Williston Basin Interstate Pipeline Co.

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Notice of request for comments; order on remand.

SUMMARY:

The Federal Energy Regulatory Commission (Commission) is requesting comments on its policy concerning a shipper's retention of its discounted rates when a secondary point is used, as that policy has been modified by the decisions in Colorado Interstate Gas Co., 95 FERC ¶ 61,321 (2001) and Granite State Transmission Co., 96 FERC ¶ 61,273 (2001).

DATES:

Initial comments are due August 9, 2004.

Reply comments are due August 30, 2004.

ADDRESSES:

Comments may be filed electronically via the eFiling link on the Commission's Web site at http://www.ferc.gov . Commenters unable to file comments electronically must send an original and 14 copies of their comments to: Federal Energy Regulatory Commission, Office of the Secretary, 888 First Street, NE., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Wayne Guest, Office of Markets, Tariffs and Rates, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6475.

Michael Goldenberg, Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8685.

Michael Miller (concerning information collection), Office of the Executive Director, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8415.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, Joseph T. Kelliher, and Suedeen G. Kelly.

1. On February 20, 2004, in Williston Basin Interstate Pipeline Co. v. FERC, the United States Court of Appeals for the District of Columbia Circuit (Court) vacated the Commission's decisions in Williston Basin Interstate Pipeline Co. The Commission's decisions addressed Williston Basin Interstate Pipeline Company's (Williston) filing to comply with Order Nos. 637, 587-G and 587-L. The Court found that the Commission had failed to present an adequate explanation for its ruling directing Williston to adopt the policy set forth by the Commission in Colorado Interstate Gas Co. (CIG) concerning shippers' ability to retain their primary point discounts when they or a replacement shipper use secondary points.

2. The Court's decision raises questions concerning the Commission's discount policy on a generic basis, as well as the effect of the policy on individual pipelines. In order to better resolve the issues raised in this proceeding, the Commission is requesting additional comments on its policy concerning a shipper's retention of its discounted rates when a secondary point is used, as that policy has been modified by the decisions in Colorado Interstate Gas Co. (CIG) and Granite State Transmission Co. (Granite State). The Commission recognizes that the resolution of the issues in this proceeding will have implications for other pipelines. Therefore, the Commission will permit late intervention in this proceeding to permit comments from all interested parties.

I. Background

A. The Commission's Discount Policy

1. The Discount Policy Prior to Order No. 636

3. As part of Order No. 436, which commenced the transition to open-access transportation, the Commission adopted regulations permitting pipelines to engage in selective discounting based on the varying demand elasticities of the pipeline's customers. The Commission explained that these selective discounts would benefit all customers, including customers that did not receive the discounts, because the discounts allow the pipeline to maximize throughput and thus spread its fixed costs across more units of service. The Commission's adoption of these regulations was upheld in Associated Gas Distributors v. FERC (AGD I).

4. In the Rate Design Policy Statement and a number of section 4 rate cases, the Commission held that if a pipeline grants a discount in order to meet competition, the pipeline is not required in its next rate case to design its rates based on the assumption that the discounted volumes would flow at the maximum rate. As the Commission explained, if the pipeline must assume in the next rate case that volumes it has transported at discounted rates would still be transported if the maximum rate were charged, the pipeline might be unable to recover its cost of service. Therefore, in order to avoid a disincentive to discounting, the Commission has stated that, in the next rate case after giving discounts, the pipeline is permitted to reduce the discounted volumes used to design its rates so that, assuming market conditions require it to continue giving the same level discounts that it gave during the test period when the new rates are in effect, the pipeline will be able to recover 100 percent of its cost of service.

2. The Discount Policy After Order No. 636

5. In Order No. 636, requiring the unbundling of the pipeline's sales and transportation services, the Commission adopted significant changes to the structure of the services provided by natural gas pipelines in order to foster greater competition in natural gas markets. As part of these changes, the Commission adopted the capacity release program that permits holders of firm transportation rights on a pipeline to resell those rights to other shippers. As the Commission explained in Order No. 636-A, the capacity release mechanism is intended to create a robust secondary market for capacity where the pipeline's direct sale of its capacity must compete with its firm shippers' offers to release their capacity. The Commission stated that this competition would help ensure that customers pay only the competitive price for the available capacity. In UDC v. FERC, the Court recognized 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. In addition to promoting competition, capacity release was a means for firm capacity holders to mitigate the shift to the SFV rate design.

