Document ID: FERC-2007-1962-0003
Agency: ferc
Document Type: Rule
Title: Promotion of a More Efficient Capacity Release Market
Posted Date: 2008-06-30T04:00Z

[Federal Register: June 30, 2008 (Volume 73, Number 126)]
[Rules and Regulations]               
[Page 37057-37093]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jn08-13]                         

[[Page 37057]]

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Part III

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Part 284

Promotion of a More Efficient Capacity Release Market; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-000; Order No. 712]

 
Promotion of a More Efficient Capacity Release Market

Issued June 19, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: In this Final Rule the Federal Energy Regulatory Commission 
revises its regulations governing interstate natural gas pipelines to 
reflect changes in the market for short-term transportation services on 
pipelines and to improve the efficiency of the Commission's capacity 
release program. The Commission permits market based pricing for short-
term capacity releases and facilitates asset management arrangements by 
relaxing the Commission's prohibition on tying and on its bidding 
requirements for certain capacity releases. The Commission further 
clarifies that its prohibition on tying does not apply to conditions 
associated with gas inventory held in storage for releases of firm 
storage capacity. Finally, the Commission waives its prohibition on 
tying and bidding requirements for capacity releases made as part of 
state-approved retail open access programs.

DATES: This rule will become effective July 30, 2008.

FOR FURTHER INFORMATION CONTACT:
William Murrell, Office of Energy Market Regulation, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
William.Murrell@ferc.gov, (202) 502-8703.
Robert McLean, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, 
Robert.McLean@ferc.gov. (202) 502-8156.
David Maranville, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington DC 20426, 
David.Maranville@ferc.gov, (202) 502-6351.

SUPPLEMENTARY INFORMATION:

Order No. 712

Final Rule

                            Table of Contents

                                                              Paragraph
                                                               Numbers

I. Background..............................................           2.
    A. The Capacity Release Program........................           2.
    B. The NOPR............................................          15.
    C. Comments............................................          19.
II. Overview of the Final Rule.............................          24.
III. Price Cap Issues......................................          30.
    A. Removal of Maximum Rate Ceiling for Short-Term                30.
     Capacity Releases.....................................
        1. Maximum Rate Ceiling Interferes With Efficient            32.
         Transactions......................................
        2. Assurance of Just and Reasonable Rates..........          38.
            a. Market Conditions Ensure Just and Reasonable          39.
             Rates.........................................
            b. Recourse Rate Protection....................          48.
            c. Short-Term Customers Are Not Captive........          50.
            d. Non-Cost Factors............................          51.
            e. Oversight...................................          55.
        3. Comments........................................          57.
            a. Lack of Competition in Certain Areas........          58.
            b. Benefits From Removing the Price Ceiling....          63.
            c. Promotion of Construction...................          67.
            d. Changed Circumstances.......................          68.
            e. Exemption From Bidding for Short-Term                 72.
             Releases at the Maximum Rate..................
    B. Removal of Price Ceiling for Long-Term Releases.....          74.
    C. Removal of Price Ceiling for Pipeline Short-Term              81.
     Transactions..........................................
        1. Removal of the Price Ceiling Is Not Justified...          82.
        2. Response to Specific Comments...................          87.
            a. Evidentiary Record..........................          87.
            b. Infrastructure Incentives...................          90.
            c. Competitive Market Structure................          92.
            d. Differences in Flexibility Between Pipeline           95.
             Capacity and Released Capacity................
            e. Bifurcation of the Markets..................         103.
IV. Asset Management Arrangements..........................         109.
    A. Background..........................................         110.
    B. Discussion..........................................         118.
        1. Tying...........................................         127.
        2. Bidding.........................................         132.
        3. Definition of AMAs..............................         138.
            a. NOPR Proposal...............................         138.
            b. Comments....................................         141.
            c. Modified Definition.........................         144.
        4. Supply AMAs.....................................         148.
        5. AMA Profit Sharing Arrangements.................         154.
        6. Exemption From Buy/Sell Prohibition.............         163.
        7. Other AMA Terms and Conditions..................         170.
        8. Posting and Reporting Requirements..............         172.
        9. Part 157 Capacity...............................         178.
V. Tying of Storage Capacity and Inventory.................         186.
VI. Liquefied Natural Gas..................................         191.

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VII. State Mandated Retail Unbundling......................         194.
VIII. Implementation Schedule..............................         202.
IX. Information Collection Statement.......................         203.
X. Environmental Analysis..................................         216.
XI. Regulatory Flexibility Act.............................         217.
XII. Document Availability.................................         220.
XIII. Effective Date and Congressional Notification........         223.

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, 
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

Order No. 712

Final Rule

Issued June 19, 2008.
    1. In this Final Rule, the Commission revises its Part 284 
regulations concerning the release of firm capacity by shippers on 
interstate natural gas pipelines. First, as proposed in its Notice of 
Proposed Rulemaking,\1\ the Commission will remove, on a permanent 
basis, the rate ceiling on capacity release transactions of one year or 
less. Second, the Commission will modify its regulations to facilitate 
the use of asset management arrangements (AMAs), under which a capacity 
holder releases some or all of its pipeline capacity to an asset 
manager who agrees to either purchase from, or supply the gas needs of, 
the capacity holder. Specifically, the Commission will exempt capacity 
releases made as part of AMAs from the prohibition on tying and from 
the bidding requirements of section 284.8. Third, the Commission 
clarifies that its prohibition on tying does not apply to conditions 
associated with gas inventory held in storage for releases of firm 
storage capacity. Fourth, the Commission will modify its regulations to 
facilitate retail open access programs by exempting capacity releases 
made under state-approved retail access programs from the prohibition 
on tying and from the bidding requirements of section 284.8. This Final 
Rule is designed to enhance competition in the secondary capacity 
release market and to increase shipper gas supply options. This rule 
will become effective 30 days after publication in the Federal 
Register.
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    \1\ Promotion of a More Efficient Capacity Release Market, 72 FR 
65,916, FERC Stats. and Regs. ] 32,625 (November 26, 2007) 121 FERC 
] 61,170 (2007) (NOPR).
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I. Background

A. The Capacity Release Program

    2. The Commission adopted its capacity release program as part of 
the restructuring of natural gas pipelines required by Order No. 
636.\2\ In Order No. 636, the Commission sought to foster two primary 
goals. The first goal was to ensure that all shippers have meaningful 
access to the pipeline transportation grid so that willing buyers and 
sellers can meet in a competitive, national market to transact the most 
efficient deals possible. The second goal was to ensure consumers have 
``access to an adequate supply of gas at a reasonable price.'' \3\
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    \2\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, 57 FR 13,267 (April 16, 1992), FERC Stats. and Regs., 
Regulations Preambles January 1991-June 1996 ] 30,939 (April 8, 
1992), order on reh'g, Order No. 636-A., 57 FR 36,128 (August 12, 
1992), FERC Stats. and Regs., Regulations Preambles January 1991-
June 1996 ] 30,950 (August 3, 1992), order on reh'g, Order No. 636-
B, 57 FR 57,911 (Dec. 8, 1992), 61 FERC ] 61,272 (1992), notice of 
denial of reh'g, 62 FERC ] 61,007 (1993); aff'd in part, vacated and 
remanded in part, United Dist. Companies v. FERC, 88 F.3d 1105 (DC 
Cir. 1996), order on remand, Order No. 636-C, 78 FERC ] 61,186 
(1997).
    \3\ Order No. 636 at 30,393 (citations omitted).
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    3. To accomplish these goals, the Commission sought to maximize the 
availability of unbundled firm transportation service to all 
participants in the gas commodity market. The linchpin of Order No. 636 
was the requirement that pipelines unbundle their transportation and 
storage services from their sales service, so that gas purchasers could 
obtain the same high quality firm transportation service whether they 
purchased from the pipeline or another gas seller. In order to create a 
transparent program for the reallocation of interstate pipeline 
capacity to complement the unbundled, open access environment created 
by Order No. 636, the Commission also adopted a comprehensive capacity 
release program to increase the availability of unbundled firm 
transportation capacity by permitting firm shippers to release their 
capacity to others when they were not using it.\4\
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    \4\ In brief, under the Commission's current capacity release 
program, a firm shipper (releasing shipper) sells its capacity by 
returning its capacity to the pipeline for reassignment to the buyer 
(replacement shipper). The pipeline contracts with, and receives 
payment from, the replacement shipper and then issues a credit to 
the releasing shipper. The replacement shipper may pay less than the 
pipeline's maximum tariff rate, but not more. 18 CFR 284.8(e) 
(2007). The results of all releases are posted by the pipeline on 
its Internet web site and made available through standardized, 
downloadable files.
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    4. The Commission reasoned that the capacity release program would 
promote efficient load management by the pipeline and its customers and 
would, therefore, result in the efficient use of firm pipeline capacity 
throughout the year. It further concluded that, ``because more buyers 
will be able to reach more sellers through firm transportation 
capacity, capacity reallocation comports with the goal of improving 
nondiscriminatory, open access transportation to maximize the benefits 
of the decontrol of natural gas at the wellhead and in the field.'' \5\
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    \5\ Order No. 636 at 30,418.
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    5. In Order No. 636, the Commission expressed concerns regarding 
its ability to ensure that firm shippers would reallocate their 
capacity in a non-discriminatory manner to those who placed the highest 
value on the capacity up to the maximum rate. The Commission noted that 
prior to Order No. 636, it authorized some pipelines to permit their 
shippers to ``broker'' their capacity to others. Under such capacity 
brokering, firm shippers were permitted to assign their capacity 
directly to a replacement shipper, without any requirement that the 
brokering shipper post the availability of its capacity or allocate it 
to the highest bidder.\6\ However, in Order No. 636, the Commission 
found ``there [were] too many potential assignors of capacity and too 
many different programs for the Commission to oversee capacity 
brokering.'' \7\
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    \6\ See Algonquin Gas Transmission Corp., 59 FERC ] 61,032 
(1992).
    \7\ Order No. 636 at 30,416.

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[[Page 37060]]

    6. The Commission sought to ensure that the efficiencies of the 
secondary market were not frustrated by unduly discriminatory access to 
the market.\8\ Therefore, the Commission replaced capacity brokering 
with the capacity release program designed to provide greater assurance 
that transfers of capacity from one shipper to another were transparent 
and not unduly discriminatory. This assurance took the form of several 
conditions that the Commission placed on the transfer of capacity under 
its new program.
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    \8\ Order No. 636-A at 30,554.
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    7. First, the Commission prohibited private transfers of capacity 
between shippers and, instead, required that all release transactions 
be conducted through the pipeline. Therefore, when a releasing shipper 
releases its capacity, the replacement shipper must enter into a 
contract directly with the pipeline, and the pipeline must post 
information regarding the contract, including any special 
conditions.\9\ In order to enforce theprohibition on private transfers 
of capacity, the Commission required that a shipper must have title to 
any gas that it ships on the pipeline.\10\
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    \9\ Order No. 636 emphasized:
    The main difference between capacity brokering as it now exists 
and the new capacity release program is that under capacity 
brokering, the brokering customer could enter into and execute its 
own deals without involving the pipeline. Under capacity releasing, 
all offers must be put on the pipeline's electronic bulletin board 
and contracting is done directly with the pipeline. Order No. 636 at 
30,420 (emphasis in original).
    \10\ As the Commission subsequently explained in Order No. 637, 
``the capacity release rules were designed with [the shipper-must-
have-title] policy as their foundation,'' because, without this 
requirement, ``capacity holders could simply transport gas over the 
pipeline for another entity.'' Regulation of Short-Term Natural Gas 
Transportation Services and Regulation of Interstate Natural Gas 
Transportation Services, Order No. 637, FERC Stats. & Regs. ] 31,091 
at 31,300, clarified, Order No. 637-A, FERC Stats. & Regs. ] 31,099, 
reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd in 
part and remanded in part sub nom. Interstate Natural Gas Ass'n of 
America v. FERC, 285 F.3d 18 (DC Cir. 2002), order on remand, 101 
FERC ] 61,127 (2002), order on reh'g, 106 FERC ] 61,088 (2004), 
aff'd sub nom. American Gas Ass'n v. FERC, 428 F.3d 255 (DC Cir. 
2005).
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    8. Second, the Commission determined that the record of the 
proceeding that led to Order No. 636 did not reflect that the market 
for released capacity was competitive. The Commission reasoned that the 
extent of competition in the secondary market may not be sufficient to 
ensure that the rates for released capacity will be just and 
reasonable. Therefore, the Commission imposed a ceiling on the rate 
that the releasing shipper could charge for the released capacity.\11\ 
This ceiling was derived from the Commission-approved monthly maximum 
tariff rates, necessary for the pipeline to recover its annual cost-of-
service revenue requirement.\12\
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    \11\ Order No. 636-A at 30,560.
    \12\ Order No. 637 at 31,270-71.
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    9. Third, the Commission required that capacity offered for release 
at less than the maximum rate must be posted for bidding, and the 
pipeline must allocate the capacity ``to the person offering the 
highest rate (not over the maximum rate).'' \13\ The Commission 
permitted the releasing shipper to choose a pre-arranged replacement 
shipper who can retain the capacity by matching the highest bid rate. 
The bidding requirement, however, does not apply to releases of 31 days 
or less or to any release at the maximum rate. But all releases, 
whether or not subject to bidding, must be posted.\14\
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    \13\ 18 CFR 284.8(e) (2007) provides in pertinent part that 
``[t]he pipeline must allocate released capacity to the person 
offering the highest rate (not over the maximum rate) and offering 
to meet any other terms or conditions of the release.''
    \14\ 18 CFR 284.8(h)(1) provides that a release of capacity for 
less than 31 days, or for any term at the maximum rate, need not 
comply with certain notification and bidding requirements, but that 
such release may not exceed the maximum rate. Notice of the release 
``must be provided on the pipeline's electronic bulletin board as 
soon as possible, but not later than forty-eight hours, after the 
release transaction commences.''
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    10. Finally, the Commission prohibited tying the release of 
capacity to any extraneous conditions so that the releasing shippers 
could not attempt to add additional terms or conditions to the release 
of capacity. The Commission articulated the prohibition against the 
tying of capacity in Order No. 636-A, where it stated:

    The Commission reiterates that all terms and conditions for 
capacity release must be posted and non-discriminatory and must 
relate solely to the details of acquiring transportation on the 
interstate pipelines. Release of capacity cannot be tied to any 
other conditions. Moreover, the Commission will not tolerate deals 
undertaken to avoid the notice requirements of the regulations. 
Order No. 636-A at 30,559 (emphasis in the original).

    11. Subsequent to the Commission's adoption of its capacity release 
program in Order No. 636, the Commission conducted two experimental 
programs to provide more flexibility in the capacity release market. In 
1996, the Commission sought to establish an experimental program 
inviting individual shipper and pipeline applications to remove price 
ceilings related to capacity release.\15\ The Commission recognized 
that significant benefits could be realized through removal of the 
price ceiling in a competitive secondary market. Removal of the ceiling 
permits more efficient capacity utilization by permitting prices to 
rise to market clearing levels and by permitting those who place the 
highest value on the capacity to obtain it.\16\
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    \15\ Secondary Market Transactions on Interstate Natural Gas 
Pipelines, Proposed Experimental Pilot Program to Relax the Price 
Cap for Secondary Market Transactions, 61 FR 41,401 (Aug. 8, 1996), 
76 FERC ] 61,120, order on reh'g, 77 FERC ] 61,183 (1996).
    \16\ 77 FERC ] 61,183 at 61,699 (1996).
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    12. In 2000, in Order No. 637, the Commission conducted a broader 
experiment in which the Commission removed the rate ceiling for short-
term (less than one year) capacity release transactions for a two-year 
period ending September 30, 2002. In contrast to the experiment that it 
conducted in 1996, in the Order No. 637 experiment the Commission 
granted blanket authorization in order to permit all firm shippers on 
all open access pipelines to participate. The Commission stated that it 
undertook this experiment to improve shipper options and market 
efficiency during peak periods. The Commission reasoned that during 
peak periods, the maximum rate cap on capacity release transactions 
inhibits the creation of an effective transportation market by 
preventing capacity from going to those that value it the most and 
therefore the elimination of this rate ceiling would eliminate this 
inefficiency and enhance shipper options in the short-term 
marketplace.\17\
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    \17\ Order No. 637 at 31,263. The Commission also explained why 
it was lifting the price cap on an experimental basis, instead of 
permanently, stating:
    While the removal of the price cap is justified based on the 
record in this rulemaking, the Commission recognizes that this is a 
significant regulatory change that should be subject to ongoing 
review by the Commission and the industry. No matter how good the 
data suggesting that a regulatory change should be made, there is no 
substitute for reviewing the actual results of a regulatory action. 
The two year waiver will provide an opportunity for such a review 
after sufficient information is obtained to validly assess the 
results. Due to the variation between years in winter temperatures, 
the waiver will provide the Commission and the industry with two 
winter's worth of data with which to examine the effects of this 
policy change and determine whether changes or modifications may be 
needed prior to the expiration of the waiver. Order No. 637 at 
31,279-80.
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    13. Upon an examination of pricing data on basis differentials 
between points,\18\ the Commission found that the price ceiling on 
capacity release transactions limited the capacity options of short-
term shippers because firm capacity holders were able to avoid

[[Page 37061]]

price ceilings on released capacity by substituting bundled sales 
transactions at market prices (where the market place value of 
transportation is an implicit component of the delivered price). As a 
consequence, the Commission determined that the price ceilings did not 
limit the prices paid by shippers in the short-term market as much as 
the ceilings limit transportation options for shippers. In short, the 
Commission found that the rate ceiling worked against the interests of 
short-term shippers, because with the rate ceilings in place, a shipper 
looking for short-term capacity on a peak day who was willing to offer 
a higher price in order to obtain it, could not legally do so; this 
reduced its options for procuring short-term transportation at the 
times that it needed it most.\19\ Throughout this experiment, the 
Commission retained the rate ceiling for firm and interruptible 
capacity available from the pipeline as well as for long-term capacity 
release transactions.
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    \18\ Among other things, the data showed that the value of 
pipeline capacity, as shown by basis differentials, was generally 
less than the pipelines' maximum interruptible transportation rates, 
except during the coldest days of the year, and capacity release 
prices also averaged somewhat less than pipelines' maximum 
interruptible rates.
    \19\ Order No. 637 at 31,280-81.
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    14. On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit, in Interstate Natural Gas Association of 
America v. FERC,\20\ upheld the Commission's experimental price ceiling 
program for short-term capacity release transactions as set forth in 
Order No. 637.\21\ The court found that the Commission's ``light 
handed'' approach to the regulation of capacity release prices was, 
given the safeguards that the Commission had imposed, consistent with 
the criteria set forth in Farmers Union Cent. Exch. v. FERC.\22\ The 
court found that the Commission made a substantial record for the 
proposition that market rates would not materially exceed the ``zone of 
reasonableness'' required by Farmers Union. The court also found that 
the Commission's inference of competition in the capacity release 
market was well founded, that the price spikes shown in the 
Commission's data were consistent with competition and reflected 
scarcity of supply rather than monopoly power, and that outside of such 
price spikes, the rates were well below the estimated regulated 
price.\23\ The Commission's experiment in lifting the price ceiling for 
short term capacity releases ended on September 20, 2002.\24\
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    \20\ 285 F.3d 18 (DC Cir. 2002) (INGAA).
    \21\ Specifically, the court found that: ``[g]iven the 
substantial showing that in this context competition has every 
reasonable prospect of preventing seriously monopolistic pricing, 
together with the non-cost advantages cited by the Commission and 
the experimental nature of this particular ``light handed'' 
regulation, we find the Commission's decision neither a violation of 
the NGA, nor arbitrary or capricious.'' INGAA at 35.
    \22\ 734 F.2d 1486 (DC Cir. 1984) (Farmers Union) (finding that 
a move from heavy-handed to light-handed regulation can be justified 
by a showing that under current circumstances, the goals and 
purposes of the Natural Gas Act (NGA) will be accomplished through 
substantially less regulatory oversight.
    \23\ Id. at 33.
    \24\ Regulation of Short-Term Natural Gas Transportation 
Services and Regulation of Interstate Natural Gas Transportation 
Services, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,091 (Feb. 9, 2000), order on rehearing, Order 
No. 637-A, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,099 (May 19, 2000), order on rehearing, Order 
No. 637-B, 92 FERC ] 61,062 (July 26, 2000), aff'd in part and 
remanded in part, Interstate Natural Gas Association of America v. 
FERC, 285 F.3d 18 (DC Cir. Apr. 5, 2002).
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B. The NOPR

    15. On January 3, 2007, the Commission, in response to petitions 
from various gas industry participants concerning issues related to 
capacity releases,\25\ issued a request for comments on the operation 
of the capacity release program and whether changes in any of its 
capacity release policies would improve the efficiency of the natural 
gas market.\26\ The Commission also included in its request for 
comments a series of questions asking whether the Commission should 
lift the price ceiling, remove its capacity release bidding 
requirements, modify its prohibition on tying arrangements, and/or 
remove the shipper-must-have-title requirement.
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    \25\ In August 2006, Pacific Gas and Electric Co. (PG&E) and 
Southwest Gas Corp. (Southwest) filed a petition requesting the 
Commission to amend sections 284.8(e) and (h)(1) of its regulations 
to remove the maximum rate cap on capacity releases. Subsequently, 
in October 2006, a group of large natural gas marketers (Marketer 
Petitioners) requested clarification of the operation of the 
Commission's capacity release rules in the context of asset (or 
portfolio) management services.
    \26\ Pacific Gas & Electric Co., 118 FERC ] 61,005 (2007).
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    16. After review of the petitions, comments, responses to its 
questions, and available data, the Commission issued a Notice of 
Proposed Rulemaking (NOPR), proposing two major changes to its capacity 
release regulations and policies. First, the Commission proposed to 
lift the price ceiling for short-term capacity release transactions of 
one year or less. The Commission determined that the traditional cost-
of-service price ceilings in pipeline tariffs, which are based on 
annual costs recovered over twelve equal monthly payments, are not well 
suited to the short-term capacity release market, because they do not 
reflect short-term variations in the market value of the capacity. 
Therefore, removing the price ceiling for short-term capacity releases 
would permit more efficient utilization of capacity by allowing prices 
to rise to market clearing levels, thereby permitting those who place 
the highest value on the capacity to obtain it. The Commission 
determined that the data obtained by the Commission both during the 
Order No. 637 experiment and more recently indicated that short-term 
release prices reflect market value of the capacity as revealed by 
basis differentials, rather than the exercise of market power. 
Moreover, the Commission reasoned that shippers purchasing capacity 
would be adequately protected because the pipeline's firm and 
interruptible services will provide just and reasonable recourse rates 
limiting the ability of releasing shippers to exercise market power. 
Finally, the Commission stated that reporting requirements in Order No. 
637 and the Commission's implementation of the Energy Policy Act of 
2005, specifically with respect to market manipulation, give the 
Commission an enhanced ability to monitor the market and detect and 
deter abuses. The Commission did not propose to remove the price 
ceiling on either long-term capacity releases or the pipelines' sale of 
their own primary capacity.
    17. Second, the Commission proposed to revise its capacity release 
policies to give releasing shippers greater flexibility to negotiate 
and implement AMAs, based on the Commission's findings that AMAs 
provide significant benefits to participants in the natural gas and 
electric marketplaces.\27\ Recognizing that the linking of 
transportation capacity with gas supply arrangements would violate the 
Commission's prohibition against ``tying'' released capacity to any 
extraneous conditions, the Commission proposed to exempt pre-arranged 
capacity release transactions that met certain criteria \28\ from the 
prohibition against tying.\29\ This proposal would permit a releasing 
shipper in a pre-arranged release to require that the replacement 
shipper agree to supply the releasing shipper's gas requirements and 
take assignment of the releasing shipper's gas supply contracts, as 
well as released transportation capacity on one or more pipelines and 
storage capacity with the gas currently in storage.\30\
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    \27\ NOPR at P 67-74.
    \28\ The Commission's definition of AMA as proposed in the NOPR 
is discussed in detail below.
    \29\ NOPR at P 75-82.
    \30\ In addition, the releasing shipper could require that, upon 
expiration of the AMA, the replacement shipper must return storage 
capacity included in the release with an appropriate level of 
inventory, e.g., to promise to replenish storage inventories to a 
mutually agreed upon level.

