This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

70077

Vol. 69, No. 231

Thursday, December 2, 2004

1See Regulations of Natural Gas Pipelines After 

Partial Wellhead Decontrol, FERC Stats. & Regs., 

Regulations Preambles (1982–1985) ¶ 30,665 at 

31,543–45 (1985).

2 18 CFR 284.10 (2004).

3 824 F.2d 981, 1010–12 (D.C. Cir. 1987).

4 Id. at 1011.

5 Id. at 1010–1012.

6 Id. at 1012.

7 Id.

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Chapter I 

[Docket Nos. RM05–2–000, RM97–7–000] 

Policy for Selective Discounting by 

Natural Gas Pipelines 

November 22, 2004.

AGENCY: Federal Energy Regulatory 

Commission, DOE.

ACTION: Notice of inquiry.

SUMMARY: The Federal Energy 

Regulatory Commission is seeking 

comments on its policy for selective 

discounting by natural gas pipelines. 

Specifically, the Commission is asking 

parties to submit comments and 

respond to specific inquiries regarding 

whether the Commission’s practice of 

permitting pipelines to adjust their 

ratemaking throughput downward in 

rate cases to reflect discounts given by 

pipelines for competitive reasons is 

appropriate when the discount is given 

to meet competition from another 

natural gas pipeline.

DATES: Comments are due January 31, 

2005.

ADDRESSES: Comments may be filed 

electronically via the eFiling link on the 

Commission’s Web site at http://

www.ferc.gov. Commenters unable to 

file comments electronically must send 

an original and 14 copies of their 

comments to: Federal Energy Regulatory 

Commission, Office of the Secretary, 

888 First Street, NE., Washington, DC 

20426. Refer to the Comment 

Procedures section of the preamble for 

additional information on how to file 

comments.

FOR FURTHER INFORMATION CONTACT:

Ingrid M. Olson, Office of the General 

Counsel, 888 First Street, NE., 

Washington, DC 20426, (202) 502–8406.

SUPPLEMENTARY INFORMATION:

1. In this Notice of Inquiry, the 

Commission is seeking comments on its 

policy regarding selective discounting 

by natural gas pipeline companies. 

Specifically, the Commission is asking 

parties to submit comments and 

respond to the specific inquiries set 

forth below regarding whether the 

Commission’s practice of permitting 

pipelines to adjust their ratemaking 

throughput downward in rate cases to 

reflect discounts given by pipelines for 

competitive reasons is appropriate when 

the discount is given to meet 

competition from another natural gas 

pipeline. 

I. The Development of the 

Commission’s Discount Policy 

A. Order No. 436

2. As part of Order No. 436, which 

commenced the transition to open 

access transportation, the Commission 

adopted regulations permitting 

pipelines to engage in selective 

discounting based on the varying 

demand elasticities of the pipeline’s 

customers.1 Specifically, the 

Commission adopted regulations 

requiring pipelines to file maximum and 

minimum transportation rates for both 

firm and interruptible service and to 

charge rates to customers within the 

maximum and minimum range.2 Under 

these regulations, the pipeline is 

permitted to discount, on a 

nondiscriminatory basis, in order to 

meet competition. For example, if a 

fuel-switchable shipper were able to 

obtain an alternate fuel at a cost less 

than the cost of gas including the 

transportation rate, the Commission’s 

policy permits the pipeline to discount 

its rate to compete with the alternate 

fuel, and thus obtain additional 

throughput that otherwise would be lost 

to the pipeline. In Order No. 436, the 

Commission explained that these 

selective discounts would benefit all 

customers, including customers that did 

not receive the discounts, because the 

discounts would allow the pipeline to 

maximize throughput and thus spread 

its fixed costs across more units of 

service. The Commission further stated 

that selective discounting would protect 

captive customers from rate increases 

that would otherwise ultimately occur if 

pipelines lost volumes through the 

inability to respond to competition.

3. In Associated Gas Distributors v. 

FERC (AGD I),3 the court upheld the 

regulations permitting selective 

discounting adopted in Order No. 436. 

The court found that, as a general 

matter, the Commission could permit 

pipelines to offer differing discounts 

depending upon the differing demand 

characteristics of their customers. The 

court agreed that such discounts could 

benefit captive customers by enabling 

pipelines to obtain demand elastic 

customers who would ‘‘mak[e] a 

contribution to fixed costs that 

otherwise would not be made at all.’’ 4

However, the court also stated, ‘‘This is 

not to say, of course, that the 

Commission is free to uphold every 

price distinction based on different 

demand elasticities. It has long been 

contended that rate differentials based 

on competition between transporters 

with similar cost functions may end up 

forcing captive customers to bear 

disproportionate shares of fixed costs 

without any offsetting gain in 

efficiency.’’ 5 The court stated, however, 

that this contention is not self-evidently 

true, explaining ‘‘if the demand of 

buyers with access to competing carriers 

is at all price elastic, the price 

reductions they enjoy will raise their 

demand close to the competitive 

level.’’ 6 In any event, the court 

concluded that the Commission could 

properly defer its ultimate resolution of 

these issues to another proceeding.