6. Order No. 636 also adopted a policy giving firm shippers the right to use, on a secondary basis, receipt and delivery points other than the primary points listed in their contracts. This permits them to receive and deliver gas to any point within the firm capacity rights for which they pay. As the Court recognized in INGAA v. FERC, Order No. 636's establishment of flexible point rights, as well as segmentation, was intended to enhance the value of firm capacity and promote competition in the secondary market between firm shippers releasing capacity and pipelines, as well as between releasing shippers themselves.

7. In the individual pipeline restructuring proceedings to comply with Order No. 636, the question arose whether a releasing shipper paying a discounted rate may retain that discount if its replacement shipper uses points other than the releasing shipper's primary points. In El Paso Natural Gas Co., the Commission held that if the pipeline's contract with the releasing shipper limited its discount to its primary points, the pipeline could require the releasing shipper to pay the maximum rate whenever its replacement shipper used a different point. The Commission explained that it permits, but does not require, pipelines to offer discounts below the maximum rate, and therefore the pipeline could limit a discount to a shipper's primary point. The releasing shipper, rather than the replacement shipper, would be responsible for paying any difference between the maximum rate and the replacement shipper's rate, because the replacement shipper's reservation charge is established through the bidding or other procedures set forth in the pipeline's tariff. The Commission also stated that the releasing shipper could protect itself by putting a condition in the release preventing the use of alternate points.

8. In Order No. 637, the Commission took additional actions to enhance flexibility and competition in the secondary market. Among other things, Order No. 637 revised the Part 284 regulations to require pipelines to permit a firm shipper to segment its capacity either for its own use or for the purpose of capacity release, where operationally possible. While Order No. 637 did not change the Commission's policy on selective discounting, the Commission stated that the policy of permitting a pipeline to limit a shipper's discount to its primary point needed to be reexamined in the compliance filings, as part of the examination of restrictions on capacity release and segmentation. The Commission explained in Order No. 637-B that it was concerned that requiring a releasing shipper with a discounted rate to pay the maximum rate in order to effectuate a segmented or release transaction could interfere with the competition created by capacity release.

9. CIG was the first Order No. 637 compliance proceeding where the Commission addressed how to resolve the tension between the Commission's selective discounting policy and the Commission's goal in adopting its segmentation and flexible point right policies of enhancing competition. The Commission explained that if a shipper always loses its primary point discount and is always required to pay the maximum rate when it uses a secondary point or segments its capacity, the shipper will be less likely to engage in these activities and competition will be restricted. On the other hand, the Commission recognized that if a shipper always retains its discount when it utilizes secondary points, discounts could be allowed at non-competitive points. Therefore, the Commission refined its discount policy to provide that if a pipeline is discounting its primary capacity at a point, a shipper that segments to that point or uses that point on a secondary basis should also receive that discount if it is similarly situated to the shipper receiving the discount. In Granite State, the Commission amended its holding in CIG to require pipelines to process shipper requests to retain discounts in no longer than two hours from the time the request is submitted.

B. The Williston Decisions

10. In Williston's Order No. 637 compliance filing, the Commission required Williston to implement the discount policies set forth in CIG/Granite State. On rehearing, Williston argued that the CIG/Granite State discount policy undercuts its ability to target firm discounts to specific points in order to encourage the shipper to flow gas in a manner that will permit Williston to maximize the capacity of its reticulated system. Williston also argued that the policy would allow a firm shipper to obtain a long-term discount for an underutilized portion of its system and then engage in short-term discounted transactions at different receipt and delivery points. Williston asserted that this could reduce interruptible throughput in heavily utilized portions of its system while failing to increase flow at the point where the discount was originally given and where additional throughput was needed. Williston also argued that the policy is harmful because it limits its ability to grant discounts to obtain long-term firm service commitments and that application of the policy is not appropriate on its reticulated system.

11. The Commission concluded that shippers could not misuse the discounts in the manner described by Williston because, under the CIG/Granite State policy, the firm shipper changing points would pay the greater of its own discounted rate or the prevailing discount at the alternate point. Thus, the Commission stated, the shipper on the less utilized portion of the system could not shift its deeper discount to the more heavily utilized portion of the system. The Commission acknowledged that this new policy may require changes in long-term contracting, but stated that the policy change was nevertheless necessary to resolve the conflict between enhancing competition by adopting segmentation and flexible point rights and continuing to permit pipelines to restrict discounts to specific shippers at specific points.