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[[Page 37062]]

    18. The Commission's second proposal to facilitate AMAs was to 
exempt pre-arranged releases to implement AMAs from competitive 
bidding.\31\ The Commission stated that, because the asset manager will 
manage the releasing shipper's gas supply operations on an ongoing 
basis, it is critical that the releasing shipper be able to release the 
capacity to its chosen asset manager. Requiring releases made in order 
to implement an AMA to be posted for bidding would thus interfere with 
the negotiation of beneficial AMAs by potentially preventing the 
releasing shipper from releasing the capacity to its chosen asset 
manager. The Commission concluded that in the AMA context the bidding 
requirement creates an unwarranted obstacle to the efficient management 
of pipeline capacity and supply assets. The Commission emphasized that 
AMAs would remain subject to all existing posting and reporting 
requirements.\32\
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    \31\ See NOPR at P 83-90. Section 284.8 of the Commission's 
regulations require capacity release transactions to be posted for 
competitive bidding unless the transactions are at the maximum 
tariff rate or are for a term of 31 days or less.
    \32\ While the NOPR originally required that any comments were 
due January 10, 2008, a number of entities filed for an extension of 
that deadline until February 8, 2008. On January 14, the Commission 
granted an extension of time for filing comments until January 25, 
2008.
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C. Comments

    19. Over 60 entities from all segments of the natural gas industry 
filed comments on the NOPR. The vast majority of those who filed 
comments regarding the Commission's proposal to permanently remove the 
price cap for short-term capacity releases of one year or less support 
the proposal, generally agreeing with the Commission's reasoning in 
support of removing the cap. Many of the local distribution companies 
(LDC), marketers, producers, and end-users who support lifting the 
price cap on short-term capacity releases also support retaining the 
price cap on long-term capacity releases \33\ and/or primary pipeline 
capacity.\34\ These parties generally view retention of these price 
caps as providing valuable safeguards in preventing the exercise of 
market power in the uncapped short-term capacity release market.
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    \33\ Those commenters include Direct Energy Services, LLC 
(Direct Energy), New Jersey Natural Gas Company (NJNG), Oklahoma 
Independent Petroleum Association (OIPA), Reliant Energy Inc. 
(Reliant), Statoil Natural Gas, LLC (Statoil), and Weyerhaeuser 
Company (Weyerhaeuser).
    \34\ Such commenters include Edison Electric Institute (EEI), 
NJNG, NJR Energy Services Company (NJR), Nstar Gas Company (Nstar), 
OIPA, Piedmont Natural Gas Company, Inc. (Piedmont), Statoil, 
Weyerhaeuser, and the Wisconsin Distributor Group (WDG). American 
Gas Association (AGA), American Public Gas Association (APGA), and 
Independent Petroleum Producers of America (IPAA) oppose lifting the 
price cap for primary capacity, arguing that doing so would undercut 
a major premise for lifting the price cap in the short-term 
secondary market, namely, that the availability of recourse rates 
from the pipeline will constrain the exercise of market power in the 
secondary market.
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    20. Two commenters oppose the Commission's proposal to lift the 
price cap for the short-term capacity release market, arguing that the 
Commission has not supported its proposed rule and that the proposed 
rule would fail a cost-benefit test.\35\ Other commenters express 
concern over the potential for capacity owners to exercise market power 
under the proposed rule.\36\ For example, some end-users of gas express 
concerns about the concentration of capacity ownership on lateral 
pipelines and therefore argue that the Commission should either not 
remove the price cap for laterals or do so on a case-by-case basis.\37\ 
Other parties generally urge the Commission to carefully monitor 
markets to ensure that they are functioning properly. Some suggest a 
final test period before permanently removing the cap, periodic 
reassessments of the uncapped market, or a process to revisit the 
determination if the market becomes dysfunctional.\38\
---------------------------------------------------------------------------

    \35\ Tenaska Marketing Ventures (Tenaska) and National Energy 
Marketers Association (NEM).
    \36\ See Comments of NEM.
    \37\ Weyerhaeuser, Northwest Industrial Gas Users (NWIGU), and 
Process Gas Consumers (PGC).
    \38\ Direct Energy, OIPA, Honeywell International, Inc. 
(Honeywell), Arizona Public Service Company (APS) (arguing that the 
market currently served by El Paso Natural Gas Pipeline east of 
California is not competitive). Commerce Energy Group, Inc. 
(Commerce Energy) suggests including a contingency for replacing the 
price cap in ``exceptional capacity situations.''
---------------------------------------------------------------------------

    21. In general, commenters also overwhelmingly supported the 
Commission's efforts to facilitate the development of AMAs.\39\ Those 
commenters agree with the Commission's assessment that AMAs provide 
value and benefits to market participants and to natural gas markets 
overall. Virtually all who commented support the steps proposed by the 
Commission to facilitate AMAs, though many of those that support the 
Commission's proposal regarding AMAs request that the Commission modify 
or clarify the proposal in various ways in order to permit broader use 
of AMAs and greater flexibility in the terms of permitted AMAs. They 
request, for example, that the Commission permit uncapped AMA releases 
of a year or less to be rolled over without bidding, clarify that 
profit sharing arrangements in an AMA do not violate any applicable 
price cap, relax the requirements concerning the replacement shipper's 
obligation to deliver gas to the releasing shipper, exempt AMAs from 
the Commission's prohibition against buy/sell arrangements, and allow 
supply side AMAs. Williston Basin commented that exempting AMAs from 
the tying prohibition and bidding requirements would encourage 
discrimination against pipelines and provide preferential treatment to 
asset managers.
---------------------------------------------------------------------------

    \39\ See e.g., Comments of the AGA at 1-2, Comments of APGA at 
2-4; Comments of Atmos Energy Corporation (Atmos) at 2-4, Comments 
of BG Energy Merchants (BGEM) at 1-2, Comments of BP Energy Company 
(BP) at 2, Comments of Direct Energy at 3-4, Comments of Duke Energy 
Corporation (Duke Energy) at 3, Comments of the EEI at 6, Comments 
of the Electric Power Supply Association (EPSA) at 2, Comments of 
Florida Cities at 2, Comments of the Interstate Natural Gas 
Association of America (INGAA) at 6, Comments of Marketer 
Petitioners at 2, Comments of National Grid Delivery Companies 
(National Grid) at 2, Comments of NJNG at 1, Comments of the Natural 
Gas Supply Association (NGSA) at 3, Comments of NJR at 1, Comments 
of NWIGU at 6, Comments of Nstar at 1-2, Comments of the Ohio Gas 
Marketers Group (OGMG) at 1, Comments of Piedmont at 1, Comments of 
PPM Energy, Inc., (PPM) at 1-3, Comments of PGC at 5, Comments of 
the Public Utilities Commission of Ohio (PUCO) at 5-7, Comments of 
Puget Sound Energy, Inc. (Puget Sound) at 8-9, Comments of Sequent 
Energy Management, L.P. (Sequent) at 5-6, Comments of the Financial 
Institutions Energy Group (FEIG) at 6-7, Comments of Turlock 
Irrigation District (Turlock) at 5, Comments of Ultra Petroleum 
Corporation (Ultra) at 4, Comments of the WDG at 3, and Comments of 
the Wyoming Pipeline Authority at 5.
---------------------------------------------------------------------------

    22. The Commission also received favorable comments on whether it 
should clarify its prohibition against tying agreements to allow a 
releasing shipper to include conditions in a storage release concerning 
the sale and/or repurchase of gas in storage inventory outside the AMA 
context. All comments that addressed this issue supported removing this 
prohibition for storage services. They assert that a shipper releasing 
storage capacity should be permitted to require the replacement shipper 
to take assignment of any gas that remains in the released storage 
capacity at the time the release takes effect; and/or to return the 
storage capacity to releasing shipper at end of the release with a 
specified amount of gas in storage.\40\ Commenters note that tying 
storage capacity with storage inventory will enable transactions to be 
consummated more readily and that the nature of the relationship 
between storage capacity and storage inventory calls out for a waiver 
of the tying rule. Others add that the ability of releasing shippers to 
``tie'' storage capacity with storage inventory such that releasing

[[Page 37063]]

shippers would be permitted to require that replacement shippers take 
inventory as a condition of release, even in circumstances outside the 
AMA context, will provide benefits to the marketplace similar to those 
provided by AMAs.\41\
---------------------------------------------------------------------------

    \40\ Public Service Commission of New York (PSCNY) comments at 
20-21.
    \41\ Comments of Marketer Petitioners.
---------------------------------------------------------------------------

    23. The Commission also received numerous comments on its inquiry 
whether pre-arranged capacity release deals necessary to implement 
retail access programs should be treated as similar to releases made as 
part of an AMA, and thus accorded the same exemptions. The majority of 
comments on this issue advocated affording capacity releases under 
state retail choice programs the same blanket exemptions from the tying 
prohibition \42\ and bidding requirements as those granted to asset 
managers.\43\ AGA, for example, recommends that the Commission add an 
exemption from the bidding requirements for any prearranged, recallable 
capacity release from an LDC to a natural gas marketer in accordance 
with the terms of a retail choice program approved by a State 
commission. AGA also asks that the Commission clarify that LDC releases 
to retail choice marketers would be entitled to the same partial 
exemption from the tying prohibition as would be releases under AMAs. 
The SPSCNY would extend the AMA exemption from the tying prohibition to 
releases of storage capacity conducted according to state retail access 
programs.
---------------------------------------------------------------------------

    \42\ Those commenters include AGA, Commerce Energy, Duke Energy, 
Hess Corporation (Hess), Interstate Gas Supply (IGS), NJNG, New York 
State Electric and Gas Corporation (NYSEG), Rochester Gas & Electric 
Corporation (RG&E), OGMG, the Public Service Commission of North 
Carolina (PSNC), South Carolina Electric and Gas Company (SCE&G), 
SCANA Energy Marketing (SEMI), PSCNY, and Sequent.
    \43\ Those commenters include the AGA, Boardwalk Pipeline 
Partners (Boardwalk), BP, Commerce Energy, Direct Energy, Duke 
Energy, FPL Energy, LLC (FPL Energy), Hess, IGS, NJNG, NYSEG, RG&E, 
Nstar, OGMG, Peoples Gas System, a Division of Tampa Electric 
Company (Peoples), PG&E, PSCNY, PUCO, SEMI, Sequent, and the WDG.
---------------------------------------------------------------------------

II. Overview of the Final Rule

    24. In this Final Rule, the Commission is modifying its policies 
and regulations concerning the release of capacity by firm shippers on 
interstate pipelines in order to enhance the efficiency and 
effectiveness of the secondary capacity release market. The 
Commission's capacity release program has created a successful 
secondary market for capacity.\44\ As a result, natural gas markets in 
general, and the secondary release market in particular, have undergone 
significant development and change in the sixteen years since Order No. 
636 and the inception of the capacity release program. As this market 
has developed, shippers and potential shippers have sought greater 
flexibility in the use of capacity. They seek to better integrate 
capacity with the underlying gas transactions, and are looking for more 
flexible methods of pricing capacity to better reflect the value of 
that capacity as revealed by the market price of gas at different 
trading points. They also seek to implement AMAs, in which capacity 
holders release their capacity to asset managers (generally marketers) 
that have greater expertise in maximizing the value of pipeline 
capacity and negotiating beneficial transactions in the gas commodity 
markets.
---------------------------------------------------------------------------

    \44\ As the Commission observed in 2005, the ``capacity release 
program together with the Commission's policies on segmentation, and 
flexible point rights, has been successful in creating a robust 
secondary market where pipelines must compete on price.'' Policy for 
Selective Discounting by Natural Gas Pipelines, 111 FERC ] 61,309, 
at P 39-41, order on reh'g, 113 FERC ] 61,173 (2005).
---------------------------------------------------------------------------

    25. In this Final Rule the Commission is taking actions to respond 
to the industry's request for greater flexibility in the capacity 
release market and to revise its policies and regulations to reflect 
the changes and developments in the marketplace. The first major 
revision is the removal of the price ceiling on short term capacity 
releases. The permanent elimination of the price ceiling for short term 
releases will enable shippers to offer competitively-priced 
alternatives to pipelines' negotiated rate offerings and will permit 
short-term capacity release prices to rise to market clearing levels, 
thereby allocating capacity to those that value it the most. It will 
also provide more accurate price signals concerning the market value of 
pipeline capacity.
    26. The Commission is also revising its regulations and policies to 
accommodate and facilitate AMAs, a relatively recent development in the 
industry. AMAs provide significant benefits to many participants in the 
natural gas and electric marketplaces and to the secondary marketplace 
itself. They maximize the utilization and value of capacity by creating 
a mechanism for capacity holders to use third party experts to both (1) 
manage their gas supply arrangements and (2) use that capacity to make 
gas sales or re-releases of the capacity to others when the capacity is 
not needed to serve the releasing shipper. AMAs result in ultimate 
savings for end-use customers by providing for lower gas supply costs 
and more efficient use of the pipeline grid.\45\ The Commission's goal 
in facilitating AMAs in this rule is to make the capacity release 
program more efficient by bringing it into line with the realities of 
today's secondary gas marketplace.
---------------------------------------------------------------------------

    \45\ See Comments of BGEM at 2, Comments of BP at 5, Comments of 
Nstar at 8, Comments of Piedmont at 4-5, Comments of PUCO at 7, 
Comments of WDG at 3.
---------------------------------------------------------------------------

    27. To that end, the Commission in this rule is adopting its NOPR 
proposal to exempt capacity releases made to implement AMAs from the 
prohibition on tying and the bidding requirements of section 284.8. The 
Commission is also making several revisions to the definition of AMAs 
as proposed in the NOPR. The Final Rule modifies the definition of AMAs 
proposed in the NOPR to relax the delivery obligation of the 
replacement shipper to the releasing shipper and to permit supply side 
AMAs. The Final Rule also clarifies that short term AMAs may be rolled 
over without bidding. Further, the Final Rule clarifies that the price 
ceiling does not apply to any consideration provided by an asset 
manager to the releasing shipper as part of an AMA. These steps, 
requested by many industry commenters that support the Commission's 
efforts in the NOPR to facilitate AMA's, will further enhance the 
efficiency of AMAs by allowing greater flexibility for parties to 
customize arrangements to meet unique customer needs while at the same 
time ensuring that capacity releases that qualify for the exemptions 
from tying and bidding granted in this rule are bona fide AMAs. The 
rule also extends the benefits of AMAs to sellers of natural gas, 
creating an even greater diversity of potential suppliers and 
participants in the secondary market.
    28. The Commission is also revising its policies to reflect the 
realities of today's marketplace by allowing a releasing shipper to 
include conditions in a release concerning the sale/and repurchase of 
gas in storage inventory, even outside the AMA context. Allowing such 
arrangements reflects the fact that in the storage context, storage 
capacity is inextricably linked to storage inventory. By permitting the 
tying of releases of storage capacity to conditions on storage 
inventory, the Commission will enhance the efficient use of storage 
capacity while at the same time ensuring that releasing shippers will 
have adequate storage inventories for the winter.
    29. The Final Rule also extends the blanket exemptions from the 
prohibition against tying and from bidding granted to AMAs to capacity 
releases made to a

[[Page 37064]]

marketer participating in a state approved retail access program, 
finding that such programs provide benefits similar to AMAs.

III. Price Cap Issues

A. Removal of Maximum Rate Ceiling for Short-Term Capacity Releases

    30. In this Final Rule, the Commission amends section 284.8 of its 
regulations to eliminate the price ceiling for short-term capacity 
release transactions of one year or less. The Commission finds that 
this action will improve shipper options and market efficiency, 
particularly during peak periods, by allowing the prices of short-term 
capacity release transactions to reflect short-term variations in the 
market value of that capacity. This will enable shippers to better 
integrate capacity with the underlying gas transactions, and will 
permit more flexible methods of pricing capacity to better reflect the 
value of that capacity as revealed by the market price of gas at 
different trading points. The Commission has previously provided 
pipelines with the flexibility to enter into negotiated rate 
transactions which are permitted to exceed the maximum rate ceiling, 
and this rule will permit releasing shippers similar flexibility in 
pricing release transactions.
    31. At the same time, we are convinced that the rates resulting 
from removal of the price cap for capacity release will be just and 
reasonable. The data collected over many years shows that the value of 
short term capacity only exceeds the price ceiling in times when 
capacity is scarce. These data are confirmed by the data gathered 
during the experimental release of the price ceiling which showed that 
capacity release prices exceed the price ceiling only for brief periods 
of constraint. Moreover, we are not relying solely on competition to 
ensure just and reasonable prices. We are maintaining the rate cap on 
pipeline services that will provide the same protection for capacity 
release transactions as it now does for pipeline negotiated rate 
transactions. Further, we have required informational postings of 
capacity release transactions that will provide transparency and 
facilitate the filing of complaints if circumstances warrant. The 
Commission will also continue to actively monitor the release market.
1. Maximum Rate Ceiling Interferes With Efficient Transactions
    32. As we explained in Order No. 637,\46\ the traditional cost-of-
service maximum rates in pipeline tariffs are not well suited to the 
short-term capacity release market.\47\ Under the traditional 
ratemaking methodology, the Commission develops a maximum annual 
transportation rate for each pipeline that, when applied to the 
pipeline's contract demand and throughput levels, will enable the 
pipeline to recover its annual cost-of-service revenue requirement. 
Each pipeline's maximum rates for services of less than a year are 
simply the maximum annual rate prorated over the shorter period.
---------------------------------------------------------------------------

    \46\ Order No. 637 at 31,271-75.
    \47\ While the Commission offered pipelines the opportunity to 
propose other types of rate designs, such as seasonal and term-
differentiated rates, only a very few pipelines have sought to make 
such rate design changes, although many pipelines have taken 
advantage of negotiated rate authority.
---------------------------------------------------------------------------

    33. Such prorated annual rates bear no relationship to the 
competitive rates that would be established in the short-term capacity 
market, particularly during peak periods. The market value of 
transportation service from the production area to the downstream 
market may be inferred by comparing the downstream delivered gas price 
in bundled sales to the market price at upstream market centers in the 
production area.\48\ As the DC Circuit recognized in INGAA, ``if the 
difference between field prices and city gate prices in a particular 
pathway is only $.07, people will not pay more than $.07 for the 
unbundled transportation.'' \49\ As discussed in more detail below, the 
data set forth in Order No. 637 and the updated data in Figures 1 
through 3 below concerning the implicit value of transportation in the 
bundled sales market demonstrates the variability of transportation 
value in the short-term market and the divergence between the 
transportation value and cost-of-service rates. This data shows that 
during most of the year, the value of transportation service is 
significantly less than the pipelines' annual cost-of-service maximum 
transportation rates, but during brief, peak demand periods, the value 
of transportation service is measurably greater than the maximum 
transportation rates.
---------------------------------------------------------------------------

    \48\ In Order No. 637, the Commission explained ``gas commodity 
markets now determine the economic value of pipeline services in 
many parts of the country. Thus, even as FERC has sought to isolate 
pipeline services from commodity sales, it is within the commodity 
markets that one can see revealed the true price for gas 
transportation.'' Order No. 637 at 31,274 (quoting M. Barcella, How 
Commodity Markets Drive Gas Pipeline Values, Public Utilities 
Fortnightly, February 1, 1998 at 24-25).
    \49\ INGAA at 31.
---------------------------------------------------------------------------

    34. Because the existing capacity release price ceiling does not 
reflect short-term variations in the market value of the capacity, the 
price ceiling inhibits the efficient allocation of capacity and harms, 
rather than helps, the short-term shippers it is intended to protect. 
The price ceiling operates to prevent the shipper most valuing short-
term capacity on a peak day from being able to obtain it, because that 
shipper cannot offer a releasing shipper the full value the shipper 
places on that capacity. The price ceiling may also reduce the amount 
of released capacity available during peak periods. As the Commission 
explained in Order No. 637, ``As a result of the maximum rate, firm 
capacity holders may not find it sufficiently profitable to make their 
capacity available for release. For instance, a dual fuel industrial 
customer might determine that it would be more economic not to use gas, 
and to substitute a different fuel, if it could obtain a sufficiently 
high price for its released capacity.'' \50\ Thus, during a peak day 
the price ceiling may only serve to limit a purchasing shipper's 
capacity options, with the result that it must purchase gas in a 
bundled transaction in the downstream market at a price reflecting the 
market-determined value of the transportation.
---------------------------------------------------------------------------

    \50\ Order No. 637 at 31,279.
---------------------------------------------------------------------------

    35. The increased use by pipelines and shippers of negotiated rate 
transactions based on gas price differentials demonstrates that buyers 
and sellers value the ability to calibrate the price of transportation 
to its value in the market. The maximum rate ceiling applied to 
capacity release transactions denies releasing and replacement shippers 
the same ability to negotiate transactions that reflect the market 
value of capacity at all times. As the Commission has found, providing 
the ability to negotiate capacity release transactions based on price 
differentials will help in providing short-term capacity to replacement 
shippers, such as gas-fired electric generators.\51\ With the price 
ceiling in effect, releasing shippers are unable to effectively use 
price differentials as a measure of capacity value because they are 
denied the ability to recover the value of capacity during peak periods 
when that value exceeds the maximum rate cap.
---------------------------------------------------------------------------

    \51\ Standards for Business Practices for Interstate Natural Gas 
Pipelines, Notice of Proposed Rulemaking, 71 FR 64,655 (November 3, 
2006), FERC Stats. & Regs. Proposed Regulations ] 32,609, P 17 (Oct. 
25, 2006), Order No. 698, 72 FR 38,757 (July 16, 2007), FERC Stats. 
& Regs. Regulations Preambles ] 31,251 at P 51 (Jun. 25, 2007).
---------------------------------------------------------------------------

    36. The price ceiling also harms captive customers holding long-
term contracts on the pipeline. Those customers pay maximum rates for 
both peak and off-peak periods. During off-

[[Page 37065]]

peak periods, they can only recover a small portion of the capacity 
cost through capacity release because of the low market value of off-
peak capacity. However, during peak periods, the price ceiling prevents 
those customers from releasing their capacity for its full market 
value.
    37. Finally, the price ceiling reduces the dissemination of 
accurate capacity pricing information. That is because the price 
ceiling causes transactions to move to the bundled sales market during 
peak periods, so that there is no separate capacity transaction to be 
reported.
2. Assurance of Just and Reasonable Rates
    38. As the court stated in INGAA, the Commission may depart from 
cost of service ratemaking upon:

    A showing that * * * the goals and purposes of the statute will 
be accomplished `through the proposed changes.' To satisfy that 
standard, we demanded that the resulting rates be expected to fall 
within a `zone of reasonableness, where [they] are neither less than 
compensatory nor excessive.' [citation omitted]. While the expected 
rates' proximity to cost was a starting point for this inquiry into 
reasonableness, [citation omitted], we were quite explicit that 
`non-cost factors may legitimate a departure from a rigid cost-based 
approach,' [citation omitted]. Finally, we said that FERC must 
retain some general oversight over the system, to see if competition 
in fact drives rates into the zone of reasonableness `or to check 
rates if it does not.' \52\
---------------------------------------------------------------------------

    \52\ INGAA at 31.

Accordingly, we analyze below (1) the extent to which market conditions 
and other factors may be expected to keep short-term capacity release 
prices within a reasonable zone despite the removal of the price 
ceiling, (2) the non-cost factors supporting a removal of the price 
ceiling, and (3) our oversight of the short-term capacity release 
market after removal of the price ceiling.
a. Market Conditions Ensure Just and Reasonable Rates
    39. The Commission finds that the short-term capacity release 
market is generally competitive. Therefore competition, together with 
our continuing requirement that pipelines must sell short-term firm and 
interruptible services to any shipper offering the maximum rate, and 
the Commission's ongoing monitoring efforts will keep short-term 
capacity release rates within the ``zone of reasonableness'' required 
by INGAA and Farmers Union.
    40. In Order Nos. 636 and 637, the Commission instituted a number 
of policy revisions which have enhanced competition between releasing 
shippers as well as between releasing shippers and the pipeline. These 
revisions provide shippers with enhanced market mechanisms that will 
help ensure a more competitive market and mitigate the potential for 
the exercise of market power. The Commission required pipelines to 
permit releasing shippers to use flexible point rights and to fully 
segment their pipeline capacity. Flexible point rights enable shippers 
to use any points within their capacity path on a secondary basis, 
which enables shippers to compete effectively on release transactions 
with other shippers. Segmentation further enhances the ability to 
compete because it enables the releasing shipper to retain the portion 
of the pipeline capacity it needs while releasing the unneeded portion. 
Effective segmentation makes more capacity available and enhances 
competition. As the Commission explained in Order No. 637:

    The combination of flexible point rights and segmentation 
increases the alternatives available to shippers looking for 
capacity. In the example,\53\ a shipper in Atlanta looking for 
capacity has multiple choices. It can purchase available capacity 
from the pipeline. It can obtain capacity from a shipper with firm 
delivery rights at Atlanta or from any shipper with delivery point 
rights downstream of Atlanta. The ability to segment capacity 
enhances options further. The shipper in New York does not have to 
forgo deliveries of gas to New York in order to release capacity to 
the shipper seeking to deliver gas in Atlanta. The New York shipper 
can both sell capacity to the shipper in Atlanta and retain the 
right to inject gas downstream of Atlanta to serve its New York 
market.\54\
---------------------------------------------------------------------------

    \53\ In the example used in Order No. 636, a shipper holding 
firm capacity from a primary receipt point in the Gulf of Mexico to 
primary delivery points in New York could release that capacity to a 
replacement shipper moving gas from the Gulf to Atlanta while the 
New York releasing shipper could inject gas downstream of Atlanta 
and use the remainder of the capacity to deliver the gas to New 
York.
    \54\ Order No. 637 at 31,301.

    41. In addition to enhancing competition through expansion of 
flexible point rights and segmentation, the Commission in Order No. 637 
also required pipelines to provide shippers with scheduling equal to 
that provided by the pipeline, so that replacement shippers can submit 
a nomination at the first available opportunity after consummation of 
the capacity release transaction. The change makes capacity release 
more competitive with pipeline services and increases competition 
between capacity releasers by enabling replacement shippers to schedule 
the use of capacity obtained through release transactions quickly 
rather than having to wait until the next day.
    42. The data accumulated by the Commission during the Order No. 637 
experiment, as well as review of more recent data, confirm that 
capacity release prices reflect competitive conditions in the industry. 
On May 30, 2002, the Commission issued a notice of staff paper 
presenting data on capacity release transactions during the 
experimental period when the capacity release ceiling price was 
waived.\55\ The staff paper provided analysis of capacity release 
transactions on 34 pipelines during the 22-month period from March 2000 
to December 2001.\56\
---------------------------------------------------------------------------

    \55\ On May 30, 2002, a staff paper was posted on the 
Commission's web site presenting, and analyzing data on capacity 
release transactions relating to the experimental period when the 
rate ceiling on short-term released capacity was waived.
    \56\ Many of these release transactions would have occurred 
prior to completion of the pipeline's Order No. 637 compliance 
proceedings and the implementation of the changes to flexible point 
rights, segmentation and scheduling described above.
---------------------------------------------------------------------------

    43. In brief, the data gathered during the 22-month period show 
that without the price ceiling, prices exceeded the maximum rate only 
during short time periods and appear to be reflective of competitive 
conditions in the industry. The following table shows the distribution 
of above ceiling price releases among the pipelines studied.