4. The court also addressed an 

argument presented by some pipelines 

that the Commission’s policy might lead 

to the pipelines under-recovering their 

costs. The court set forth a numerical 

example showing that the pipeline 

could under-recover its costs, if, in the 

next rate case after a pipeline obtained 

throughput by giving discounts, the 

Commission nevertheless designed the 

pipeline’s rates based on the full 

amount of the discounted throughput, 

without any adjustment. However, the 

court found no reason to fear that the 

Commission would employ this 

‘‘dubious procedure,’’ 7 and accordingly 

rejected the pipelines’ contention.

70078 Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / Proposed Rules 

8 47 FERC ¶ 61,295, reh’g granted, 48 FERC, 

¶ 61,122 (1989).

9See, e.g., Southern Natural Gas Co., 65 FERC 

¶ 61,347 at 62,829–62,833 (1993), reh’g denied, 67 

FERC ¶ 61,155 at 61,456–61,460 (1994); Williston 

Basin Interstate Pipeline Co., 67 FERC ¶ 61,137 at 

61,377–61,282 (1994); Panhandle Eastern Pipe Line 

Co., 71 FERC ¶ 61,228 at 61,866–61,871 (1995) 

(Opinion No. 395); Northwest Pipeline Corp., 71 

FERC ¶ 61,253 at 62,007–61,009 (1995); Panhandle 

Eastern Pipe Line Co, 74 FERC ¶ 61,109 at 61,399–

61,408 (1996) (Opinion No. 404); Williams Natural 

Gas Co, 77 FERC ¶ 61,277 at 62,205–61,207 (1996), 

reh’g denied, 80 FERC ¶ 61,158 at 61,189–61,190; 

Iroquois Gas Transmission System, L.P., 84 FERC 

¶ 61,086 at 61,478 (1998), reh’g denied, 86 FERC 

¶ 61,261 (1999); Williston Basin Interstate Pipeline 

Co., 84 FERC ¶ 61,266 at 61,401–61,402(1998); 

Northwest Pipeline Corp, 87 FERC ¶ 61,266 at 

62,077 (1999); and Trunkline Gas Co., 90 FERC 

¶ 61,017 at 61,084–61,096 (2000).

10 84 FERC ¶ 61,086 at 61,476–61,478 (1998), 

reh’g denied, 86 FERC ¶ 61,261 (1999).

11 90 FERC ¶ 61,017 at 61,092–95 (2000).

12 74 FERC ¶ 61,109 at 61,401–02 (1996).

13 77 FERC ¶ 61,277 at 62,206–61,207 (1996), 

reh’g denied, 80 FERC ¶ 61,158 (1997).

14 90 FERC ¶ 61,017 at 61,096 (2000).

15Order No. 636–A, FERC Stats. & Regs. 

Regulations Preambles ¶30,950, at 30,562 (1992), 

reh’g granted, Order No. 636–B, 61 FERC ¶61,272, 

at 61,999 (1992) (capacity release ‘‘may affect the 

rates charged for interruptible transportation since 

the competition from released capacity might 

require the pipelines to offer greater discounts for 

interruptible transportation than they had in the 

past’’).

B. The Discount Adjustment 

5. In the 1989 Rate Design Policy 

Statement,8 the Commission sought to 

adopt a rate design methodology that 

would prevent the subsidization of the 

discounts by nondiscounted customers 

and, at the same time, achieve the goal 

of Order No. 436 of maximizing 

throughput. Thus, the Commission held 

that if a pipeline grants a discount in 

order to meet competition, the pipeline 

is not required in its next rate case to 

design its rates based on the assumption 

that the discounted volumes would flow 

at the maximum rate, but may reduce 

the discounted volumes so that the 

pipeline will be able to recover its cost 

of service. The Commission explained 

that if a pipeline must assume that the 

previously discounted service will be 

priced at the maximum rate when it 

files a new rate case, there may be a 

disincentive to pipelines discounting 

their services in the future to capture 

marginal firm and interruptible 

business. The policy of permitting 

discount adjustments is consistent with 

the discussion of the court in AGD I

suggesting that discount adjustments 

should be permitted.

6. Since the Rate Design Policy 

Statement, the issue of adjusting rate 

design volumes to account for discounts 

has been litigated in a number of general 

section 4 rate cases.9 In these cases, the 

Commission has again explained that 

discounts benefit all customers, 

including captive customers who do not 

receive discounts, because the discounts 

allow the pipeline to maximize 

throughput and thus spread its fixed 

costs across more units of service. 

Therefore, in order to avoid a 

disincentive to discounting, the 

Commission has held that the pipeline 

need not design its rates in the next rate 

case on the assumption that the 

discounted volumes would flow at the 

maximum rate, and has permitted the 

pipelines to reduce the discounted 

volumes used to design its rates so that, 

assuming market conditions require it to 

continue giving the same level 

discounts when the new rates are in 

effect that it gave during the test period, 

the pipeline will be able to recover 100 

percent of its cost of service.

7. In order to obtain such a discount 

adjustment in a rate case, the pipeline 

has the ultimate burden of showing that 

its discounts were required to meet 

competition. However, the Commission 

has distinguished between the burden of 

proof the pipeline must meet, 

depending upon whether a discount 

was given to a non-affiliate or an 

affiliate. In the case of discounts to nonaffiliated shippers, the Commission has 

stated that it is a reasonable 

presumption that a pipeline will always 

seek the highest possible rate from such 

shippers, since it is in the pipeline’s 

own economic interest to do so. 

