/North Shore.

\38\ Comments by Cascade, TVA.

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

c. Penalties for bumped interruptible shippers. In Tennessee Gas

Pipeline Company,\39\ the Commission permitted the pipeline to

implement a tariff provision under which firm intra-day nominations

bumped scheduled interruptible gas, but waived the pipeline's daily

variance penalty for bumped interruptible shippers on the day of the

bump. Referring to this decision, the Commission, in the NOPR, stated

that pipelines filing to implement the regulation giving firm intra-day

nominations priority over scheduled interruptible gas should consider

whether bumped interruptible shippers should be exempt from certain

penalties on the day of the bump.

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

\39\ 73 FERC para. 61,158, at 61,456 (1995).

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

Pipelines as well as some shippers contend that the pipelines must

be able to assess penalties against interruptible shippers or else

shippers will have no incentive to comply with the bump and the

pipelines' management of their system will be jeopardized.\40\ Columbia

Gas/Columbia Gulf maintain that penalties should be waived only if the

interruptible shipper conforms its flow to the rescheduled volumes. The

pipelines contend that they do not have the system flexibility to

permit overuse of capacity even on a single day.\41\

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

\40\ Comments by Enron, INGAA, NGPL, Nicor Gas, NGT/MRT,

Southern, TransCapacity, Cascade.

\41\ See comments by INGAA, Enron, NGPL, Southern.

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

Shippers maintain that penalties should be waived for bumped

interruptible shippers.\42\ They contend that interruptible shippers

should not be subject to penalties when the shipper is unable to

reschedule gas and may not be able to get a point operator to change

physical volumes. NGC maintains the Commission should not just consider

waiving penalties, but affirmatively adopt a rule that no penalties can

be assessed on bumped shippers.

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

\42\ Comments by ECT, FPL, National Fuel Distribution, NGC,

NGSA, PGC, et al.

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

Given the variety of penalty provisions in pipeline tariffs, the

waiver of penalties for bumped shippers will have to be considered when

pipelines make compliance filings. The Commission will set forth below

some general principles for assessing when pipelines should waive

penalties for bumped interruptible shippers. No penalties should be

imposed on bumped shippers if the pipeline fails to provide appropriate

notice of a bump. Once notified, shippers are expected to make a good

faith effort to adjust their flows to conform to revised scheduling

volumes. But the Commission recognizes that in some cases the shortened

notice period for intra-day nominations (three hours under the GISB

timeline) may make such adjustments difficult. As in Tennessee,

therefore, pipelines should waive non-critical penalties, such as daily

scheduling or variance penalties, for the day of the bump. But these

penalties would be waived only for the day of the bump; interruptible

shippers should remain responsible for the excess gas put on the system

and would be subject to all penalties in subsequent days resulting from

the excess gas.

The Commission also recognizes the pipelines' need to maintain

control of their systems in critical situations, when they invoke

operational flow orders. In these cases, bumped interruptible shippers

may not be entitled to special treatment on penalties, because, when

OFOs are in effect, the pipelines are less likely to be able to absorb

extra gas on their systems and all shippers may have difficulty

adjusting to the OFO. Waiving penalties for bumped interruptible

[[Page 20079]]

shippers in critical situations, therefore, could come at the expense

of reduced service or increased penalties on other shippers. The

Commission, however, expects pipelines to comply with the principle

embodied in standard 1.1.14 which provides:

where a nomination is required by the service provider to make an

effective physical change necessary to comply with an Operational

Flow Order, unless critical circumstances dictate otherwise, an

Operational Flow Order penalty should not be assessed unless the

shipper is given the opportunity to correct the circumstance giving

rise to the Operational Flow Order and fails to do so or the

action(s) taken fails to do so. The opportunity to correct the

critical circumstance should include the opportunity to:

(a) Make a nomination, which, once confirmed and scheduled would

cure the circumstance giving rise to the Operational Flow Order, or

(b) Take other appropriate action which cures the circumstance

giving rise to the Operational Flow Order.\43\

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\43\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.1.14.

For instance, under this principle, where an OFO would require an

interruptible shipper (which is bumped by a firm service intra-day

nomination at 6 p.m. the day prior to gas flow) to make a nomination to

effect a physical change to comply with the OFO, the pipeline should

afford the interruptible shipper the opportunity to make a new intra-

day nomination at the next intra-day nomination opportunity (10 a.m.)

to cure the circumstance giving rise to the OFO. If the interruptible

shipper can make such a change, no OFO penalties should be charged for

the period between 9 a.m. and 5 p.m. when the interruptible shipper's

10 a.m. intra-day nomination would take effect. However, if the

interruptible shipper is unable to cure the OFO at the 10 a.m. intra-

day nomination opportunity all applicable OFO penalties would apply.

These principles appear to strike a fair balance between the

operational needs of the pipelines and the protection of shippers.

When pipelines file to implement the regulations, the Commission

will consider whether pipelines should waive specific penalties for

bumped interruptible shippers. Section 284.10(c)(1)(i)(A) also requires

pipelines to notify bumped interruptible shippers if penalties for

overrunning their scheduled quantities will apply on the day of the

bump.

d. Other Issues. (1) Overnight rescheduling opportunity. In the

NOPR, the Commission decided not to propose a regulation requiring

pipelines to provide an overnight rescheduling opportunity for

interruptible shippers which are bumped. PGC, et al., contend that the

Commission should require pipelines to permit interruptible shippers to

renominate bumped supply overnight. NGPL, on the other hand, contends

that pipelines cannot provide overnight renominations, because

confirmation of these nominations could not take place in the evening

and early morning.

Pipelines wishing to provide greater certainty to interruptible

shippers may provide an overnight opportunity for interruptible

shippers to reschedule bumped gas. However, the Commission agrees with

NGPL that given the confirmation difficulties occasioned by overnight

rescheduling, pipelines should not be required to provide such a

service. The 11 hour advance notice to interruptible shippers and the

interruptible shippers' ability to renominate at the 10 a.m. intra-day

opportunity provides sufficient protection to interruptible shippers.

(2) Priority of firm capacity to primary and secondary points. In

the NOPR, the Commission restated its policy that, once scheduled,

intra-day nominations for firm service to primary receipt or delivery

points do not bump previously scheduled firm capacity to secondary

points. ECT, K N Interstate Group, and NWIGU support the current policy

that intra-day nominations to firm primary points do not bump already

scheduled gas at secondary points. ECT and NWIGU maintain that giving

firm primary and secondary points firm priority is necessary for the

capacity release process to work efficiently. On the other hand, MGE

and NGT/MRT contend the Commission should change the policy to give

intra-day nominations to firm primary points priority over previously

scheduled firm capacity at secondary points. They assert that firm

shippers pay for such primary point rights. Cascade maintains that

Commission policies permitting exceptions to priority rules need to be

reconsidered as the industry moves to a more continuous and contiguous

scheduling system under which the pipelines may reschedule the entire

system more frequently than once a day. Koch, PG&E, and SoCal Gas/SDG&E

request clarification that the Commission's statements of priority

regarding the impact of intra-day nominations on scheduled service to

firm secondary points do not affect specific resolution of priority

issues with respect to the Koch and El Paso pipelines.

At this time, the Commission will not adopt a regulation requiring

pipelines to revise existing tariff priorities relative to the rights

of intra-day nominations to firm primary points to affect scheduled

volumes to firm secondary points. Given the potential effects of

changing the priority rules relating to intra-day nominations to

secondary points, such as potentially reducing the ability of shippers

to obtain released capacity and to use that capacity at secondary

points, changes in priority rules require additional consideration by

the Commission and the industry.

(3) Pipelines processing intra-day nominations on a continuous or

rolling basis. Some pipelines currently process intra-day nominations

on a continuous or rolling basis permitting the shipper to choose when

to submit its intra-day nomination. Others use a batch process in which

all intra-day nominations are processed at the same time.

CNG, Enron, Nicor Gas, Peoples/North Shore, Southern, and

TransCapacity contend that pipelines should be able to revise their

prior continuous intra-day nomination procedures to conform to the GISB

batch schedule. CNG maintains that pipelines should not be held to

prior intra-day schedules based on different operating assumptions. CNG

and Enron maintain that changing to a batch process should not be

deemed a degradation of service. Peoples/North Shore and Nicor Gas

maintain that continuous processing complicates LDCs' supply planning

because they have to make operational changes throughout the gas day.

AGA, on the other hand, is concerned that pipelines currently

offering continuous service should not be able to unnecessarily degrade

their services by changing to the batch process. While Peoples/North

Shore support the batch process, they argue that pipelines offering

special services with more than the required number of intra-day

opportunities should not be able to reduce those to the standard three.

Adoption of the three synchronization times is not necessarily

inconsistent with continuous intra-day processing, since the shipper

can simply choose whether to time its nominations to achieve synchrony

with other pipelines. However, if a pipeline finds that continuation of

the continuous process will disrupt its system, it should be able to

change its procedures to conform to the industry standards. The

efficiency gained by the entire industry in being able to coordinate

nominations across the pipeline grid outweighs any potential diminution

of service resulting solely from the change in the method of processing

the nominations. Pipelines, however, should not use the change to batch

processing to reduce the number of intra-day opportunities to which

[[Page 20080]]

shippers are entitled. Although these additional intra-day

opportunities are not coordinated across pipelines, they still provide

shippers with benefits, particularly to those shippers revising storage

or other nominations that do not need to be coordinated with

nominations on other pipelines.

3. Regulation Requiring Pipelines To Enter Into Operational Balancing

Agreements

In Sec. 284.10(c)(2)(i), the Commission is adopting a regulation

requiring each interstate pipeline to enter into an Operational

Balancing Agreements at all points of interconnection between its

system and the system of another interstate or intrastate pipeline.

a. Background. An operational balancing agreement (OBA) is a

contract between two physically interconnected parties specifying the

procedures to be used in processing imbalances or differences in hourly

flows between the parties. GISB passed a standard requiring pipelines

to enter into OBAs at all interstate and intrastate pipeline

interconnects where economically and operationally feasible. In Order

No. 587-C, the Commission declined to adopt this standard, finding the

phrase economically and operationally feasible too vague to define

pipeline obligations. In the NOPR, the Commission proposed to require

interstate pipelines to enter into OBAs with all interconnecting

interstate and intrastate pipelines.

b. Adoption of the regulation. Almost all the commenters either

support the regulation or do not oppose it. INGAA and some of the

pipelines suggest the regulation is not needed since OBAs already exist

at over 91% of interconnects between interstate pipelines. Enron

contends that, instead of mandating that pipelines enter into OBAs, the

Commission should adopt a regulation prohibiting pipelines from

enacting tariff provisions that inhibit the use of OBAs at interconnect

points.