[[Page 37066]]

                                    Table I.--Above Cap Releases by Pipeline
                         [Releases Awarded Between March 26, 2000 and December 31, 2001]
----------------------------------------------------------------------------------------------------------------
                                                  Releases above                      Release
                                                     max rate       % of total    quantity above    % of total
                    Pipeline                        (number of       releases        max rate         release
                                                   transactions)                    (MMBtu/day)      quantity
----------------------------------------------------------------------------------------------------------------
Algonquin.......................................               1             0.1          18,453             0.2
ANR Pipeline....................................               1             0.1          30,000             0.2
CIG.............................................              19             6.5         109,984             4.4
Dominion (CNGT).................................              21             1.0          65,789             0.7
Columbia Gas....................................             101             4.4         374,727             2.7
Columbia Gulf...................................  ..............  ..............  ..............  ..............
East Tennessee..................................  ..............  ..............  ..............  ..............
El Paso.........................................             135            13.3         631,683            12.5
Florida Gas.....................................              25             1.7          43,526             1.4
Great Lakes.....................................               3             1.3          15,000             0.6
Iroquois........................................  ..............  ..............  ..............  ..............
Kern River......................................               2             3.9          55,000             2.5
KMI (KNEnergy)..................................               3             1.0           1,409             0.0
Gulf South (Koch)...............................  ..............  ..............  ..............  ..............
Midwestern......................................               1             0.6          50,000             2.3
Mississippi River...............................  ..............  ..............  ..............  ..............
Mojave Pipeline Co..............................               1             2.6          40,000             4.7
Natural Gas Pipeline Co.........................              16             3.2         270,489             2.3
Reliant (Noram).................................  ..............  ..............  ..............  ..............
Northern Border.................................  ..............  ..............  ..............  ..............
Northern Natural................................              12             1.6          23,273             0.5
Northwest Pipeline..............................              24             1.8         139,850             4.1
Paiute Pipeline.................................  ..............  ..............  ..............  ..............
Panhandle Eastern...............................               1             0.4           1,000             0.1
Southern Natural................................               7             0.3          24,101             0.2
Tennessee Gas...................................              11             0.4          36,421             0.2
TETCO...........................................             122             3.8         645,856             3.3
Texas Gas.......................................               6             0.5         103,237             1.0
Trailblazer.....................................               3            25.0          15,000            10.0
Transco.........................................             183             3.3       1,540,885             4.1
Transwestern....................................              11             4.5          64,058             6.5
Trunkline.......................................  ..............  ..............  ..............  ..............
Williams........................................               4             0.4          16,500             0.3
Williston Basin.................................  ..............  ..............  ..............  ..............
                                                 ---------------------------------------------------------------
    Total.......................................             713             2.2       4,316,241             2.1
----------------------------------------------------------------------------------------------------------------

    44. These data show that during periods without capacity 
constraints, prices remained at or below the maximum rate. The staff 
paper does identify 713 releases above the ceiling price, representing 
an average total capacity release contract volume of 4.3 billion cubic 
feet (Bcf) per day. However, the staff paper reflects that these above-
ceiling price releases represented only a small portion of the total 
releases on these pipelines, comprising approximately two percent of 
total transactions on the pipelines studied for the entire period, and 
two percent of gas volumes. Further, above ceiling releases accounted 
for no more than six or seven percent of transactions during any given 
month of the period. As one would expect, the percentages of releases 
occurring above the ceiling increased during peak periods. However, 
average release rates were higher by only one cent per MMBtu per day or 
five and one-half percent higher than they would have been with the 
price ceiling in place. Of the 34 pipelines in the study, 10 reported 
no releases above the ceiling price, and 20 pipelines reported fewer 
than 25 above-ceiling price releases. The data gathered during this 22-
month period reflects the Commission's expectations and affirms the 
Commission's findings in the Order No. 637 proceeding. As the court 
stated in INGAA:

    The data represented in the graph [ ] do support the 
Commission's view that the capacity release market enjoys 
considerable competition. The brief spikes in moments of extreme 
exigency are completely consistent with competition, reflecting 
scarcity rather than monopoly. * * * [citation omitted] A surge in 
the price of candles during a power outage is no evidence of 
monopoly in the candle market.\57\
---------------------------------------------------------------------------

    \57\ INGAA at 32.

    45. The Commission has gathered additional current data and has 
replicated the evidence presented in Order No. 637. The current data 
shows that the conditions that existed at the time of Order No. 637 and 
during the past experimental period continue in today's marketplace.
    46. For example, Figure 1 illustrates the fluctuations in the 
market value of transportation service, as shown by the basis 
differentials between Louisiana and New York City. This graph compares 
the daily difference in gas prices between Louisiana and New York City 
to Transcontinental Gas Pipe Line Corporation's maximum interruptible 
transportation rate, including fuel retainage, during the 12 months 
ending July 31, 2007. This graph shows that for most of the year, the 
value of transportation service, as indicated by the basis 
differentials, is less than the maximum transportation rate. However, 
during brief, peak demand periods, the value of transportation service 
is measurably greater than the maximum transportation rate. For 
example, on

[[Page 37067]]

February 5, 2007, the basis differential between Louisiana and New York 
City was in excess of $27.00 per MMBtu, while the maximum tariff rate 
plus the cost of fuel was approximately $1.08 per MMBtu.\58\
---------------------------------------------------------------------------

    \58\ In Order No. 637, the Commission presented similar data in 
figure 6 showing the implicit transportation value between South 
Louisiana and Chicago. Order No. 637 at 31,274.
---------------------------------------------------------------------------

BILLING CODE 6717-01-P
[GRAPHIC] [TIFF OMITTED] TR30JN08.020

    47. Figures 2 and 3 below reflect that a similar pattern of 
transportation value is evident in other areas of the country. Focusing 
on fluctuations in the market value of transportation service as shown 
by basis differentials between Louisiana and Chicago and between the 
Permian Basin and the California border, respectively, these figures 
show that for most of the year, the value of transportation service is 
less than the maximum transportation rate of Natural Gas Pipeline 
Company of America and El Paso Natural Gas Company, respectively. 
However, similar to figure 1, these figures also reflect that during 
brief peak-demand periods the value of transportation service is 
measurably greater than the maximum transportation rate.

[[Page 37068]]

[GRAPHIC] [TIFF OMITTED] TR30JN08.021

[GRAPHIC] [TIFF OMITTED] TR30JN08.022

BILLING CODE 6717-01-C

[[Page 37069]]

    The data in all three of the above figures reflect similar market 
conditions to the data that the Commission relied upon in lifting the 
price ceiling for short-term capacity releases in Order No. 637, with 
the market value of capacity generally below the pipeline's maximum 
rate except for relatively brief price spikes.\59\ In affirming the 
Commission's actions, the court in INGAA found that the data presented 
by the Commission constituted a substantial basis for the conclusion 
that a considerable amount of competition existed in the capacity 
release market. Further, the INGAA court concluded that the price 
spikes reflected in the data were consistent with competition and that 
such spikes reflected scarcity rather than monopoly power.\60\
---------------------------------------------------------------------------

    \59\ Order No. 637 at 31,273-75.
    \60\ INGAA at 31-32.
---------------------------------------------------------------------------

b. Recourse Rate Protection
    48. Moreover, the Commission is not relying only on a competitive 
market to ensure just and reasonable rates. The pipeline's maximum 
rates for short-term firm and interruptible services serve as recourse 
rate protection for negotiated rate transactions,\61\ and will provide 
the same protection to replacement shippers by giving them access to a 
just and reasonable rate if the releasing shipper seeks to exercise 
market power.\62\ As the Commission explained in Order No. 637:
---------------------------------------------------------------------------

    \61\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines, 74 FERC ] 61,076, reh'g denied, 75 FERC ] 
61,024 (1996), petitions for review denied sub nom., Burlington 
Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (DC Cir. 1998). See 
also Natural Gas Pipelines Negotiated Rate Policies and Practices; 
Modification of Negotiated Rate Policy, 104 FERC ] 61,134 (2003), 
order on reh'g and clarification, 114 FERC ] 61,042, order 
dismissing reh'g and denying clarification, 114 FERC ] 61,304 
(2006). As the Commission explained in its negotiated rate policy 
statement, ``[t]he availability of a recourse service would prevent 
pipelines from exercising market power by assuring that the customer 
can fall back to traditional cost-based service if the pipeline 
unilaterally demands excessive prices or withholds service.'' 74 
FERC ] 61,076 at 61,240 (1996).
    \62\ The pipeline is obligated to sell capacity at the just and 
reasonable rate. Tennessee Gas Pipeline Co., 91 FERC ] 61,053 
(2000), reh'g denied, 94 FERC ] 61,097 (2001), petitions for review 
denied sub nom., Process Gas Consumers Group v. FERC, 292 F.3d 831, 
837 (DC Cir. 2002).

    The Commission is continuing to protect against the possibility 
that, in an oligopolistic market structure, the pipeline and firm 
shipper will have a mutual interest in withholding capacity to raise 
the price because the Commission is continuing cost based regulation 
of pipeline transportation transactions. The pipeline will be 
required to sell both short-term and long-term capacity at just and 
reasonable rates. In the short-term, a releasing shipper's attempt 
to withhold capacity in order to raise prices above maximum rates 
will be undermined because the pipeline will be required to sell 
that capacity as interruptible capacity to a shipper willing to pay 
the maximum rate. Shippers also have the option of purchasing long-
term firm capacity from the pipelines at just and reasonable 
rates.\63\
---------------------------------------------------------------------------

    \63\ Order 637 at 31,282.

    49. The court in INGAA similarly recognized the value of the 
pipeline's recourse rate protecting against possible abuses of market 
---------------------------------------------------------------------------
power by releasing shippers stating that:

    [i]f holders of firm capacity do not use or sell all of their 
entitlement, the pipelines are required to sell the idle capacity as 
interruptible service to any taker at no more than the maximum 
rate--which is still applicable to the pipelines.\64\
---------------------------------------------------------------------------

    \64\ INGAA at 32.
---------------------------------------------------------------------------

c. Short-Term Customers Are Not Captive
    50. The releasing shippers' ability to exercise market power in the 
short-term capacity release market also is limited because short-term 
customers are not captive, even if only connected to one pipeline. 
Short-term customers, those using interruptible or short-term firm 
pipeline service or relying on capacity release transactions, are by 
the very nature of the service for which they are contracting, 
expressly taking the risk that they may have to forgo the use of gas 
entirely if short-term capacity is too expensive, or not available, 
when they need it.\65\ Thus, short-term shippers always have the option 
simply not to take service, if the price demanded is above competitive 
market levels.
---------------------------------------------------------------------------

    \65\ Order No. 637 at 31,285, 31,336-42.
---------------------------------------------------------------------------

d. Non-Cost Factors
    51. Removal of the price ceiling on short-term capacity release 
transactions provides a number of advantages which ``offset whatever 
harm the occasional high rate might entail.'' \66\ Most importantly, 
removal of the price cap permits more efficient utilization of capacity 
by permitting prices for short-term capacity releases to rise to market 
clearing levels, thereby permitting those who place the highest value 
on the capacity to obtain it. Removal of the price ceiling also will 
provide potential customers with additional opportunities to acquire 
capacity. Without the price ceiling, firm capacity holders will have a 
greater incentive to release capacity during times of scarcity, because 
they will be able to obtain the full market value of the capacity.\67\ 
Therefore, a shipper needing gas on a peak day will have a greater 
opportunity to obtain the capacity it needs from a firm capacity 
holder, instead of having only the choices of purchasing a bundled sale 
or taking gas out of the pipeline and paying the pipeline's scheduling 
or overrun penalties.\68\ Thus, removal of the price ceiling benefits 
short-term shippers because the shipper placing a high value on the 
capacity has a greater assurance of obtaining the capacity it needs 
than it does under a price cap where that shipper may be unable to 
obtain any capacity.
---------------------------------------------------------------------------

    \66\ INGAA at 33.
    \67\ For example, an LDC shipper may hold capacity on one or 
more pipelines and have access to storage and peak shaving 
facilities. Using these facilities may cost the LDC more to deliver 
gas than purchasing gas in the upstream markets and using its 
transportation capacity to transport that gas to the city gate. 
However, the LDC might be willing to release its transportation 
capacity and use its peak shaving device instead if it could receive 
a price above the maximum rate for its transportation capacity so 
that the price it receives will cover the costs of the peak shaving 
device. Order No. 637 at 31,277.
    \68\ Order No. 637 at 31,280; INGAA at 34.
---------------------------------------------------------------------------

    52. Second, even if replacement shippers do end up paying higher 
prices for capacity during peak periods than they did with the 
regulated rate in effect, it is appropriate for shippers using the 
system only during peak periods to pay higher prices reflecting the 
greater demand on the system. Short-term shippers currently receive the 
benefit of paying reduced capacity release prices during off-peak 
periods but face a cap on the market price during peak periods. Removal 
of the price ceiling on short-term capacity releases will ensure that 
those shippers that receive the benefit of lower market prices during 
off-peak periods face the higher market prices during peak periods.
    53. Third, removing the price ceiling on short-term capacity 
releases should benefit the ``primary intended beneficiaries of the 
NGA--the `captive' shippers'' \69\ by removing the regulatory bias 
built into the current rate structure. Those shippers typically have 
long-term firm contracts with the pipeline. Long-term shippers pay the 
same rate for capacity during both peak and off-peak periods. During 
off-peak periods they can recover only a small portion of their 
capacity cost through capacity release, because the market value for 
release capacity is generally quite low due to the reduced demand for 
capacity and the increased availability of released capacity. But 
during peak periods, the price cap limits long-term captive customers 
(who cannot make bundled sales) from receiving the full market value of 
their capacity. Long-term shippers pay for the largest proportion of 
the pipeline's fixed costs through their annual reservation charges, 
and

[[Page 37070]]

permitting them to receive more revenue from capacity release during 
peak periods will help them defray those costs. In short, the captive 
customers will ``continue to receive whatever benefits the rate 
ceilings generally provide,'' while also ``reaping the benefits of 
[the] new rule, in the form of higher payments for their releases of 
surplus capacity.'' \70\
---------------------------------------------------------------------------

    \69\ INGAA at 33.
    \70\ Id.
---------------------------------------------------------------------------

    54. Finally, by providing more accurate price signals concerning 
the market value of pipeline capacity, removal of the price ceiling for 
short-term capacity releases will promote the efficient construction of 
new capacity by highlighting the location, frequency, and severity of 
transportation constraints. Correct capacity pricing information will 
also provide transparent market values that will better enable 
pipelines and their lenders to calculate the potential profitability 
and associated risk of additional construction designed to alleviate 
transportation constraints.
e. Oversight
    55. The reporting requirements in Order No. 637 and the 
Commission's implementation of the Energy Policy Act of 2005, 
specifically with respect to market manipulation, provide the 
Commission with enhanced ability to monitor the market and detect and 
deter abuses.
    56. Order No. 637 improved the Commission's and the industry's 
ability to monitor capacity release transactions by requiring daily 
posting of these transactions on pipeline Web sites.\71\ This has 
increased the information available to buyers while at the same time 
making it easier for the Commission to identify situations in which 
shippers are abusing their market power.\72\ Further, the Commission 
will entertain complaints and respond to specific allegations of market 
power on a case-by-case basis if necessary. Furthermore, the Commission 
directs staff to monitor the capacity release program and, using all 
available information, issue a report on the general performance of the 
capacity release program, within six months after two years of 
experience under the new rules.
---------------------------------------------------------------------------

    \71\ 18 CFR 284.8 (2007).
    \72\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
---------------------------------------------------------------------------

3. Comments
    57. The vast majority of comments support the removal of the price 
ceiling for capacity release transactions. But some commenters have 
raised limited concerns.
a. Lack of Competition in Certain Areas
    58. A few commentors have alleged that certain discrete portions of 
the short term capacity release market may not be competitive at all 
times. For example, Arizona Public Service states that the 
transportation markets served by El Paso Natural Gas Company (El Paso) 
located east of California are not currently competitive. It asserts 
that during the 2000-2002 California energy crisis, when the Commission 
had lifted the price cap on short term capacity releases, prices of 
releases of El Paso capacity spiked to levels in excess of $20 per Dth. 
Honeywell similarly argues that the Commission has failed to address 
the fact that many geographical areas do not operate as a free market 
and that areas in the Northeast, East, and Southwest portions of the 
country faced constrained capacity and difficulties in building new 
pipeline facilities. Honeywell argues that lifting the price cap on 
short term capacity release will only exacerbate prices while not 
addressing the underlying problem of these constrained markets. In 
addition, some end-users of gas express concerns about the 
concentration of capacity ownership on lateral pipelines and therefore 
argue that the Commission should either not remove the price cap for 
laterals or do so on a case-by-case basis, after a review of market 
concentration and a demonstration that the releasing shipper does not 
have market power on the lateral.\73\
---------------------------------------------------------------------------

    \73\ Weyerhaeuser, NWIGU, and PGC.
---------------------------------------------------------------------------

    59. While the Commission has not conducted a detailed market 
analysis for each discrete area of the interstate pipeline grid, the 
data previously discussed shows that the short-term capacity release 
market is generally competitive. Indeed, with respect to the El Paso 
market, the data in Table 1 shows that during the period March 26, 2000 
to December 31, 2001, which included the California energy crisis 
referred to by APS, only 12.5 percent of the total volume of capacity 
released on El Paso was released at prices above the maximum rate. 
Moreover, the updated data in Figure 3 for August 2006 through July 
2007 shows that the market value of transportation service from the 
Permian Basin to the California border was less than El Paso's maximum 
transportation rate, except during brief, peak-demand periods when the 
value of transportation service was somewhat greater than the maximum 
transportation rate. Similar data for deliveries to East of California 
markets on El Paso's South Mainline reflects the same overall pattern, 
as shown in the following graph.\74\
---------------------------------------------------------------------------

    \74\ The data for this chart comes from ICE, an on-line 
electronic trading platform. The El Paso South Mainline area is 
described on ICE as: El Paso-South Mainline--buyers' choice west of 
Cornudas.

BILLING CODE 6717-01-P

[[Page 37071]]

[GRAPHIC] [TIFF OMITTED] TR30JN08.023

BILLING CODE 6717-01-C

    60. Similarly, while Honeywell suggests that capacity is 
constrained in areas in the East and Northeast, the data in Figure 1 
shows that for most of the year the value of transportation service 
from Louisiana to New York City is less than the maximum transportation 
rate on Transco, with only brief spikes above that level during peak 
demand periods.
    61. These data are consistent with the proposition that prices will 
exceed the maximum rate only during periods of constraint. Moreover, it 
is precisely for these reasons that the Commission is continuing to 
insist on the maintenance of the pipeline's recourse rate as protection 
against the exercise of market power. Even on laterals or other parts 
of the pipeline grid where all firm capacity may be held by only a few 
or one firm shipper, those shippers cannot withhold their capacity in 
order to charge a price above competitive levels. The pipeline's cost-
based interruptible rate is always available as an alternative when a 
releasing shipper attempts to withhold its capacity. For example, 
assume that a releasing shipper with available capacity on a little 
used lateral seeks to exercise market power by withholding capacity 
unless a potential replacement shipper pays a higher than justified 
rate. If market demand for capacity at that rate does not exist,\75\ 
the replacement shipper has the option of turning down the deal and 
purchasing the capacity from the pipeline at the just and reasonable 
interruptible rate.
---------------------------------------------------------------------------

    \75\ In other words, the market is not constrained.
---------------------------------------------------------------------------

    62. NEM remains concerned that in spite of the Commission's finding 
that the short term capacity release market is competitive, market 
power may exist for some market participants resulting in historically 
high natural gas prices reaching even higher levels. However, the data 
reflects the competitive nature of the short term capacity release 
market and the safeguards that the Commission employs in the instant 
Final Rule to mitigate any residual market power. The Commission 
accordingly finds that NEM's speculative concerns are unwarranted.\76\
---------------------------------------------------------------------------

    \76\ NEM also posits that the lifting of the short term capacity 
release market price ceiling in states where LDCs are required to 
release their capacity to marketers as part of a state retail 
unbundling program will place the marketer in a position where they 
would no longer be guaranteed the same underlying capacity costs as 
if the capacity had remained with the utility, and this could 
increase the costs the marketers must pass on to their state retail 
customers. To the extent that this feature causes problems in states 
where capacity release assignments are a mandatory part of a state 
retail unbundling program, the Commission would expect that the 
State would consider this in its policies.
---------------------------------------------------------------------------

b. Benefits From Removing the Price Ceiling
    63. Tenaska contests some of the benefits the Commission has cited 
for removing the price ceiling. It argues there will be no overall 
increase in allocative efficiency from removal of the short term 
release price cap. It asserts that capacity that is in excess to the 
current capacity holder's needs already finds it way to those who value 
it more by a variety of means, including bundled downstream sales, 
short and long term capacity releases, and pipeline sales of short-term 
firm and interruptible service. It also argues that releasing shippers 
with excess capacity are more likely to release that capacity over a 
longer term, perhaps multiple years, rather than speculate that it 
could profit by making very short-term releases during peak period 
price spikes. It states that releases over relatively long term with 
few exceptions allow the releasing shipper to realize its full market 
value without being constrained by maximum pipeline rates.\77\
---------------------------------------------------------------------------

    \77\ Tenaska explains, ``[c]apacity that basis markets show to 
be worth more than the applicable pipeline maximum rate in the 
prompt month will almost always drop in value to a level below that 
maximum rate at some future point. Such capacity can be sold for its 
full value within the pipeline maximum rate cap simply by extending 
the term.'' Tenaska comments at 4-5.

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

[[Page 37072]]

    64. Rather than undercutting the removal of the price cap, 
Tenaska's argument that releasing shippers can now avoid the price 
ceiling by making gas sales (in effect bundled sales of gas and 
transportation) supports our determination. Shippers may well find that 
releasing transportation alone is far more efficient than making a 
bundled sales transaction, and therefore, removal of the price ceiling 
will serve only to promote efficiency with negligible effect, if any, 
on price levels. Similarly, requiring shippers to execute long-term 
contracts in order to effectuate short-term transactions is 
inefficient, and would mask more accurate short-term price signals. 
Moreover, as discussed earlier, releasing and replacement shippers want 
to contract based on price differentials between markets even when such 
differentials exceed the maximum rate, and executing long term 
contracts at some approximate capped rate would not achieve that goal.
    65. Tenaska also argues that holders of long term pipeline 
contracts, that are ``net long'' compared to their actual capacity 
needs will be the only shippers to benefit. Market participants that 
are ``net short'' hold less capacity than they need and choose to match 
some portion of their demand with short term services and delivered gas 
purchases rather than to rely exclusively on long term pipeline 
contracts. Tenaska argues that the effect of the removal of the short 
term release rate cap, if there is any effect on reallocation of 
capacity at all, will be a transfer of value from net short companies 
to net long companies and states that there will be no net market 
benefit of the type the Commission must show to justify the proposed 
removal of the cap.
    66. Tenaska ignores the fact that ``net short'' holders of capacity 
under its scenario will benefit from the removal of the price cap from 
short term capacity release because they may be able to gain access to 
capacity in a constrained market that they could not if the price cap 
remained. A releasing shipper, subject to a rate ceiling, may well hold 
onto capacity if the maximum rate is less than its opportunity cost, 
such as using an alternative fuel, using expensive storage, or 
conservation of gas.\78\ Moreover, the fact low load factor ``net 
long'' holders of capacity of the type described by Tenaska can profit 
from above-cap short term releases is one of the benefits of removing 
the short-term price cap.
---------------------------------------------------------------------------

    \78\ Order No. 637 at 31,554.
---------------------------------------------------------------------------

c. Promotion of Construction
    67. Honeywell argues that the Commission has failed to show that 
more accurate price signals concerning the value of pipeline capacity 
will, in fact, promote construction of needed capacity. First, higher 
prices should serve as price signals indicating where capacity 
shortages exist and where potentially profitable construction can take 
place. If prices are ``exacerbated'' as Honeywell argues, replacement 
shippers paying such prices have every incentive to go to the pipeline 
and support economically efficient construction to rectify the 
shortage. While political and environmental obstacles are also a factor 
in construction, this factor has not stymied construction. The 
Commission has processed a large number of certificate applications for 
new construction of capacity, storage, and liquefied natural gas 
terminals in every region.\79\ Third, providing incentives for new 
construction is not the only benefit of removing the price ceiling. As 
discussed earlier, removal of the price ceiling will benefit the market 
even in the short term by providing for a more efficient allocation of 
capacity to those who value that capacity.
---------------------------------------------------------------------------

    \79\ In 2007 alone, approximately 34 major pipeline projects 
were authorized by the Commission which was comprised of 
approximately 2,782 miles of pipeline, 850 thousand horsepower of 
compression and the capacity to transport some 23,000 million MMd/t 
of gas. See the ``2007'' data at http://www.ferc.gov/industries/gas/
indus-act/pipelines/approved-projects.asp. See similar data for 
storage at http://www.ferc.gov/industries.asp and liquefied natural 
gas terminals at http://www.ferc.gov/industries/lng.asp.
---------------------------------------------------------------------------

d. Changed Circumstances
    68. Tenaska and APS argue that even if the Commission's conclusion 
that all pipeline capacity release markets are competitive is 
supportable at this time, circumstances could change dramatically in 
this industry. As a result, they assert that the Commission must 
include a process for promptly revisiting its determination that the 
market is competitive if there is evidence that the market is 
dysfunctional. Honeywell also states that the Commission also proposes 
to blind itself for almost three years to any problems in the capacity 
release market by directing its staff to issue a report within six 
months after gaining two years of experience under the new rules.
    69. As set forth above, we are maintaining oversight over the 
market and can act if market power is being abused in particular 
circumstances. Order No. 637 improved the Commission's and the 
industry's ability to monitor capacity release transactions by 
requiring daily posting of these transactions on pipeline Web 
sites.\80\ This has increased the information available to buyers while 
at the same time making it easier for the Commission to identify 
situations in which shippers are abusing their market power.\81\ Such 
information allows the Commission to monitor, with the assistance of 
all industry participants, the overall competitiveness of the market 
including discrete portions of the market that may not be competitive 
at all times. Moreover, the Commission will entertain complaints and 
respond to specific allegations of market power on a case-by-case basis 
if necessary. This action will also guard against the use of market 
power by any market participant.
---------------------------------------------------------------------------

    \80\ 18 CFR 284.8 (2007).
    \81\ Order No. 637 at 31,283; Order No. 637-A at 31,558.
---------------------------------------------------------------------------

    70. Further, Honeywell misreads the Commission's directives and 
intent when it claims the Commission has voluntarily blinded itself to 
market forces for some three years. While the Commission directs its 
staff to monitor the capacity release program and issue a report on the 
general performance of the capacity release program within six months 
after two years of experience under the new rules, nothing in this 
directive precludes staff from alerting the Commission to any 
irregularities in the capacity release market before it issues its 
general report.
    71. Moreover, while Tenaska refers to the Commission lifting of the 
short term price cap as permanent, and notes that the INGAA court 
reviewed a proposal by the Commission to lift the price ceiling only on 
a temporary basis, it is important to note that, although the 
Commission will remove the price ceiling on short term capacity 
releases it will monitor the capacity release market and review its 
staff's report on the effects of the new rule and the overall 
functioning of the capacity release market.
e. Exemption From Bidding for Short-Term Releases at the Maximum Rate
    72. The NGSA and others request that the Commission continue to 
allow market participants to enter into a pre-arranged capacity release 
transaction without bidding for releases of capacity with a term of a 
year or less as long as those releases are made at the pipeline's 
maximum tariff rate. NGSA asserts that prearranged releases at the 
pipeline's maximum rate without the competitive bidding requirement 
have been proven to provide significant market benefits and should not 
be eliminated, solely

[[Page 37073]]

because the Commission removes the rate cap on short-term capacity 
release transactions.
    73. The reason for the prior exemption from bidding for pre-
arranged capacity release transactions at the maximum rate was based 
solely on the fact that with the rate cap in place, no one could submit 
a higher bid and win the capacity. As discussed earlier, one of the 
reasons for removing the price ceiling for short-term releases is to 
ensure that capacity is allocated to the shipper that values it the 
most. NGSA has not provided a sufficient justification for permitting 
shippers to consummate a capacity release at the maximum rate when 
another potential shipper places a greater value on that capacity.