Therefore, once the pipeline has 

explained generally that it gives 

discounts to non-affiliates to meet 

competition, parties opposing the 

discount adjustment have the burden of 

producing evidence that discounts to 

non-affiliates were not justified by 

competition. To the extent those parties 

raise reasonable questions concerning 

whether competition required the 

discounts given in particular nonaffiliate transactions, then the burden 

shifts back to the pipeline to show that 

the questioned discounts were in fact 

required by competition. 

8. The Commission has disallowed 

discount adjustments with respect to 

some non-affiliated transactions 

involving discounts for long-term firm 

service. Thus, in Iroquois Gas 

Transmission System, L.P.10 and 

Trunkline Gas Co.,11 the Commission 

disallowed a discount adjustment with 

respect to discounts given to nonaffiliates. In both cases, the discounts 

were given to long-term, firm customers. 

The Commission found that the parties 

opposing the discount adjustment had 

raised enough questions about the 

circumstances in which those long-term 

discounts were given to shift the burden 

back to the pipeline to justify the 

discount. The Commission then found 

that, when a pipeline gives a long-term 

discount, the Commission would expect 

that the pipeline would make a 

thorough analysis whether competition 

required such a long-term discount, and 

in both these cases the pipeline had 

failed to present any evidence of such 

an analysis.

9. In contrast to its treatment of nonaffiliate discounts, the Commission has 

consistently held that the pipeline has 

a heavy burden to show that 

competition required discounts to 

affiliates. Thus, in Panhandle Eastern 

Pipe Line Co,12 the Commission held 

that the pipeline had not met its burden 

to show that its discounts to its affiliates 

were required by competition. While the 

pipeline did show that it had granted 

some non-affiliates similar discounts, 

the Commission held that this was not 

sufficient. Rather, the Commission 

stated that the pipeline should have 

identified the specific competitive 

alternatives the affiliate had, which 

required giving the discount. In 

addition, in Williams Natural Gas Co.13

and Trunkline Gas Co.,14 the 

Commission also disallowed a discount 

adjustment in connection with a 

discount to an affiliate on similar 

grounds.

C. Order No. 636

10. In Order No. 636, the Commission 

began to move away from the 

monopolistic selective discounting 

model to a competitive model, 

particularly for the secondary market. 

The institution of capacity release 

created competition between shippers 

and the pipeline with respect to unused 

capacity. Rather than having to rely on 

the timing and vagaries of the pipeline 

rate cases and the discount adjustment, 

shippers would be able to capture the 

revenue from their own unused capacity 

by releasing that capacity themselves. 

But at the same time, the competition 

engendered by capacity release forced 

the pipeline to compete with prices set 

in a more competitive market. The 

Commission recognized that the 

imposition of capacity release would 

significantly reduce both the pipelines’

interruptible volume as well as the rates 

the pipeline could charge for 

interruptible service.15 Thus, even with 

respect to gas-on-gas competition in the 

secondary market, competition from 

capacity release will require pipelines to 

discount their interruptible and shortterm firm capacity or suffer the potential 

loss of such sales to releasing shippers.

Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / Proposed Rules 70079

16 67 FERC ¶61,155 (1994).

17 Id. at 61,458.

18 Mississippi Valley Gas Co. v. FERC, 68 F.3d 503 

(D.C. Cir. 1995).

19 Iroquois Gas Transmission System, 84 FERC 

¶61,086 at 61,476–61,478 (1998); Trunkline Gas 

Company, 90 FERC ¶61,017 at 61,092–61,095 

(2000).

D. Gas-on-Gas Competition 

11. Since AGD I and the Rate Design 

Policy Statement, the issue of ‘‘gas-ongas’’ competition, i.e., where the 

competition for the business is between 

pipelines as opposed to competition 

between gas and other fuels, has been 

raised in several Commission 

proceedings. In these proceedings, 

certain parties have questioned the 

Commission’s rationale for permitting 

selective discounting, i.e., that it 

benefits captive customers by allowing 

fixed costs to be spread over more units 

of service. These parties have contended 

that, while this may be true where a 

discount is given to obtain a customer 

who would otherwise use an alternative 

fuel and not ship gas at all, it is not true 

where discounts are given to meet 

competition from other gas pipelines. In 

the latter situation, these parties have 

argued, gas-on-gas competition permits 

a customer who must use gas, but has 

access to more than one pipeline, to 

obtain a discount. But, if the two 

pipelines were prohibited from giving 

discounts when competing with one 

another, the customer would have to 

pay the maximum rate to one of the 

pipelines in order to obtain the gas it 

needs. This would reduce any discount 

adjustment and thus lower the rates 

paid by the captive customers. 