The Commission concludes the regulation is needed. As the

commenters point out, OBAs have increased the efficiency and

reliability of the pipeline grid. An OBA ensures that a shipper, once

it has properly nominated and had its gas confirmed, will not be

subjected to imbalance penalties resulting from the transfer of gas

between the pipelines. Enron's suggestion that the Commission limit the

regulation to one that merely prohibits pipelines from adopting tariff

provisions inhibiting the development of OBAs does not go far enough,

because it imposes no affirmative obligation on the pipelines to enter

into OBAs.

Other issues raised by the comments will be discussed below.

c. Definition of intrastate pipeline. Section 284.10(c)(2)(i)

requires interstate pipelines to enter into OBAs at all interstate and

intrastate pipeline interconnects. The comments principally concern the

scope of the term intrastate pipeline. The pipelines contend it should

be limited to intrastate pipelines only (defined by Koch as those with

transmission facilities that do not cross state lines) and should not

include gatherers and LDCs.44 ANR/CIG contend it should

include only intrastate pipelines regulated by the Commission which

would obviate the possibility that interstate pipelines would have to

file for waivers if they cannot negotiate an acceptable OBA with an

unregulated entity. The pipelines argue that expanding the requirement

to gatherers and LDCs would be too burdensome, particularly if they had

to file for a waiver every time they could not negotiate an acceptable

agreement.

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

\44\ Comments by ANR/CIG, Enron, INGAA, Koch, National Fuel

Distribution, SGPC, Williston Basin.

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

TransCapacity and PGC, et al., assert the requirement should extend

to all interconnect points where nominations need to be confirmed with

multiple parties behind the point, specifically including interconnects

with LDCs and gatherers. TransCapacity contends that the burden of

including these points is minimal if GISB develops a model OBA.

The proposed regulation uses the term intrastate pipeline, as

contained in the original GISB formulation. The term intrastate

pipeline should apply to pipelines providing transmission services, as

opposed to gathering or local distribution functions. To aid in

identifying those pipelines to which the regulation applies, the term

will apply to all pipelines performing interstate transportation that

are subject to the Commission's regulations under Subparts C and G of

Part 284.45 As National Fuel Distribution suggests, this

constitutes a good beginning, but, after experience is gained,

consideration should be given to expanding the definition so that

interstate pipelines will be expected to negotiate OBAS with all those

transporting gas for others, such as gatherers and LDCs.

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

\45\ 18 CFR 284.121-126; 18 CFR 284.224.

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

As ANR/CIG suggest, since the requirement applies only to OBAs

between interstate pipelines and intrastate pipelines regulated by the

Commission, pipelines have no need to file for waivers. While the

Commission expects that interconnecting parties will be able to

negotiate acceptable OBA conditions, if an intractable dispute should

arise, they can submit the dispute to the Commission for resolution.

d. Date by which pipelines must execute OBAs. Enron questions

whether pipelines can be expected to enter into an OBA by a date

certain, while NGC contends the Commission needs to set an outside date

by which the OBA process must be completed. The Commission recognizes

that pipelines must be given some time to negotiate and enter into OBAs

and, therefore, would expect that pipelines should be able to complete

the OBA process within three months after the Commission adopts final

regulations governing OBAs.

e. Requirement to make OBA contracts available. NGPL objects to the

requirement that pipelines maintain OBAs and provide them to requesting

parties, asserting the Commission has offered no justification for the

requirement. NGPL would not object to posting the OBA operator and the

points covered by the OBA. PG&E contends OBAs are proprietary contracts

and should be filed under seal. SoCal Gas/SDG&E and TransCapacity

maintain OBAs must be publicly available.

Section 4 of the Natural Gas Act requires that pipelines:

file * * * and shall keep open in convenient form and place for

public inspection, schedules showing all rates and charges for any

transportation or sale * * * and the classifications, practices, and

regulations affecting such rates and charges, together with all

contracts which in any manner affect or relate to such rates,

charges, classifications, and services.

Since OBAs are contracts relating to the provision of transportation

service, they are jurisdictional. The Commission, however, has not

required pipelines to file OBAs with the Commission.46

Instead, pipelines must make them available, along with all relevant

records of volumes and amounts paid under OBAS, to the Commission and

any person requesting copies.

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

\46\ See Transcontinental Gas Pipe Line Corporation, 65 FERC

para. 61,315, at 62,437 (1994) (although OBAs are jurisdictional,

filing is unnecessary if copies are made available by the pipeline).

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

f. Development of a standard OBA and other issues relating to

negotiation and implementation of OBAs. Several commenters contend that

GISB should develop a standard OBA and pipelines should be required to

accept the standard OBA.47 A standard OBA, they assert, will

reduce the burden of having to individually negotiate OBA terms in

[[Page 20081]]

every instance. The pipelines oppose a requirement that they adhere to

a standard OBA, because, they assert, an OBA needs to deal with issues

specific to the interconnected parties.48

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

\47\ Comments by NGC, SoCal Gas/SDG&E, TransCapacity.

\48\ Comments by CNG, INGAA, K N Interstate Group.

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

Development of a standard OBA would be of significant value in

setting forth terms that are reasonably fair to both parties, and GISB

should work on developing such a contract. Pipelines, however, would

not have to agree to the standard OBA if its terms are inapplicable in

a particular situation.

Pipelines raise questions about negotiation and implementation of

OBAs. El Paso seeks clarification that it can insist on inclusion of

certain necessary terms, such as creditworthiness guarantees and other

assurances of performance. K N Interstate Group, Koch, and NGPL ask if

pipelines can terminate OBAs for non-performance. NGT/MRT ask whether

pipelines can reject OBAs, without filing for a waiver, where the OBA

would inhibit pipeline operations. SGPC raises concerns about having to

enter into unreasonable terms and conditions with unregulated entities,

such as gatherers.

Pipelines can insist that OBAs contain reasonable terms that are

standard in the industry. Development of a standard OBA would provide a

benchmark for comparison. Based on the history of OBAs, the Commission

does not expect numerous cases in which parties fail to perform.

However, pipelines would have a right to terminate an OBA for

substantial, consistent non-performance, but must do so in a non-

discriminatory fashion and should make every effort to work out any

difficulties with the other contracting party.

Pipelines cannot unilaterally decide not to enter into an OBA with

an interconnecting pipeline. As discussed previously, interstate

pipelines must enter into OBAs only with intrastate pipelines regulated

by the Commission. Any disputes over OBA terms and conditions between

interconnected parties can be submitted to the Commission for

resolution.

NGSA argues the OBA regulation should be expanded to require the

downstream party to adhere to the pre-determined allocations of the

upstream party. Without such a requirement, it claims the OBA cannot

properly allocate volumes to the appropriate downstream customer when

capacity is scarce.

The Commission, at this time, does not have sufficient information

to impose this as a requirement for all OBAs. As NGSA recognizes, this

issue is related to the question of how to handle multi-tiered

allocations on which GISB will be developing standards by the fourth

quarter of 1998. GISB should consider how to handle upstream and

downstream pre-determined allocations when it considers the issues

relating to a standard OBA and multi-tiered allocations.

4. Regulation Requiring Pipelines To Net Imbalances and Permit

Imbalance Trading

In Sec. 284.10(c)(2)(ii), the Commission is requiring pipelines to

permit shippers (including agents) to offset imbalances on different

contracts held by the shipper and to trade imbalances with other

shippers so long as the imbalances have similar operational impact on

the pipeline. In their filings to comply with this regulation, each

pipeline must delineate the largest operational area in which

imbalances can be traded without affecting system operations. Pipelines

also will be expected to propose procedures governing the method by

which they will post and process imbalance trades provided to them by

shippers or shippers' agents, including third-party firms that would

conduct imbalance trading for shippers. GISB is examining standards to

make the posting and processing of imbalance trades more uniform and

efficient, and the Commission will defer implementation of the

imbalance trading requirement until after approval of standards

governing imbalance trading, which are due to be filed on June 30, 1998

according to GISB's 1998 Annual Plan.

Under the regulation, pipelines are not required to establish a

computerized system on which trading would take place, although they

would be free to establish such a system and to assess a separate fee

for using that system. If a pipeline does establish its own trading

system, it must provide equal and non-discriminatory access for

shippers trading their own imbalances or those using third-party

services.

The Commission will address below the comments dealing with the

adoption of the requirement itself and the operational details.

a. Adoption of imbalance trading. Most of the comments favor or do

not oppose the imposition of imbalance trading.49 Those

supporting imbalance trading contend that it is needed to offset the

tightened balancing tolerances, increased penalties, and gas forfeiture

provisions implemented by pipelines.

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\49\ Comments by Altra, Burlington, ECT, Engage, INGAA, K N

Interstate Group (pipelines account for imbalances differently and

pipelines should define operational impact), MoPSC, MGE, NGPL, NGC,

NGSA, Nicor Gas, Peoples/North Shore, PGC, et al., PG&E, ProEnergy,

ProLiance, SoCal Gas/SDG&E, TransCapacity.

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WGP and SGPC oppose the requirement, contending that permitting

imbalance trading could reduce financial incentives for shippers to

stay in balance. WGP also argues that if a pipeline accounts for

operational imbalances at the end of the month, a severe imbalance in

one direction at the beginning of the month would not be operationally

offset by a corresponding imbalance running the other way at the end of

the month.

Permitting shippers to trade imbalances in the same operational

area enables shippers to avoid imbalance charges without jeopardizing

system reliability. When individual shipper imbalances offset each

other, the pipeline as a whole is in balance. The Commission does not

agree with WGP and SGPC that imbalance trading will significantly

weaken shippers' incentives to stay in balance. As NGSA points out,

shippers are unlikely to allow large imbalances to accumulate, because

they run the risk that they will be subject to penalties if they are

unable to find a shipper with an offsetting imbalance with whom to

trade. For example, if one shipper has a financial incentive to

underdeliver gas, other shippers likely will have the same incentive

and all the imbalances will run in the same direction and be

untradable. Thus, imbalance trading will ensure that imbalance

penalties are linked more closely to operational integrity, so that

shippers are not penalized for imbalances that do not affect pipeline

operations.