B. Removal of Price Ceiling for Long-Term Releases

    74. Several commenters to the NOPR request that the Commission 
remove the price ceiling on long-term capacity releases in addition to 
eliminating the price ceiling on short-term capacity releases. \82\ 
These commenters assert that the same arguments that support removal of 
the price cap for short-term capacity releases apply equally to lifting 
the price cap for long-term capacity releases. For example, commenters 
argue that lifting the price ceiling on long-term capacity releases 
would increase liquidity and competition in the market for capacity 
release and primary pipeline capacity, thereby promoting the goals of 
allocative efficiency. Moreover, commentors assert that lifting the 
price cap on long-term capacity releases will promote the construction 
of additional pipeline capacity by providing more accurate price 
signals reflecting the value of such capacity.
---------------------------------------------------------------------------

    \82\ See, e.g., Comments of Allegheny Energy Supply Co. 
(Allegheny), Duke Energy, Dynegy Marketing and Trade (Dynegy), and 
Southwest .
---------------------------------------------------------------------------

    75. Commentors also point out that the Commission's concern over 
replacement shippers being ``locked in'' to high price long-term 
contracts is misplaced because such releases of capacity would likely 
be priced using basis differentials at different price index 
locations.\83\ Other commentors such as Duke assert that the 
Commission's concerns are misplaced because replacement shippers 
accepting such multi-year deals are sophisticated market participants 
capable of negotiating fair agreements.
---------------------------------------------------------------------------

    \83\ See e.g., Comments of Southwest at 10; Allegheny at 6-7.
---------------------------------------------------------------------------

    76. Allegheny argues that the pipelines' recourse rates will serve 
as a check on over-priced long-term capacity releases because 
replacement shippers would have the ability to negotiate for capacity 
from a pipeline at the recourse rate if the releasing shippers were 
seeking excessive prices. Allegheny also points to the Commission's 
reporting requirements, complaints process, and enhanced civil penalty 
authority as additional safeguards against the exercise of market 
power.
    77. Several commenters support the retention of the price ceiling 
on long term capacity releases and argue that it protects customers 
from being locked into a long term contract without price cap 
protection, that the price cap provides protection against possible 
abuse of market power and that removal of the price cap for long term 
capacity releases does not provide the efficiency gains provided by the 
removal of the price ceiling on short term capacity release.\84\
---------------------------------------------------------------------------

    \84\ See, e.g., Comments of NJNG at 33, OIPA at 3, Statoil at 
14, Weyerhaeuser at 11.
---------------------------------------------------------------------------

    78. In this instant Final Rule, the Commission will not extend the 
removal of price ceilings to long term releases as urged by these 
commentors. The data discussed above indicate only that removal of the 
price cap for short-term releases is needed to reflect market values. 
The Commission removed the price ceiling to permit shippers to quickly 
align their capacity prices with the fluctuating short term market for 
capacity releases. Such flexibility is not relevant to long-term 
releases.
    79. Limiting this rulemaking to short-term transactions is a 
reasonable response to the circumstances the Commission is trying to 
address, i.e., short term price spikes. Only under these conditions do 
Commission-approved maximum rates prevent the market from rationally 
allocating scarce capacity to those shippers who value it most. 
Removing the price cap only for short-term transactions allows a more 
efficient market-driven allocation of capacity during those brief peak 
demand periods, and provides more detailed price signals to the market 
on the value of peak capacity, while retaining valuable consumer 
protections provided by the price ceiling for longer term transactions. 
The Commission's policy emphasis in this rule is on short-term 
transactions, because that is where there is a problem to be solved. No 
commenter has made a convincing argument that price ceilings on longer 
term transactions create significant allocative inefficiencies or 
market failures. Accordingly, the Commission concludes that the current 
record does not warrant removal of the price ceiling on long-term 
capacity releases.
    80. Moreover, as we said in the NOPR,\85\ limiting the release to 
one year will not prevent the releasing and replacement shipper from 
continuing an index-based release past one year, because they could 
repost the release for another year, and the price ceiling would not 
apply to the release. However, such reposting provides additional 
assurance to the market that capacity will be allocated to those who 
value it the most. Any transaction in which the parties want to 
continue the release past one year would have to be re-posted for 
bidding to ensure that the capacity is allocated to the highest valued 
use.\86\ This bidding process could provide an opportunity for re-
determining the current market value of the capacity.
---------------------------------------------------------------------------

    \85\ NOPR at P 44-45.
    \86\ As discussed below, however, short term capacity releases 
made in context of an AMA need not be re-posted for bidding at the 
end of their term.
---------------------------------------------------------------------------

C. Removal of Price Ceiling for Pipeline Short-Term Transactions

    81. Pipelines request that the Commission remove the price ceiling 
for short-term primary pipeline capacity whether firm or interruptible. 
In sum, the Interstate Natural Gas Association of America (INGAA) and 
the commenting pipelines argue that if the Commission lifts the price 
cap for short-term capacity releases, it should also lift the price cap 
for primary pipeline capacity.\87\
---------------------------------------------------------------------------

    \87\ See e.g., Comments of Boardwalk, Spectra Energy 
Transmission, LLC and Spectra Energy Partners, LP (Spectra), and 
Williston Basin Interstate Pipeline Co. (Williston Basin).
---------------------------------------------------------------------------

1. Removal of the Price Ceiling Is Not Justified
    82. The Commission declines to remove the ceiling from short-term 
pipeline capacity. In the Alternative Rate Design Policy statement, we 
offered the pipelines the flexibility to exceed the price cap in one of 
two ways: either pipelines can make a filing with appropriate 
information to establish the market is competitive or pipelines can 
negotiate rates as long as the shipper has the option of purchasing 
capacity at the recourse (maximum) tariff rate.\88\ These two 
approaches assured shippers that the pipelines were not exercising 
market power. The pipelines request for lifting the maximum rate on 
short-term releases would effectively negate the recourse rate 
protection we included in the negotiated rate program.
---------------------------------------------------------------------------

    \88\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996).
---------------------------------------------------------------------------

    83. Our action here is designed to permit releasing shippers some 
of the

[[Page 37074]]

same flexible pricing authority the Commission has already granted 
pipelines through the negotiated rate program. But, as discussed 
earlier, the Commission is retaining the maximum rate ceiling on 
pipeline capacity because it acts as the recourse rate for both 
pipeline transactions as well as release transactions. Removing the 
rate ceiling for pipeline transactions would therefore remove an 
important protection both for pipeline customers and for replacement 
shippers on capacity release transactions.
    84. In addition, pipelines are the principal holders of capacity. 
As the court recognized in INGAA:

    There seems every reason to suppose that [releasing shipper] 
ownership of such capacity (in any given market) is not so 
concentrated as that of the pipelines themselves--the concentration 
that prompted Congress to impose rate regulation in the first place.
* * * * *
    Here, the distinction between pipelines and other holders of 
unused capacity, based on probable likelihood of wielding market 
power, seems to us to pass muster.\89\
---------------------------------------------------------------------------

    \89\ INGAA at 35.

    85. Unlike releasing shippers, the pipeline holders of primary 
capacity have a greater ability to exercise market power by withholding 
capacity and not constructing facilities. Because pipelines are in the 
best position to expand their own systems, cost-of-service rate 
ceilings help to ensure that pipelines have appropriate incentives to 
construct new facilities when needed. As the Commission found, ``the 
only way a pipeline [can] create scarcity to force shippers to accept 
longer term contracts would be to refuse to build additional capacity 
when demand requires it.'' \90\ As long as cost-of-service rate 
ceilings apply, however, ``pipelines [will] have a greater incentive to 
build new capacity to serve all the demand for their service, than to 
withhold capacity, since the only way the pipeline could increase 
current revenues and profits would be to invest in additional 
facilities to serve the increased demand.'' \91\ Similarly, as long as 
pipeline short-term services are subject to a cost of service rate, the 
pipelines will not limit their construction of new capacity to meet 
demand in order to create scarcity that increases short-term prices. 
Indeed, releases at prices above the maximum rate will indicate that 
pipeline capacity is constrained and demonstrate that constructing 
additional capacity could be profitable.
---------------------------------------------------------------------------

    \90\ Regulation of Short-Term Natural Gas Transportation 
Services, 101 FERC ] 61,127, at P 12 (2002), aff'd, American Gas 
Ass'n v. FERC, 428 F.3d 255 (DC Cir. 2005). See also Tennessee Gas 
Pipeline Co., 91 FERC ] 61,053 (2000), reh'g denied, 94 FERC ] 
61,097 (2001), aff'd, 292 F.3d 831 (DC Cir. 2002).
    \91\ Id.
---------------------------------------------------------------------------

    86. Further, pipelines already have significant pricing discretion. 
As discussed above, pipelines can enter into negotiated rate 
transactions above the maximum rate. Pipelines also may seek market-
based rates by making a filing with the Commission establishing that 
they lack market power in the markets they serve.\92\ In addition, 
pipelines have the ability to propose seasonal rates for their systems, 
and therefore, recover more of their annual revenue requirement in peak 
seasons.\93\ The proposed rule is designed solely to give releasing 
shippers some of the same flexibility enjoyed by the pipelines, subject 
to the same recourse rate protection. But removing the ceiling price 
from the release market does not justify removing all regulatory 
protections applicable to the primary capacity holder.
---------------------------------------------------------------------------

    \92\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996).
    \93\ See Order No. 637 at 31,574-81.
---------------------------------------------------------------------------

2. Response to Specific Comments
a. Evidentiary Record
    87. INGAA states that the same evidentiary record relied upon by 
the Commission to propose lifting the ceiling on capacity releases 
reflects that the entire market, including short-term pipeline 
services, is competitive, and therefore contends that the Commission 
should lift the rate ceilings on the entire short-term market. Spectra 
adds that the evidence cited by the Commission supports the existence 
of competition by all participants in the single market for short-term 
capacity, not just competition in the capacity release sector of the 
overall market. INGAA asserts that if the market is competitive, the 
identity of the seller should be irrelevant.
    88. As we have explained above, while the data indicates that the 
short-term secondary market is competitive in general, we have not made 
a finding that every segment of every pipeline is competitive; we 
retained the recourse rate as a protection against the potential 
exercise of market power by both pipelines and releasing shippers in 
those cases in which the market may not be competitive. While the 
purpose of capacity release, segmentation, and flexible point rights is 
to encourage competition between the pipeline's sale of its own 
capacity and capacity release, and those policies have successfully 
created a robust secondary market as demonstrated by the data discussed 
earlier in this rule, that does not necessarily mean that every 
pipeline faces competition in the sale of its short-term capacity on 
all segments of its system. For example, the Commission's selective 
discounting policy permits pipelines to restrict a shipper's discount 
to specific points, so that the shipper must pay the pipeline's maximum 
rate if it releases the capacity to a replacement shipper who uses 
different points where the pipeline faces less competition.\94\ This 
may reduce that shipper's incentive to release its capacity to a 
replacement shipper who will use points on a segment with less 
competition.\95\ Retaining the recourse rate helps protect against the 
pipeline's abuse of market power in the sale of capacity on any such 
segments of its system.
---------------------------------------------------------------------------

    \94\ Williston Basin Interstate Pipeline Co., 110 FERC ] 61,210 
at P 22, order on reh'g, 112 FERC ] 61, 038 (2005). These orders 
responded to a decision by the United States Court of Appeals for 
the District of Columbia Circuit in Williston Basin Interstate 
Pipeline Co. v. FERC, 358 F.3d 45 (DC Cir. 2004) (Williston), 
vacating orders in an Order No. 637 compliance proceeding permitting 
releasing shippers to retain primary point discounts when their 
replacement shippers used different points. The DC Circuit held that 
the policy could undermine the benefits of selective discounting, 
stating that ``economic theory tells us price discrimination, of 
which selective discounting is a species, is least practical where 
arbitrage is possible--that is, where a low price buyer can resell 
to a high price buyer * * * yet this is precisely what the 
Commission's policy would appear not only to allow but to 
encourage.'' 358 F.3d at 50 (cite omitted).
    \95\ In addition, a particular shipper's incentive to release 
capacity in competition with the pipeline could be reduced, if its 
discounted or negotiated rate agreement contains a provision, as 
permitted by Commission policy, providing that the pipeline will 
share any revenues the shipper receives from a capacity release in 
excess of its discounted or negotiated rate. See LSP Cottage Grove, 
L.P. v. Northern Natural Gas Co., 111 FERC ] 61,108 at P58-59 
(2005), and cases cited.
---------------------------------------------------------------------------

    89. Further, the repercussions of removing price ceilings for 
pipeline transactions are more serious than for released capacity, 
because the exercise of market power by pipelines could reduce the 
total amount of primary pipeline capacity available to the market. 
Finally, to the extent pipelines believe their markets are competitive, 
they have a full opportunity to make a filing with the Commission to 
obtain market based rates based on a showing of lack of market 
power.\96\
---------------------------------------------------------------------------

    \96\ Pipelines so far have not been successful in demonstrating 
that their major markets are competitive. See e.g., Gas Transmission 
Northwest Corp., 119 FERC ] 61,288 (2007); Koch Gateway Pipeline 
Co., 85 FERC ] 61,013 (1998), order on reh'g, 89 FERC ] 61,046 
(1999).

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

[[Page 37075]]

b. Infrastructure Incentives
    90. INGAA alleges that maintaining cost-based recourse rates for 
pipelines is not required to preserve an incentive for pipelines to 
construct needed pipeline infrastructure. It asserts this runs counter 
to the general presumption that market-based rates send the proper 
signals as to whether new pipeline construction is needed and can be 
constructed economically. In their comments, INGAA and Spectra argue 
that pipelines actually compete to build new capacity, and that there 
is no reason to assume that non-pipeline investment will not fill any 
void caused by pipelines withholding capacity.\97\
---------------------------------------------------------------------------

    \97\ Spectra also argues that the Commission should remove the 
price caps for pipeline short-term firm and interruptible capacity, 
and suggests that to the extent the Commission retains its concerns 
regarding withholding of capacity, the Commission could retain the 
price caps for interruptible service. Spectra further argues that 
this action would provide shippers with a recourse alternative that 
would be available if the pipeline attempted to withhold short-term 
firm capacity or the releasing customer tried to withhold short-term 
release capacity.
---------------------------------------------------------------------------

    91. Neither INGAA nor Spectra have shown that the entry barriers to 
constructing capacity on existing pipeline rights of way are so low 
that there is effective competition. Moreover, they have the 
opportunity to present any such detailed evidence in a proceeding 
seeking to show that they do not have market power, and other parties 
would have an opportunity to challenge such evidence. This is not a 
finding we can make on a generic basis in this proceeding.
c. Competitive Market Structure
    92. INGAA asserts that the Commission's concern that pipelines own 
more pipeline capacity than their firm shippers is based on a pre-
restructuring, pre-open access view of the industry, and not based on 
any empirical study of pipeline market power. Moreover, INGAA and 
Spectra assert that control of the short-term market is now primarily 
in the hands of pipelines' firm shippers, which have substantial rights 
such as capacity release, flexible point rights and segmentation 
rights. These shipper rights produce a competitive short-term market 
that cannot reasonably be bifurcated based on the identity of the 
seller. INGAA and Spectra state that the Commission should focus its 
concern not on formal ownership, but rather on the entity that controls 
access to or use of the capacity.
    93. Spectra points out that a check on prices is not needed to 
prevent the exercise of market power because sufficient safeguards--in 
the form of competition between shippers seeking to release or acquire 
capacity in the short-term markets, as well as the competition between 
shippers and pipelines themselves--will protect the market from abuse. 
Further, Spectra asserts that construction of new capacity, the open 
access tariff, reporting and posting requirements, and the Commission's 
oversight and enforcement authority will also serve as added 
safeguards.
    94. However, as the Court of Appeals found, these arguments are 
comparing ``apples and oranges.'' \98\ First, the available capacity of 
the pipeline is on hand and ready to be sold, whereas the capacity held 
by releasing shippers is not necessarily available, since much of it 
may be needed to serve its native loads:
---------------------------------------------------------------------------

    \98\ INGAA at 24.

    The petitioning pipelines assert that pipelines hold only about 
7% of pipeline transportation capacity, while shippers hold the 
remaining 93%. This is classic apples and oranges. The Commission 
points out that whereas the uncontracted capacity of a pipeline is 
presumptively available for the short-term market, no such 
presumption makes sense for the non-pipeline capacity holders: they 
presumably contracted for the capacity in anticipation of actually 
using it.\99\
---------------------------------------------------------------------------

    \99\ Id. In addition, as previously discussed, there may be 
circumstances in which shippers' discounted or negotiated rate 
agreements contain provisions that have the effect of reducing 
competition from capacity release on some segments of the pipeline.

    Second, using the market shares for already existing capacity does 
not reflect the more important relationship of the price ceiling to 
construction of new capacity infrastructure which is far more critical 
to ensuring that the pipeline grid is expanded to meet demand. Because 
the pipelines are the principal parties constructing additional 
capacity, it is crucial that their incentive to build is not diluted by 
the ability to earn scarcity rents in the short-term market.
d. Differences in Flexibility Between Pipeline Capacity and Released 
Capacity
    95. INGAA and the pipelines argue that the pricing flexibility 
available to the pipelines does not allow pipelines to compete with 
shippers offering short-term capacity releases without a price ceiling. 
They argue that market-based pricing for pipelines is subject to a 
strenuous market-power test that involves lengthy and costly 
administrative proceedings. They argue that the Commission rarely finds 
that a pipeline meets this market-power test, and therefore it is 
impractical for pipelines to engage in competition with capacity 
releases.\100\
---------------------------------------------------------------------------

    \100\ INGAA at 12 (citing, KN Interstate Gas Transmission Co., 
76 FERC ] 61,134 (1996); and Rendezvous Gas Services, LLC, 112 FERC 
] 61,141, at 61,792-94 (2005)). Spectra notes that the Commission 
has never approved market based rates for a major natural gas 
pipeline. Spectra comments at 24.
---------------------------------------------------------------------------

    96. In regard to negotiated rates, the pipelines argue that their 
flexibility is limited because the maximum rate is always subject to 
the shipper's right to elect the recourse rate, and implementation is 
subject to regulatory delays. INGAA and Williston also argue that the 
negotiated rate program offers pipelines very little, if any, 
opportunity to employ market-based pricing to efficiently allocate 
capacity to those who desire it most.
    97. Third, INGAA asserts that seasonal rates do not provide the 
flexibility necessary to address the pipelines' competitive 
disadvantage under the Commission's proposal because seasonal rates 
result in new recourse rates, capped at the pipeline's annual revenues, 
not the ability to charge rates in excess of recourse rates. Spectra 
adds that seasonal rates do not allow pipelines to award the capacity 
to the customers who value it most because there is still a maximum 
rate. In addition, Spectra notes that pipelines are unable to respond 
to market signals in the short-term market using seasonal recourse 
rates. Williston asserts that seasonal rates are not a substitute for 
the removal of a price ceiling because they do not necessarily align 
prices with what the market will bear.
    98. We agree that the flexibility offered to pipelines and 
releasing shippers is not identical, due to the differences already 
noted between the primary and secondary markets. The recourse rate, for 
example, may operate somewhat differently in the two markets by virtue 
of the design of these markets; but as we have found, the retention of 
the recourse rate is necessary to provide an effective check on both 
markets. Thus, we have sought to provide both pipelines and shippers 
with reasonably comparable flexibility consistent with the differences 
between these entities and the need to provide protection against 
market power.
    99. For example, the commentors assert that the Commission has 
rarely granted a pipeline authority to price its capacity upon market 
based rates. INGAA and the pipelines make this allegation to show that 
it is administratively difficult to obtain market-based rates from the 
Commission and that is a difference from the pricing authority the

[[Page 37076]]

Commission grants capacity releases in this rule. On the other hand, 
the fact that the pipelines have not been granted market based rates 
based on their factual showings is strong evidence that the recourse 
rate is still needed to protect shippers against the exercise of market 
power.\101\ This fact also leaves the Commission reluctant to find that 
it should remove the ceiling from primary short term pipeline capacity.
---------------------------------------------------------------------------

    \101\ See e.g., Gas Transmission Northwest Corp., 119 FERC ] 
61,288 (2007); Koch Gateway Pipeline Co., 85 FERC ] 61,013 (1998), 
order on reh'g, 89 FERC ] 61,046 (1999).
---------------------------------------------------------------------------

    100. Spectra argues that the Commission uses a stricter market 
power analysis to determine whether to grant a pipeline market based 
rates than it did to conclude that it would remove the price caps for 
short term capacity releases. Spectra asserts that the Commission, in 
removing the price ceiling from short term capacity releases, did not 
define the relevant product market and the relevant geographic market, 
nor did it calculate a Herfindahl-Hirschman Index to measure market 
concentration of the releasing shippers and other competing sellers in 
the market. Spectra argues that the Commission should remove the price 
caps on short-term pipeline capacity on the same basis it used for 
removing the caps on short-term capacity releases.
    101. The Commission is not using the same analysis to remove the 
price ceiling from short term capacity releases as it does to determine 
whether a pipeline lacks market power and should therefore be permitted 
market based rates. As we have explained, one of the principal reasons 
for removing the price ceiling on released capacity is the existence of 
the pipeline's service as recourse in the event market power is 
exercised.\102\ As the court in INGAA observed:
---------------------------------------------------------------------------

    \102\ Tennessee Gas Pipeline Co., 91 FERC ] 61,053 (2000), reh'g 
denied, 94 FERC ] 61,097 (2001), petitions for review denied sub 
nom., Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 (DC 
Cir. 2002).

    If holders of firm capacity do not use or sell all of their 
entitlement, the pipelines are required to sell the idle capacity as 
interruptible service to any taker at no more than the maximum 
rate--which is still applicable to the pipelines. [footnote omitted] 
Even though interruptible service may not be as desirable as firm 
service, the Commission concluded that it would provide an adequate 
substitute, whose availability would place a meaningful check on 
whatever anti-competitive tendencies the resellers might have.\103\
---------------------------------------------------------------------------

    \103\ INGAA at 22.

    102. The analysis we have employed in removing the price ceiling 
for released capacity is therefore more comparable to that used for 
pipeline negotiated rates than for the market power analysis under the 
Alternative Rate Design Policy statement. The continuation of the 
recourse rate provides sufficient protection to enable us to remove the 
price ceiling for short term capacity releases without doing a more 
detailed market power analysis.\104\ The Commission finds, however, 
that there are sufficient concerns about the ability of pipelines to 
exercise market power in short-term transactions on at least some 
segments of their systems, that a blanket removal of the price cap on 
all such pipeline transactions in this rulemaking proceeding, without 
consideration of specific circumstances on individual pipeline systems, 
would be inappropriate.
---------------------------------------------------------------------------

    \104\ Moreover, the Commission's use of stricter standard in 
reviewing petitions by a pipeline for alternative pricing authority 
for its primary transportation is not a new concept and is based 
upon the different risks of abuses of market power. In Koch Gateway 
Pipeline Co., 89 FERC ] 61,046 (1999), the Commission stated:
    As reflected in the market power analysis set forth in the 
Policy Statement, the Commission has taken a conservative and 
cautious approach concerning the showing a pipeline must make in 
order to justify a finding that it lacks market power in its primary 
transportation market, i.e., the pipeline's own sale of its 
transportation capacity. In fact, many commenters asserted that it 
would be unlikely that the pipeline's primary market would meet the 
proposed criteria for market-based rates. The Commission recognizes 
that it has taken a more relaxed and light-handed approach toward 
market-based rates in other contexts, including for example, the 
pipeline's sales of storage service and unbundled sales of the gas 
commodity. Purchasers of such other services are more likely to have 
good alternatives to purchasing from the pipeline; for example, 
barriers to entry in the storage and gas commodity markets are 
likely to be less. The Commission also recognizes that its Short-
Term Transportation NOPR proposed a different approach for 
justifying removal of the price cap on short term (less than one 
year) transportation services in both the pipeline's primary 
transportation market and the secondary, capacity release market. 
That proposal included the establishment of mandatory capacity 
auctions to control market power. Id. at 61,129 (footnote omitted).
---------------------------------------------------------------------------

e. Bifurcation of the Markets
    103. The pipelines maintain that continuing the price ceiling on 
pipeline short term services will create a bifurcated market with 
higher market prices in the uncapped release market. The premise of 
this argument is that if shippers that place a lower value on 
transportation are able to acquire the capped pipeline service, the 
prices in the uncapped market will be higher than if all capacity were 
sold without a price ceiling. In the NOPR, the Commission responded to 
similar arguments.\105\ The Commission pointed out that interruptible 
service has lower priority than firm service so that even if a shipper 
placing a relatively low value on the capacity has a higher position on 
the pipeline's queue for price-controlled interruptible transportation, 
it is not guaranteed that it can acquire that capacity, leading to the 
supposed higher market clearing price. A firm shipper could always 
release its unused firm capacity to a replacement shipper who places a 
higher value on that capacity, thereby displacing the lower-value 
interruptible shipper.
---------------------------------------------------------------------------

    \105\ NOPR at P 51.
---------------------------------------------------------------------------

    104. With respect to short-term firm service, the Commission stated 
that higher market clearing prices would not occur as long as arbitrage 
exists. Any shipper with a higher queue position that acquires the 
pipeline capacity at the lower capped rate would have an incentive to 
resell that capacity to another shipper who places a higher value on 
the capacity, thus ensuring that the market clearing price will reflect 
all relevant demand.
    105. INGAA asserts that the Commission's observation that pipeline 
short-term capacity is interruptible and inferior to firm released 
capacity is a partial answer to its argument that a bifurcated market 
will produce higher prices in the regulated portion of the market than 
would otherwise be the case. But INGAA and Spectra assert that short-
term pipeline capacity is not always interruptible--unsubscribed 
pipeline capacity can be sold on a firm basis during periods of peak 
demand, and would, if treated on a par with released capacity, compete 
on a head to head basis. INGAA and Spectra argue that if the rate for 
that short-term firm pipeline capacity is capped, the pricing 
inefficiencies will occur because the arbitrage opportunities relied 
upon by the Commission in the above-quoted text often entail high 
costs, making reliance on such opportunities inefficient. For example, 
Spectra cited articles for the proposition that arbitrage opportunities 
``often entail high costs, making the reliance on them also 
inefficient.'' \106\
---------------------------------------------------------------------------

    \106\ Spectra comments at 12, citing, Stephen J. Choi and A.C. 
Pritchard, Behavioral Economics and the SEC, 56 Stan. L. Rev. 1, n. 
11 (2003) (discussing that ``arbitrage is costly, which may limit 
its effect''). See also Lynn A. Stout, The Mechanics of Market 
Inefficiency: An Introduction to the New Finance, 28 J. Corp. L. 
635, 655 (2003) (observing that ``arbitrage is costly and 
imperfect'') and Andrei Shleifer & Robert W. Vishny, The Limits of 
Arbitrage, 52 J. Fin. 35 (1997) (explaining why the capital costs 
required to engage in arbitrage opportunities can hamper market 
efficiency).
---------------------------------------------------------------------------

    106. The only arbitrage costs at issue in this case are the costs 
of releasing that capacity, which is precisely the same cost releasing 
shippers must incur and we have sought to reduce the costs

[[Page 37077]]

of capacity release over the years. In particular, the Commission's 
action in Order No. 637, where the Commission instituted a number of 
policy revisions that were designed to enhance competition and improve 
efficiency across the pipeline grid should reduce arbitrage costs. 
There the Commission required pipelines to permit releasing shippers to 
use flexible point rights in order to compete effectively on release 
transactions with other shippers and to fully segment their pipeline 
capacity which permits the releasing shipper to retain the portion of 
the pipeline capacity it needs while releasing the unneeded 
portion.\107\ This combination of flexible point rights and 
segmentation increases the alternatives available to shippers looking 
for capacity. Moreover, the Commission also required that pipelines 
provide shippers with scheduling equal to that provided by the 
pipeline, so that replacement shippers can submit a nomination at the 
first available opportunity after consummation of the capacity release 
transaction. This action also makes the two types of capacity more 
interchangeable and should reduce arbitrage costs.
---------------------------------------------------------------------------

    \107\ Order No. 637 at 31,300.
---------------------------------------------------------------------------

    107. On the other hand, we have to recognize that arbitrage can 
never be perfect. If it were, no interruptible transportation would be 
sold on fully subscribed pipelines. Moreover, as previously discussed, 
in order to preserve at least some of the benefits of selective 
discounting, the Commission permits pipelines to include provisions in 
discounted rate agreements which may reduce a shipper's incentive to 
engage in arbitrage in certain circumstances. It is also important to 
recognize that the pipelines' argument for removing the price ceiling 
for pipeline interruptible and short-term firm capacity is predicated 
on arbitrage. Their essential argument is that as long as long-term 
prices are regulated, short-term price ceilings can be removed because 
shippers can purchase firm capacity in the long-term market and 
arbitrage that capacity by releasing it in the short-term market. If 
such arbitrage is costly or ineffective, as the pipelines argue here, 
or if a pipeline uses selective discounting to discourage arbitrage on 
some parts of its system, the pipelines retain market power over their 
sales of short-term capacity. Thus, even if arbitrage is not fully 
effective, that fact does not require removal of the price ceiling 
because impediments to arbitrage may enhance pipeline market 
power.\108\
---------------------------------------------------------------------------

    \108\ Further, even if maintenance of the price ceiling on 
short-term firm capacity serves to bifurcate the market, we are 
concerned that lifting the price ceiling on short term firm capacity 
would create a perverse incentive for pipelines to forgo the sale of 
firm capacity for periods of more than a year in order to reap the 
uncapped rates that would be available in the short term.
---------------------------------------------------------------------------

    108. In balancing the risks of creating a somewhat bifurcated 
market against the possibility of the exercise of market power by the 
pipelines in the short-term market, we have determined to err on the 
side of enhanced protection against market power. In INGAA, the court 
recognized the importance of the same trade-off between the possible 
bifurcation of the market and the need to continue to regulate pipeline 
short-term capacity. It recognized that while price distortions might 
occur if arbitrage is not effective,\109\ the recourse rate applied to 
the pipelines provided protection with respect to both pipeline and 
released capacity:
---------------------------------------------------------------------------

    \109\ ``The basic proposition asserted by the pipelines (and, as 
we say, recognized by the Commission) is that where (1) a portion of 
the supply of a good or service is subject to price controls, and 
(2) demand exceeds (the price-controlled) supply at the fixed price, 
the market-clearing price in the uncontrolled segment will be 
normally higher than if no price controls were imposed on any of the 
supply.'' INGAA at 33.