12. In Southern Natural Gas Co.,16 the 

Commission rejected the argument 

made by one of Southern’s customers, 

Mississippi Valley Gas Co., that no 

discount adjustment should be 

permitted with respect to gas-on-gas 

competition. The Commission stated, 

‘‘in light of the dynamic nature of the 

natural gas market, the Commission 

believes any effort to prohibit interstate 

gas pipelines from discounting to meet 

gas-on-gas competition would inevitably 

result in a loss of throughput to the 

detriment of all their customers.’’ 17 The 

Commission explained that the pipeline 

faced competition from intrastate 

pipelines not subject to the 

Commission’s jurisdiction, so that the 

Commission could not prohibit gas-ongas competition altogether. The 

Commission also stated that discounts 

given to meet gas-on-gas competition are 

not readily distinguishable from 

discounts given to meet competition 

from alternative fuels. For example, the 

Commission stated, discounts that on 

the surface appear to be given to meet 

gas-on-gas competition may also serve 

to reduce a customer’s transportation 

costs sufficiently to minimize the 

incentives for many gas purchasers to 

make necessary investment to use 

alternate fuel. As a result, the 

Commission stated, given the 

difficulties in distinguishing between 

the two types of discounts, prohibiting 

the first type might discourage the 

pipeline from offering needed discounts 

to meet alternative fuel competition for 

fear that such discounts would be 

challenged as improper. Mississippi 

Valley sought review of these holdings, 

but the court found Mississippi Valley’s 

appeal not ripe for review, because the 

severed proceeding was still ongoing.18

Subsequently, the case settled.

13. The issue was also raised by the 

Illinois Municipal Gas Agency (IMGA) 

in a petition for rulemaking in Docket 

No. RM97–7–000. In its petition, IMGA 

alleged that the impact of the 

Commission’s practice of adjusting 

ratemaking throughput downward to 

reflect discounts given by pipelines for 

competitive reasons causes rates to 

captive customers to be higher than they 

would be if the Commission did not 

adjust throughput for gas-on-gas 

competitive discounts and causes 

captive customers to subsidize 

customers receiving the discounts. 

IMGA asked the Commission to adopt a 

rule of general applicability that the 

pipelines’ maximum rates will be based 

on estimates of the pipelines’ total 

throughput without regard to discounts 

given for gas-on-gas competition with 

other jurisdictional pipelines. 

14. Parties also raised this issue in 

Order No. 637, and again argued that a 

discount adjustment is not appropriate 

in a subsequent rate case for discounts 

given to meet gas-on-gas competition. 

When the Commission declined to 

address the issue in Order No. 637, 

IMGA raised the issue on appeal. In 

INGAA v. FERC, 285 F.3d 18, 43–44 

(D.C. Cir. 2002), the court concluded 

that the Commission did not err in 

deciding not to address this issue as part 

of its Order No. 637 rulemaking. 

However, the court did indicate that the 

Commission should not delay resolution 

of the issue indefinitely. 

II. Discussion 

15. The Commission seeks comments 

on its policy of permitting selective 

discounting and how that policy affects 

the pipeline’s captive customers, i.e., 

those customers that do not receive 

discounts. In particular, the 

Commission is interested in exploring 

the effects of the policy of permitting a 

discount adjustment in a rate case for all 

selective discounts, including those 

given to meet gas-on-gas competition as 

well as on the specific questions set 

forth below: 

(1) Effect of the Current Policy on 

Captive Customers. As explained above, 

the purpose of the Commission’s policy 

is to allow pipelines to discount to meet 

competition so as to obtain greater 

throughput over which to spread fixed 

costs. The policy is based on the view 

that the increased throughput obtained 

through discounting will benefit captive 

customers and lower their rates in the 

next rate case. The Commission requests 

comments on the following issues 

related to how its current policy has 

worked in practice.

(a) Has the Commission’s current 

discount policy helped captive 

customers by enabling pipelines to 

obtain increased throughput over which 

to spread fixed costs, or hurt captive 

customers by causing tariff rates to 

increase with no net increase in 

throughput? 

(b) In several cases, the Commission 

has rejected pipelines’ requests for 

discount adjustments given in 

connection with long-term firm 

contracts on the ground that the 

pipeline had not shown that 

competition required such discounts.19

Have the discount adjustments 

approved in pipeline rate cases been 

based primarily on discounts given for 

interruptible and short-term firm 

transportation? Provide examples of any 

pipeline rate cases where discounts in 

long-term firm transportation 

contributed significantly to any allowed 

discount adjustment in the overall 

volumes used to design the pipeline’s 

rates.

(c) The Commission has also rejected 

pipelines’ requests for discount 

adjustments for discounts given to 

affiliates where the pipeline failed to 

show that the discount was given to 

meet competition. Provide examples of 

any pipeline rate cases where discounts 

given to affiliates contributed 

significantly to any allowed discount 

adjustment. 

(d) Has the heavy burden that the 

Commission has placed on pipelines to 

justify discounts to affiliates been 

sufficient to assure that discounts to 

affiliates are in fact given to meet 

competition? The Standards of Conduct 

for Transmission Providers provide that 

a pipeline must post on its website any 

offer of discount and must include the 

name of the customer involved in the 

discount and whether that customer is

70080 Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / Proposed Rules 

an affiliate of the pipeline; the posting 

must also include the rate offered, the 

maximum rate, the time period for 

which the discount would apply, the 

quantity of gas scheduled to be moved, 

the delivery points and any conditions 

or requirements applicable to the 

discount. 18 CFR 358.5(d) (2004). Have 

these requirements been sufficient to 

assure that discounts are offered in a 

non-discriminatory manner? 