WGP's example of imbalances occurring at different times of the

month appears to have little to do with imbalance trading. Currently, a

single shipper may run positive imbalances early in the month and

negative ones at the end of the month. Despite WGP's concern about

potential adverse operational affects on a daily basis, the shipper's

imbalances will offset each other by the end of the month, resulting in

no imbalance penalties. Thus, establishing imbalance trading on a

monthly basis will not change the relative operational impacts of

imbalances on a daily basis.

b. Operational details. Most of the commenters address operational

aspects of imbalance trading, such as whether imbalances can be traded

across rate schedules, the role of agents, and what services pipelines

are required to provide.

[[Page 20082]]

(1) Accommodating imbalance trading to system requirements. INGAA

argues that each pipeline should be able to accommodate imbalance

trading to the requirements of its system. The regulation does permit

each pipeline to structure imbalance trading to its system, because

pipelines need only permit imbalance trading in areas where the

imbalances have similar operational effect. When pipelines file to

comply with this requirement, they must define the largest possible

areas on their systems in which imbalances have similar operational

effect and explain why imbalances crossing those lines are not

sufficiently similar in operational effect.

(2) Trading across rate schedules or rate zones. Section

284.10(c)(2)(ii) requires pipelines to permit imbalance trades as long

as they have similar operational impact on the pipeline. Some of the

pipelines contend that further restrictions are appropriate. ANR/CIG,

El Paso, and NGPL contend imbalance trading should be limited to trades

within rates zones.

Whether imbalance trading should be permitted across rate zones

depends on the operational characteristics of the

pipeline.50 As stated earlier, each pipeline must delineate

in its compliance filing, the largest operational area in which

imbalances can be traded without affecting system operations.

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\50\ Trunkline Gas Company, 64 FERC para. 61,141, at 62,134

(1993) (denying request for netting of imbalances across rate zones

where the imbalance within each zone may have operational impact on

system operations).

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Other pipelines contend they should not have to permit imbalance

trades that affect transportation charges.51 El Paso

maintains a pipeline may lose revenue if imbalances on discounted

contracts are traded with those on full price contracts. Williston

Basin argues that imbalances should not be traded across different

contract classes, providing the following example. If a shipper has a

positive imbalance of 1,000 Dth under an interruptible contract

52 and trades that imbalance with a shipper that has a 1,000

Dth negative imbalance on a firm contract,53 Williston Basin

claims it would have received revenues only on 100 Dth at the higher

interruptible rate and revenues based on 1,100 Dth at the lower firm

commodity rate. Williston Basin contends that if the trade was between

interruptible contracts alone, it would receive revenues on 1,200 Dth

at the higher interruptible rate. (100 Dth for the shipper with the

positive imbalance and 1,100 Dth for the shipper with the negative

imbalance).

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\51\ Comments by Columbia Gas/Columbia Gulf, Enron, El Paso,

Williston Basin.

\52\ The shipper delivers 1,100 Dth into the system of which the

pipeline delivers only 100 Dth off the system.

\53\ The shipper delivers 100 Dth into the system and the

pipeline delivers 1,100 Dth off the system.

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Permitting pipelines to limit imbalance trading to contracts within

the same rate schedule would significantly reduce the efficacy of the

imbalance trading program and is unrelated to operational needs of the

pipeline. Trading would be restricted because shippers would not only

have to search out offsetting imbalances in the same operational area,

they would have to find offsetting imbalances under the same rate

schedule. Such a restriction on trading is unrelated to pipeline

operations since, regardless of the rate schedule under which the gas

is shipped, the pipeline is physically in balance so long as imbalances

net out.

The pipelines have not made clear how they lose transportation

revenue from imbalance trading across firm and interruptible or maximum

rate and discounted contracts.54 The Commission's policy is

to require pipelines to permit shippers to offset imbalances across

contracts under different rate schedules.55 If a pipeline

can document that such trading will cause a loss of transportation

revenue, the solution is not to restrict imbalance trading, but for the

pipeline to devise an appropriate mechanism to ensure that it is made

whole for all appropriate transportation charges.56

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\54\ In the example given by Williston Basin, the pipeline's

transportation revenues for the quantity of gas delivered for each

shipper appears the same with or without imbalance trading. The

pipeline delivers only 100 units of interruptible volume and charges

for the amount delivered. The only potential loss of revenue would

be from resolution of the imbalance through cash-out. Under

Commission policy, however, pipelines are not entitled to such

penalty revenue; such charges are imposed only to discourage conduct

inimical to the operations of the system.

\55\ See Panhandle Eastern Pipeline Company, 64 FERC para.

61,009, at 61,066 (1993); Trunkline Gas Company, 64 FERC para.

61,141, at 62,133 (1993); Algonquin Gas Transmission Company, 63

FERC para. 61,188, at 62,373 (1993).

\56\ See Panhandle Eastern Pipeline Company, 64 FERC para.

61,009, at 61,066 (1993).

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(3) Pipeline fees for providing imbalance trading services.

Commenters raise questions about the pipelines' ability to charge fees

for imbalance trading services. NGPL is uncertain which services

pipelines must provide and for which a fee can be charged. NGC contends

that pipelines with current imbalance trading programs should not be

able to charge a fee and that no fee should be charged for shippers

trading amongst themselves. CNG and Columbia Gas/Columbia Gulf contend

the pipelines should not post imbalances, but provide a space on their

EBB or web site for shippers to post imbalances. Altra is concerned

that pipelines may abuse the imbalance trading process by establishing

affiliates with preferential access to pipeline delivery and receipt

information. Altra further maintains pipelines should be precluded from

hosting the trading process, because it fears that allowing the

pipelines to participate in a rate-based environment would preclude

competitive markets from working most efficiently.

To clarify, pipelines will be required, without charging a separate

fee, to notify shippers of their imbalances and post imbalances

automatically if shippers provide pipelines with standing authority for

posting. Pipelines also should permit shippers the opportunity to post

their own imbalances in the same location. Pipelines also must process,

without charging a separate fee, imbalance trades submitted by shippers

or third-parties acting to facilitate imbalance trading.

The posting of imbalances will permit shippers to negotiate their

own trades. Pipelines also can set up an imbalance trading or auction

process by which shippers can arrange to trade imbalances and charge a

separate fee for this service. The Commission will not forbid pipelines

from hosting such an imbalance trading service, as Altra suggests,

since such a prohibition would limit potential competition. If

pipelines charge a separate fee for such a service, third-parties

providing a similar service should not be unduly disadvantaged.

Pipelines establishing such a system or dealing with an affiliate,

however, must act non-discriminatorily in processing imbalance trades

submitted by shippers or third-parties and comply with the Commission's

standards of conduct with respect to sharing of relevant information.

(4) Standards and procedures for trading imbalances. Commenters

raise questions about the procedures that pipelines should adopt to

facilitate netting of imbalances and imbalance trading.57

PG&E argues pipelines should file tariff changes to establish the

protocols for imbalance trading so shippers can comment.

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\57\ ECT argues pipelines should automatically offset imbalances

across a shipper's contracts. Enron argues that pipelines need to

establish practical parameters for trading such as setting a fixed

time frame for shippers to trade imbalances, keeping the pipeline

out of shipper trading negotiations and agreements, except to

process the resulting adjustments to the parties, and limiting

trading activity to the immediately preceding production month's

activity to avoid cross-month price arbitrage.

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[[Page 20083]]

As discussed earlier, the development of standards for processing

imbalance trading would make the process more efficient, and the

Commission, therefore, is deferring implementation of the imbalance

netting and trading requirement until after approval of standards

governing imbalance trading, which are due to be filed on June 30, 1998

according to GISB's 1998 Annual Plan. Pipelines will have to make

tariff filings to establish the parameters of their trading areas as

well as other aspects of their programs, if not covered by the

standards. At that time, shippers will have an opportunity to comment

on these provisions.

Enron and Koch raise questions about a statement in the NOPR that

shippers may be willing to put gas on a pipeline system for a fee in

order to resolve another shipper's imbalance. Koch maintains that

shippers should not be physically permitted to add or take away gas to

resolve historic imbalances. Enron requests clarification that

imbalance trading should reflect end of the month imbalances and not

daily incremental needs.

The Commission will clarify that the regulation relates to the

pipelines' current methods for accounting for imbalances and does not

require pipelines to institute daily imbalance procedures, if they are

not already present on the system. However, if a pipeline presently

imposes daily imbalance penalties, it should establish a means of

permitting shippers to trade those imbalances before assessing

penalties. The regulation also does not require pipelines to permit

shippers to add gas to the system at other than the normal scheduling

opportunities.

(5) Agents. The Commission has proposed to allow agents for

shippers to offset imbalances across contracts and to trade imbalances.

National Fuel Distribution contends that permitting agents to provide

an imbalance netting service will diminish pipelines' control of their

systems. Columbia Gas/Columbia Gulf contend that offset and trade

options should not be extended to shippers' agents unless they are

acting for the shipper. They contend agents do not have title to the

gas, but act only as a surrogate for nominating supplies and some

contracting activity. ProLiance argues that there is no reason to

exclude agents from imbalance netting or trading.

National Fuel Distribution does not explain why permitting agents

to participate in netting imbalances or trading imbalances will affect

pipelines' control of their systems. As long as imbalances offset each

other within the relevant operational area, there should be no negative

operational effects on the pipeline. In fact, since all shippers will

be able to trade imbalances, there is no reason why agents should not

be able to offset imbalances on the contracts they manage. Columbia

Gas/Columbia Gulf's concern with agents is similarly unclear. For

imbalance trading to work efficiently, pipelines must process imbalance

trades by those acting on behalf of shippers. A third-party, for

example, may establish a computerized service to facilitate imbalance

trades for shippers, and the pipeline will need to process the results

of those trades. Any issues with establishing the proper scope of

agency should be worked out between the pipeline, the third-party, and

the parties involved.

