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[Federal Register: December 11, 2003 (Volume 68, Number 238)]
[Rules and Regulations]
[Page 69133-69162]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de03-16]
[[Page 69133]]
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Part II
Department of Energy
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Federal Energy Regulatory Commission
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18 CFR Part 37, et al.
Standards of Conduct for Transmission Providers; Final Rule
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Parts 37, 161, 250, 284 and 358
[Docket No. RM01-10-000; Order No. 2004]
Standards of Conduct for Transmission Providers
November 25, 2003.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Final rule.
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SUMMARY: The Federal Energy Regulatory Commission is adopting standards
of conduct that apply uniformly to interstate natural gas pipelines and
public utilities (jointly referred to as Transmission Providers). The
standards of conduct will govern the relationships between regulated
Transmission Providers and all of their Energy Affiliates. The new
standards of conduct will eliminate the loophole in the current
regulations that do not cover a Transmission Provider's relationship
with Energy Affiliates that are not marketers or merchant affiliates.
The Final Rule will ensure that Transmission Providers cannot extend
their market power over transmission to wholesale energy markets by
giving their Energy Affiliates unduly preferential treatment.
EFFECTIVE DATE: The rule will become effective February 9, 2004.
FOR FURTHER INFORMATION CONTACT: Demetra Anas, Office of Market
Oversight and Investigation, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC, (202) 502-8178.
SUPPLEMENTARY INFORMATION:
Table of Contents
Paragraph
Number
I. Background.............................................. 2
II. Current Regulations.................................... 5
III. Need for the Rule..................................... 6
IV. Section-by-Section Analysis of Final Rule.............. 16
A. Applicability--Sec. 358.1......................... 16
i. Regional Transmission Organizations/Independent 17
System Operators..................................
ii. Non-Public Utilities........................... 24
iii. Cooperatives and Small Pipelines and Utilities 25
iv. Delay of Applicability......................... 29
B. General Principles--Sec. 358.2.................... 30
C. Definitions--Sec. 358.3........................... 32
i. Definition of a Transmission Provider........... 33
ii. Definition of an Energy Affiliate.............. 37
1. LDCs........................................ 41
2. Affiliates not engaged or involved in 45
transmission transactions, e.g., trading and
financial affiliates..........................
3. Affiliated Transmission Providers........... 49
4. Holding or service companies................ 52
5. Foreign affiliates.......................... 59
6. Affiliates buying power for themselves...... 63
7. Producers, Gatherers, and Processors........ 66
8. Intrastate and Hinshaw Pipelines............ 72
iii. Definition of Marketing, Sales or Brokering... 73
iv. Definition of a Transmission Function.......... 80
v. Definition of a Reseller........................ 81
D. Independent Functioning--Sec. 358.4............... 82
i. Background and History of Independent 86
Functioning Requirement
ii. Energy Affiliate Function or Commercial 88
Function..........................................
iii. Sharing of Non-Transmission Functions......... 95
iv. Sharing of Senior Officers and Directors....... 102
v. Sharing of Field and Maintenance Personnel...... 105
vi. Transmission Employees that Engage in 107
Operational Purchases.............................
vii. Risk Management Employees..................... 109
viii. Costs of compliance.......................... 113
ix. Conclusion..................................... 118
E. Identification of Affiliates on Internet............ 122
i. Posting Organizational Charts................... 123
ii. Posting of Merger Information.................. 126
iii. Transfer of Employees......................... 128
F. Books and Records................................... 132
G. Written Procedures.................................. 133
i. Posting Standards of Conduct Procedures......... 135
ii. Training....................................... 138
iii. Chief Compliance Officer...................... 140
H. Non-Discrimination Requirements--Sec. 358.5....... 142
i. Information Access and Disclosure Prohibitions.. 143
A. ``No Conduit'' or ``Automatic 144
Imputation''..............................
B. Sharing of Operational Information...... 151
C. Generation Dispatch..................... 154
D. Voluntary Consent....................... 156
E. Transaction Specific Exemption.......... 158
ii. Implementing Tariffs........................... 162
I. Discounts........................................... 163
V. Conforming Changes...................................... 170
[[Page 69135]]
VI. Additional Policy Changes not Adopted.................. 171
VII. Regulatory Flexibility Act Certification.............. 173
VIII. Information Collection Statement..................... 174
IX. Environmental Statement................................ 202
X. Document Availability................................... 203
XI. Effective Date and Congressional Notification.......... 206
Before Commissioners: Pat Wood, III, Chairman; William L. Massey, and
Nora Mead Brownell.