(e) IMGA has asserted that 75 percent 

of discounts are given to meet 

competition from other interstate 

pipelines. We request comment from 

IMGA and others as to the basis for this 

determination and whether this is a 

reliable estimate. Further, has the level 

of discounts given to meet gas-on-gas 

competition varied significantly from 

pipeline to pipeline? Has the practice of 

giving discounts to meet gas-on-gas 

competition been widespread through 

the industry or has it generally been 

limited to only a small portion of 

interstate pipelines? 

(f) Please provide specific examples of 

rate cases where a significant portion of 

the discounts underlying the discount 

adjustment was given to meet gas-on-gas 

competition. 

(g) Provide examples of rate cases 

where the Commission’s current policy 

concerning selective discounts has 

helped captive customers and has 

resulted in lower rates for those 

customers. 

(h) Pipelines are no longer required to 

file periodic rate cases and many 

pipelines have not filed a rate case for 

a number of years. How has the 

Commission’s policy affected captive 

customers in the absence of a section 4 

rate case filing? 

(2) Elimination of the Discount 

Adjustment for Discounts to Meet Gason-Gas Competition. As discussed 

above, the issue of ‘‘gas-on-gas’’

competition has been raised in several 

Commission proceedings and it has 

been argued that the rationale behind 

the discount policy does not apply 

when discounts are given to demand 

inelastic customers to meet competition 

from other gas pipelines. The 

Commission requests comments on the 

following issues concerning the impact 

of a change in current Commission 

policy to eliminate the discount 

adjustment for gas-on-gas competition 

and how the Commission would 

implement and monitor this change in 

policy. 

(a) What problems would there be in 

implementing a policy of not allowing 

a discount adjustment for gas-on-gas 

competition and in determining 

whether a shipper would buy 

transportation if a discount were not 

given? Would it be possible to 

distinguish between discounts to meet 

gas-on-gas competition and discounts 

given for other reasons, and if so how? 

As the Commission pointed out in the 

Southern case, discounts given to meet 

gas-on-gas competition are not readily 

distinguishable from discounts given to 

meet competition from alternative fuels. 

For example, discounts that on the 

surface appear to be given to meet gason-gas competition may also serve to 

reduce a customer’s transportation costs 

sufficiently to minimize the incentives 

for many gas purchasers to make the 

necessary investment to use alternate 

fuel. 

(b) Are customers to whom pipelines 

have given discounts to meet gas-on-gas 

competition sufficiently demand 

inelastic that they would have taken the 

same level of service without the 

discount? For example, if an electric 

generator were negotiating with two 

pipelines for a discount, it is not 

necessarily the case that the generator is 

demand inelastic and would buy 

transportation if neither pipeline 

granted it a discount. Given the demand 

elasticity of the electric market, the 

electric generator might not build the 

generator at all if the discount were not 

given and the potential additional gas 

and transportation volumes would be 

lost. If customers currently receiving 

discounts due to gas-on-gas competition 

are predominantly demand elastic, 

would eliminating the throughput 

adjustments for such discounts actually 

hurt the captive customers? 

(c) How would elimination of a 

discount adjustment for discounts given 

to meet gas-on-gas competition affect 

the ability of pipelines with higher 

maximum rates to compete with 

pipelines with lower maximum rates, 

and would it penalize the captive 

customers on the higher rate pipelines 

by making it more difficult for those 

pipelines to obtain additional customers 

over which to spread their fixed costs?

(d) Competition between the 

pipeline’s sale of its capacity and its 

firm shippers’ capacity release may be 

viewed as gas-on-gas competition. How 

would the effect of competition from 

capacity release be factored into a 

determination of whether the discount 

adjustment should be permitted? 

Should the Commission permit a 

discount adjustment for discounts given 

in competition with capacity release, 

regardless of the approach it takes 

generally with respect to discounts 

given to meet gas-on-gas competition? 

(e) As a result of capacity release, the 

value of transportation between two 

points is related to the commodity price 

differential between those two points, 

for example the difference in the price 

of gas in the production basin and at the 

city gate. This basis differential can be 

a limit on the rate the pipeline can 

charge. How would elimination of the 

discount adjustment for gas-on-gas 

competition affect the pipeline’s 

revenues if they were discouraged from 

giving the discounts necessary to reduce 

their rates to the basis differential? 

(f) To what extent is gas commodity 

market competition between different 

producing regions dependent on 

pipeline’s discounting? One of the 

Commission’s goals in Order No. 636 

was to promote competition between 

different producing regions and to 

permit customers to access different 

producing regions. If the Commission 

prohibited an adjustment for discounts 

given to meet gas-on-gas competition, 

would this adversely affect the 

pipeline’s ability to bring its rates down 

to the basis differential level? Would 

this have an adverse impact on 

producers, markets, and customers? 

(g) As the Commission explained in 

the Southern decision discussed above, 

an inability to discount to meet 

competition from intrastate pipelines 

would lead to a loss of throughput by 

the interstate pipeline. Should interstate 

pipelines be permitted to have an 

adjustment for discounts given to meet 

competition from intrastate pipelines? 