5. Electronic Communication Using the Internet

a. Background. For many years, pipelines have communicated with

their customers using direct dial up connections to pipeline Electronic

Bulletin Boards (EBBs). Each pipeline EBB is a proprietary system, with

unique software, log-on, and other procedures. The uniqueness of each

pipeline's EBB raises costs to those who ship across multiple

pipelines, since shippers must maintain redundant computers and

communication software and train their staff in the idiosyncracies of

each pipeline's system.

Creating greater standardization in electronic communication was

one of the first standardization tasks the Commission and GISB

undertook. The current communication system reflects a tripartite

approach. First, shippers can still use EBBs to conduct interactive

transactions with the pipelines and obtain information from the

pipelines.

Second, pipelines must permit shippers to conduct many of the

important business transactions in the industry, such as nominations,

flowing gas, invoicing, and capacity release, using datasets in ASC X12

electronic data interchange (EDI) format 58 transmitted over

the Internet. An EDI dataset is a highly structured or formatted method

of conducting computer-to-computer communication.59 To make

use of EDI over the Internet, the user must have its own Universal

Resource Locator (URL) address 60 and be able to translate

the formatted information into the report or display it desires. For

instance, a user could, if it wanted, translate the EDI information

into the same display it now receives from an EBB. Or, it could use the

EDI data to feed a more sophisticated gas management computer system.

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

\58\ ASC X12 is a standardized format for electronic

transmission of documents. Standards for the use of such documents

are promulgated by the American National Standards Institute (ANSI)

Accredited Standards Committee (ASC).

\59\ An EDI dataset is analogous to a spread-sheet with each

block or location containing specific information that is then

processed by a computer. A computer program can translate from the

raw EDI data to whatever format or display the user wants.

\60\ To maintain a URL address, the user has to have its own

Internet server and establish a connection to the Internet.

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

Third, some information, such as pipeline tariffs, affiliate

information, and available capacity, that is posted on EBBs also is

posted on pipeline web sites.61 This information, however,

is not transactional, like a nomination, in which the shipper needs to

communicate with the pipeline; the information is posted on web sites

for shippers to read or to download.

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\61\ 18 CFR 284.10(b)(i)(iv) (1997), Electronic Delivery

Mechanism Related Standards 4.3.6.

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Although GISB's standards state that all current EBB transactions

should be achieved through one mode of communication,62 the

standards developed by GISB do not cover all transactions now conducted

electronically over EBBs. Pipelines are continuing to post information

and conduct many transactions on their proprietary EBBs.

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\62\ 18 CFR 284.10(b)(1)(iv) 1997), Electronic Delivery

Mechanism Related Standards 4.3.6.

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In Sec. 284.10(c)(3), the Commission is adopting a series of

regulations to standardize electronic communication, specifically

requiring pipelines to: post all information and conduct all business

transactions using the public Internet and internet protocols by June

1, 1999; adhere to specific standards in posting information on

pipeline web sites and in maintaining electronic records; and provide

shippers with notice of critical system events by using the Internet.

The Commission will discuss these requirements below.

b. Regulation requiring pipelines to conduct all transactions over

the Internet. In Sec. 284.10(c)(3)(i), the Commission is requiring

pipelines to provide all electronic information and conduct all

electronic transactions over the public Internet. The Commission

further is requiring pipelines to provide private networks with non-

discriminatory connections using internet tools, internet directory

services, and internet communication protocols upon payment of a

reasonable fee to recover the costs of providing such an

interconnection. The comments address both the Commission's proposed

use of the Internet to conduct all transactions and various aspects of

[[Page 20084]]

its implementation, which are discussed below.

(1) The requirement to use the internet to conduct transactions.

The commenters generally support the requirement to move transactions

to the Internet to establish a single, efficient mode of conducting

business with all pipelines.63 Only two commenters oppose

requiring pipelines to move all electronic communication to the

Internet. Koch argues that, rather than requiring that all transactions

be conducted over the Internet, the Commission should require pipelines

to conduct only basic, minimum transactions over the Internet, such as

the EDI transactions contained in Version 1.2 of the datasets.

Wisconsin Distributors contend that the Internet may not be reliable

enough and that pipelines must have back-up systems, such as EBBs,

available to avoid degradation of reliability.

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\63\ See comments by Altra, CNG, Duke Energy Interstate

Pipelines, ECT, Engage, Enron, Gaslantic, INGAA, K N Interstate

Group, Latitude, MGE, NGSA, Nicor Gas, PGC, et al., PG&E, Piedmont,

ProEnergy, SoCal Gas/SDG&E, Southern, TransCapacity.

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The Commission is adopting the requirement that all transactions

and information be conducted using the Internet, because, as the

majority of the comments recognize, moving to a single, standardized

mode of communication is necessary to achieve an efficient

communication system. GISB has considered the reliability and security

issues relating to the use of the Internet for conducting transactions

and concluded that these concerns can be met.64 Indeed, as

Wisconsin Distributors note, the Internet backbone itself is reliable;

most of the difficulties with Internet connections are the result of

problems with the Internet servers of the parties and not the Internet

itself, problems that can also affect pipeline EBBs.65

Pipelines, therefore, must make sure that they test their Internet

systems prior to implementation. Since problems with Internet

communications generally will result from problems with pipeline

servers or with the Internet Service Provider (ISP) used to connect the

pipeline's server to the Internet, GISB and the pipelines should

consider measures to ensure communication reliability, such as mirrored

(duplicate) servers and the use of a back-up ISP. Pipelines also may

keep their EBBs functional for one year after implementation of the

Internet system, solely as a back-up.

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\64\ K N Interstate Group states that no pipelines have

experienced difficulties with the Internet and that stocks and bonds

are traded over the Internet, reflecting the financial industry's

confidence in the security of the Internet.

\65\ The Internet is designed to maintain communication even if

portions of the network go down. What is now termed the Internet

initially was conceived during the cold war as a communication

method to maintain continuing transmission capability in the event

of nuclear war. The concept was to replace the point-to-point

networks, where each site on the network was dependent on the link

before it, with a web network, where information could find its own

path even if a section was destroyed. See e.g., Bruce Sterling,

Short History of the Internet, http://www.forthnet. gr/forthnet/

isoc/short.history.of.internet (Feb. 27, 1997). The more likely

eventuality, therefore, is an individual problem such as a pipeline

or customer's Internet service provider going down, just as in the

current EBB system a pipeline or customer's EBB computer can

malfunction.

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Moving to the Internet is intended to eliminate the idiosyncracies

resulting from the EBB system. Thus, the goal of the regulation would

be defeated if, as Koch suggests, only some functions were moved to the

Internet, since shippers still would be forced to use the EBBs for

other transactions.

(2) Implementation of the regulation. (a) EDI v. interactive web

sites and the future of EBBs. The principal division between the

comments is over how the proposal is to be implemented and what will

happen to EBBs. Several commenters envision a system where the current

interactive EBBs will become interactive web sites.66 This

would mean that shippers would be able to conduct transactions in much

the same way they do today, by having a person type information on the

computer screen. NGSA argues that the standards should include both EDI

and an interactive web site.

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\66\ Comments by Duke Energy Interstate Pipelines (migrate EBBs

to the Internet), NGSA (should require interactive web sites),

Southern (not sacrifice the ease of use of EBBs).

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TransCapacity and Gaslantic contend that requiring pipelines to

provide interactive web sites fails to achieve the necessary

standardization. They contend that except for the few informational

components already required to be posted on web pages,67 all

transactions should be conducted through EDI dataset transactions.

TransCapacity asserts that an EDI solution would be far less expensive

for the pipelines to implement than an interactive web approach. It

maintains that GISB need only create a few more datasets to transfer

all EBB functions to EDI and that implementation of these datasets will

be relatively simple, since the infrastructure for transferring EDI

data already exists. Koch similarly urges that the requirement only

apply to EDI transactions. Requiring a dual EDI and interactive web-

based system, it asserts, is just as inefficient as the current dual

EDI and EBB system and pipelines would have to make substantial

investments to create an interactive web-based system.

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

\67\ 18 CFR 284.10(b)(1)(iv) (1997), Electronic Delivery

Mechanism Related Standards 4.3.6.

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TransCapacity further asserts that if pipelines are able to recover

their interactive web site costs through their cost-of-service, the

less efficient interactive web-based system will receive an unfair

subsidy relative to shippers implementing EDI on their own or by using

third-parties. The shippers using the interactive web site will incur

no incremental charge,68 while those using EDI will incur

costs for implementing this solution. It argues that if pipelines want

to provide an interactive web based or EBB approach they should do so

only if they impose a separate charges for this service. Other

commenters similarly contend that once the Internet solution is

implemented, pipeline recovery of dial-up EBB costs through cost-of-

service should be discontinued.69

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\68\ Shippers not paying demand rates, in effect, would receive

the interactive EBB solution for free.

\69\ Comments by Altra, NGC, NGSA.

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According to GISB's 1998 Annual Plan, it is convening an Internet

transition task force to consider how to effectuate the transition to

full Internet communications. However, according to the minutes of the

GISB Executive Committee Meeting of February 12, 1998, GISB also

appears divided over which model of Internet communication should be

adopted.70

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\70\ See GISB's March 23, 1998 filing (Volume I, Appendix 9).

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To guide the industry's deliberations, the Commission will explain

below the general outline of how the standardized communications policy

should be implemented.

First, pipelines conducting business transactions electronically

must conduct all such transactions using EDI format. The industry, and

the Commission, chose EDI as the standardized method for conducting

transactions with all pipelines using a single uniform methodology.

Many of the efficiency benefits from establishing the infrastructure to

process EDI transactions would be lost unless shippers can use EDI for

conducting all business transactions with the pipelines. Thus, the

pipelines and GISB need to create EDI datasets for all transactions not

yet standardized.

Second, pipelines may, but will not be required to, provide

interactive web sites. Pipelines will be permitted cost-of-service

recovery in subsequent section 4 rate cases for the costs of the

interactive web site only if the pipelines together with GISB create

standards governing the access to, presentation,

[[Page 20085]]

and format (``look and feel'') of the sites. This approach will enable

the pipelines to respond to shippers' needs while still providing a

reasonably standardized method of communication. As NGC notes, many

electric utilities collaborated on developing a common Internet site

that not only provided shippers with a standardized format, but

significantly reduced the utilities' development costs as well. The

pipelines and GISB should give serious consideration to pursuing a

similar course.