12. The Court vacated the Commission's decisions in Williston on essentially two grounds. First, the Court held that the Commission had not adequately addressed whether the application of the CIG/Granite State policy in this case was appropriate in light of Williston's individual circumstances, particularly the reticulated nature of its system. The Court found that the Commission had not addressed Williston's contention that the policy could adversely affect its ability to use targeted discounts to manage gas flows across its system, in order to maximize its capacity and system utilization. Second, the Court held that the Commission had not adequately justified the general policy established in CIG/Granite State concerning retention of discounts when secondary points are used. The Court observed that the purpose of selective discounting is to increase throughput by allowing price discrimination in favor of demand-elastic customers, but a pipeline is unlikely to be able to increase throughput by selective discounting if capacity at secondary points can be transferred readily among shippers through resale at a discounted rate. The Court stated 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. Therefore, the Court was concerned that the CIG/Granite State policy undermines the benefits of selective discounting.

II. Discussion

13. This case raises important issues concerning the relationship between the Commission's discounting policy and its policies concerning capacity release, segmentation, and flexible point rights. As explained above, the Commission's regulations permitting selective discounting were first adopted as part of the Commission's regulatory policies as set forth in Order No. 436 and the Rate Design Policy Statement. Since that time, in Order Nos. 636 and 637, the Commission has moved toward a more competitive model, using a blend of approaches to approximate the results of a competitive market. The Commission has sought to create choice and competition where incentives and lack of market power allow for it, and to retain a cost-based approach where market power is too strong to allow a more market-oriented approach. Capacity release, segmentation, and flexible point rights are features of the Commission's more competitive model, while selective discounting is an outgrowth of the regulatory model.

14. Because the policies were developed at different times under different regulatory and economic models, selective discounting may not always be entirely compatible with the competitive measures adopted in Order Nos. 636 and 637. For example, the value of selective discounting to the captive customer has been to some extent replaced by the captive customer's ability to receive discounted capacity on the secondary market. The purpose of capacity release and flexible point rights is to encourage competition between the sale of the pipeline's own capacity and capacity release. The availability of capacity in the secondary market reduces the pipeline's sale of interruptible service, and may cause a reallocation of costs to firm customers in the next rate case. Thus, capacity release itself has undercut the ability of pipelines to use selective discounting both to obtain increased throughput from shippers with competitive alternatives and to maximize the revenue it obtains from each unit of throughput at the expense of inelastic or captive customers. However, capacity release gives firm customers a more direct way to reduce their costs. By releasing capacity in the secondary market, the firm shipper, including a captive customer, receives immediate payment for unused capacity, rather than waiting for the pipeline to file a new rate case to reflect throughput it has received through discounts.

15. Thus, as the Commission recognized in CIG, there is a tension between the policy of permitting pipelines to restrict discounts to specific shippers at specific points and the goal of enhancing competition through segmentation and flexible point rights. Placing restrictions on discounted transactions could interfere with competition created through released capacity. A shipper that uses flexible point rights to move to a secondary point or segments its capacity will require the use of different points than the primary points contained in the contract. Replacement shippers frequently need to use points different from those of the releasing shippers, and neither the releasing shipper nor the replacement shipper may be willing to absorb the differential between the discounted and maximum rate. If the releasing and/or replacement shipper is always required to pay the maximum rate when a secondary point is needed, competition will be restricted, but if the Commission requires the discount to apply to all points along the path, discounts may be given for other than competitive reasons.

16. In the CIG decision, the Commission attempted to strike a balance between these two extremes, so that a replacement or segmenting shipper could retain a discount if it was moving to a point where a discount was being given to a similarly situated shipper. Therefore, the Commission adopted a rebuttable presumption that a shipper segmenting, releasing, or utilizing specific points on a secondary basis will receive a discount at those points only if the pipeline is already granting discounts to those points under other firm or interruptible service agreements. The Commission intended that this balancing would address pipeline concerns that a discount necessary to meet competition at one point would not be appropriate or necessary at another point where conditions were different.