(h) Would a prohibition against 

discount adjustments for discounts 

given to meet gas-on-gas competition 

discourage pipeline expansions into 

areas to compete with existing service in 

that area? 

(3) Alternative Policy Choices. The 

Commission is requesting comments on 

what alternative changes in the 

Commission’s discount adjustment 

policy could be considered to minimize 

any adverse effects on captive 

customers. 

(a) Should the Commission eliminate 

the presumption that discounts given to 

non-affiliates are given to meet 

competition and require the pipelines to 

justify all discounts and show that the 

discounts are not given simply to meet 

gas-on-gas competition? Should it 

eliminate the presumption only for 

long-term sales of pipeline capacity? 

(b) Should the Commission adopt 

procedures in addition to those set forth 

in the Standards of Conduct for 

Transmission Providers, 18 CFR 

358.5(d) (2004), to assure that any 

discounts given to affiliates are made 

available to non-affiliates in a nondiscriminatory manner? 

(c) Are the incentives for giving 

discounts to affiliates sufficiently 

different from the incentive to give 

discounts to non-affiliates that the 

Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / Proposed Rules 70081

20 824 F.2d 981, 1010–1012 (D.C. Cir. 1987).

21 67 FERC ¶61,155 (1994).

22 67 FERC at 61,458.

Commission should prohibit all affiliate 

discounts? 

III. Procedure for Comments 

16. The Commission invites interested 

persons to submit comments, and other 

information on the matters, issues and 

specific questions identified in this 

notice. Comments are due 60 days from 

the date of publication in the Federal 

Register. Comments must refer to 

Docket No. RM05–2–000, and must 

include the commentor’s name, the 

organization they represent, if 

applicable, and their address. The 

Commission will consider all the 

comments in Docket No. RM05–2–000 

and will terminate the proceeding in 

Docket No. RM97–7–000 because the 

issues included in Docket No. RM05–2–

000 include all the issues raised in the 

Docket No. RM97–7–000 proceeding. 

17. To facilitate the Commission’s 

review of the comments, commentors 

are requested to provide an executive 

summary of their position. Commentors 

are requested to identify each specific 

question posed by the Notice of Inquiry 

that their discussion addresses and to 

use appropriate headings. Additional 

issues the commentors wish to raise 

should be identified separately. The 

commentors should double space their 

comments. 

18. Comments may be filed on paper 

or electronically via the eFiling link on 

the Commission’s Web site at http://

www.ferc.gov. The Commission accepts 

most standard word processing formats 

and commentors may attach additional 

files with supporting information in 

certain other file formats. Commentors 

filing electronically do not need to make 

a paper filing. Commentors that are not 

able to file comments electronically 

must send an original and 14 copies of 

their comments to: Federal Energy 

Regulatory Commission, Office of the 

Secretary, 888 First Street, NE., 

Washington, DC 20426. 

19. All comments will be placed in 

the Commission’s public files and may 

be viewed, printed, or downloaded 

remotely as described in the Document 

Availability section below. Commentors 

are not required to serve copies of their 

comments on other commentors. 

IV. Document Availability 

20. In addition to publishing the full 

text of this document in the Federal 

Register, the Commission provides all 

interested persons an opportunity to 

view and/or print the contents of this 

document via the Internet through the 

Commission’s home page (http://

www.ferc.gov) and in the Commission’s 

Public Reference Room during normal 

business hours (8:30 a.m. to 5 p.m. 

eastern time) at 888 First Street, NE., 

Room 2A, Washington, DC 20426. 

21. From the Commission’s home 

page on the Internet, this information is 

available in the Commission’s document 

management system, eLibrary. The full 

text of this document is available on 

eLibrary in PDF and Microsoft Word 

format for viewing, printing, and/or 

downloading. To access this document 

in eLibrary, type the docket number 

(excluding the last three digits) in the 

docket number field. 

22. User assistance is available for 

eLibrary and the Commission’s Web site 

during normal business hours. For 

assistance, please contact the 

Commission’s Online Support at 1–866–

208–3676 (toll free) or 202–502–6652 (email at FERCOnlineSupport@ferc.gov or 

the Public Reference Room at 202–502–

8371, TTY 202–502–8659 (e-mail at 

public.referenceroom@ferc.gov).

By direction of the Commission. 

Commissioner Brownell concurring with a 

separate statement attached. 

Linda Mitry, 

Deputy Secretary.

Brownell, Commissioner, concurring: This 

NOI seeks comment on all potential issues 

that could be raised about the Commission’s 

discounting program: (a) Whether 

discounting should be allowed; (b) Whether 

a discount adjustment should be allowed for 

discounts; (c) If discounting adjustments are 

allowed, what types of discounts warrant a 

discount adjustment; (d) The adequacy of the 

posting and reporting requirements; and (e) 

What is the interplay between discounting 

and the absence of a section 4 rate case filing 

requirement. I am concerned that we are 

again creating market uncertainty with the 

specter of regulatory intervention, on a 

generic basis, in a discounting program that 

works well, promotes competition, provides 

regulatory safeguards and ultimately benefits 

gas consumers. 