Third, the pipelines must assure a level playing field for shippers

using EDI and the interactive web site. Regardless of which system is

used, the shipper must obtain the same service and same information

handling and response priority from the pipeline. All transactions

available on the interactive web site also must be available through

standardized EDI communications.

Fourth, by the June 1, 1999 conversion to Internet communications,

communications using EBBs should cease. Continued use of EBBs past June

1, 1999 would only delay the move to a standardized communication

system. Pipelines, however, may maintain EBBs solely as a back-up

system for a period of one year after the June 1, 1999 date for

implementing Internet communication. Pipelines must remove EBB costs

from cost-of-service in any general section 4 rate case effective after

June 1, 2000. Pipelines also may request recovery of any stranded costs

resulting from discontinuation of EBBs that are incurred during the

test period of a general section 4 rate case that removes EBB costs

from cost-of-service.71 New investments in EBB technology

will not be recoverable.

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\71\ 18 CFR Part 154, subpart D.

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

TransCapacity suggests that permitting pipelines cost-of-service

recovery for standardized interactive web sites provides a subsidy to

the users of the interactive web site. But the Commission does not find

an undue preference. The costs of implementing the EDI standards

currently are included in pipeline cost-of-service even though not all

shippers may use this approach. While, in theory, pipelines could

impose separate charges for EDI and interactive web sites, allocating

costs between the services could prove difficult, given the integrated

nature of communication systems. Thus, including all standardized

approaches in the pipelines' cost-of-service will permit shippers to

choose the communication approach that best fits their business needs.

(b) Third-party networks. In a related issue, several commenters

oppose the proposal that pipelines provide connections to third-party

networks. Enron argues that pipelines should not have to support value-

added-networks (VANs) that charge for connections. The K N Interstate

Group maintains that maintenance of third-party connections is

inconsistent with a commitment to standardization, would be expensive,

and is not needed for security concerns. NGPL asks for clarification of

the requirement, contending that issues need to be resolved such as

standards governing these networks, network obligations for interfacing

with pipelines, and network responsibility for failure to perform all

necessary tasks in a timely manner. TransCapacity and Altra support the

requirement, contending that third-party networks should be

accommodated as long as they are willing to pay all costs of the

interconnection. Altra contends that such connections can be made at

relatively low cost by means of a simple router where both the Internet

and third-party transactions go through the same system with the same

priority.

The Commission will require pipelines to provide third-party

connections as long as the third-party pays a reasonable fee, to be

included in the pipeline's tariff, reflecting the costs to the pipeline

of providing the connection.72 Third-parties would have to

use the same datasets and internet protocols as the EDI services. The

pipelines also must provide the same information handling and response

priority for those using the standard Internet services and third-party

networks. GISB should consider whether any additional standards are

necessary to ensure that third-party and Internet connections receive

equal priority.

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\72\ The Commission similarly has required electric utilities to

provide connections to third-party networks using the same protocols

as the connections to the Internet. Open Access Same-Time

Information System, Order No. 889, 61 FR 21737 (May 10, 1996), FERC

Stats. & Regs. Regulations Preambles [Jan. 1991-June 1996] para.

31,035, at 31,619 (Apr. 24, 1996).

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Pipelines will not have to pay VAN charges, as raised by Enron;

those charges would have to be paid by the third-party. Moreover, there

should be no added costs or burdens on the pipelines since under the

regulation, the third-party networks would have to communicate using

the same internet tools, protocols, and directory services as would be

used for the pipelines' Internet service.

(c) Transactions covered. Enron, while not disagreeing with the

regulation, maintains it is too broad. Enron argues that the use of

Internet communications should be limited to those functions now

conducted over EBBs, and not other electronic transactions, such as

funds transfers. All transactions provided on EBBs are covered by the

regulation. GISB should consider how to handle other electronic

transactions, such as funds transfers, in the most standardized fashion

possible.

(3) Implementation date. The final rule requires pipelines to

implement the requirement to move all communications to the Internet by

June 1, 1999. In the NOPR, the Commission stated that while the June 1,

1999 deadline should give GISB sufficient time to develop any needed

standards, the pipelines should be prepared to move to the Internet by

the June 1, 1999 deadline regardless of whether standards are

developed.

Several commenters argue that implementation should not precede the

development of standards even if implementation is

delayed.73 They contend that pipeline implementation prior

to standardization would be wasteful, since pipelines would have to

revise their systems after the standards are developed.

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\73\ Comments by ANR/CIG, Columbia Gas/Columbia Gulf, Enron,

Koch, NGPL, NGSA, Southern.

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The pipelines 74 and Latitude contend that June 1, 1999

is too aggressive a timetable for implementation. In particular, the

pipelines object to the deadline because such an effort would drain

resources from pipeline efforts to ensure that their computer systems

are not subject to the Year 2000 problem (the use of only two digits,

e.g. 98, to represent the year, causing problems if 00 is interpreted

as 1900 rather than 2000). Duke Energy Interstate Pipelines contend

that the June 1, 1999 deadline should require pipelines to do nothing

more than move their EBBs to the Internet. Any further standardization,

it recommends, should take place after 2000.

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\74\ Comments by CNG, Columbia Gas/Columbia Gulf, Duke Energy

Interstate Pipelines, INGAA, Latitude, NGPL, Southern, WGP.

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

NGC and TransCapacity argue that the June 1, 1999 deadline is

achievable and should not be changed. TransCapacity maintains the

pipelines are using the Year 2000 issue as a pretext for delay and

there is no reason why pipelines could not implement additional EDI

standards by June 1, 1999. Other commenters argue the Commission should

require the pipelines to begin testing their Internet solutions at

least three months before the deadline and that GISB should be given an

interim

[[Page 20086]]

deadline of June 1, 1998 to develop standards.75

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\75\ Comments by NGC, NGSA, ProEnergy, SoCal Gas/SDG&E.

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The Commission agrees that the development of standards for moving

to the Internet is necessary and is encouraged by GISB's development of

task forces to begin this process. The June 1, 1999 implementation

date, however, should provide the industry with sufficient time to

develop appropriate standards prior to implementation and also permit

inauguration of the new system during the summer months, when pipelines

are not running at peak. With the wide-spread availability of

commercial Internet solutions, it does not appear developing a

standardized Internet communication system should represent a major

technological challenge. Maintaining the June 1, 1999 deadline will

give all parties an incentive to reach agreement on standards and

proceed with implementation expeditiously.

While the general issue of computer readiness for the Year 2000 has

received much publicity, the pipelines have not shown that this problem

is of such magnitude for them that implementation of the regulation

should be delayed across the board. The pipelines refer generally to

the problem, but do not provide any details about the scope of their

difficulties, such as by showing how many pipelines even have a

problem, how many systems are affected, or the extent of the resources

needed to address the problem. Moreover, the regulation adopted here

requires only that pipelines conduct transactions using EDI, and the

pipelines do not contend that implementing that requirement by June 1,

1999 creates a technological problem.

As discussed earlier, pipelines may not continue to use their EBBs

past the June 1, 1999 implementation deadline.76 For those

pipelines that choose to replace their EBBs with interactive web sites,

the ready availability of commercial Internet solutions suggests the

development of an interactive web site is not such a daunting

technological feat that it would unduly interfere with correcting a

particular pipeline's problem in accommodating the transition to the

Year 2000. In addition, as discussed earlier, pipelines can save

significant monetary and personnel resources as well as provide a more

standardized product if, instead of each pipeline developing a

proprietary solution, they collaborated on development of a

standardized Internet communication system, as was done in the electric

industry.

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\76\ EBBs may be maintained only as back-up systems.

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c. Regulations for posting information on web sites. In Order No.

587-C, the Commission adopted GISB standard 4.3.6 requiring pipelines

to post information relating to pipeline tariffs, affiliate

transactions, operationally available capacity, system notices, and an

Index of Customers for viewing in HTML format on pipeline Internet web

sites. The Commission is incorporating by reference standards 4.3.5 and

4.3.16 of GISB's Version 1.2, which will require that pipelines provide

for downloads of the posted documents either in hyper-text mark-up

language (HTML) or rich-text-format (RTF). Additionally, in

Sec. 284.10(c)(3)(ii), the Commission is adopting regulations requiring

pipelines to adhere to the following standards with respect to the

posted information: the documents must be accessible to the public over

the public Internet using commercially available web browsers, without

imposition of a password or other access requirement; users must be

able to search an entire document online for selected words and users

must be able to copy selected portions of the documents; and documents

on the Web site should be directly downloadable without the need for

users to first view the documents on the web site.

ECT contends more standards are necessary, for example, to

establish common methods of doing text searches. It also contends that

HTML should not be used for downloads as provided in GISB standard

4.3.16 because the printed version of HTML documents may lose

formatting features and because of the difficulty in printing entire

HTML documents if the documents are broken into separate linked

chapters or pages. It recommends that all downloads be provided solely

in RTF format. Altra contends that there should be a common URL or

Internet name for all standardized documents. Latitude contends the

Commission needs to protect against web sites that are specifically

tailored to a particular proprietary Internet browser. SGPC argues

pipelines should be able to rely upon the most recent software.

The Commission will adopt the proposed regulations as providing a

basic foundation for posting upon which GISB can improve. GISB has

established its own ``Look and Feel'' task force to develop a

consistent and uniform presentation for information posted on pipeline

web sites.

With respect to Latitude's concern, Sec. 284.10(c)(3)(ii)(A)

provides that web sites must be viewable using commercially available

browsers, which protects against a pipeline making its site accessible

to only one browser. In response to SGPC's comment about current

software versions, standards 4.3.6 and 4.3.16 require that all

information be posted in HTML and downloadable in HTML or RTF format.

Therefore, pipelines should not be requiring the use of other software

to view information on or download information from web sites. While

pipelines should accommodate reasonably current versions of web

browsers, they should not be required to accommodate browsers that have

been out-of-date for several years. GISB should consider the

development of standards reflecting the level of HTML coding that

should be supported. At this point, the Commission sees no reason to

depart from the industry consensus permitting pipelines to download

documents in HTML, as ECT suggests. That, along with other

standardization issues, such as the use of a common URL designation for

documents, should be examined by GISB as it continues its

deliberations.

d. Regulations requiring that pipelines provide a cross-reference

table for numeric designations. In many places in the standardized

datasets, GISB has used a common code to represent the shipper's name.