17. In view of these concerns, and the issues raised by the Court's decision in Williston, the Commission has determined in this proceeding to reexamine both (1) the general policy established in CIG/Granite State concerning retention of discounts when secondary points are used and (2) the application of that policy in the specific circumstances of Williston's reticulated system. Because the Commission will be using this proceeding to consider general policy matters applicable in other proceedings, the Commission will permit any interested party to intervene in this proceeding. To assist the Commission in this reevaluation, the Commission seeks responses from interested parties on the following issues.

A. The General Policy Issue

18. Parties should state their views on whether the Commission should reaffirm the general policy established in CIG/Granite State concerning retention of discounts when secondary points are used, return to its previous policy as set forth in El Paso Natural Gas Co., or adopt some other alternative policy. One alternative policy, for example, could permit a releasing shipper to retain its discount if the release is for one month or less. This alternative would permit the releasing shipper to release capacity in competition with the pipeline's sale of interruptible and short-term firm capacity, without allowing the shifting of a long-term firm discount to another point on a long-term basis. The Commission seeks comments on this alternative.

19. Further, the Commission is interested in comments on the extent to which the CIG/Granite State policy does, in fact, undercut the benefits of selective discounting for captive customers, and seeks comments on the following issues within 60 days of the date of publication of this order in the Federal Register. Parties may also file reply comments within 80 days of the date of publication of this order in the Federal Register.

(A) The Court was concerned that “a pipeline is unlikely to be able to increase throughput by selective discounting * * * if capacity at secondary points can be transferred readily among shippers through resale at the discounted rate.” 358 F.3d at 50. Under the CIG/Granite State policy, the pipeline need only permit a releasing shipper with a discount at its primary point to retain that discount in connection with its replacement shipper's transaction at a secondary point, if (1) the pipeline has given another shipper at the secondary point a discount due to its competitive alternatives, and (2) the replacement shipper is similarly situated, i.e., also has competitive alternatives. Given these limitations on the right of the releasing shipper to retain its discount, does the CIG/Granite State policy significantly increase the opportunities for arbitrage?

(B) Is there less of an incentive under the CIG/Granite State policy for pipelines to offer discounts to attract additional throughput? Pipeline commenters should explain how the policy has affected their discounting practices, and provide detailed information concerning how many discounts were given prior to adoption of the policy and after its adoption, and how many discount firm contracts are in effect on their systems. Specifically, pipeline commenters should provide information concerning the term of the agreement, the total CD involved, and the receipt and delivery points for each discount given in the year prior to the adoption of the CIG/Granite State policy, and that same information for the year after adoption of the policy. In addition, pipeline commenters should state how many requests they have received from shippers, pursuant their tariff provisions implementing the CIG/Granite State discount policy, seeking to retain discounts when a different point is used, and how many such requests have been granted. For those requests for discounts that were denied, pipeline commenters should supply the reasoning used and whether the transaction was consummated without a discount. Pipeline commenters should also provide information on how selective discounts were used for system management prior to the adoption of the policy and whether their ability to use selective discounts for this purpose has been harmed by the policy. Provide examples.

(C) Shipper commenters should explain how the CIG/Granite State policy has affected their release of capacity, and provide information concerning release of discounted capacity prior to adoption of the policy and after its adoption. Shipper commenters should explain whether and why they were discouraged from engaging in capacity release as a result of the previous policy and the extent to which the CIG/Granite State policy has reduced such disincentives.

(D) Explain whether the impact of the CIG/Granite State policy is different on reticulated systems than on long line systems.

B. Application of the Policy to Williston

20. Williston has asserted that the application of the CIG/Granite State policy to its system is not appropriate because of the reticulated nature of its system. Therefore, if the Commission upholds the policy on a generic basis, it will also consider whether the nature of Williston's system supports applying the policy to Williston on a modified basis.

(A) In order to aid the Commission in that determination, the Commission directs Williston to provide the following information within 60 days of the date of publication of this order in the Federal Register:

1. For the year before implementation of the CIG/Granite State policy on your system, list each discount that you granted to firm shippers. Provide information concerning the term of the agreement, the total CD involved, and the receipt and delivery points. Explain the benefits to system management that resulted from each discount. To the extent that any of these discounts were intended to increase flows on particular parts of the system, identify each discount and explain on what parts of the system the discount was intended to increase flow.