    If holders of firm capacity do not use or sell all of their 
entitlement, the pipelines are required to sell the idle capacity as 
interruptible service to any taker at no more than the maximum 
rate--which is still applicable to the pipelines.\110\
---------------------------------------------------------------------------

    \110\ Id.

The Court concluded, and we agree that, the essential differences 
between pipelines and releasing shippers justified their differential 
---------------------------------------------------------------------------
treatment:

    Here, the distinction between pipelines and other holders of 
unused capacity, based on probable likelihood of wielding market 
power, seems to us to pass muster.\111\
---------------------------------------------------------------------------

    \111\ Id at 36.
---------------------------------------------------------------------------

IV. Asset Management Arrangements

    109. In this Final Rule, the Commission is revising its capacity 
release policies to give releasing shippers greater flexibility to 
negotiate and implement AMAs. AMAs are a relatively recent development 
in the capacity release market, and are beneficial to numerous market 
participants and to the market in general. However, the Commission's 
existing regulations and policies concerning capacity release interfere 
with the ability of releasing shippers to implement the most efficient 
AMAs. Accordingly, as discussed below, the Commission is adopting its 
NOPR proposals to grant an exemption from the prohibition against tying 
and an exemption from bidding for AMAs. The Commission is also revising 
the definition of AMAs proposed in the NOPR so as to relax the 
requirements concerning an asset manager's obligation to deliver gas to 
the releasing shipper and to allow supply side AMAs. In addition, the 
Final Rule clarifies that uncapped AMA capacity releases of one-year or 
less may be rolled over without competitive bidding, and that profit 
sharing arrangements included in an AMA will not violate any applicable 
price cap. The Commission also exempts certain AMAs from the buy/sell 
prohibition.

A. Background

    110. In general, AMAs are contractual relationships where a party 
agrees to manage gas supply and delivery arrangements, including 
transportation and storage capacity, for another party. Typically a 
shipper holding firm transportation and/or storage capacity on a 
pipeline or multiple pipelines temporarily releases all or a portion of 
that capacity along with associated gas production and gas purchase 
agreements to an asset manager. The asset manager uses that capacity to 
serve the gas supply requirements of the releasing shipper, and, when 
the capacity is not needed for that purpose, uses the capacity to make 
releases or bundled sales to third parties.
    111. While AMAs may be fashioned in a myriad of ways, there are 
several common components of these arrangements. First, the releasing 
shipper generally enters into a pre-arranged capacity release to an 
asset manager ostensibly at the maximum rate in order to avoid the 
bidding requirement. Second, the releasing shipper makes payments to 
the asset manager for the gas supply service performed by the asset 
manager for the releasing shipper. These payments may include the 
releasing shipper paying the asset manager: (1) The full cost of the 
released capacity (e.g., maximum rate) on the theory that the asset 
manager is using the released capacity to transport the releasing 
shipper's gas supplies, (2) a management fee for transportation-related 
tasks (e.g. nominations, scheduling, storage injections, etc.) 
associated with the asset manager's obligation to provide gas supplies 
to the releasing shipper, and (3) the asset manager's cost of 
purchasing gas supplies for the releasing shipper. Third, the asset 
manager generally shares with the releasing shipper the value it is 
able to obtain from the releasing shipper's capacity and supply 
contracts when those assets are not

[[Page 37078]]

needed to supply the releasing shipper's gas needs. The asset manager 
obtains such value either by re-releasing the capacity or by using it 
to make bundled sales to third parties. The asset manager may share 
that value by: (1) Paying a fixed ``optimization'' fee to the releasing 
shipper, (2) sharing profits pursuant to an agreed-upon formula, or (3) 
making its gas sales to the releasing shipper at a price below market 
levels.
    112. In many instances the asset manager is chosen through a 
request for proposal (RFP) process. The RFP describes the details and 
terms and conditions of the proposed deal and seeks bids from service 
providers willing to provide the requested services. The methodology 
for choosing a winning bidder under an RFP often reflects many 
different factors, including price, creditworthiness, experience, 
reliability, and flexibility, and it is clear that price is not always 
the determining factor. Some RFP procedures are state mandated, and 
thus, in those situations, the LDC must get approval from the state for 
the final agreement.
    113. As the Commission described in the NOPR, there are several 
ways in which the Commission's current capacity release regulations may 
interfere with the ability of shippers to negotiate and implement AMAs. 
The first relates to the Commission's prohibition against the ``tying'' 
of release capacity to any condition. The Commission established this 
prohibition in Order No. 636-A, using the following language:

    [t]he Commission reiterates that all terms and conditions for 
capacity release must be posted and non-discriminatory and must 
relate solely to the details of acquiring transportation on the 
interstate pipelines. Release of capacity cannot be tied to any 
other conditions. Moreover, the Commission will not tolerate deals 
undertaken to avoid the notice requirements of the regulations. 
Order No. 636-A at 30,559.\112\
---------------------------------------------------------------------------

    \112\ The Commission stated in Order No. 636-A that releasing 
shippers may include in their offers to release capacity reasonable 
and non-discriminatory terms and conditions to accommodate 
individual release situations, including provisions for evaluating 
bids. All such terms and conditions applicable to the release must 
be posted on the pipeline's electronic bulletin board and must be 
objectively stated, applicable to all potential bidders, and non-
discriminatory. For example, the terms and conditions could not 
favor one set of buyers, such as end users of an LDC, or grant price 
preferences or credits to certain buyers. The pipeline's tariff also 
must require that all terms and conditions included in offers to 
release capacity be objectively stated, applicable to all potential 
bidders, and non-discriminatory. Order No. 636-A at 30,557.

A critical component of many AMAs is that the releasing shipper be able 
to require the replacement shipper (asset manager) to satisfy the 
supply needs of the releasing shipper and take assignment of the 
releasing shipper's gas supply agreements as a condition of obtaining 
the released capacity. However, such requirements could be considered 
prohibited tying conditions that go beyond ``the details of acquiring 
transportation on the interstate pipelines,'' because they relate to 
the purchase and sale of the gas commodity.\113\
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    \113\ Since Order No. 636-A, the Commission has granted several 
waivers of the prohibition against tying, Tennessee Gas Pipeline 
Co., 113 FERC ] 61,106 (2005); Northwest Pipeline Corp. and Duke 
Energy Trading and Marketing, 109 FERC ] 61,044 (2004), but only 
where an entity sought the waiver to exit the natural gas 
transportation business. See Louis Dreyfus Energy Services, L.P., 
114 FERC ] 61,246, at 61,780 (2006), denying a waiver request.
---------------------------------------------------------------------------

    114. AMAs also have implications for the rate cap and bidding 
regulations. Section 284.8 of the Commission's regulations requires 
capacity release transactions to be posted for competitive bidding, 
unless the transactions are at the maximum rate or are for 31 days or 
less.\114\ Section 284.8 also allows the releasing shipper to enter 
into a ``pre-arranged'' release with a designated replacement shipper 
before any posting for bidding.\115\ Prearranged releases are subject 
to the same bidding requirements as other releases; however, the 
prearranged replacement shipper will receive the capacity if it matches 
the highest bid submitted by any other bidder.\116\
---------------------------------------------------------------------------

    \114\ 18 CFR 284.8(h).
    \115\ 18 CFR 284.8(b).
    \116\ 18 CFR 284.8(e).
---------------------------------------------------------------------------

    115. As noted, in an AMA, the releasing shipper typically enters 
into a prearranged deal to release all of its pipeline capacity at the 
maximum rate to the marketer. It is reasonable to surmise that the main 
reason for the maximum release rate is so the release will qualify for 
the exemption from bidding of all maximum rate prearranged capacity 
releases. By avoiding the requirement to post the release for bidding, 
the releasing shipper can ensure that the capacity will go to the asset 
manager whom the releasing shipper has determined will provide the most 
effective asset management services.
    116. As described above, however, the releasing shipper may agree 
to rebate some or all of the demand charge to the marketer so that the 
marketer's actual cost of obtaining the capacity is something less than 
the maximum rate. The Commission has held that such rebates render the 
release to be at less than the maximum rate, thereby requiring that the 
prearranged release be posted for bidding.\117\
---------------------------------------------------------------------------

    \117\ In Louis Dreyfus Energy Services, L.P, 114 FERC ] 61,246 
(2006), the Commission stated that:
    [t]he Commission has held that any consideration paid by the 
releasing shipper to a prearranged replacement shipper must be taken 
into account in determining whether the prearranged release is at 
the maximum rate. For instance, where the replacement shipper agrees 
to pay the pipeline the maximum rate for the released capacity, but 
the releasing shipper agrees to make a payment to the replacement 
shipper, the release must be treated as a release at less than the 
maximum rate to which the posting and bidding requirements of 
sections 284.8(c) through (e) apply. Id. at P 15, citing, Pacific 
Gas Transmission Co. and Southern California Edison Co., 82 FERC ] 
61,227 (1998).
---------------------------------------------------------------------------

    117. Moreover, as described above, some AMAs may require the asset 
manager (replacement shipper) to pay fees to the releasing shipper. The 
Commission has ruled that if the prearranged release is at the maximum 
rate, such additional payments violate the maximum rate ceiling on 
capacity releases.\118\
---------------------------------------------------------------------------

    \118\ See Consumers Energy Co., 82 FERC ] 61,284, order 
approving settlement, 84 FERC ] 61,240 (1998). See also Order No. 
636-A at 30,561, where the Commission stated that capacity cannot be 
``resold at a rate including the pipeline marketing fee. The 
marketing fee is not part of the cost of transportation being 
released and the replacement shipper should not pay more than the 
maximum transportation rate for the capacity it is acquiring.''
---------------------------------------------------------------------------

B. Discussion

    118. In this rule, the Commission is revising its capacity release 
regulations and policies in order to facilitate the use of AMAs. Based 
on the industry-wide support for AMAs as shown in the comments, the 
Commission finds that AMAs are in the public interest because they are 
beneficial to numerous market participants and to the market in 
general. Thus, the Commission is modifying the prohibition on tying, 
the section 284.8 regulations concerning bidding, and making additional 
policy changes requested by the commenters discussed below in order to 
eliminate obstacles to the utilization and implementation of AMAs.
    119. AMAs are a relatively recent development in the natural gas 
market, which the Commission did not anticipate when it adopted the 
capacity release program in Order No. 636. The purpose of that program 
was to permit shippers to ``reallocate unneeded firm capacity'' to 
those who do need it.\119\ The bidding requirements of section 284.8 
and the prohibition against tying the release to extraneous conditions 
were all part of the Commission's fundamental goal of ensuring that 
such unneeded capacity would be reallocated to the person who values it 
the most. The Commission found that such ``capacity reallocation will 
promote

[[Page 37079]]

efficient load management by the pipeline and its customers and, 
therefore, efficient use of pipeline capacity on a firm basis 
throughout the year.'' \120\
---------------------------------------------------------------------------

    \119\ Order No. 636 at 30,418.
    \120\ Id.
---------------------------------------------------------------------------

    120. The Commission thus developed its capacity release policies 
and regulations based on the assumption that shippers would handle 
their own gas purchase and transportation arrangements and release 
their capacity only when they were not using the capacity to serve 
their own needs. For example, the Commission envisioned that LDCs with 
long-term contracts for firm transportation service up to the peak 
needs of their retail customers would, during off-peak periods, release 
that portion of capacity not needed to serve the lower off-peak demand 
of its retail customers but otherwise would retain the capacity to 
serve their own needs.
    121. However, this basic assumption underlying the capacity release 
program does not hold true in the context of AMAs. As the Commission 
stated in the NOPR, a distinguishing factor between standard capacity 
releases and AMAs is that in the AMA context, the releasing shipper is 
not releasing unneeded capacity, but capacity that it needs to serve 
its own supply function. Releasing shippers in the AMA context are 
releasing capacity for the primary purpose of transferring the capacity 
to entities that they perceive have greater skill and expertise both in 
purchasing low cost gas supplies, and in maximizing the value of the 
capacity when it is not needed to meet the releasing shipper's gas 
supply needs. In short, AMAs entail the releasing shipper transferring 
its capacity to a third party expert who will perform the functions the 
Commission expected releasing shippers would do for themselves--
purchase their own gas supplies and release capacity or make bundled 
sales when the releasing shipper does not need the capacity to satisfy 
its own needs. The goal of the changes adopted by the Commission herein 
is to make the capacity release program more efficient by bringing it 
in line with these developments in today's secondary gas markets.
    122. As virtually all the commenters on the NOPR agree, AMAs 
provide significant benefits to a variety of participants in the 
natural gas and electric marketplaces and to the secondary natural gas 
market itself. One of the most important aspects of AMAs is that they 
provide broad benefits to the marketplace in general. By permitting 
capacity holders to use third party experts to manage their gas supply 
arrangements and their pipeline capacity, AMAs provide for lower gas 
supply costs and more efficient use of the pipeline grid. Asset 
managers have resources and market knowledge not necessarily available 
to natural gas capacity holders, such as trading platforms, credit 
portfolios, hedge fund and risk management experience, cost containment 
and counterparty credit and contracting expertise, which allow asset 
managers to better maximize the value of the releasing party's assets 
and manage the associated risk. AMAs bring diversity to the mix of 
capacity holders and customers that are served through the capacity 
release program, thus enhancing liquidity and diversity for natural gas 
products and services. AMAs result in an overall increase in the use of 
interstate pipeline capacity, as well as facilitating the use of 
capacity by different types of customers in addition to LDCs. AMAs 
benefit the natural gas market by creating efficiencies as a result of 
more load responsive gas supply, and an increased utilization of 
transportation capacity.
    123. AMAs are an important mechanism used by LDCs to enhance their 
participation in the secondary market and allow LDCs to increase the 
utilization of facilities and lower gas costs. They provide the needed 
flexibility to customize arrangements to meet unique customer needs. 
AMAs allow LDCs to use an entity with more expertise to manage their 
gas supply and thus relieve LDCs of administrative burdens. The ability 
of LDCs to use AMAs as a means of relieving the burdens of 
administering their capacity or supply needs on a daily basis also 
works to the benefit of the entire market because that burden may at 
times result in LDCs not releasing unused capacity.
    124. AMAs also provide LDCs and their customers an increased 
ability to offset their upstream transportation costs. The profit 
sharing arrangements in AMAs often allow an LDC to reduce reservation 
costs that it normally passes on to its customers. They foster market 
efficiency by allowing the releasing shipper to reduce its costs to the 
extent that its capacity is used to facilitate a third party sale that 
also benefits that third party.
    125. LDCs are not the only entities that benefit from AMAs. As 
evidenced by certain comments on the NOPR, many other large gas 
purchasers, including electric generators and industrial users, may 
desire to enter into such arrangements.\121\ AMAs increase the ability 
of wholesale electric generators to provide customer benefits through 
superior management of fuel supply risk, allow generators to focus 
their attention on the electric market, and eliminate administrative 
burdens relating to multiple suppliers, overheads, capital requirements 
and the risks associated with marketing excess gas and pipeline 
imbalances.
---------------------------------------------------------------------------

    \121\ See e.g., Comments of the EPSA, Comments of the EEI, 
Comments of FPL and Comments of the NWIGU. See also Comments of NJNG 
to the Commission's January 3, 2007 request for comments (``in 
addition to LDCs, there are many other types of large natural gas 
purchasers, such as electric generation facilities and large gas 
process industrial users, who face the same challenges with managing 
and optimizing their natural gas portfolios. These customers, whose 
core business lies outside the natural gas industry--are also likely 
consumers of third party portfolio management services.'') at 9, 
n.9.
---------------------------------------------------------------------------

    126. Finally, AMAs bring benefits to consumers, mostly through 
reductions in consumer costs. AMAs provide in general for lower gas 
supply costs, resulting in ultimate savings for end use customers. The 
overall market benefits described above also inure to consumers. These 
benefits have been recognized by state commissions and the National 
Regulatory Research Institute.\122\ In light of these substantial 
benefits provided by AMAs, the Commission is modifying its capacity 
release regulations and policies in the specific respects discussed 
below.
---------------------------------------------------------------------------

    \122\ See e.g., Comments of BGEM to the January 3, 2007 request 
for comments at 8-9, citing to the Indiana Utility Regulatory 
Commission's order in Case No. 42, 973, approved April 25, 2006. See 
also Orders of the Massachusetts Department of Telecommunications 
and Energy, attached to the Marketer Petitioners comments on the 
January 3, 2007 request for comments, which describe and approve 
certain asset management arrangements.
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1. Tying
    127. First, the Commission adopts its proposal to exempt AMAs from 
the prohibition against tying in order to permit a releasing shipper in 
a pre-arranged release to require that the replacement shipper (1) 
agree to supply the releasing shipper's gas requirements and (2) take 
assignment of the releasing shipper's gas supply contracts, as well as 
released transportation capacity on one or more pipelines \123\ and 
storage capacity with the gas currently in storage. This exemption will 
allow firm shippers to pre-arrange releases of capacity to an asset 
manager (replacement shipper) along with upstream assets and gas 
purchase agreements in a bundled transaction where the capacity being 
released will

[[Page 37080]]

be used to meet that party's gas supply requirements.\124\
---------------------------------------------------------------------------

    \123\ Commission policy already permits a releasing shipper to 
require a replacement shipper to take a release of aggregated 
capacity contracts on one or more pipelines, at least in some 
circumstances. See Order No. 636-A at 30,558 and n.144.
    \124\ The exemption is limited to releases to an asset manager 
to implement an AMA, and does not apply to re-releases to third 
parties during the term of the AMA.
---------------------------------------------------------------------------

    128. As discussed above, AMAs provide recognizable benefits to 
market participants and the marketplace overall in terms of more load-
responsive use of gas supply, greater liquidity, increased utilization 
of transportation capacity and the overall efficiencies these 
arrangements bring to the marketplace. However, AMAs require that the 
releasing shipper be able to release both its capacity and its natural 
gas supply arrangements in a single package. The very purpose of the 
transaction would be frustrated if the releasing shipper could not 
combine the supply and capacity components of the deal. This tying is 
meant to ensure that the released capacity will continue to be used to 
support the releasing shipper's acquisition of needed gas supplies. 
Based on the fact that AMAs provide benefits to the market, and that 
tying of capacity and supply is necessary to implement beneficial AMAs, 
it is reasonable to allow the tying conditions discussed above in the 
AMA context in order to foster and facilitate the use and 
implementation of such arrangements.
    129. All the commenters support this change in Commission policy, 
except Williston. Williston argues that approval of the proposed 
changes to exempt AMAs from the prohibition on tying (as well as the 
bidding requirements discussed in the next section) would encourage 
discrimination and preferential treatment toward asset managers by 
allowing participants in the secondary capacity release market to 
engage in activities prohibited to pipelines.\125\ According to 
Williston, allowing releasing shippers to tie releases to a requirement 
that the replacement shipper provide asset management services, and 
exempting such releases from bidding, will give releasing shippers a 
strong competitive edge over the pipelines for the sale of similar 
types of services. Williston asserts the pipelines' reduced sale of 
similar types of services will result in increased firm transportation 
rates charged by pipelines. Williston also claims that exempting AMAs 
from tying will nullify the goal of awarding capacity to the shipper 
that values it most and that removing the bidding requirement will 
inhibit transparency.\126\
---------------------------------------------------------------------------

    \125\ Comments of Williston Basin at 12-14.
    \126\ The Commission explains in the next section how the 
benefits AMAs outweigh any disadvantages in exempting such releases 
from bidding and how the Final Rule will continue to satisfy the 
goals of disclosure and transparency.
---------------------------------------------------------------------------

    130. Williston has failed to show that exempting capacity releases 
to implement AMAs from the prohibition against tying and bidding will 
subject pipelines to unfair competition. Pipelines' core business is 
providing unbundled transportation services. By contrast, a major 
component of asset management service is the purchase and sale of gas 
as a commodity. Williston does not assert that it has any interest in 
either providing or purchasing asset management services. Therefore, 
Williston has no need or reason to tie the sale of its transportation 
services to the provision of asset management services. Many shippers, 
by contrast, have indicated a desire to purchase (or provide) asset 
management services, and as discussed above, the Commission has found 
that such services provide substantial benefits to the natural gas and 
electric markets as a whole. Williston has not identified any tying 
requirement that it would desire to impose on the sale of its 
unsubscribed capacity that would provide comparable benefits to the 
market as a whole.
    131. The Commission recognizes that, to the extent asset managers 
are more skilled at releasing and managing capacity in competition with 
the pipelines' interruptible services, pipelines may face increased 
competition from capacity release as a result of this rule. The 
Commission, however, has always intended that capacity releases would 
compete with the pipelines' short-term firm and interruptible 
transportation services.\127\ Accordingly, the fact that this rule may 
result in greater competition for pipelines' interruptible services is 
not a compelling reason for the Commission to decline to facilitate 
AMAs as set forth in this Final Rule.
---------------------------------------------------------------------------

    \127\ See Order No. 636-A at 30,553 and 30,556 (stating ``the 
Commission views the competition between interruptible 
transportation and capacity releasing as part of a healthy secondary 
market'' and finding ``pipeline capacity (firm and interruptible) 
must compete with released capacity''); see also UDC v. FERC, 88 
F.3d 1105, 1149 (DC Cir. 1996) (recognizing that capacity release is 
intended to develop an active secondary market with holders of 
unutilized firm capacity rights reselling those rights in 
competition with capacity offered directly by the pipeline).
---------------------------------------------------------------------------

2. Bidding
    132. Second, the Commission adopts its proposal to exempt pre-
arranged releases to implement AMAs from the bidding requirements of 
section 284.8 of its regulations. In light of its experience with 
capacity releases and the comments discussed above, the Commission 
concludes that, in the AMA context, the bidding requirement creates an 
unwarranted obstacle to the efficient management of pipeline capacity 
and supply assets.
    133. All capacity releases made to implement AMAs are pre-arranged 
because it is important that a releasing shipper be able to use the 
asset manager of its choice to effectuate the components of the 
agreement. Unlike a normal capacity release where the releasing shipper 
is often shedding excess capacity and has no intention of an ongoing 
relationship with the replacement shipper, in the AMA context the 
identity of the replacement shipper is often critical because it will 
manage the releasing shipper's portfolio for some time into the future. 
During the process of choosing an asset manager (often an RFP process), 
the releasing shipper considers a number of factors, including 
experience in managing capacity and gas sales, experience with a 
particular pipeline or area of the country, flexibility, 
creditworthiness and price. Because the asset manager will manage the 
releasing shipper's gas supply operations on an ongoing basis, it is 
critical that the releasing shipper be able to release the capacity to 
its chosen asset manager. Requiring releases made in order to implement 
an AMA to be posted for bidding would thus interfere with the 
negotiation of beneficial AMAs, by potentially preventing the releasing 
shipper from releasing the capacity to its chosen asset manager. 
Moreover, AMAs at their core entail a bundling of commodity sales with 
capacity release. As a result, it is difficult to have meaningful 
bidding on the released capacity as a stand-alone component of the 
arrangement, because the values of the commodity and capacity 
components of the arrangement are not easily separated. The Commission 
concludes that the benefits of facilitating AMAs outweigh any 
disadvantages in exempting such releases from bidding.
    134. The exemption from bidding adopted by this rule will apply to 
all releases to asset managers, made for the purpose of implementing an 
AMA, regardless of the term of the AMA and whether the release is 
subject to the price ceiling. As discussed above, in this rule the 
Commission is removing the price ceiling for all short-term capacity 
release transactions of one year or less, but is continuing the price 
ceiling for capacity release transactions of more than one year. In the 
NOPR, the Commission stated that, if the parties wanted to continue an 
uncapped short-term capacity release beyond one year, the release 
``would have to be re-posted for bidding to ensure the capacity is