GISB has chosen to use the numeric designation provided by Dun &

Bradstreet (DUNS) as the means of identifying shippers. But there is no

requirement in the standards to provide a table cross-referencing the

numeric designation with the shipper's name. In Sec. 284.10(c)(3)(iii),

the Commission, therefore, is requiring pipelines to provide a table

cross-referencing any numeric designation with the applicable name or

other information being represented.

No party objects to this regulation. NGC asks the Commission to

clarify that the numeric representation is for the EDI datasets, used

for computer-to-computer interaction only. It maintains that numeric

designations are not useful for information provided on web sites for

human to computer interaction. NGSA maintains that a standardized

cross-reference table needs to be developed so that shippers can use

the format across all pipelines.

The regulation requiring that pipelines provide a cross-reference

table when using numeric designations is needed to ensure that the

Commission and shippers can identify parties to a transaction. For

instance, without a cross-reference table, neither the Commission nor

other shippers can identify what shipper is receiving capacity on a

capacity release

[[Page 20087]]

transaction, information which Commission regulations require to be

publicly available. When the Commission previously required pipelines

to use a common code to identify pipeline transaction points, it

similarly required the pipelines to provide a cross-reference table at

a cost not to exceed the expenses of shipping and

handling.77

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\77\ See Standards For Electronic Bulletin Boards Required Under

Part 284 Of The Commission's Regulations, Order No. 563-A, 59 FR

23624 (May 9, 1994), III FERC Stats. & Regs. Regulations Preambles

para. 30,994, at 31,044-45 (May 2, 1994).

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

The GISB standards require the use of numeric representations only

for EDI, computer-to-computer communication. The Commission agrees with

NGC that numeric designations should not be used for information posted

on web sites for computer-to-human interaction. The Commission also

agrees with NGSA that GISB either should develop a single, central

cross-reference table or else establish standards governing the cross-

reference tables provided by the pipelines.

Altra contends that, rather than using DUNS numbers, GISB should

develop its own cross-reference table. Altra maintains that Dun &

Bradstreet will not agree to permit pipelines to provide a cross-

reference table and that, even if it did, the DUNS number is not a

precise enough designation, because the number is not distinctly

assignable to a particular party.

The Commission will continue to accept the industry consensus to

use DUNS numbers. However, if DUNS will not permit the development of a

cross-reference table, the industry either needs to develop its own

cross-reference table or cease using numeric designations and return to

using names.

e. Requirement that information be the same regardless of the

format in which it is provided. Under the Commission regulations

adopted here, pipeline customers can (or will be able to) obtain

information and transact business using a number of formats, EBBs

(until implementation of the Internet communication methods), EDI

datasets, or interactive web sites. In Sec. 284.10(c)(3)(iv), the

Commission is adopting a regulation requiring that the informational

content must be the same regardless of the format in which it is

provided.

Altra strongly supports this regulation to ensure that all

functions achievable on one format can be achieved through the other

formats, and no commenter has opposed it. Given the different methods

that pipelines can use to provide information, it is crucial that the

content be the same regardless of the format. For instance, information

about operationally available capacity is available currently on EBBs,

pipeline web sites, and EDI downloads. The information obtained using

each of these methods needs to be the same.

f. Regulation regarding the retention period for electronic

information. In the NOPR, the Commission had proposed to expand the

current three-year requirement for retention of electronic EBB data to

a five year period for retention of all electronically conducted

transactions. The pipelines oppose the extension as being unwarranted,

unjustified, and burdensome.78 ANR/CIG point out that they

conduct more than 6,000 nominations and confirmations each day and

that, on an industry-wide basis, this would amount to tens of thousands

of nominations and confirmations, figures which do not include the

requirement to maintain records of other transactions. ANR/CIG suggest

adoption of the GISB two-year requirement for maintenance of electronic

data.

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\78\ Comments by ANR/CIG, Columbia Gas/Columbia Gulf, Enron (5

years unwarranted), INGAA, K N Interstate Group, Koch, NGPL (no

justification), NGT/MRT.

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

MGE, NGSA, and ProEnergy support the five year requirement.

TransCapacity contends there is no need to retain every electronic

transaction record for five years. It suggests the pipelines be

required to maintain only summary electronic records, such as the end

of day scheduled quantities dataset which summarizes the nomination

activity for the day.

After reviewing its need for information, the Commission has

determined not to change its current three year retention period for

electronic information. The current requirement to retain electronic

information in section 284.10(a) applies only to information maintained

on EBBs. This requirement, therefore, needs to be updated to encompass

all information and transactions conducted electronically regardless of

form, such as EDI or other Internet-based communication. In section

284.10(c)(3)(v), the Commission is adopting a regulation requiring that

pipelines retain for a period of three years records of all information

displayed and transactions conducted electronically and be able to

recover and regenerate all such electronic information and

documents.79

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\79\ GISB standard 4.3.4 provides for two year retention of

transactional data, but states that this requirement does not

otherwise modify statutory, regulatory, or contractual record

retention requirements. Because the Commission is continuing its

current three year requirement for retention of electronic

information, it will not adopt GISB standard 4.3.4.

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

Koch maintains that the data archived under this section should not

be maintained on-line, but should be provided on disk or through other

electronic means. Section 284.10(c)(3)(v) requires pipelines to make

the information available in electronic form for a reasonable fee.

Pipelines, therefore, need not maintain the information on line, but

may make archived information available on disk or CD ROM.

g. Regulation requiring Internet notice for operational flow orders

and other critical notices. In Sec. 284.10(c)(3)(vi), the Commission is

adopting a regulation requiring pipelines to provide notice of

operational flow orders and other critical notices by posting the

notice on their web sites and by notifying the affected customers

directly either by Internet E-mail or notification to the customer's

URL or Internet address. The Commission will address below the comments

on the regulation as well as issues concerning the method of

implementing the requirement.

(1) The use of Internet notification. Three commenters oppose the

requirement to use Internet notification, contending that notice should

be made by telephone or facsimile, at the customer's

choice.80 Their concern is that customers may not be

available to check the Internet or read the notice.

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

\80\ Comments by Florida Cities (costs too much for shippers to

monitor Internet connections on a 24 hour basis), MGE (until

Internet is tested, facsimile and telephone should be used), NGSA

(mode of notification at shipper's choice).

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

The Commission concludes that, on balance, posting on the web site

together with Internet E-mail or direct notice to an Internet address

effects a reasonable balance between the shippers' need for notice and

the pipelines' need to create an efficient automated system for

communicating with all of their shippers. By permitting automated

notice to all shippers simultaneously, Internet notification speeds up

the notification process and removes any potential for disparate

treatment between shippers as to the time at which they receive

notice.81 The commenters preferred solution, notification by

telephone or fax, is not necessarily any more reliable than Internet

notification since telephones or fax machines also may not be monitored

and there would be no record that a notice was sent by the pipeline.

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

\81\ For example, one pipeline representative at the technical

conference stated that even calling in all available personnel,

about 24 people, it took them six hours to contact all affected

parties using telephonic communication. Transcript of December 13,

1996 technical conference at 37.

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

Even for after hours notice, Internet postings provide shippers

with a

[[Page 20088]]

significant amount of flexibility. Employees can check for critical

notices on the Internet at home. In addition, the requirement for

direct notice to E-mail and Internet addresses will enable those

shippers who want telephonic or pager notification to receive such

notice by purchasing software that automatically triggers telephones or

pagers when an Internet message is received.

(2) Implementation after development of standards. ECT, NGC, and

NGSA urge that prior to implementation of the Internet notice

requirement, standardization of definitions and format is needed to

differentiate types of notices so the notification software can

properly determine whether to trigger the phone or pager.

The Commission agrees that standards are needed for this

notification process to operate efficiently. In particular, a dataset

will be needed for those customers relying upon EDI communication with

the pipelines. Therefore, the Commission will defer implementation of

this requirement until the necessary standards are developed by GISB.

According to GISB's 1998 Annual Plan, no schedule has been set for

development of standards for OFO notification. However, during the

December 12-13, 1996 technical conference, members of the GISB Future

Technology Task Force stated that, if needed, such standards could be

developed and others pointed out that a similar dataset already exists

for general, as opposed to customer specific, notices.82

Modification of this dataset should not prove particularly difficult

and GISB should be able to add this to its agenda for 1998. The

Commission will expect GISB and others in the industry to propose such

standards by December 31, 1998. Until that time, pipelines should

continue to provide notice according to the provisions of their

tariffs.

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\82\ Transcript of December 13, technical conference, at 32-31.

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

(3) Penalties and other implementation details. NGC, NGSA, and

Nicor Gas argue that penalties should not be imposed for E-mail

failures or if actual notice is not received. SoCal Gas/SDG&E contend

that the pipelines should seek to notify the shipper using an

alternative method if the pipeline is notified that the E-Mail was not

delivered. On the other hand, INGAA, K N Interstate Group, and NGPL

contend that E-mail should be the shippers' responsibility and not the

pipelines.

The Commission finds no reason for pipelines to waive penalties

except when the pipelines' notification system fails. Shippers are

responsible for maintaining a current E-Mail or Internet address, and

they should bear responsibility for failures by their chosen Internet

provider. Pipelines, however, have little reason to leave shippers

without notice in critical operational situations, since that could

lead to adverse consequences for the system. Thus, the Commission fully

expects the pipelines to try alternative methods in the event they have

specific notice that electronic notice has not been received.

INGAA maintains the pipelines should be responsible for notifying

only one E-Mail address. The Commission will not impose such an

absolute requirement. Given the ease of automatic notification,

shippers should be able to choose a reasonable number of addresses for

notification, for example, if they want a different notification

address for after-business-hours notification.

Columbia Gas/Columbia Gulf argue that pipelines should be able to

conform their current procedures to the regulation without concern

about shippers' arguments that a change constitutes a degradation of

service. Florida Cities, however, maintains that the new regulation

should not overturn a settlement on this issue on Florida Gas.

As a general matter, pipelines should be able to revise their

notification procedures to conform to the regulation. However, while

pipelines must comply with the regulation, they may also agree with

their shippers to provide additional methods of notification. If a

pipeline chooses to make a filing under section 4 of Natural Gas Act to

eliminate or revise their current procedures, the Commission will be

able to consider specific circumstances, such as settlements or rate

issues, bearing upon the proposed change.83

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\83\ A filing to change current procedures cannot be made as

part of a filing to comply with the requirements of this rule. Any

filing to change current procedures must be made as a separate

section 4 filing.

