FERC Drops Proposal Limiting Capacity Release by Affiliates

In a final rule, FERC has dropped its earlier proposal to require that, if more than one affiliate of the same entity participates in an interstate natural gas pipeline open season, then none of those affiliates may release any capacity obtained in that open season pursuant to a pro rata allocation to any affiliate, or otherwise allow any affiliate to obtain the use of the allowed capacity (RM11-15).

FERC's action came in final regulations governing open seasons under which FERC will prohibit multiple affiliates of the same entity from bidding in an open season for pipeline capacity in which the pipeline may allocate capacity on a pro rata basis, unless each affiliate has an independent business reason for submitting a bid.

"This prohibition will help to prevent shippers from using multiple affiliates to defeat the pro rata allocation tiebreaker mechanism and obtain a greater share of available capacity than a single bidder could acquire by itself," FERC said.

FERC noted that stakeholders requested further clarification of what constitutes an "independent business reason."

"As the Commission explained in the NOPR, it is impossible to describe in advance every situation that demonstrates an independent business reason. However, our intent in permitting bidding by multiple affiliates where each has its own independent business reason for bidding is to allow each affiliate to acquire capacity which will facilitate or enhance its ability to provide service of value to its own customers or otherwise help accomplish its own business goals. The phrase 'independent business reason' should be interpreted and applied in specific situations consistent with that intent," FERC said.

More specifically, FERC said that situations where each affiliate is seeking pipeline capacity in order to transport natural gas to its own sales customers would constitute an independent business reason.

Furthermore, FERC described several additional permissible scenarios for bidding, including situations where a marketer affiliate participating in a retail access program is seeking pipeline capacity to serve its retail customers in that program, or a marketer affiliate seeking is pipeline capacity to transport natural gas to any other type of customer to whom it ordinarily sells natural gas.

"In all of these scenarios, the affiliate or business unit is seeking pipeline capacity to transport natural gas which it will consume in its own business operations or sell to others as part of its ordinary course of business. In such circumstances, the affiliate may participate in an open season, regardless of whether any other affiliate may participate in the same open season," FERC said.

Regarding the originally proposed prohibition on affiliate capacity release, which FERC struck from the final rule, the Commission said that the any behavior that the Commission intended to fall under the proposed capacity release prohibition has been covered by the prohibition on multiple affiliate bidding.

"Upon further consideration, the Commission has determined that an affiliate who legitimately obtains capacity in an open season for its own independent business purposes should be permitted to release that capacity to any entity under the normal capacity release rules applicable to all other shippers. This will enable affiliates to obtain the same benefits from capacity release as other shippers. We note, however, that the Commission may consider what an entity does with its awarded capacity, such as subsequently releasing the capacity to an affiliate on a long-term basis, as a factor in the determination of whether the entity in fact had an independent business reason to obtain the capacity," FERC said.