[[Page 37081]]

allocated to the highest valued use.'' \128\ Some commenters \129\ 
request that the Commission clarify that the reposting and bidding 
requirements for extending uncapped, short-term capacity releases 
beyond one year do not apply in the context of short-term AMAs. They 
assert that the proposed exemption from bidding for capacity releases 
to asset managers should apply in all circumstances, including the 
circumstance of an expiring short-term release related to an AMA. In 
essence, they inquire whether the reposting and bidding requirements 
for extensions of short-term capacity releases would trump the general 
exemption from bidding requirements proposed by the Commission for 
AMAs.
---------------------------------------------------------------------------

    \128\ NOPR at P 44.
    \129\ See e.g., comments of Southwest and BGEM.
---------------------------------------------------------------------------

    135. The Commission clarifies that the exemption from bidding for 
AMAs adopted in this rule applies to all releases to an asset manager, 
including those made for the purpose of extending a short-term 
AMA.\130\ The rationale for exempting releases to an asset manager from 
bidding applies equally to releases made for the purpose of extending a 
short-term AMA as to any other release to an asset manager. In all such 
releases, the identity of the asset manager is critical to the 
releasing shipper, because the releasing shipper will be relying on the 
asset manager to obtain its gas supplies. Therefore, as with any other 
release to an asset manager, requiring releases made for the purpose of 
extending a short-term AMA to be posted for bidding could interfere 
with the negotiation of beneficial AMAs by potentially preventing such 
releases to be made to the releasing shipper's chosen asset manager.
---------------------------------------------------------------------------

    \130\ Section 284.8(h)(1), as adopted by this rule, provides a 
blanket exemption from posting and bidding for all releases to an 
asset manager:
    A release of capacity by a firm shipper to a replacement shipper 
for any period of 31 days or less, a release of capacity for more 
than one year at the maximum tariff rate, or a release to an asset 
manager as defined in (h)(3) of this section need not comply with 
the notification and bidding requirements of paragraphs (c) through 
(e) of this section. (emphasis added).
    The section 284.8(h)(2) prohibition on extending exempt releases 
without posting and bidding expressly applies only to the first 
category of releases included in the section 284.8(h)(1) exemption: 
Releases for a period of 31 days or less.
---------------------------------------------------------------------------

    136. While the Commission is exempting releases made to implement 
AMAs from the capacity release bidding requirements, those releases 
will remain subject to existing posting and reporting requirements, 
including the section 284.13(c)(2)(viii) requirement to post the name 
of any asset manager. In addition, as discussed below, the Commission 
is adding a requirement to post the asset manager's delivery obligation 
to the releasing shipper. Therefore, the Commission's goals of 
disclosure and transparency will still be met. Williston's argument 
that the exemption from bidding for AMAs will impair transparency and 
allow deals to be consummated without Commission or market participant 
knowledge thus fails.\131\
---------------------------------------------------------------------------

    \131\ Williston Basin is also incorrect in suggesting that the 
Commission requires pipelines to sell their available capacity in a 
bidding auction. See Northern Natural Gas Co., 110 FERC ] 61,361, at 
P 10 (2005) (``[T]he Commission has not required pipelines to sell 
capacity solely through open seasons. Rather, so long as the 
pipeline posts all available firm capacity, it may sell that 
capacity on a first-come, first-served basis'').
---------------------------------------------------------------------------

    137. The exemption from bidding adopted by this rule does not 
extend to releases made outside the AMA context. There has been no 
showing that non-AMA prearranged releases provide benefits of the type 
we have found justify exempting AMA releases from bidding. Moreover, in 
the typical non-AMA pre-arranged release, price is the primary factor, 
and therefore the releasing shipper should generally be indifferent as 
to the identity of the replacement shipper so long as it receives the 
highest possible price. Accordingly, non-maximum rate capacity releases 
of more than 31 days, made outside the AMA context, will still need to 
be posted for bidding in order to ensure that the capacity is allocated 
to the highest valued use.
3. Definition of AMAs
a. NOPR Proposal
    138. In the NOPR, the Commission proposed to define AMAs that would 
qualify for the tying and bidding exemptions, as follows:

    Any pre-arranged release that contains a condition that the 
releasing shipper may, on any day, call upon the replacement shipper 
to deliver to the releasing shipper a volume of gas equal to the 
daily contract demand of the released transportation capacity. If 
the capacity release is a release of storage capacity, the asset 
manager's delivery obligation need only equal the daily contract 
demand under the release for storage withdrawals (emphasis added).

    139. The Commission developed this definition in order to address 
two concerns relating to its facilitation of AMAs. It wanted to limit 
the exemptions from tying and bidding to bona fide AMAs, that is, 
arrangements that place a significant delivery obligation on the 
replacement shipper so as to distinguish AMAs eligible for the 
exemptions from standard capacity releases. The Commission also sought 
to avoid a definition that was too narrow and would effectively limit 
efficient and innovative AMAs. The Commission focused on what it 
understood to be the fundamental purpose of AMAs, namely that the asset 
manager would use the released capacity to deliver gas supplies to the 
releasing shipper. Thus, it included the requirement that the 
replacement shipper contractually commit itself to deliver to the 
releasing shipper, on any day, gas supplies equal to the daily contract 
demand of the released capacity. The Commission reasoned this would 
achieve the goal of exempting only bona fide AMA transactions from 
bidding and the prohibition against tying.
    140. The Commission also believed that the proposed definition was 
sufficiently flexible to allow releasing shippers to use AMAs to obtain 
only a portion of its required gas supplies or to enter into multiple 
AMAs with different asset managers. In addition, the Commission noted 
that the proposed definition does not require that the asset manager 
make all its deliveries to the releasing shipper over the released 
capacity, nor did it limit the types of entities that can use AMAs and 
take advantage of the exemptions. The Commission recognized that 
electric generators and industrial end-users may make use of AMAs, and 
thus the exemption is not limited to LDCs utilizing AMAs.
b. Comments
    141. Numerous commenters \132\ requested that the Commission revise 
or clarify the ``on any day'' and/or the ``equal to'' phrases 
highlighted in the definition above. They claim that ``on any day'' may 
be interpreted as requiring the asset manager to stand ready to deliver 
the contract quantity on ``every day'' in order for the arrangement to 
be considered an AMA. Commenters assert that such a requirement would 
severely inhibit the asset manager's flexibility and its ability to 
maximize the value of the capacity. Many commenters also seek to 
replace ``equal to'' the daily contract demand of the released capacity 
with ``up to.'' Again, commenters cite a lack of flexibility and 
devaluation of the released capacity because it would inhibit the asset 
manager from re-releasing the capacity. Commenters note that the 
beneficial aspects of AMAs are hindered if the asset manager must hold 
in reserve the entire portfolio of its

[[Page 37082]]

assets even on days when the releasing shipper does not need the 
capacity for its supply needs.
---------------------------------------------------------------------------

    \132\ Those commenters include the AGA, BGEM, BP, Canadian 
Association of Petroleum Producers (CAPP), FPL Hess, the Marketer 
Petitioners, National Grid, NJNG, NGSA, Nicor Enerchange (Nicor), 
NJR, Piedmont, PPM, PSNC, SCE&G, SEMI, Sequent, Statoil and WDG.
---------------------------------------------------------------------------

    142. Commenters suggest several general language changes to remedy 
these perceived problems. AGA recommends that the Commission clarify 
the definition by adding ``but not necessarily every day'' after the 
phrase ``on any day.'' It also suggests changing ``equal to'' to ``up 
to'' as noted above.\133\ BGEM agrees with this latter change, as do 
FPL, National Grid, PPM, and PSNC. Others take a broader view, 
suggesting that the delivery obligation should be left to the parties 
to negotiate. BP, for example, advocates permitting the parties to 
determine by mutual agreement when the releasing shipper may call upon 
the replacement shipper to deliver to it a volume of gas equal to the 
daily contract demand.\134\ Numerous parties agree with the concept 
that the details of the delivery obligation should be left to the 
parties and spelled out in the contract. NGSA comments that ``may, on 
any day, call upon'' should be revised to ``may, as agreed by the 
parties, require. * * *'' \135\ Nicor would add the phrase ``pursuant 
to the terms of its contract'' after ``any day''. It would also clarify 
that the replacement shipper should be required to deliver gas to a 
``location'' specified in the agreement.\136\ Piedmont suggests that 
parties be permitted to negotiate call rights ``as necessary and 
appropriate for the contracting parties.'' \137\ SCANA suggests that 
because the releasing shipper is in the best position to know the 
appropriate level of delivery obligation it will require, the 
definition should be revised to clarify that the delivery requirement 
is limited to specified days set forth in the agreement.\138\ The WDG 
suggests that parties should be given the flexibility to ``tailor'' 
capacity recall rights in AMA transactions to the releasing shipper's 
market and supply needs.\139\
---------------------------------------------------------------------------

    \133\ AGA provides a revised definition on page 21 of its 
comments.
    \134\ See BP comments at 2, 5-8.
    \135\ NGSA comments at 10.
    \136\ Nicor comments at 2-3.
    \137\ Piedmont comments at 6.
    \138\ Scana comments at 4-7.
    \139\ WDG comments at 4-5.
---------------------------------------------------------------------------

    143. NJNG also recommends that the definition of AMA be clarified 
such that a releasing shipper's recall rights up to the maximum daily 
quantity of the released capacity is limited to use by the releasing 
shipper for its ``own load'' requirements--either its utility retail 
service obligation or its own system generation or consumption needs.
c. Modified Definition
    144. In light of the comments received, the Commission has 
reconsidered its definition of AMAs and in this rule is modifying the 
definition to strike a balance between facilitating flexible and 
innovative AMAs and drawing a clear line between AMAs and standard 
capacity releases.\140\ The specific modifications to the definition 
which the Commission is making for this purpose are shown in bold 
below:
---------------------------------------------------------------------------

    \140\ As discussed in detail below, the Commission is also 
revising the AMA definition to allow for supply AMAs and to extend 
to retail state unbundling programs the same blanket exemption from 
bidding granted for AMAs.

    Any pre-arranged release that contains a condition that the 
releasing shipper may, on any day during a minimum period of five 
months out of each twelve-month period of the release, call upon the 
replacement shipper to deliver to the releasing shipper a volume of 
gas up to one-hundred percent of the daily contract demand of the 
released transportation capacity. If the capacity release is for a 
period of less than one year, the asset manager's delivery 
obligation described in the previous sentence must apply for the 
lesser of five months or the term of the release. If the capacity 
release is a release of storage capacity, the asset manager's 
delivery obligation need only be one-hundred percent of the daily 
contract demand under the release for storage withdrawals.\141\
---------------------------------------------------------------------------

    \141\ The annual five month minimum would apply to AMAs with 
terms of one year or longer. The delivery obligation for any AMA 
between five months and a year would be for five months of the 
release. The delivery obligation would apply to the entire term for 
any AMA of less than five months.

    145. The Commission finds that this definition of AMA will further 
its goal of delineating AMAs from standard capacity releases. First, it 
continues to differentiate bona fide AMAs from standard capacity 
releases by placing a significant delivery obligation, applicable 
during at least five months out of each 12 month period of the release, 
on the asset manager, while alleviating the concerns of those 
commenters that assert the NOPR definition was too restrictive. The 
Commission has replaced ``equal'' in the definition with ``up to'' in 
order to clarify that the asset manager does not have to actually make 
deliveries equal to the daily contract demand on every day the delivery 
obligation is in effect. However, by using the phrase ``up to'' in the 
adopted definition, the Commission doest not intend to allow the 
parties to negotiate a potential delivery obligation of less than one 
hundred percent of the daily contract demand for the required time 
period, even though that amount may not actually be delivered to the 
releasing shipper every day. Before entering into an AMA an asset 
manager should be able to make reasonable judgments about the releasing 
shipper's requirements based upon the releasing shipper's gas usage in 
earlier years, and thus make reliable estimations as to when it can use 
the capacity for bundled sales or re-releases. Thus, under the 
definition adopted in this rule, the releasing shipper will have the 
right to call upon the asset manager to deliver the full contract 
volume on every day of the five month minimum, though it need not 
actually do so. This delivery obligation for the asset manager will 
adequately distinguish AMAs from standard capacity releases as well as 
ensure that AMAs eligible for the exemptions from tying and bidding 
will fulfill the primary purpose of using the releasing shipper's 
capacity to supply its gas needs during peak periods.
    146. The definition also furthers the goal of defining AMAs in such 
a way that they will be flexible enough to allow diverse parties to 
enter into AMAs and for those parties to be able to maximize the value 
of pipeline capacity within the context of an AMA. The definition only 
requires a delivery obligation on behalf of the replacement shipper for 
a portion of each twelve month period, thus giving the asset manager 
additional assurance it can utilize the capacity during non peak 
periods. The definition adopted in this rule also allows for releasing 
shippers to only release a portion of their capacity, places no 
limitations on the asset manager that would require it to use the 
released capacity to make its deliveries to the releasing shipper, and 
does not limit the type of party that can enter into an AMA.
    147. The Commission considered the comments that the extent of the 
asset manager's delivery obligation should be left to the parties to 
negotiate themselves but ultimately determined that approach would not 
further the primary goal of AMAs that they be used to serve the 
releasing shipper's supply needs. Absent a specific delivery obligation 
in the definition, there would be no assurances that capacity releases 
meant to implement an AMA would actually contain a substantial delivery 
obligation that would differentiate it from a standard capacity 
release. Parties would be able to enter into arrangements that may 
require an asset manager to deliver supply to the releasing shipper on 
only one day of the year for instance. Such arrangements would 
technically qualify as AMAs but would not serve the Commission's goal 
to ensure that AMAs be used to serve the releasing shipper's needs.

[[Page 37083]]

 Accordingly, the Commission does not deem it appropriate to grant the 
benefits of the exemptions from tying and bidding to such arrangements.
4. Supply AMAs
    148. In the NOPR the Commission sought comments on whether it 
should expand the definition of AMAs and if so, how supply side AMAs 
should be distinguished from other capacity releases. The Commission in 
this Final Rule is revising its regulations and the proposed definition 
of AMAs to allow for supply side AMAs. Pursuant to the revised 
definition for AMAs discussed below, a supply AMA will be 
distinguishable from a standard capacity release, and thus eligible for 
the tying and bidding exemptions, only if it includes a condition that 
requires the replacement shipper to purchase a volume from the 
releasing shipper up to the maximum daily contract demand of the 
released capacity.
    149. In general, gas supply AMAs are arrangements where a 
production area capacity holder releases capacity to an asset manager 
that commits to purchase (receive) the releasing shipper's gas and use 
the capacity to transport and market that gas. The asset manager nets 
back to the producer a fixed percentage of the price that the asset 
manager is able to obtain for resale of the gas on a delivered basis. 
Numerous producer and marketer commenters filed in favor of AMAs for 
gas sellers.\142\ No commenter opposed expanding the AMA definition to 
include gas supply AMAs.
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    \142\ See e.g., comments of NGSA, BGEM, BP, Dominion Marketers, 
FPL, Marketer Petitioners, Mewbourne Oil, NEM, Nicor, NJR, Statoil, 
Ultra, Walter Oil and Gas, and the Wyoming Pipeline Authority.
---------------------------------------------------------------------------

    150. Based on the comments received, the Commission finds that the 
benefits of AMAs as identified in the NOPR apply with equal weight to 
producers that want to optimize the value of their capacity and 
minimize costs. The Commission understands from producer commenters 
that producers often acquire firm pipeline capacity for flow assurance, 
that is, to ensure that there will be sufficient capacity to transport 
the gas they produce to relevant markets.\143\ Because of the 
fluctuation in flows related to new wells in particular, producers 
often purchase capacity in excess of their immediate needs to ensure 
that there is sufficient capacity for their gas to flow once the 
production volumes ramp up. The Commission's approval of supply AMAs 
will allow a producer to release all of its capacity to an asset 
manager who could maximize the value of that capacity during the start-
up period when producers may not need it, resulting in increased and 
efficient use of capacity.
---------------------------------------------------------------------------

    \143\ See e.g., comments of BP.
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    151. The Commission also finds that the rationale supporting AMAs 
for end users equally supports supply AMAs. Supply AMAs will help to 
alleviate a producer's burden of administering capacity on a day to day 
basis, will maximize the value of pipeline capacity, and will further 
diversify the mix of capacity holders and customers served through 
capacity releases. Similar to delivery AMAs, supply AMAs involve an 
ongoing relationship between the releasing shipper and the asset 
manager that differentiates the deals from normal capacity 
releases.\144\ Further, supply AMA capacity will be used for its 
original purpose, that is, to transport the producer's gas to the 
market place. The Commission finds reasonable comments that the 
purchase obligation in a supply side AMA is a mirror image of the 
delivery obligation required by the Commission for the downstream AMA's 
facilitated in the NOPR.\145\
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    \144\ See e.g., comments of NGSA at 14.
    \145\ Comment of NGSA at 13, comments of Ultra at 8.
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    152. As discussed above, in the Commission's view the most 
important aspect of a supply AMA is the requirement that the asset 
manager commit to purchasing the releasing shipper's gas as a part of 
the agreement. While several commenters suggest definitional language 
for gas supply AMAs that would require the replacement shipper to 
``receive'' the releasing shipper's gas,\146\ the Commission finds that 
the condition must be to ``purchase'' the gas in order to avoid running 
afoul of the shipper must have title rule.\147\ This condition would 
also help ensure that such arrangements are bona fide AMAs because it 
imposes a significant purchase obligation on the asset manager.
---------------------------------------------------------------------------

    \146\ For example, Statoil states that the Commission should 
extend the exemption to include supply-side AMAs by expanding its 
proposed section 284.8(h) as follows:
    (h)(3) A release to an asset manager exempt from bidding 
requirements under paragraph (h)(1) of this section is any 
prearranged capacity release that contains a condition that the 
releasing shipper may, on any day, call upon the replacement shipper 
to (i) deliver to the releasing shipper a volume of gas equal to the 
daily contract demand of the released transportation capacity or the 
daily contract demand for storage withdrawals or (ii) receive from 
the releasing shipper a volume of gas equal to the daily contract 
demand of the released transportation capacity or the daily contract 
demand for storage withdrawals. Statoil comments at 12-13.
    \147\ As described in the comments, a typical supply AMA could 
involve a requirement that the replacement shipper accept delivery 
of the releasing shipper's gas, and use the capacity released to 
ship and market that gas. Under that scenario, where the replacement 
shipper would accept the releasing shipper's gas and transport that 
gas on the released capacity to the releasing shippers' customers, 
the arrangement would violate the Commission's requirement that the 
shipper hold title to the gas. The shipper in that situation would 
be the replacement shipper, and it would be transporting gas that 
was owned by the releasing shipper. Thus, in order for there to be a 
valid supply AMA, the replacement shipper must purchase and take 
title to the gas that it will ship for the releasing shipper.
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    153. Based on the determination to allow supply AMAs, the 
Commission will further modify the proposed definition of capacity 
releases to asset managers to accommodate supply AMAs. Thus, the full 
definition of the capacity releases that will be eligible for the tying 
and bidding exemptions adopted by this rule is as follows:

    Any pre-arranged release that contains a condition that the 
releasing shipper may, on any day during a minimum period of five 
months out of each twelve-month period of the release, call upon the 
replacement shipper to (i) deliver to the releasing shipper a volume 
of gas up to one-hundred percent of the daily contract demand of the 
released transportation capacity or (ii) purchase a volume of gas up 
to the daily contract demand of the released transportation 
capacity. If the capacity release is for a period of less than one 
year, the asset manager's delivery or purchase obligation described 
in the previous sentence must apply for the lesser of five months or 
the term of the release. If the capacity release is a release of 
storage capacity, the asset manager's delivery or purchase 
obligation need only be one-hundred percent of the daily contract 
demand under the release for storage withdrawals or injections, as 
applicable.
5. AMA Profit Sharing Arrangements
    154. AMAs generally include provisions for the asset manager to 
share with the releasing shipper the value it is able to obtain from 
the releasing shipper's capacity and other assigned assets when those 
assets are not used to serve the releasing shipper. The manager may 
share that value by: (1) Paying a fixed ``optimization'' fee to the 
releasing shipper; (2) sharing with the releasing shipper the asset 
manager's profits from the use of the released capacity and other 
assigned assets \148\ pursuant to an agreed-upon formula; (3) making 
gas sales to the releasing shipper at a below-market commodity price; 
or (4) in some other way mutually agreed to by the contracting 
parties.\149\
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    \148\ These uses could include re-releases of the capacity or 
bundled sales to third parties.
    \149\ The AMA may also require the releasing shipper to make 
payments to the manager for the services performed by the manager 
for the releasing shipper under the AMA. These payments may include 
the releasing shipper paying the manager: (1) A management fee for 
transportation related tasks (e.g. nominations, scheduling, storage 
injections) associated with the manager's obligation to provide gas 
supplies to the releasing shipper, and (2) the manager's cost of 
purchasing gas supplies for the releasing shipper.

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[[Page 37084]]

    155. As discussed above, while this rule removes the price ceiling 
for all short-term capacity release transactions of one year or less, 
the Commission is continuing the price ceiling for capacity release 
transactions of more than one year. Numerous commenters, including 
marketers, LDCs, and producers are concerned that AMA profit sharing 
arrangements, such as those described above, may be considered to 
violate the price ceiling for long-term capacity releases. Accordingly, 
they contend that the Commission should either (1) exempt long-term 
capacity releases to asset managers from the price ceiling or (2) 
determine that the maximum rate does not apply to the asset manager's 
payments to the releasing shipper under such profit sharing 
arrangements.
    156. AGA, FPL, Integrys,\150\ the Marketer Petitioners, NGSA, PGC, 
NWIGU, Southwest, and others request that the Commission clarify that 
the various payments made by or to an asset manager under an AMA will 
not be attributed or imputed to the transportation component of an AMA, 
and that payments by the parties to one another will not be viewed as 
causing the maximum rate ceiling to be exceeded for any releases made 
pursuant to an AMA. Alternatively, they request that the Commission 
clarify that the price ceiling is removed for all capacity releases 
associated with an AMA, regardless of their term.
---------------------------------------------------------------------------

    \150\ The Integrys Gas Group (Integrys) consists of the Michigan 
Gas Utilities Corporation, Minnesota Energy Resources Corporation, 
North Shore Gas Company, The Peoples Gas Light and Coke Company, and 
Wisconsin Public Service Corporation.
---------------------------------------------------------------------------

    157. These commenters explain that applying the price ceiling to 
profit sharing arrangements in long-term releases to an asset manager 
could significantly hinder parties' ability to successfully structure 
an acceptable AMA. They assert that limiting the compensation the 
releasing shipper can collect from the asset manager under long-term 
releases would prevent the releasing shipper from sharing in the full 
market value the asset manager is able to obtain from the capacity, 
contrary to the basic purpose of an AMA. This could discourage parties 
from entering into AMAs with terms of more than a year. These 
commenters further state that the parties frequently desire to enter 
into AMAs with terms of two or three years, because longer-term AMAs 
provide the parties with a greater ability to plan their business 
operations for a longer period of time and are administratively more 
efficient.
    158. In response to these comments, the Commission is modifying 
section 284.8(b) of its regulations to clarify that the price ceiling 
does not apply to any consideration provided by an asset manager to the 
releasing shipper as part of an AMA. However, apart from this 
clarification, capacity releases of more than one year to an asset 
manager will, like any other long-term capacity release, remain subject 
to the price ceiling. This modification of the Commission's regulations 
will provide the parties to an AMA the flexibility to negotiate 
mutually acceptable arrangements under which the asset manager shares 
with the releasing shipper the value it obtains from the released 
capacity, without running afoul of the capacity release price ceiling. 
However, the price ceiling will continue to apply to the rates the 
asset manager pays to the pipeline for the released capacity.\151\
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    \151\ As pointed out in the NOPR, in Consumers Energy Co., 82 
FERC ] 61,284, order approving settlement, 84 FERC ] 61,240 (1998), 
the Commission investigated certain joint marketing agreements 
whereby replacement shippers agreed either to share with the 
releasing shipper revenues obtained by the replacement shippers on 
the sales of the gas transported by means of the released capacity 
or to pay the releasing shipper prices based on the amount of gas 
bought and sold. The Commission found in this situation that 
Consumers had collected money in excess of the pipeline's maximum 
rate, thereby violating the capacity release price ceiling. 
Recently, the Commission similarly held in Louis Dreyfus Energy 
Services, L.P., 114 FERC ] 61,246, at 61,779 (2006), that if a pre-
arranged release is at the maximum rate, additional payments by the 
replacement shipper to the releasing shipper are deemed to render 
the release price above the maximum rate. As a result of the 
modification to section 284.8(b) adopted in this rule, these 
precedents will not apply in the context of capacity releases to 
asset managers. However, these precedents will continue to apply to 
all other capacity releases.
---------------------------------------------------------------------------

    159. The Commission finds that this change in its regulations is 
consistent with the overall goal of this rulemaking of facilitating 
beneficial AMAs. In the AMA context, unlike in other capacity release 
situations, the releasing shipper is not releasing unneeded capacity, 
but capacity that is needed to serve its own supply function and will 
be so used during the term of the release. Releasing shippers enter 
into AMAs ``for the primary purpose of transferring the[ir] capacity to 
entities they perceive have greater skill and expertise both in 
purchasing low cost gas supplies and in maximizing the value of the 
capacity when it is not needed to meet the releasing shipper's gas 
supply needs. In short, AMAs entail the releasing shipper transferring 
its capacity to another entity that will perform the functions the 
Commission expected releasing shippers would do for themselves--
purchase their own gas supplies and release capacity or make bundled 
sales when the releasing shipper does not need the capacity to satisfy 
it owns needs.'' \152\
---------------------------------------------------------------------------

    \152\ NOPR at P 66.
---------------------------------------------------------------------------

    160. Thus, a fundamental purpose of an AMA is for the asset manager 
to extract as much value from the released capacity and assigned assets 
as possible and to share that value with the releasing shipper, who has 
contracted with the asset manager precisely because of the asset 
manager's expertise in this area. The asset manager generally obtains 
revenues related to the released capacity from two basic revenue 
sources. First, the asset manager may earn money through the re-release 
of the releasing shipper's capacity for a higher value. For example, 
the asset manager could enter into short-term re-releases of the 
capacity that are not subject to the price cap. Second, the asset 
manager could garner funds through utilizing the released capacity to 
make bundled sales to third parties. In either situation, the releasing 
shipper could have attempted to garner these revenues by itself, but 
instead it utilized the asset manager's skills through the use of an 
AMA to increase the value of its capacity.\153\
---------------------------------------------------------------------------