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C. Issues on Which the Commission Determined Not to Adopt Requested

Regulations

In the NOPR, the Commission did not propose regulations as

requested by some industry members in other areas in which GISB could

not reach consensus--title transfer tracking, cross-contract ranking,

multi-tiered allocations, fuel reimbursement, and penalty

determinations. The Commission, however, did provide the industry with

guidance as to its general policies in these areas to help facilitate

GISB's consideration of standards in these areas.

1. Title Transfer Tracking

Title transfer tracking refers to the accounting for transfers of

title to gas at a nomination point when no transportation is involved.

Under Commission policy, shippers must have title to gas in order to

transport the gas on a pipeline. Pipelines, therefore, have always had

to perform some title transfer tracking to ensure that shippers have

title to gas.84

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\84\ For example, if shipper A on an upstream pipeline

transports gas to an interconnect with a downstream pipeline and

transfers the gas to shipper B on the downstream pipeline, the

pipelines would have to match those transactions as part of the

process of confirming the nominations.

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

However, with unbundling and the development of a more fluid gas

market, gas purchase and sale transactions at nomination points are

increasing dramatically. Thus, at an interconnect point, there may be

multiple transfers of title before the gas is nominated on the

downstream pipeline. In order for pipelines to confirm the gas

nominated on the upstream and downstream pipelines, they need to know

which upstream shipper(s) are delivering the gas to the shipper on the

downstream pipeline.

GISB had begun the process of trying to create standards for title

transfer tracking, but the industry segments differed over whether the

pipelines should be required to establish a computerized title transfer

tracking service. In the NOPR, the Commission stated that its policy

was not to require pipelines to establish a service to account for the

purchase and sale of gas between shippers independent of

transportation. The Commission found it should be the shipper's

responsibility to furnish sufficient information to the pipeline to

establish its title to the gas and its right to nominate on the

pipeline. The Commission noted that third-parties are now providing

title transfer tracking services and concluded that pipelines must be

willing to accept title transfer information from these third parties.

The Commission requested GISB to submit standards, by March 31, 1998,

governing pipeline obligations to accept confirmations by third-party

title transfer trackers.

The Commission will address below comments on the Commission's

determination not to propose a regulation requiring pipelines to

provide title transfer tracking service and on several issues relating

to the pipelines' processing of information

[[Page 20089]]

from third-party title transfer tracking service providers.

a. Pipeline obligations to provide title transfer tracking

services. The pipelines and LDCs generally agree with the Commission's

decision not to require pipelines to provide a title transfer tracking

service.85 NGC, NGSA, and ProEnergy oppose the decision.

They contend that due to the nature of title transfer tracking service,

it can be performed by only one party and that the pipelines are the

best positioned to perform the service. They contend that third-parties

have not emerged to provide this service.

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

\85\ Comments by El Paso, Enron, INGAA, Koch, NGPL, Nicor Gas,

Peoples/North Shore, SoCal Gas/SDG&E, TransCapacity.

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

NGC contends that having multiple parties provide title transfer

tracking is inefficient, because the pipeline would still have to track

title transfers running between the trackers. It suggests that the

Commission's approach may open the door to a plethora of title transfer

trackers each of which the pipeline would have to support. NGSA, while

recognizing that title transfer tracking is not an integral requirement

of natural gas transportation, contends the pipelines are the only

parties capable of providing the service. It states GISB is considering

an option under which pipelines would provide title transfer tracking

services and asks the Commission to defer a final ruling on this issue

until GISB has finished its considerations.

Altra agrees that only one party can efficiently perform the

service, but it argues that, rather than having the pipelines perform

the service, each pipeline should be required to choose the third-party

provider for its system. TransCapacity, on the other hand, contends

that monopoly provision of title transfer tracking service is not

necessary. TransCapacity argues that pipelines can implement several

provisions in their tariffs to ensure that they will deal with only

bona fide title transfer tracking services.

GISB should not necessarily short-circuit on-going discussions over

options for conducting title transfer tracking. If GISB reaches

consensus that pipelines should be required to provide this service,

the Commission will give that agreement great weight in later

considerations of the issue.

Absent a consensus position from GISB, however, the Commission

finds insufficient justification for proposing a regulation requiring

pipelines to perform title transfer tracking services. It should be the

shipper's responsibility to furnish the transporter with sufficient

information to establish its title to gas and its right to nominate

that gas on the pipeline. NGSA itself concedes that title transfer

tracking is not an integral part of providing transportation of natural

gas. While pipelines may wish to offer title transfer tracking as an

added service option to their shippers, the Commission is not convinced

at this juncture that the pipelines are the only possible or the best

provider of the service and, therefore, should be required to provide

it.

Rather than mandating that pipelines be the sole provider of title

transfer tracking service, the Commission is opening the market to the

force of competition from third-party service providers. The

competition between providers, including those pipelines that wish to

compete, should provide the proper incentive for firms to provide the

level of title transfer tracking services that customers desire and for

which they are willing to pay.86

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\86\ When pipelines are the sole provider of title transfer

tracking, disputes have arisen as to the level of the service which

should be provided. See El Paso Natural Gas Company, 81 FERC para.

61,174 (1997) (complaints about the extent of title transfer

activity the pipeline should be required to process).

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It is incorrect to assume, as do the commenters, that the absence

of third-party title transfer tracking services today means such

services will not develop in the future. Hub and storage operators

currently provide title transfer tracking services, and the pipelines

accept their confirmations.87 While independent third party

title transfer trackers do not exist currently, that is not surprising

since, as TransCapacity notes, until the NOPR, pipelines did not

recognize an obligation to support confirmations from independent

third-party title transfer tracking services. The provision of title

transfer tracking services by storage and hub operators suggests that a

market for this service exists and that parties other than pipelines

can provide the service. Once GISB develops the standards and pipelines

are required to support third-party title transfer trackers, firms will

have incentives to enter this market, particularly if the demand for

the service is as great as the commenters contend.

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

\87\See Moss Bluff Hub Partners, L.P., 80 FERC para. 61,181, at

61,475 (1997).

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

It also is not clear that pipelines must provide this service

because a monopoly provider of title transfer tracking services is

needed at each point or on each pipeline. The competitive market may

develop naturally so that only one or a few title transfer tracking

service exists at each point. The pipelines can propose tariff

provisions, if it becomes necessary, to protect against NGC's concern

that every shipper will designate itself as a title transfer tracking

service provider.88 Moreover, even if multiple title

transfer trackers do prove to be inefficient, there are competitive

solutions which would not require the Commission to mandate that

pipelines provide the service. Shippers, either alone or together with

pipelines, could solicit competitive bids for title transfer tracking

services on each pipeline and choose the firm offering the best

bid.89

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\88\ For instance, TransCapacity notes pipelines could require

that title transfer tracking services provide non-discriminatory

service to anyone requesting the service and that they adhere to the

GISB standards.

\89\ Pipelines could even propose tariff provisions setting out

the requirements for submitting bids to provide the service.

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In the NOPR, the Commission requested that GISB and others in the

industry submit, by March 31, 1998, business practices and electronic

communication standards for dealing with title transfer tracking. A

consensus of the industry supports the GISB 1998 Annual Plan which

provides for the development of such standards by the fourth quarter of

1998, and the Commission will therefore expect the submission of

standards by December 31, 1998.

b. Timing of pipeline processing of title transfer tracking

information. In the NOPR, the Commission stated that pipelines should

accept title transfer tracking information as part of its process for

confirming nominations. The pipelines point out that the GISB task

force has not completed work on title transfer tracking standards, and

the pipelines are not yet convinced title transfer tracking can be

accomplished through the confirmation process.90 Their

principal concern is that, if title transfer tracking can be performed

by any firm, multiple title transfer tracking services may develop and

that processing all those transactions during the confirmation process

would be burdensome. Most pipelines suggest title transfer tracking

should be part of the nomination process.91

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\90\ Comments by Columbia Gas/Columbia Gulf, Enron, INGAA, NGPL,

Williston Basin.

\91\ Comments by Enron, NGPL.

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

On the other hand, Columbia Gas/Columbia Gulf and TransCapacity

maintain that title transfer tracking should be a part of the

confirmation, rather than the nomination process. They also agree that

title transfer tracking should take place earlier in the confirmation

cycle than the 3:30 p.m. confirmation from point operators.

While GISB should seek to work out the details for conducting title

transfer

[[Page 20090]]

tracking, the Commission does not want the timing of title transfer

tracking processing to inhibit standards development. To forestall

possible later disputes over this issue, the Commission generally

agrees with Columbia Gas/Columbia Gulf and TransCapacity that title

transfer tracking properly should be part of the confirmation process.

First, the purpose of title transfer tracking is to confirm that gas

nominated by a shipper will be at the nominated point. Physical point

operators provide title transfer tracking services and their

information generally is processed during the confirmation process. To

ensure non-discriminatory treatment, the same rules should apply to

independent third-party operators. Second, placing title transfer

tracking in the nomination cycle could reduce market liquidity and

comparability between physical and title transfer transactions. For

instance, a shipper may arrange for physical flows up until the 11:30

a.m. nomination deadline. But those who wish to arrange for paper

transactions would have to make earlier arrangements in order to permit

the title transfer tracker sufficient time to process the paper

transactions in time to meet the 11:30 a.m. deadline. Third, there is

no reason now to suspect that multiple independent title transfer

tracking services will arise or that the pipelines will be unable to

develop reasonable measures to ensure that title transfer tracking does

not unduly burden the confirmation process.

The compromise solution proposed by Columbia Gas/Columbia Gulf and

TransCapacity would seem to satisfy the need to include title transfer

tracking as part of the confirmation process while at the same time

providing pipelines with time to process the title transfer tracking

information and coordinate that information with the physical point

operators. GISB should further explore this potential solution in its

deliberations.

c. Other issues. In the NOPR, the Commission stated that pipelines

could, if they chose, provide a title transfer tracking service and

charge a fee for the service. TransCapacity requests clarification that

such fees cannot be charged for processing title transfer tracking

information from third-party service providers. The Commission agrees

with TransCapacity. Pipelines may not charge a fee for processing

nomination or confirmation information from point operators, other

pipelines, or third-party title transfer tracking service providers.