2. Provide this same information for the year following implementation of the CIG/Granite State policy on the system. Explain how any transfer of discounts to secondary points that occurred pursuant to the CIG/Granite State policy harmed system management. Explain how shippers were able to use the discounts granted on less heavily utilized portions of the system to displace volumes of gas moving on other more heavily utilized portions of the system. Explain how this could occur in view of the fact that the Commission's policy requires that a discount be granted at another point only if a discount has already been granted to a similarly situated shipper at that point, i.e., the point has already been designated by the pipeline as a point where competition requires a discount.

3. For the year before and the year after Williston implemented the CIG/Granite State policy, list each discount you gave to interruptible shippers, including the term of each agreement and the receipt and delivery points.

4. In the Williston decision, the Court referred to Williston's concern that under the CIG/Granite State policy, a shipper with a long-term discount to an underutilized portion of the system could use the discount instead either to reduce its own shipments or displace those of other shippers on more heavily utilized portions of the system. Provide specific examples of how this would occur and indicate whether this has in fact ever occurred. If it has in fact occurred, be specific as to the customer(s), the term of the agreement, the discount rate, and the CD involved.

5. Provide information on all instances, after implementation of the CIG/Granite State policy, where Williston refused to grant a firm shipper a discount based on the concern that the shipper would be able to shift the discount to another point, thereby causing Williston to lose business.

(B) Within 80 days of the date of publication of this order in the Federal Register, other interested parties may reply to the information submitted by Williston regarding how the CIG/Granite State policy should be applied to Williston.

C. Administrative Findings

Information Collection Statement

21. As discussed above, the Commission seeks comment on whether it should reaffirm the general policy established in CIG/Granite State concerning retention of discounts when secondary points are used, return to its previous policy as set forth in El Paso Natural Gas Co., or adopt some other policy. In order to make a determination the Commission seeks specific information from pipelines on their discounting practices. Because the Commission is asking identical questions to obtain information from ten or more respondents, it is seeking approval of this data request from the Office of Management and Budget.

22. The collection of information set forth below has been submitted to the Office of Management and Budget (OMB) for review under section 3507(d) of the Paperwork Reduction Act of 1995. OMB's regulations require OMB to approve certain information collection requirements imposed by agency rule. The Commission identifies the information provided for under this order as FERC-605, Discount Practice Reports.

Information Collection Costs: The Commission seeks comments on the cost to comply with this data request. It has projected the average annualized cost of all respondents to be: $15,459. (300 hrs. ÷ 2,080 hours × $107,185) or 300 @ $52.00 an hour.

23. OMB's regulations require it to approve certain information collection requirements imposed by agency rule. The Commission is submitting a copy of this order to OMB.

Title: Discount Practice Reports.

Action: Proposed collection.

OMB Control No: To be determined.

Respondents: Businesses or other for profit.

Frequency of Responses: On occasion.

Necessity of Information: The information is needed so that the Commission can prepare an order in response to the Court's determination in Williston Basin Interstate Pipeline Co. v. FERC and assess its current policies. The Commission must ascertain the effects of its generic discount policy on pipeline operations and the relationship with other Commission policies, specifically, capacity release, segmentation and flexible point rights. The Commission will use responses to this inquiry to formulate its response in other proceedings on whether to maintain the current policy or adopt an alternative policy.

Internal Review: The Commission has reviewed the data request and has determined that the information is necessary in order to reevaluate both the general policy established in CIG/Granite State concerning the retention of discounts when secondary points are used and the application of that policy in the specific circumstances of Williston's reticulated system. This information conforms to the Commission's plan for efficient information collection, communication and management within the natural gas industry. The Commission has assured itself, by means of internal review, that there is specific, objective support for the burden estimates associated with the information/data request.

24. Interested persons may obtain information on the information request by contacting the following: Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426 [Attention: Michael Miller, Office of the Executive Director, Phone (202) 502-8415, fax: (202) 273-0873, e-mail: michael.miller@ferc.gov.]

25. For submitting comments concerning the collection of information and the associated burden estimates, please send your comments to the contact listed above and to the Office of Management and Budget, Office of Information and Regulatory Affairs, Washington, DC 20503, [Attention: Desk Officer for the Federal Energy Regulatory Commission, phone: (202) 395-7856, fax: (202) 395-7285.

The Commission orders:

Parties may submit comments on the issues set forth above within 60 days of the date of the publication of this order in the Federal Register, and may file reply comments within 80 days of the date of the publication of this order in the Federal Register.