The impetus for this NOI is the Illinois 

Municipal Gas Agency’s (IMGA) petition 

requesting that the Commission develop a 

rule of general applicability that a pipeline’s 

maximum rates can not reflect a discount 

adjustment for discounts given for gas-on-gas 

competition with other jurisdictional 

pipelines. IMGA does not challenge 

discounting for alternative fuel competition; 

discounts to compete with intrastate 

pipelines; the posting and reporting 

requirements; or the relevancy of the lack of 

a section 4 rate case filing. IMGA deserves an 

answer, but given the legal precedent, actual 

experience and our regulatory actions over 

nearly twenty years, I would have hoped that 

we could have limited our inquiry to the 

specific issue raised by IMGA. 

In Associated Gas Distributors v. FERC 

(AGD I), 20 the court upheld the regulations 

permitting selective discounting and 

indicated that a discount adjustment in 

setting maximum rates would be appropriate 

to prevent a pipeline from underrecovering 

its costs. However, in order to obtain a 

discount adjustment, the pipeline must file a 

rate case and must show that the discount 

was necessary to meet competition. The issue 

of adjusting rate design volumes to account 

for discounts has been litigated in a number 

of cases. Based on the particular facts of the 

case, the Commission has both allowed and 

disallowed discount adjustments. I see 

nothing broken in this general process. 

Moreover, even with regard to the specific 

issues of discounting adjustments for gas-ongas competition, while I am open to seeing 

the comments we receive, I also recognize 

that the Commission has already opined on 

this issue. In Southern Natural Gas Co., 21 the 

Commission addressed the issue of a 

discount adjustment for gas-on-gas 

competition. The Commission stated, ‘‘in 

light of the dynamic nature of the natural gas 

market, the Commission believes any effort to 

prohibit interstate gas pipelines from 

discounting to meet gas-on-gas competition 

would inevitably result in a loss of 

throughput to the detriment of all their 

customers.’’ 22 The Commission explained 

that a pipeline faces competition from 

intrastate pipelines, so all gas-on-gas 

competition could not be prohibited. 

Moreover, the Commission stated that the 

distinction between gas-on-gas discounts and 

discounts for alternative fuel competition is 

not so simplistic. For example, the 

Commission noted that a gas-on-gas discount 

could reduce a customer’s transportation 

costs enough that it is uneconomic to invest 

in alternative fuel capability.

Why are the Commission’s findings in 

Southern Natural Gas Company not still 

applicable? I can also see other situations 

where the purpose of the discount is not 

readily apparent. For example, how should 

one categorize a discount to a generator 

negotiating to locate a generating plant on 

one of two pipelines, who is unwilling to 

take service on either pipeline unless it 

receives a discount rate? Or discounts to a 

new gas customer with the choice between 

two pipelines? I am also concerned that gason-gas discounting is a necessary by-product 

of our capacity release program. How do you 

have a robust secondary market with 

competition between the pipeline services 

and released capacity without gas-to-gas 

discounts? I hope that when commenters 

respond to the NOI, they will consider these 

questions as well. 

Finally, the expansive nature of the NOI 

seems to me to be a search for a problem. I 

would contrast our action here with our 

inaction in the Policy Statement on Electric 

Creditworthiness that we also issue today. As 

I state in my dissent in that proceeding, we 

are faced with a very real problem of lack of 

transparency and potential undue 

discrimination. Yet, the best we can do is 

issue a guidance order that requires little if 

anything to remedy the problem.

70082 Federal Register / Vol. 69, No. 231 / Thursday, December 2, 2004 / Proposed Rules 

1As discussed in section II of this document, on 

March 25, 2003 (68 FR 14502 at 14503), EPA 

revised the rule text to express the MCL as 0.010 

mg/L.

For these reasons, I respectfully concur. 

Nora Mead Brownell,

Commissioner.

[FR Doc. 04–26535 Filed 12–1–04; 8:45 am] 

BILLING CODE 6717–01–P

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 165

[Docket No. 2004N–0416]

Beverages: Bottled Water

AGENCY: Food and Drug Administration, 

HHS.

ACTION: Proposed rule.

SUMMARY: The Food and Drug 

Administration (FDA) is proposing to 

amend its bottled water quality standard 

regulations by revising the existing 

allowable level for the contaminant 

arsenic. As a consequence, bottled water 

manufacturers would be required to 

monitor their finished bottled water 

products for arsenic at least once each 

year under the current good 

manufacturing practice (CGMP) 

regulations for bottled water. Bottled 

water manufacturers would also be 

required to monitor their source water 

for arsenic as often as necessary, but at 

least once every year unless they meet 

the criteria for the source water 

monitoring exemptions under the CGMP 

regulations. This proposed rule, if 

finalized, will ensure that the minimum 

quality of bottled water, as affected by 

arsenic, remains comparable with the 

quality of public drinking water that 

meets the Environmental Protection 

Agency’s (EPA’s) standards.

DATES: Submit written or electronic 

comments by January 31, 2005.

ADDRESSES: You may submit comments, 

identified by Docket No. 2004N–0416, 

by any of the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the 

instructions for submitting comments.

• Agency Web site: http://

www.fda.gov/dockets/ecomments. 