    \153\ There are a number of other potential methods for an asset 
manager to gain additional revenues from a releasing shipper's 
transportation, storage, gas supply, and hedging ``assets''. An 
asset manager may use the full range of acquired ``assets'' to enter 
into a variety of financial, commodity, transportation, or storage-
related arrangements which allows the asset manager to generate more 
revenues from these ``assets,'' when they are not needed to serve 
the releasing shipper's direct needs, than the releasing shipper 
would have generated on its own. We do not mean to suggest here any 
limit to the range of legally-allowed transactions that an asset 
manager may pursue, but merely provide illustrative examples.
---------------------------------------------------------------------------

    161. Given that the purpose of an AMA is to allow a releasing 
shipper to maximize the value of its capacity by obtaining the services 
of an asset manager with greater expertise at accomplishing that goal, 
it makes little sense to apply the price ceiling on long-term capacity 
releases in a manner which limits the amount of that value which the 
asset manager can share with the releasing shipper. As discussed above, 
permitting the asset manager to maximize the value of released capacity 
and share that value with the releasing shipper provides numerous 
benefits, including reducing the releasing shipper's costs of reserving 
pipeline capacity, and these benefits ultimately serve to reduce 
consumer costs. Moreover, as some commenters point out, applying the 
long-term capacity release price ceiling to AMA profit sharing 
arrangements would likely

[[Page 37085]]

discourage parties from negotiating AMAs with terms of more than a year 
in order to avoid the price ceiling. However, longer-term AMAs may 
provide the parties significant advantages, for example, by enabling 
the parties to obtain greater certainty concerning their gas supply and 
sale arrangements for a longer period of time and by minimizing the 
administrative costs of negotiating multiple AMA arrangements over a 
relatively short period of time.
    162. Thus, the Commission concludes that profit sharing agreements 
between the releasing shipper and the replacement shipper in the 
context of an AMA, where the releasing shipper could have earned the 
monies itself, should not violate the price ceiling just because the 
releasing shipper utilized the skills of an asset manager. Modifying 
our regulations to exempt all such profit sharing arrangements from the 
price ceiling will permit the parties flexibility to craft AMAs in a 
manner that they perceive as capturing the true value of the release 
and related assignments of other assets, consistent with our goal of 
facilitating the use of AMAs.
6. Exemption From Buy/Sell Prohibition
    163. Some commenters state that they wish to enter into AMAs 
whereby they would release their capacity to an asset manager, but 
would continue to negotiate their own gas purchase contracts. Because 
such gas supply contracts would be competitively negotiated 
arrangements containing confidential pricing information, these 
commenters do not want to assign such contracts to the asset 
manager.\154\ Instead, they want to sell the gas they purchase from 
their supplier to their asset manager and then direct the asset manager 
to transport the gas to their city gate and resell the gas to them. 
These commenters ask that the Commission exempt such arrangements from 
the Commission prohibition on buy/sell arrangements.
---------------------------------------------------------------------------

    \154\ See e.g., NWIGU comments at 7, PGC comments at 6, 
Weyerhaeuser comments at 3-11.
---------------------------------------------------------------------------

    164. The Commission prohibited buy/sell arrangements in Order No. 
636 and companion orders in El Paso Natural Gas Company.\155\ Order No. 
636 stated that ``[u]nder those arrangements, an LDC will purchase gas 
in the production area from an end-user or a merchant designated by an 
end-user. The LDC will ship the gas on its own firm capacity and sell 
the gas to the end-user at the retail delivery point.'' \156\ The 
Commission explained that it had adopted a nationally uniform capacity 
release program in order to provide greater assurance that transfers of 
capacity from one shipper to another were transparent and not unduly 
discriminatory. The Commission found that permitting buy/sell 
arrangements would frustrate this goal, because such arrangements 
``would provide a major loophole, potentially inviting substantial 
circumvention of the capacity release mechanism.'' \157\
---------------------------------------------------------------------------

    \155\ 59 FERC ] 61,031, reh'g denied, 60 FERC ] 61,117 (1992).
    \156\ Order No. 636 at 30,416. In Order No. 636-B, 61 FERC ] 
61,272, at 61,997 (1992), the Commission clarified that the buy/sell 
prohibition applies to all firm capacity holders, not just LDCs. See 
also, In re BP Energy Co., 121 FERC ] 61,088, at P 14 (2007).
    \157\ El Paso, 59 FERC at 61,080.
---------------------------------------------------------------------------

    165. The Commission grants an exemption from the buy/sell 
prohibition for AMAs that qualify for the exemptions from bidding and 
tying, but only for volumes of gas delivered to the releasing shipper. 
In this proceeding, the Commission is modifying its regulations and 
policies in order to facilitate the development of efficient and 
beneficial AMAs. Consistent with this objective, the Commission will 
permit shippers to hire an asset manager solely for the purpose of 
managing their interstate pipeline capacity, while they continue to 
purchase their gas supplies from a different marketer under contracts 
which they do not assign to the asset manager.
    166. As the commenters explain, the marketer having the best terms 
and price for asset management services is not always the marketer who 
is able to supply the gas commodity at the lowest cost. Moreover, such 
marketers may be in direct competition with each other, both in the 
asset management field and in the commodity supply area. Such 
competition helps the end-user obtain the lowest possible delivered 
cost for its gas supplies. The commenters state, however, that in such 
circumstances, the releasing shipper may prefer not to assign its gas 
purchase contracts to the marketer providing asset management services 
for their pipeline capacity because this would reveal competitively 
sensitive information concerning the commodity prices offered by the 
other marketer. Rather, the releasing shipper could avoid this result 
by entering into what is in essence a buy/sell transaction, in which 
the releasing shipper would purchase the gas commodity from someone 
other than its asset manager and sell that gas to the asset 
manager.\158\ The asset manager would then use the released capacity to 
transport the gas to the shipper and resell the gas to the shipper at 
the delivery point.
---------------------------------------------------------------------------

    \158\ The sale to the asset manager is necessary to avoid a 
violation of the shipper-must-have title requirement.
---------------------------------------------------------------------------

    167. The Commission finds that exempting such transactions from the 
buy/sell prohibition is appropriate, in light of the above-described 
benefits of AMAs in which the asset manager only manages the releasing 
shipper's pipeline capacity. This exemption will not undercut the 
Commission's goal in adopting the prohibition on buy/sell arrangements 
of preventing circumvention of the capacity release program. As we have 
previously explained, capacity releases to an asset manager differ from 
other releases, because the releasing shipper is not releasing unneeded 
capacity, but capacity that will continue to be used to serve its own 
supply function during the term of the release. The purpose of the buy/
sell transactions at issue here is to permit the releasing shipper to 
negotiate its own gas purchase arrangements with a third party, while 
having its asset manager transport the gas over the released capacity 
to the releasing shipper. Thus, the asset manager's purchase from the 
releasing shipper and resale to that shipper enables the released 
capacity to be used to meet the releasing shipper's own gas 
requirements and is a condition of the capacity release. This is unlike 
the buy/sell transactions prohibited by Order No. 636, where the 
purchases, transportation, and re-sales were for the purpose of meeting 
the gas requirements of a third party, and there was no capacity 
release to any participant in the transactions. While, here, the asset 
manager would be buying gas from, and reselling it to, the releasing 
shipper, the capacity release to the asset manager would be done in 
accordance with the Commission's capacity release regulations and as 
such, would be transparent to the market. The parties would need to 
comply with all the notice and posting provisions currently in place. 
Further, the Commission has found that AMAs are beneficial to the 
secondary gas markets. By providing a limited exemption from the buy/
sell prohibition for AMAs, the Commission is further facilitating the 
flexibility of AMAs and promoting enhanced competition in the capacity 
release market.
    168. The Commission also clarifies, as requested by several 
commenters, that an AMA does not necessarily need to involve an 
assignment of gas supply contracts.\159\ Those commenters suggest

[[Page 37086]]

that while an AMA may involve an assignment of gas supply agreements, 
an AMA should not be so limited because the asset manager may have 
different supply sources from which to draw. For example, the releasing 
shipper may enter into a supply agreement directly with the asset 
manager, or the asset manager itself may be responsible for acquiring 
supply for delivery to the releasing shipper. Some commenters seek 
clarification that an end use customer need not assign actual gas 
supply contracts under which it takes service to an asset manager but 
that it may avail itself of ``any lawful mechanism for transferring 
title to gas supply.'' \160\
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    \159\ Commenters supportive of this general view include the 
AGA, BGEM, Direct Energy, NWIGU, Nstar, PPM, PGC, Sequent and 
Weyerhaeuser.
    \160\ Weyerhaeuser comments at 2-5.
---------------------------------------------------------------------------

    169. The Commission notes that the definition for AMAs approved in 
this rule does not include a requirement that the releasing shipper 
assign gas supply contracts. As discussed above, the releasing shipper 
may want to negotiate its own gas supply contracts. Alternatively, the 
releasing shipper may not currently have any of its gas supply 
contracts to assign, but is hiring an asset manager in part for the 
purpose of having the asset manager negotiate and enter into gas supply 
contracts for the purpose of supplying the releasing shippers' gas 
supply needs. Consistent with the Commission's desire to give the 
parties the flexibility to negotiate the most efficient AMA 
arrangements to fit their needs, the definition of AMA-related releases 
adopted in this rule only requires that the replacement shipper enter 
into a contractual commitment to make the requisite delivery of gas 
supplies to the releasing shipper. The mechanism by which the 
replacement shipper will obtain those supplies is left to the parties 
to negotiate.
7. Other AMA Terms and Conditions
    170. Several commenters request that the Commission clarify that 
parties are free to negotiate all relevant terms and conditions of an 
AMA, and the Commission does not intend to preclude parties from 
including in their AMA agreements terms and conditions relating to 
matters beyond the asset manager's delivery obligation to the releasing 
shipper. For example, Sequent comments that the definition of AMA 
should not preclude parties from negotiating terms and conditions in 
addition to capacity release and delivery/receipt requirements, such as 
form of service and other related agreements, compensation, operating 
and communication protocols, asset descriptions and risk 
allocations.\161\ NJNG likewise seeks clarification that the tying 
exemption for AMAs applies to all aspects of an AMA, including 
financial risk management products and services, nominations and 
scheduling services, asset optimization fees and profit sharing 
arrangements and other products and services reasonably related to an 
AMA.
---------------------------------------------------------------------------

    \161\ Sequent comments at 8-9.
---------------------------------------------------------------------------

    171. The Commission clarifies that its definition of AMAs is not 
meant to preclude the parties from negotiating the terms and conditions 
of other agreements necessary to implement AMAs, provided the elements 
of the AMA definition are satisfied. It is the Commission's intention 
in this rule to facilitate innovative and efficient AMAs. The 
Commission recognizes that in order to successfully implement an AMA, 
the parties will need to negotiate and agree upon certain other 
practical elements of the transaction aside from the release terms and 
delivery aspects of the deal. Those items may include communication 
protocols, risk management arrangements, nominations and scheduling 
services, asset optimization fees and profit sharing arrangements and 
other products and services reasonably related to an AMA. It would be 
counterproductive to the Commission's goal of facilitating AMAs to 
disallow parties to tie these other necessary aspects of AMAs to the 
deal. Thus, the Commission clarifies that if the arrangement meets the 
essential elements of the definition of AMAs, then the tying exemption 
applies to all other agreements necessary to implement the AMA. The 
Commission also clarifies that payments made by or to an asset manager 
under an AMA that are separate and apart from the cost of the released 
capacity do not violate the prohibition against tying.
8. Posting and Reporting Requirements
    172. In the NOPR, the Commission stated that, while it proposed to 
exempt capacity releases implementing AMAs from bidding, such releases 
would remain subject to all existing posting and reporting 
requirements. Accordingly, the Commission stated, pipelines would still 
be obligated to provide notice of the release pursuant to 18 CFR 
section 284.8(d). In addition, the details of the release transaction 
would have to be posted on the pipeline's Internet web site under 18 
CFR section 284.13(b)(1)(viii), which requires the posting of ``special 
terms and conditions applicable to a capacity release transaction.'' 
The Commission also stated that sections 284.13(c)(2)(viii) and (ix) 
require that the pipeline's index of customers include the name of any 
agent or asset manager managing a shipper's transportation service and 
whether that agent or asset manager is an affiliate of the releasing 
shipper.
    173. Several parties filed comments regarding the posting and 
reporting requirements for AMAs.\162\ While most support the 
Commission's goals of transparency and disclosure, they seek 
clarification as to what exactly must be posted. Essentially these 
comments request clarification that commercially sensitive details of 
an AMA, such as the structure, assets available for use by the asset 
manager, and the compensation to be paid, do not need to be posted as 
``special terms and conditions'' of the release pursuant to section 
284.13(b)(1)(viii). They assert that only the fact that the release is 
an AMA needs to be disclosed. FPL requests that the Commission 
specifically define the facts that must be reported for there to be a 
valid AMA. Hess makes a similar request, and emphasizes that releasing 
shippers should not be required to post an RFP or any other details of 
the AMA because they are proprietary, confidential and commercially 
sensitive. Hess also requests the Commission confirm that it is not 
expanding the details that it expects to be disclosed as special terms 
and conditions. Hess and Integrys assert that posting and reporting on 
AMAs should be limited to the fact that the release is part of an AMA 
and describing the terms and conditions of the release associated with 
the AMA.\163\ NGSA also requests clarification that the posting of a 
capacity release in the context of an AMA should require only the 
information normally posted for a typical release of capacity (receipt 
and delivery points, term), along with a statement that acknowledges 
that it is part of an AMA.
---------------------------------------------------------------------------

    \162\ See e.g., Comments of AGA; Comments of FPL, Comments of 
Hess; Comments of Integrys, and NGSA comments.
    \163\ Integrys comments at 6-7.
---------------------------------------------------------------------------

    174. In response to these comments, the Commission clarifies in 
this rule the posting and reporting requirements that will be 
applicable to release transactions implementing AMAs. By stating in the 
NOPR that existing section 284.13(b)(1)(viii) requires that any 
``special terms and conditions'' of such releases must be posted, the 
Commission did not intend to require that commercially sensitive 
details of an AMA be disclosed, particularly information concerning the 
gas commodity aspects of the AMA.\164\ The

[[Page 37087]]

Commission recognizes that in order to promote competition certain 
details of the AMA are commercially sensitive and thus should remain 
confidential.
---------------------------------------------------------------------------

    \164\ The Commission retains the right, however, to require a 
releasing shipper to make all relevant agreements and supporting 
documents available to the Commission for review if questions arise 
as to whether a purported AMA satisfies the Commission's 
regulations.
---------------------------------------------------------------------------

    175. However, the Commission finds that any posting under section 
284.13(b) that relates to a release to implement an AMA should include 
(1) the fact that the release is to an asset manager and (2) the 
delivery or purchase obligation of the AMA, in addition to the 
information required to be posted for all capacity releases. As 
discussed in detail above, the requirement that the asset manager 
deliver or purchase gas to fulfill the releasing shipper's supply or 
marketing obligations is the cornerstone for differentiating AMAs from 
standard capacity releases. In order to ensure that capacity releases 
posited as AMAs eligible for the exemptions from tying and bidding are 
bona fide AMAs, the Commission must have a means to monitor this 
critical component of the arrangement. Other information specifically 
related to the AMA, however, such as the pricing of any sales of gas 
commodity and any profit sharing arrangements between the releasing and 
replacement shipper need not be posted pursuant to section 284.13(b). 
Consistent with this discussion, the Commission is revising section 
284.13(b)(1) of its regulations to add a new subsection (x) specifying 
the information concerning an AMA that must be included in the posting 
of any capacity release meant to implement an AMA. The required posting 
concerning the delivery or purchase obligation that qualifies the 
release as an AMA under the definition discussed above should specify 
the volumetric level of the replacement shipper's delivery or purchase 
obligation and the time periods during which that obligation is in 
effect.
    176. INGAA and other pipeline commenters state that as pipelines 
already have a substantial role in administering the Commission's 
capacity release program, pipelines should not be overburdened by the 
proposed changes nor should they be responsible for policing asset 
managers' compliance therewith. They assert that pipelines' obligations 
should be limited to posting offers submitted by releasing shippers 
using the terms and conditions provided to the pipeline.\165\
---------------------------------------------------------------------------

    \165\ INGAA comments at 21; Spectra comments at 29.
---------------------------------------------------------------------------

    177. The Commission hereby clarifies in this rule that pipelines 
are responsible for posting offers submitted by releasing shippers that 
are meant to implement AMAs using the terms and conditions provided by 
the releasing shipper to the pipeline. It is incumbent upon the 
releasing shipper to include the details discussed above to qualify the 
release as an AMA. The Commission further clarifies that the pipeline 
has no obligation to act on any information other than is provided to 
it by its customers. The pipeline must of course, comply with all 
applicable elements of section 284.13 of the Commission's regulations.
9. Part 157 Capacity
    178. Several commentors \166\ urge the Commission to permit Part 
157 individually certificated transportation and storage agreements to 
be used in the AMA context.\167\ The Commission's Part 284 regulations, 
including the provisions for flexible receipt points and capacity 
release, do not apply to Part 157 services. This is because pipelines 
perform Part 157 services pursuant to an individual certificate rather 
than a Part 284 blanket certificate for open access transportation. 
Under Part 157, a pipeline negotiates a service with a particular 
shipper, including the terms and conditions of service. Such an 
agreement generally would only provide for service between specified 
receipt and delivery points. Subsequently, the pipeline would apply to 
the Commission under NGA section 7 for a certificate to perform this 
individual service.
---------------------------------------------------------------------------

    \166\ See e.g., comments of AGA, National Grid, NJNG, Nstar, and 
PPM.
    \167\ Individually-certificated service agreements are 
transportation and storage services that have been certificated 
pursuant to Part 157 of the Commission's regulations and under the 
authority of Section 7(c) of the NGA. See 18 CFR 157 Subpart A 
(2007).
---------------------------------------------------------------------------

    179. NJNG states that the Commission should permit a capacity 
holder desiring to enter into an AMA ``to release Part 157, as well as 
Part 284, capacity to the asset manager.'' However, it qualifies its 
request to explain that while it believes that a release of Part 157 
capacity should be permitted in this context, it does not request all 
the flexibility of Part 284 capacity. NJNG states that a limited 
expansion of flexibility afforded to Part 157 transactions will 
facilitate the asset manager's ability to optimize the customer's 
portfolio of transactions.\168\ NGNJ also suggests that inclusion of 
Part 157 service in AMAs could be achieved ``either by making Part 157 
services releasable for this limited purpose, or it could be 
effectuated by affording the asset manager a waiver of the Shipper Must 
Have Title requirement * * *.'' \169\
---------------------------------------------------------------------------

    \168\ NJNG comments at 3.
    \169\ Id.
---------------------------------------------------------------------------

    180. National Grid also requests that the Commission clarify that 
``as part of an AMA, a shipper can include all of its pipeline 
contracts, including individually certificated Part 157 contracts and 
upstream sales agreements without violating any otherwise applicable 
Commission rules or policies * * *.'' \170\ AGA recommends that the 
Commission allow Part 157 capacity to be included in the portfolio of 
assets that a releasing shipper may assign to an asset manager, but 
does not advocate that Part 157 capacity be permitted to be released or 
assigned on a stand-alone basis.\171\ PPM and Nstar request that the 
Commission permit customers to include Part 157 service as part of an 
AMA. They argue that inclusion of Part 157 capacity in AMAs would 
further advance the Commission's goal of facilitating AMAs and warrants 
an exception from the rules that otherwise prohibit shippers from 
releasing their Part 157 capacity, while exclusion of Part 157 
capacity, would serve as an obstacle to the maximization of efficient 
capacity.
---------------------------------------------------------------------------

    \170\ National Grid comments at 5.
    \171\ AGA comments at 22.
---------------------------------------------------------------------------

    181. On February 15, 2008, Spectra filed a reply to these comments. 
Spectra supports the ability of customers to have asset managers act as 
their agents in managing Part 157 service agreements, so long as the 
agreements themselves are not released or otherwise assigned to the 
asset manager and the customer and asset manager follow all other 
Commission policies and regulations related to Part 157 service. 
Spectra opposes requests that the Commission allow Part 157 service to 
be released or, in any way, be treated in the same manner as Part 284 
services and states that such suggestions are inconsistent with 
Commission policy and are outside the scope of the NOPR.
    182. On March 3, 2008, Nstar filed a response to Spectra and 
clarifies that commentors requesting this treatment for Part 157 
capacity are not arguing for flexibility equal to that the Commission 
provides shippers under Part 284 service. Rather, they simply urge the 
Commission to clarify that Part 157 rights may be among the assets 
conveyed under an AMA, and that they seek no additional Part 284 
service flexibilities. Nstar argues that the Commission should not 
require shippers to convert Part 157 service to Part 284 service as a 
condition of subjecting such capacity to an AMA. Nstar argues that such 
conversion

[[Page 37088]]

would be costly and the added flexibilities would not warrant the cost 
of conversion as they are unnecessary.
    183. The Commission did not propose in the NOPR to require 
pipelines to allow shippers to transfer their Part 157 service 
agreements to an AMA, because the essence of an AMA, as defined by 
Commission, is a pre-arranged capacity release, pursuant to the Part 
284 regulations, from the holder of the capacity to the asset manager. 
The Commission's policies regarding the release of Part 157 capacity 
are well set:

    In Order No. 636-A, the Commission determined that holders of 
individually certificated transportation under section 7(c) of the 
Natural Gas Act and Part 157 of the Commission's regulations (Part 
157 shippers), i.e. not Part 284 shippers, are not eligible to 
release capacity under section 284.243 since they are not governed 
by Part 284 or affected by the provisions of Order No. 636 that 
amended the Part 284 regulations.\172\
---------------------------------------------------------------------------

    \172\ Order No. 636-B, 61 FERC ] 61,272 at 61,992 (1992), 
citing, Order No. 636-A at 30,569.

    184. In its Order No. 636 proceeding, the Commission recognized 
that shippers under Part 157 service would not have the same rights and 
flexibility as Part 284 shippers such as flexible receipt and delivery 
points and the right to release their capacity to another shipper. 
However, the Commission stated that shippers with Part 157 service 
could convert their Part 157 service to Part 284 service if they wanted 
to release capacity or use flexible receipt and delivery points.\173\ 
Further, in Order No. 636-B, the Commission recognized that while its 
open access program under Part 284 granted shippers benefits not 
enjoyed by Part 157 shippers, it also imposed obligations upon Part 284 
shippers that were not imposed on Part 157 shippers, such as requiring 
non-discriminatory access for all shippers under Part 284 while Part 
157 arrangements may include unique terms and conditions.\174\ The 
Commission also pointed out that, because the Part 284 capacity 
releasing program permits releases at discounted rates but Part 157 
capacity cannot be discounted, Part 157 shippers cannot simply be 
included in the Part 284 capacity release program.\175\
---------------------------------------------------------------------------

    \173\ Order No. 636-A at 30,569. Moreover, in Order No. 636-B, 
the Commission stated:
    Although the Commission is denying the requests for rehearing, 
the Commission reemphasizes that it finds conversions from 
individually certificated transportation to open access 
transportation to be in the public interest. The Commission 
anticipates that pipelines and their customers will be able to reach 
agreement on proposals for implementing such conversions and 
encourages them to do so. Id. at 61,994. (footnote omitted)
    \174\ Order No. 636-B at 61,992.
    \175\ Order No. 636-B at 61,993.
---------------------------------------------------------------------------

    185. For the reasons stated above, the Commission is not persuaded 
to revise its longstanding policy of not permitting Part 157 shippers 
to participate in the capacity release program without converting their 
services to service under Part 284 blanket authority. Further, to the 
extent that Nstar argues that the commentors do not seek capacity 
release rights such as those enjoyed by Part 284 shippers but, rather 
the ability to assign a Part 157 individually certificated service 
agreement to its asset manager, such a request entails a change of the 
contract between the pipeline and the shipper. That is because such a 
modification would replace the existing shipper under a contract 
individually certificated by the Commission with another shipper. If 
the contract does not include a provision permitting such an 
assignment, the Commission could only require the pipeline to permit 
the assignment by acting under NGA section 5. The Commission finds that 
such modifications to individually certificated agreements should be 
addressed on a case by case basis, rather than in this rulemaking 
proceeding.

V. Tying of Storage Capacity and Inventory

    186. In its decision in Texas Eastern Transmission, LP,\176\ the 
Commission found that a proposed tariff provision stating that ``[i]f 
the Releasing Customer proposes or requires a transfer of all or a 
portion of its Storage Inventory in conjunction with its release of 
storage capacity rights, it shall so specify in its offer to release 
capacity'' constituted a broad authorization for shippers on Texas 
Eastern's system to tie their release of storage capacity to an 
extraneous condition (i.e. the taking of gas inventory) in all 
situations. The Commission held that this proposed tariff provision 
violated the Commission's current prohibition against tying a release 
of its capacity to any extraneous conditions. The Commission thus 
required Texas Eastern to delete the proposed language.
---------------------------------------------------------------------------

    \176\ Texas Eastern Transmission LP, 120 FERC ] 61,199, order on 
compliance filing, 121 FERC ] 61,026 (2007), reh'g denied without 
prejudice, 122 FERC 61,014 (2008) (Texas Eastern). The Commission 
stated in its rehearing order that the issues raised in the requests 
for clarification and/or rehearing in the Texas Eastern case were 
general policy issues that would be more appropriately addressed in 
this rulemaking proceeding.
---------------------------------------------------------------------------

    187. Subsequent to the Texas Eastern decision, the Commission in 
the NOPR requested comment on whether it should clarify its prohibition 
concerning tying agreements outside of the AMA context to allow a 
releasing shipper to include conditions in a storage release concerning 
the sale and/or repurchase of gas in storage inventory.\177\ All 
commenters that addressed this issue supported removing the tying 
prohibition for storage services to allow a shipper that releases 
storage capacity to condition a release of storage capacity on the sale 
and/or repurchase of gas in storage inventory. They want to be able to 
require that a replacement shipper take title to any gas that remains 
in the storage at the time the release takes effect and/or to require 
the releasing shipper to return the storage capacity to the releasing 
shipper at the end of the release with a specified amount of gas in 
storage.\178\ Commenters supporting this change argue that there is 
nothing extraneous about a releasing shipper addressing gas in storage 
at the time it releases storage capacity, and thus the requisite 
``tying'' should be permitted.
---------------------------------------------------------------------------

    \177\ NOPR at P 82.
    \178\ See e.g. Comments of the AGA, Duke Energy, Florida Cities, 
INGAA, the NGSA, Piedmont, National Grid, NYSEG and RG&E.
---------------------------------------------------------------------------

    188. Commenters note that tying storage capacity with storage 
inventory will allow the releasing shipper greater ease in releasing 
capacity and will enable transactions to be consummated more 
readily.\179\ Further, because releasing shippers may want to release 
storage capacity in the summer when they do not need it, they need to 
get the capacity back with gas in storage or there will not be enough 
time to re-fill it for the winter season.
---------------------------------------------------------------------------

    \179\ See e.g. Comments of Piedmont at 7.
---------------------------------------------------------------------------

    189. Commenters also assert that the nature of the relationship 
between storage capacity and storage inventory calls out for a waiver 
of the tying rule. They add that the ability of releasing shippers to 
``tie'' storage capacity with storage inventory such that releasing 
shippers would be permitted to require that replacement shippers take 
inventory as a condition of release, even outside the AMA context, will 
provide benefits to the marketplace similar to those provided by 
AMA.\180\ Finally, the NYPSC asserts that the AMA exemption from tying 
prohibition should be extended to releases of storage capacity 
performed pursuant to state retail access programs.
---------------------------------------------------------------------------

    \180\ Comments of Marketer Petitioners at 15-16.
---------------------------------------------------------------------------

    190. Based on the substantial support expressed in the comments, 
the Commission is clarifying in this rule its prohibition on tying to 
allow a releasing shipper to include conditions in a release concerning 
the sale and/or repurchase of gas in storage inventory even outside the 
AMA context. Specifically, this exception to the tying

[[Page 37089]]

rule is meant to allow a shipper that releases storage capacity to 
require the replacement shipper to (1) take title to any gas in the 
released storage capacity at the time the release takes effect and/or 
(2) return the storage capacity to the releasing shipper at the end of 
the release with a specified amount of gas in storage. The Commission 
is persuaded in the storage context, storage capacity is inextricably 
attached to the gas in storage. By allowing releasing shippers to 
condition the release of storage capacity on sale and or repurchase of 
gas in storage inventory and on there being a certain amount of gas 
left in storage at the end of the release, the Commission will enhance 
the efficient use of storage capacity while at the same time ensuring 
that the releasing shipper will have gas in storage for the winter. The 
Commission also agrees that allowing the tying of storage capacity to 
storage inventory will provide benefits to the market by enabling more 
active release of storage capacity into the wholesale market.