Pipelines may charge a separate fee only for tracking title transfers

between parties that are independent of transportation.

NGC maintains that pipelines providing a title transfer tracking

service should not be able to charge a separate fee, but should include

the costs in their reservation charges. The Commission's policy has

been to permit pipelines to charge a separate fee for title transfer

tracking.92 Charging a separate fee ensures that those using

the service are not subsidized by the firm shippers paying reservation

charges and can help to ensure that shippers will use the service only

to the point at which the shippers' value from the service equals or

exceeds the price charged.

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\92\ Trunkline Gas Company, 75 FERC para. 61,003 (1996)

(approving a separate flat charge for title tracking service). But

see Williams Natural Gas Company, 79 FERC para. 61,096 (1997)

(permitting a separate fee, but rejecting a volumetric fee unrelated

to costs of providing the service).

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ECT contends that, if pipelines do provide a title transfer

tracking service, they should be able to require that all shippers

submit their title transfer tracking information to the pipeline.

Shippers should not have to use a pipeline's title transfer tracking

service. If title transfer tracking is to develop as a competitive

service, shippers should be able to choose whether to use the

pipelines' title transfer tracking service or one provided by a third-

party. Pipelines providing their own title transfer tracking service

should enjoy no special advantages over third-party providers and must

process all title transfer tracking information in a comparable manner.

Koch maintains that pipelines should not bear liability for title

transfer tracking information provided by third-parties. The Commission

finds no reason to distinguish between pipeline responsibilities to

process title transfer tracking information and their responsibilities

and liabilities with respect to processing a confirmation from a point

operator or other connecting party.

K N Interstate Group maintains that pipelines should be able to

require agency agreements with title transfer tracking service

providers and shippers. As stated above, pipelines should be able to

impose reasonable tariff requirements for dealing with third-party

title transfer tracking services. GISB also can consider standards

delineating the type of agency or other business agreements that are

needed to facilitate the provision of title transfer tracking service.

2. Cross-contract ranking. Gas package ranking refers to the

designation by a shipper of the amount of gas that will be allocated to

particular markets or customers in the event the shipper's full

nomination is not accepted. The standards adopted by the Commission

already require pipelines to honor shipper ``rankings when making

reductions during the scheduling process when this does not conflict

with tariff-based rules.'' 93 For example, if a shipper

nominates 1,000 MMBtus under one contract for several markets, it can

specify how to divide gas between markets if the full 1,000 MMBtus is

not confirmed.

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\93\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.3.23.

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Shippers had complained that, under this standard, pipelines were

not permitting them to rank gas supplies across contracts. In the NOPR,

the Commission concluded that pipelines should permit cross-contract

ranking so long as it does not affect the operational integrity of the

pipeline's system. The Commission asked GISB and the industry to submit

any additional standards necessary to facilitate cross-contract ranking

by March 31, 1998.

Shippers and NGPL support cross-contract ranking.94

TransCapacity, while supporting the requirement, suggests that

implementation may require some pipelines that handle nominations on a

contract basis to change systems so that they become point based. It

suggests that either the Commission provide further guidance on this

point or allow GISB to try to develop a way for pipelines to implement

the requirement without changing their systems. Most pipelines, with

the exception of NGPL, oppose cross-contract ranking, contending that

it adds too much complexity to the nominations process.95

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\94\ Comments by Altra, MGE, NGC, NGSA, Nicor Gas, PG&E,

Piedmont, ProEnergy, SoCal Gas/SDG&E, TransCapacity.

\95\ Comments by K N Interstate Group (adds too much complexity

on web based systems), NGT/MRT (make pipeline allocations

unmanageable), SGPC (affects transportation priority rules and adds

complexity), Viking (requires computer system upgrades and dataset

revisions), Williston Basin (cause too many problems), WGP (should

only be permitted between contracts or family of contracts of like

priority and rate).

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The Commission's policy is to provide shippers with the tools to

enable them most effectively to manage their capacity. Shippers today

may be shipping under a variety of contracts, including their own firm

and interruptible contracts as well as capacity release contracts which

have their own specific terms and conditions. Some pipelines permit

cross-contract ranking or have structured their pooling to permit such

ranking. The ability to allocate gas among these contracts gives

shippers additional flexibility. As with title transfer tracking, a

consensus of the industry supports the GISB 1998

[[Page 20091]]

Annual Plan in which cross-contract ranking standards will be developed

by the fourth quarter of 1998, and the Commission, therefore, will

expect the submission of such standards by GISB and others by December

31, 1998.

Several shippers and pipelines raise concerns about one aspect of

the NOPR dealing with whether shipper rankings across contracts should

apply when transportation constraints require pipelines to restrict

transportation based on tariff-based service priorities.96

For example, if a shipper has nominated 100 units of gas under an

interruptible contract and a 100 units under a firm contract, and the

pipeline can schedule only the 100 units of firm transportation, which

has a higher transportation priority, should the shipper be able to

allocate the 100 units to the interruptible contract.97

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\96\ Comments by ECT, El Paso, Enron, NGPL, NGC, TransCapacity.

\97\ Even if the shipper in the example allocated the 100 units

to the interruptible contract, it still could not receive more than

the 100 units represented by its firm capacity contract. If the

shipper had nominated no firm service, it would be unable to

allocate any gas to the interruptible contract.

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Those opposing cross-contract ranking in this situation contend

that permitting ranking in this case goes beyond what shippers were

seeking in GISB and would improperly override scheduling priorities in

pipeline tariffs. While the commenters recognize that permitting

ranking would not completely obviate contractual priorities, they

maintain it fudges the distinctions and priorities between contract

types. NGC, one of the original and strongest proponents of cross-

contract ranking, argues that ranking should not override

transportation priorities. It argues that permitting such ranking could

lead to gaming in which a shipper gains priority to a constrained point

under a firm contract and then changes to an interruptible contract,

thereby freeing up its firm capacity to gain access to another point,

perhaps using an intra-day nomination. El Paso contends that permitting

ranking to take precedence over scheduling allocations would cause

confusion over which service should be billed as well as create

confusion and problems during the confirmation process. On the other

side, Altra, although its comment is not altogether clear, appears to

contend that even when a cut occurs on the market side of the equation,

shippers should be able to rank all contracts flowing into the market

regardless of the contractual priority of the contract.

GISB should strive to develop mechanisms that provide shippers with

the maximum flexibility to rank contracts for both supply and market

cuts. GISB, however, should strive to develop a method for handling

ranking that will not compromise the transportation priorities

associated with firm and interruptible contracts.

3. Multi-Tiered Allocations

A pre-determined allocation is a set of instructions by owners of

gas as to how gas should be allocated amongst them when the actual

volumes do not match the scheduled volumes. The standards currently

require pipelines to accept one tier of allocations from the upstream

or downstream custody transfer party.98 Some shippers

requested the Commission to issue a regulation requiring pipelines to

support multi-tiered allocations from all owners of gas, including the

wellhead operator and each producer owner.

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\98\ 18 CFR 284.10(b)(1)(ii) (1997), Flowing Gas Related

Standards 2.3.19.

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In the NOPR, the Commission found, as it did for title transfer

tracking, that there was no basis for requiring pipelines to maintain

the accounting for allocations occurring at the wellhead or at

interconnections not affecting the pipeline. Since GISB had recognized

that tracking multi-tiered allocations was another aspect of title

transfer tracking, the Commission suggested that GISB work on standards

to permit third-parties to track multi-tiered allocations.

Pipelines generally support the Commission's

determination.99 Columbia Gas/Columbia Gulf agree that

pipelines should not be required to provide multi-tiered allocations,

but they point out the current standards are not usable for pipelines

or others who may wish to track multi-tiered allocations. They urge the

Commission to ensure that GISB follow through and develop datasets

appropriate for tracking multi-tiered allocations.

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\99\ Comments by Columbia Gas/Columbia Gulf, K N Interstate

Group, NGPl, Williston Basin.

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NGC, NGSA, and ProEnergy contend multi-tiered allocations are

needed for producers to accurately account for their transactions.

Pipelines should be required to perform the service, they assert,

because pipelines have traditionally been the clearinghouse for all

information related to gas transactions and are in a unique position to

track multi-tiered allocations. TransCapacity argues that GISB

currently is working on multi-tiered allocations and may have devised a

solution in which all allocations can be made through a single or a

series of levels.

The current regulations give those parties connecting with a

pipeline the right to determine how gas is to be allocated at the

interconnection with the pipeline system. The Commission fails to see

why this right needs to be extended so that pipelines become

responsible for maintaining the accounting records for allocations

occurring at the wellhead or at interconnections not affecting the

pipeline. The tracking of multi-tiered allocations should be no

different than the tracking of title transfers, and third-parties

tracking title transfers should also be able to account for allocations

back to the wellhead. GISB's Annual Plan recognizes the interrelation

between standards for title transfer tracking and multi-tiered

allocations and targets the development of standards for both by the

fourth quarter of 1998.

NGPL requests clarification about whether pipelines can charge a

separate fee for tracking multi-tiered allocations. Pipelines choosing

to provide a service tracking multi-tiered allocations may charge a

separate fee, as they are permitted to do for title transfer tracking.

Pipelines, however, cannot charge a separate fee for processing the

single tier of allocations required by the current regulations.

4. Paper Pooling

Pooling refers to the aggregation of gas from multiple physical or

logical points to a single physical or logical point.100 The

current standards provide shippers with the ability to both deliver gas

from receipt points into at least one pool and receive quantities at a

delivery point from at least one pool.101 Some pipelines

provide paper pools while others use physical pools in which shippers

have to pay transportation charges to move gas into the pools. GISB

could not reach a consensus on whether paper pooling should be

mandated, and shippers asked the Commission for a regulation requiring

that all pipelines establish paper pools into which shippers could

deliver gas without any additional transportation charge. In the NOPR,

the Commission declined to require pipelines to provide paper pooling,

finding that those advocating paper pools had not provided a sufficient

rationale for requiring the use of paper pools in all situations.

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\100\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1.2.3.

\101\ 18 CFR 284.10(b)(1)(i) (1997), Nominations Related

Standards 1

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