Follow the instructions for submitting 

comments on the agency Web site.

• E-mail: fdadockets@oc.fda.gov. 

Include Docket No. 2004N–0416 in the 

subject line of your e-mail message.

• FAX: 301–827–6870.

• Mail/Hand delivery/Courier [For 

paper, disk, or CD-ROM submissions]: 

Division of Dockets Management, 5630 

Fishers Lane, rm. 1061, Rockville, MD 

20852.

Instructions: All submissions received 

must include the agency name and 

Docket No. for this rulemaking. All 

comments received will be posted 

without change to http://www.fda.gov/

ohrms/dockets/ohrms/dockets/

default.htm, including any personal 

information provided. For detailed 

instructions on submitting comments 

and additional information on the 

rulemaking process, see section VIII in 

the SUPPLEMENTARY INFORMATION section 

of this document.

Docket: For access to the docket to 

read background documents or 

comments received, go to http://

www.fda.gov/ohrms/default.htm and 

insert the docket number, found in 

brackets in the heading of this 

document, into the ‘‘Search’’ box and 

follow the prompts and/or the Division 

of Dockets Management, 5630 Fishers 

Lane, rm. 1061, Rockville, MD 20852.

FOR FURTHER INFORMATION CONTACT:

Jennifer A. Burnham, Center for Food 

Safety and Applied Nutrition (HFS–

306), Food and Drug Administration, 

5100 Paint Branch Pkwy., College Park, 

MD 20740, 301–436–2030.

SUPPLEMENTARY INFORMATION:

I. Background

In the Federal Register of January 22, 

2001 (66 FR 6976), EPA published the 

arsenic rule to address potential public 

heath effects from the presence of 

arsenic in drinking water. This 

rulemaking finalized a proposed rule 

that EPA published in the Federal 

Register of June 22, 2000 (65 FR 38888).

Arsenic is an element that occurs 

naturally in rocks, soil, water, air, 

plants, and animals. In addition to the 

numerous natural sources of arsenic, 

human activities may also introduce 

arsenic into food and drinking water. 

Major present and past sources of 

arsenic include wood preservatives, 

agricultural uses, industrial uses, 

mining and smelting. The human 

impact on arsenic levels in water 

depends on the level of human activity, 

the distance from the pollution sources, 

and the dispersion and fate of the 

arsenic that is released. Because arsenic 

is naturally occurring, the entire 

population is exposed to low levels of 

arsenic through food, water, air, and 

contact with soil. Studies have shown 

long-term exposure to inorganic arsenic 

in drinking water may result in 

increased risk of cancer (e.g., skin, 

bladder, lung, kidney, liver, prostate, 

and nasal passage) and is associated 

with noncancer effects, such as 

alterations in gastrointestinal, 

cardiovascular, hematological (e.g., 

anemia), pulmonary, neurological, 

immunological, and reproductive/

developmental function (66 FR 6976 at 

7001 through 7003).

National primary drinking water 

regulations (NPDWRs) are issued by 

EPA to protect the public health from 

the adverse effects of contaminants in 

drinking water. NPDWRs specify 

maximum contaminant levels (MCLs) or 

treatment techniques for drinking water 

contaminants. In addition, at the same 

time that it issues NPDWRs, EPA 

publishes maximum contaminant level 

goals (MCLGs), which are not regulatory 

requirements but rather are 

nonenforceable health goals that are 

based solely on considerations of 

protecting the public from adverse 

health effects of drinking water 

contamination.

In the arsenic rule, EPA issued an 

NPDWR containing an MCL of 0.01 

milligram per liter (mg/L)1 or 10 parts 

per billion (ppb) and an MCLG of zero 

for arsenic. EPA based the MCL on total 

arsenic, because drinking water contains 

almost entirely inorganic forms, and the 

analytical methods for total arsenic are 

readily available and capable of being 

performed by certified laboratories at an 

affordable cost. EPA’s effective date of 

March 23, 2001, for this rule was 

temporarily delayed for 60 days to a 

new effective date of May 22, 2001, in 

accordance with the memorandum of 

January 20, 2001, from the Assistant to 

the President and Chief of Staff, entitled 

‘‘Regulatory Review Plan’’ (66 FR 7702, 

January 24, 2001). On May 22, 2001, 

EPA announced that it would further 

delay the effective date for the rule until 

February 22, 2002, to allow time to 

complete a reassessment of the 

information on which the revised 

arsenic standard is based. On February 

22, 2002, the arsenic MCL of 0.01 mg/

L in public drinking water rule became 

effective and water systems must 

comply with the new standard for 

arsenic in public drinking water by 

January 23, 2006.

Under section 410(b)(1) of the Federal 

Food, Drug, and Cosmetic Act (the act) 

(21 U.S.C. 349(b)(1)), not later than 180 

days before the effective date of an 

NPDWR issued by EPA for a 

contaminant under section 1412 of the 

Safe Drinking Water Act (SDWA) (42 

U.S.C. 300g-1), FDA is required to issue 

a standard of quality regulation for that 

contaminant in bottled water or make a 

finding that such a regulation is not 

necessary to protect the public health 

because the contaminant is contained in 

water in public water systems but not in