VI. Liquefied Natural Gas

    191. Statoil seeks clarification that akin to the exemption for 
AMAs that would allow the tying of released capacity to gas sales 
agreements, it would be permissible to link throughput agreements and/
or sales of gas at the outlet of an NGA Section 3 liquefied natural gas 
(LNG) terminal with a prearranged capacity release on an interstate 
pipeline connected to the terminal. Statoil comments that LNG importers 
often hold firm capacity on interstate pipelines adjacent to the 
terminals to ensure that re-gasified LNG can exit the terminal 
efficiently and be transported to the markets on the interstate 
pipeline grid. Noting that while the contracts governing the use of NGA 
section 3 capacity are not subject to the Commission's open access or 
capacity release policies, and that the terms of agreements for the 
sale of LNG are not governed by the Commission, the NGA section 7 
pipelines that connect the terminals to the interstate grid are subject 
to those regulations. Accordingly, Statoil suggests that the Commission 
should recognize and permit the natural link between an LNG terminal 
throughput agreement and an agreement to release downstream pipeline 
capacity and clarify that such a tie is permissible. Shell LNG filed in 
support of Statoil's comments.\181\
---------------------------------------------------------------------------

    \181\ Chevron also filed late supporting comments on May 27, 
2008.
---------------------------------------------------------------------------

    192. The Commission declines to grant the requested clarification 
in this generic rulemaking proceeding. In this rule, the Commission is 
providing an exemption from bidding and the prohibition on tying in 
order to permit gas sellers to use supply AMAs. Statoil and other LNG 
importers holding firm capacity on interstate pipelines connected to an 
LNG terminal can use a supply AMA. The comments of Statoil and other 
LNG importers do not provide adequate detail on the types of 
transactions for which they seek a tying exemption to explain why a 
further exemption beyond that provided for supply AMAs is required for 
LNG facilities. Likewise, it is unclear from the comments how far 
downstream they seek to have the exemption apply. For example, while 
some terminals may have direct connection to a dedicated lateral line, 
others interconnect directly with a major interstate natural gas 
pipeline. Nor do we have a sufficient record at this time to evaluate 
the possible benefits of such an exemption or the effect on open access 
competition that such an exemption might have.
    193. While the Commission declines to grant the clarification in 
this general rulemaking proceeding, the Commission is open to 
considering this issue on a case-by-case basis if presented to it in a 
fully justified proposal.

VII. State Mandated Retail Unbundling

    194. Section 284.8(h)(1) of the Commission's current capacity 
release regulations exempts prearranged releases of more than 31 days 
from bidding only if they are at the ``maximum tariff rate applicable 
to the release.'' States with retail open access gas programs (in which 
customers can buy gas from marketers rather than LDCs) have relied on 
this ``safe harbor'' exemption from bidding in structuring their 
programs. Specifically, a key component of most such programs is a 
provision for the LDC to make periodic releases, at the maximum rate, 
of its interstate pipeline capacity to the marketers participating in 
the program. The marketers then use the released capacity to transport 
the gas supplies that they sell to their retail customers. The 
exemption from bidding ensures that the LDC's capacity is transferred 
only to the marketers participating in the state retail unbundling 
program and is not obtained by non-participating third parties.
    195. However, the Commission's removal of the price ceiling for 
releases of one year or less in this rule eliminates the bidding 
exemption for releases with terms of between 31 days and one year. That 
is because there will no longer be a maximum tariff rate applicable to 
such releases. As a result, absent some additional modification of the 
regulations concerning bidding, LDCs will have to post for bidding all 
releases of between 31 days and one year that are made as part of a 
state retail unbundling program. This would mean that the marketers 
participating in the program could only obtain the capacity if they 
matched any third party bid for the capacity.
    196. In the NOPR, the Commission proposed to address this issue in 
a manner generally consistent with its actions in Order No. 637, when a 
similar issue arose with respect to the experimental lifting of the 
price ceiling for short-term capacity releases. In Order Nos. 637-A and 
637-B,\182\ the Commission denied the request by LDCs for a blanket 
exemption from bidding of all capacity releases made as part of a state 
retail unbundling program. The Commission explained that, with the 
price ceiling removed, posting and bidding was necessary to protect 
against undue discrimination and ensure that the capacity is properly 
allocated to the shipper placing the greatest value on the capacity. 
The Commission nevertheless provided that, if an LDC considered an 
exemption from bidding essential to further a state retail unbundling 
program, the LDC could request a waiver of the bidding regulation to 
allow the LDC to consummate pre-arranged capacity release deals at the 
maximum rate, subject to certain conditions.\183\
---------------------------------------------------------------------------

    \182\ Order No. 637-A at 31,569; Order No. 637-B, 92 FERC at 
61,163.
    \183\ On appeal of Order No. 637, the court in INGAA affirmed 
the Commission's refusal to grant a blanket waiver of the bidding 
requirement for releases made as part of a state retail unbundling 
program, finding that the Commission's concern about discrimination 
was reasonable. However, the court remanded the issue of the 
reasonableness of the Commission's condition that an LDC seeking a 
waiver must agree to subject all its releases to the maximum rate. 
The Commission did not address this issue in its order on remand, 
because the price ceiling had been re-imposed by the time of the 
remand order, thus rendering the issue moot.
---------------------------------------------------------------------------

    197. In the NOPR, the Commission similarly proposed to permit LDCs 
to request a waiver of the bidding regulation to allow them to 
consummate short-term pre-arranged capacity release deals necessary to 
implement retail access at the maximum rate without bidding. The 
Commission stated that this limited waiver of the bidding requirement 
would enable retail access programs to continue to operate with the 
same exemption from bidding which they now have. While the Commission 
did not propose a blanket exemption from bidding for releases made by 
LDCs under state retail choice programs comparable to the blanket 
exemption for AMAs, the Commission requested

[[Page 37090]]

comment on whether such releases should be treated as similar to 
releases made as part of an AMA and thus accorded the same full 
exemption from bidding. The Commission recognized that there are 
similarities between releases made pursuant to a state retail 
unbundling program and those made as part of an AMA, but requested 
comment on whether a blanket exemption for state programs would entail 
greater potential for undue discrimination.
    198. The vast majority of comments that addressed this issue 
supported treating capacity releases under state retail choice programs 
the same way as AMAs, advocating that those capacity releases be 
afforded the same blanket exemptions from capacity release bidding 
requirements as those granted to releases to implement AMAs.\184\ 
Commenters assert that releases made by LDCs for state unbundling 
programs closely resemble AMAs in that the capacity is committed to be 
used for its original purpose, to serve the LDC's customers. Commenters 
also note that the reasons given by the Commission in the NOPR for the 
bidding and tying exemptions for AMAs apply with equal force to 
releases to implement state approved retail access programs. Others 
argue that the Commission's case-by-case exemption analysis creates a 
greater potential for discrimination than a blanket exemption would. As 
pointed out by the NYPSC, requiring LDCs seeking to participate in 
state approved unbundling programs will inject a level of uncertainty 
into the process as well as impose additional expensive burdens on 
those LDCs. AGA urges the Commission to permit LDCs to make exempt 
releases at the price the LDC paid for the capacity as opposed to the 
applicable maximum tariff rate.\185\ FPL Energy provides the Commission 
with an alternative suggestion that would continue to allow a general 
exemption from bidding for prearranged releases where the replacement 
shipper agrees to pay the maximum tariff rate.\186\
---------------------------------------------------------------------------

    \184\ Those commenters include the AGA, Boardwalk, BP, Commerce 
Energy, Direct Energy, Duke Energy, FPL, Hess, IGS, NJNG, NStar, 
NYSEG, RG&E, Ohio OGMG, PG&E, PSCNY, PUCO, SEMI, Sequent and WDG.
    \185\ AGA comments at 7.
    \186\ FPL Energy comments at 23.
---------------------------------------------------------------------------

    199. The Commission finds that capacity releases by LDCs to 
implement state approved retail access programs should be granted the 
same blanket exemptions from the prohibition against tying and the 
bidding requirements as capacity releases made in the AMA context. As 
the Commission stated in Georgia Public Service Commission,\187\ 
``state retail unbundling is consistent with the Commission's overall 
goals in Order No. 636 of improving the competitive structure of the 
natural gas industry by promoting access to the interstate pipeline 
transportation grid and the wellhead market so that willing buyers and 
sellers can meet in a competitive, national market to transact the most 
efficient deals possible. Therefore the Commission does not wish to 
discourage state retail unbundling programs that give retail end-users 
a greater choice of suppliers from whom to purchase their gas.'' State 
retail unbundling programs provide benefits similar to AMAs.
---------------------------------------------------------------------------

    \187\ 110 FERC ] 61,048 at P 20 (2005).
---------------------------------------------------------------------------

    200. Accordingly, this rule clarifies that the prohibition against 
tying does not apply to releases by an LDC to a marketer that agrees to 
sell gas to the LDC's retail customers under a state approved retail 
access program. The final rule also amends section 284.8(h) in order to 
provide for such an exemption from bidding. The exemption from bidding 
will apply regardless of the rate at which the LDC makes its releases 
to the marketers participating in the state retail unbundling program. 
In order to qualify for the exemption, the capacity release must be 
used by the replacement shipper to provide the gas supply requirement 
of retail consumers pursuant to a retail access program approved by the 
state agency with jurisdiction over the LDC that provides delivery 
service to such retail consumers. The exemption does not apply to re-
releases made by marketers participating in the retail access program.
    201. In light of our granting this blanket bidding exemption, the 
Commission is also modifying section 284.13(b)(1) of its regulations to 
add a requirement that the pipeline's posting of a capacity release 
must state whether the release is to a marketer participating in an 
eligible state retail access program.

VIII. Implementation Schedule

    202. The regulatory changes in this rule will become effective as 
of the effective date of this rule, at which time parties may act in 
accordance with the revised regulations adopted by this rule. Pipelines 
must file within 180 days of the effective date of this rule to remove 
any inconsistent tariff provisions and can incorporate this filing into 
any other tariff filing made by the pipeline within the 180 day period.

IX. Information Collection Statement

    203. The Office of Management and Budget (OMB) regulations require 
that OMB approve certain reporting, recordkeeping, and public 
disclosure (collections of information) imposed by an agency.\188\ 
Accordingly, pursuant to OMB regulations, the Commission is providing 
notice of its proposed information collections to OMB for review under 
section 3507(d) of the Paperwork Reduction Act of 1995.\189\
---------------------------------------------------------------------------

    \188\ 5 CFR 1320.11 (2007).
    \189\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------

    204. The Commission identifies the information provided under Part 
284.13 as contained in FERC-549B. As mentioned above, natural gas 
pipelines must also amend their tariffs to remove inconsistent language 
and to incorporate the provisions from this rule into another tariff 
filing as covered under FERC-545 and file with the Commission.
    205. The Commission did not receive specific comments concerning 
its burden estimates and uses the same estimates here in the Final 
Rule, as modified to reflect the addition of what must be included in 
the posting of any capacity release to implement an asset management 
agreement or a release made as part of a state retail access program 
and to make the require tariff filings. The burden estimates for 
complying with additional filing requirements of this rule pursuant to 
the procedures in proposed new sections 284.13(b)(1) are set forth 
below. For the most part, the burden on respondents to comply with the 
existing reporting requirements in section 284.13 of the Commission's 
regulations will not be changed by this proposed rule. In 1992 in Order 
No. 636 the Commission established a capacity release mechanism under 
which shippers could release firm transportation and storage capacity 
on either a short or long term basis to other shippers wanting to 
obtain capacity. This Final Rule modifies policies and regulations 
concerning capacity releases by shippers on interstate pipelines in 
order to enhance the efficiency and effectiveness of the secondary 
capacity release market. The Commission is responding to industry's 
request for greater flexibility in the capacity release market and to 
reflect changes and developments in the marketplace. On average, we 
expect the burden of making the corresponding changes under this Final 
Rule to be 35 hours. This estimate is based on the modification of Web 
sites to account for the posting of the delivery and/or purchase 
obligation and whether a release is to a marketer serving as an asset 
manager or a shipper who is

[[Page 37091]]

participating in a state unbundling program, as well as to make the 
required tariff changes.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                 Data collection                     Number of     responses per     Hours per     Total annual
                                                    respondents     respondent       response          hours
----------------------------------------------------------------------------------------------------------------
FERC-549B.......................................             102               1              10           1,020
FERC-545........................................             102               1              25           2,550
                                                 ---------------------------------------------------------------
    Totals......................................             102               1              25           3,570
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection: 3570 hours.
    206. Information Collection Costs: The Commission sought comments 
on the cost to comply with these requirements. No comments were 
received. The Commission has projected the average annualized cost for 
all respondents to be $$145,350. This takes into account IT technical 
support 5 hours @ $125 an hour, legal review 3 hours @ $250 an hour and 
administrative support 22 hours @ $25 an hour.
    207. Title: Capacity Information (FERC-549B), Gas Pipeline Rates: 
Rate Change (Non-Formal) (FERC-545).
    208. Action: Proposed Information Collection.
    209. OMB Control Nos.: 1902-0169, 1902-0154.
    210. The applicant shall not be penalized for failure to respond to 
these collections of information unless the collections of information 
display valid OMB control numbers.
    211. Respondents: Business or other for profit.
    212. Frequency of Responses: On occasion.
    213. Necessity of Information: This Final Rule will permit market 
based pricing for short-term capacity releases and facilitate AMAs by 
relaxing the Commission's prohibition on tying and its bidding 
requirements for certain capacity releases. Elimination of the price 
ceiling for short-term capacity releases will provide more accurate 
price signals concerning the market value of pipeline capacity. 
Further, implementation of AMAs will make the capacity release program 
more efficient as releasing shippers can transfer their capacity to 
entities with greater expertise both in purchasing low cost gas 
supplies, and in maximizing the value of the capacity when it is not 
needed to meet the releasing shipper's gas supply needs. Such 
arrangements free up the time, expense and expertise involved with 
managing gas supply arrangements and serve as a means of relieving the 
burdens of administering their capacity or supply needs.
    214. Interested persons may obtain information on the reporting 
requirements by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426 (Attention: 
Michael Miller, Office of the Executive Director, 202-502-8415, fax: 
202-273-0873, e-mail: michael.miller@ferc.gov).
    215. For submitting comments concerning the collection of 
information and the associated burden estimate(s) including suggestions 
for reducing this burden, please send your comments to the contact 
listed above and to the Office of Management and Budget, Room 10202 
NEOB, 725 17th Street, NW., Washington, DC 20503 (Attention: Desk 
Officer for the Federal Energy Regulatory Commission, 202-395-7345, 
fax: 202-395-7285).

X. Environmental Analysis

    216. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\190\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\191\ The actions proposed to be taken here fall within 
categorical exclusions in the Commission's regulations for rules that 
are corrective, clarifying or procedural, for information gathering, 
analysis, and dissemination, and for sales, exchange, and 
transportation of natural gas that requires no construction of 
facilities.\192\ Therefore an environmental review is unnecessary and 
has not been prepared in this rulemaking.
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    \190\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47,897 (Dec. 17, 1987), FERC Stats. 
& Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \191\ 18 CFR 380.4 (2007).
    \192\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5) and 
380.4(a)(27)(2007).
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XI. Regulatory Flexibility Act

    217. The Regulatory Flexibility Act of 1980 (RFA) \193\ generally 
requires a description and analysis of the impact the proposed rule 
will have on small entities or a certification that the proposed rule 
will not have significant economic impact on a substantial number of 
small entities. The amendments to our regulations would apply only to 
natural gas companies, most of which are not small businesses. Under 
the industry standards used for purposes of the RFA, a natural gas 
pipeline company qualifies as a ``small entity'' if it has annual 
revenues of $6.5 million or less. As we stated in both the NOPR and in 
this Final Rule, removal of the price ceiling will enable releasing 
shippers to offer competitively-priced alternatives to the pipelines' 
negotiated rate offerings. Further, removal of the ceiling also permits 
more efficient utilization of capacity by permitting prices to rise to 
market clearing levels, allowing those entities that place the highest 
value on the capacity to obtain it.
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    \193\ 5 U.S.C. 601-612, citing to Section 3 of the Small 
Business Act, 15 U.S.C. 623 (2000). Section 3 defines a ``small 
business concern'' as a business which is independently owned and 
operated and which is not dominant in its field of operation.
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    218. The RFA directs agencies to consider at a minimum four 
regulatory alternatives in drafting a rulemaking to lessen the impact 
on small entities: Tiering or establishment of different compliance or 
reporting requirements for small entities; classification, 
consolidation, clarification or simplification of compliance and 
reporting requirements; performance rather than design standards; and 
exemptions. In this Final Rule, the Commission has revised its 
regulations to lift the ceiling price from the release market and 
provided a different compliance regime for shippers making short-term 
capacity release transactions. This gives releasing shippers some of 
the same flexibility that is currently enjoyed by jurisdictional 
pipelines. In addition, the Commission will exempt capacity releases 
made as part of AMAs from the prohibition of tying and from the bidding 
requirements of section 284.8. AMAs provide significant benefits to 
many participants in the natural gas and electric marketplaces 
particularly by allowing greater flexibility for entities to customize 
arrangements to meet unique customer needs. Sellers of natural gas by 
using the

[[Page 37092]]

benefits of AMAs create a greater diversity of potential suppliers and 
participants in the secondary markets. AMAs benefits also include 
better management of risks to the fuel supply which in turn allows 
generators to focus on the electric market and not to be consumed with 
administrative burdens relating to multiplier suppliers, overheads and 
capital requirements for and the risks associated with marketing excess 
gas. In addition, capacity releases made under state-approved retail 
access programs are also exempt from the prohibition on tying and 
bidding requirements of section 284.8 A small entity that participates 
in the market will no longer be constrained by a ceiling price for its 
unused capacity.
    219. Accordingly, pursuant to section 605(b) of the RFA, the 
Commission certifies that the Final Rule would not have a significant 
economic impact on a substantial number of small entities.

XII. Document Availability

    220. In addition to publishing the full text of this document in 
the Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    221. From FERC's Home Page on the Internet, this information is 
available on 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 of this document in the docket 
number field.
    222. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC Online Support at 202-502-
6652 (toll free at 1-866-208-3676) or e-mail at 
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

XIII. Effective Date and Congressional Notification

    223. These regulations are effective July 30, 2008. The Commission 
has determined, with the concurrence of the Administrator of the Office 
of Information and Regulatory Affairs of OMB, that this rule is not a 
``major rule'' as defined in section 351 of the Small Business 
Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 18 CFR Part 284

    Continental shelf, Natural gas, and Reporting and recordkeeping 
requirements.

    By the Commission. Commissioner Moeller dissenting in part with 
a separate statement attached.
Kimberly D. Bose,
Secretary.

0
In consideration of the foregoing, the Commission amends part 284, 
Chapter I, Title 18, Code of Federal Regulations, as follows:

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES

0
1. The authority citation for part 284 continues to read as follows:

    Authority:  15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352; 
43 U.S.C. 1331-1356.

0
2. Amend Sec.  284.8 as follows:
0
a. In paragraph (e), remove the words ``(not over the maximum rate)''.
0
b. Remove paragraph (i).
0
c. Add two sentences to the end of paragraph (b) and revise paragraph 
(h) to read as follows:

Sec.  284.8  Release of firm capacity on interstate pipelines.

* * * * *
    (b) * * * The rate charged the replacement shipper for a release of 
capacity for more than one year may not exceed the applicable maximum 
rate. Payments or other consideration exchanged between the releasing 
and replacement shippers in a release to an asset manager as defined in 
(h)(3) of this section are not subject to the maximum rate. No rate 
limitation applies to the release of capacity for a period of one year 
or less.
* * * * *
    (h)(1) A release of capacity by a firm shipper to a replacement 
shipper for any period of 31 days or less, a release of capacity for 
more than one year at the maximum tariff rate, a release to an asset 
manager as defined in (h)(3) of this section, or a release to a 
marketer participating in a state-regulated retail access program as 
defined in (h)(4) of this section need not comply with the notification 
and bidding requirements of paragraphs (c) through (e) of this section. 
Notice of a firm release under this paragraph must be provided on the 
pipeline's electronic bulletin board as soon as possible, but not later 
than the first nomination, after the release transaction commences.
    (2) When a release of capacity for 31 days or less is exempt from 
bidding requirements under paragraph (h)(1) of this section, a firm 
shipper may not roll-over, extend, or in any way continue the release 
without complying with the requirements of paragraphs (c) through (e) 
of this section, and may not re-release to the same replacement shipper 
under this paragraph at less than the maximum tariff rate until 28 days 
after the first release period has ended.
    (3) A release to an asset manager exempt from bidding requirements 
under paragraph (h)(1) of this section is any pre-arranged release that 
contains a condition that the releasing shipper may, on any day during 
a minimum period of five months out of each twelve-month period of the 
release, call upon the replacement shipper to (i) deliver to the 
releasing shipper a volume of gas up to one-hundred percent of the 
daily contract demand of the released transportation capacity or (ii) 
purchase a volume of gas up to the daily contract demand of the 
released transportation capacity. If the capacity release is for a 
period less than one year, the asset manager's delivery or purchase 
obligation described in the previous sentence must apply for the lesser 
of five months or the term of the release. If the capacity release is a 
release of storage capacity, the asset manager's delivery or purchase 
obligation need only be one-hundred percent of the daily contract 
demand under the release for storage withdrawals or injections, as 
applicable.
    (4) A release to a marketer participating in a state-regulated 
retail access program exempt from bidding requirements under paragraph 
(h)(1) of this section is any prearranged capacity release that will be 
utilized by the replacement shipper to provide the gas supply 
requirement of retail consumers pursuant to a retail access program 
approved by the state agency with jurisdiction over the local 
distribution company that provides delivery service to such retail 
consumers.

0
3. In Sec.  284.13 add paragraphs (b)(1)(x) and (b)(1)(xi) to read as 
follows:

Sec.  284.13  Reporting requirements for interstate pipelines.

* * * * *
    (b) * * *
    (1) * * *
    (x) Whether a capacity release is a release to an asset manager as 
defined in Sec.  284.8(h)(3) and the asset manager's obligation to 
deliver gas to, or purchase gas from, the releasing shipper.

[[Page 37093]]

    (xi) Whether a capacity release is a release to a marketer 
participating in a state-regulated retail access program as defined in 
Sec.  284.8(h)(4).

    Note:  The following text will not appear in the Code of Federal 
Regulations.

United States of America Federal Energy Regulatory Commission

Promotion of a More Efficient Capacity Release Market; Docket No. RM08-
1-000

Issued June 19, 2008.

    MOELLER, Commissioner dissenting, in part:
    Several commenters with interests in the importation of liquefied 
natural gas (LNG) seek clarification that a prohibited tying 
arrangement would not occur if an LNG importer combines an LNG 
throughput agreement (or the sale of regasified LNG at the outlet of 
the terminal) with a prearranged release of pipeline transportation 
capacity on the terminal's directly connected pipeline. In the 
alternative, the parties seek a limited exception from the Commission's 
tying prohibition. Today's final rule declines to grant either the 
requested clarification or the limited tying exception, but instead 
provides for adjudication on a case-by-case basis. I cannot support 
this determination.
    While LNG imports admittedly have characteristics that are similar 
to both natural gas production and storage, LNG imports have important 
differences that merit a somewhat different policy. LNG cargo owners 
and terminal operators may have less flexibility as they enter into 
negotiations and supply arrangements in the global market on the high 
seas, and the Commission should provide the regulatory certainty to 
permit the linkage of such agreements without fear of running afoul of 
the tying prohibition. Providing such an assurance could benefit the 
public interest by encouraging increased LNG supply deliveries and the 
efficiencies associated with linking the terminal capacity and pipeline 
capacity (since the commodity would flow uninterrupted from the 
terminal to its directly connected pipeline--although separately 
contracted arrangements on other pipeline(s) may be necessary to 
deliver the gas to its final destination.) However, separating these 
arrangements risk stranding capacity at the import terminal or may even 
result in LNG suppliers serving more flexible markets that do not have 
such regulatory obstacles. Moreover, due to the limited nature of the 
exception being sought, I would not expect that either domestic 
producers or interstate shippers would be placed at a competitive 
disadvantage.
    The need for LNG imports will undoubtedly increase in the coming 
years and the Commission should take steps to provide regulatory 
certainty to ensure that LNG tankers can reach our domestic markets 
without unnecessary risk. Accordingly, I believe that this narrow 
exception is appropriate in light of the unique position of LNG 
terminals in the interstate pipeline system.

Philip D. Moeller,
Commissioner.
[FR Doc. E8-14444 Filed 6-27-08; 8:45 am]

BILLING CODE 6717-01-P