1. The Federal Energy Regulatory Commission is adding Part 358 to
its regulations and revising Parts 37 and 161 of its regulations in
response to the changing structure of the energy industry.\1\ In this
rule, the Commission adopts standards of conduct that apply uniformly
to interstate natural gas pipelines and public utilities (jointly
referred to as Transmission Providers) that are currently subject to
the gas standards of conduct in Part 161 of the Commission's
regulations and the electric standards of conduct in Part 37 of the
Commission's regulations.\2\ In light of the changing structure of the
energy industry, the standards of conduct will govern the relationships
between regulated Transmission Providers and all of their Energy
Affiliates. The new standards of conduct will eliminate the loophole in
the current regulations that do not cover a Transmission Provider's
relationship with Energy Affiliates that are not marketers or merchant
affiliates. The Final Rule will ensure that Transmission Providers
cannot extend their market power over transmission to wholesale energy
markets by giving their Energy Affiliates unduly preferential
treatment.
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\1\ The Commission is also making minor conforming changes in
Parts 250 and 284.
\2\ The gas standards of conduct are codified at part 161 of the
Commission's regulations, 18 CFR part 161 (2003), and the electric
standards of conduct are codified at 18 CFR 37.4 (2003).
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I. Background
2. On September 27, 2001, the Commission issued a Notice of
Proposed Rulemaking (NOPR) in this proceeding.\3\ One hundred and
fifty-five interested persons submitted comments.\4\ Several commenters
requested an opportunity for an oral presentation on the matters raised
in the NOPR. On April 25, 2002, the Commission published an ``Analysis
of the Major Issues Raised in the Comments'' (Major Issues Analysis),
suggesting some possible changes to the proposals in the NOPR. The
Major Issues Analysis proposed changes in the definition of an Energy
Affiliate, among other things, and provided draft regulatory text.
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\3\ Standards of Conduct for Transmission Providers, 66 FR 50919
(Oct. 5, 2001), IV FERC Stats. & Regs. Regulation Preambles ] 32,555
(Sept. 27, 2001).
\4\ See Appendix A for a list of commenters.
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3. The Major Issues Analysis also gave notice that the Commission
would host a full-day technical conference giving interested persons
the opportunity to discuss issues raised in the NOPR and the Major
Issues Analysis. Approximately 200 participants attended the conference
on May 21, 2002. During and following the conference, participants were
encouraged to submit drafting options for regulatory text. The
Commission then posted all of the proposals on its Internet Website.
Since the conference, the Commission has received more than 100
additional comments, many from interested persons who previously
submitted comments.
4. This Final Rule is being issued after a review of all the
comments filed in this proceeding and will become effective on February
9, 2004. By February 9, 2004, each Transmission Provider is required to
file with the Commission and post on the OASIS or its Internet website
a plan and schedule for implementing the standards of conduct. By June
1, 2004, all Transmission Providers must comply with the standards of
conduct and post procedures on the Internet that will enable customers
and the Commission to determine whether Transmission Providers are in
compliance with the standards of conduct requirements contained herein.
II. Current Regulations
5. The current standards of conduct restrict the ability of
interstate natural gas pipelines and public utilities (Transmission
Providers) to give their marketing affiliates or wholesale merchant
functions undue preferences over non-affiliated customers. The
Commission's goal--to prevent unduly discriminatory behavior--reflects
FERC's statutory responsibilities under the NGA and FPA.\5\ Both gas
\6\ and electric \7\ standards of conduct rely on
[[Page 69136]]
similar mechanisms to prevent transmission from being used in an unduly
preferential or discriminatory manner by: (1) Separating employees \8\
engaged in transmission services from those engaged in commodity
marketing services, i.e., marketing or sales for resale of natural gas
or electric energy; and (2) ensuring that all transmission customers,
affiliated and non-affiliated, are treated on a non-discriminatory
basis. The Commission's goals have not changed. This rule is designed
to prevent Transmission Providers from giving undue preferences to any
of their Energy Affiliates to ensure that transmission is provided on a
non-discriminatory basis.
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\5\ Sections 4 and 5 of the Natural Gas Act (NGA), 15 U.S.C.
717c and 717e (2000), state that no natural gas company shall make
or grant an undue preference or advantage with respect to any
transportation or sale of natural gas subject to the Commission's
jurisdiction. Similarly, under sections 205 and 206 of the Federal
Power Act (FPA), 16 U.S.C. 824d and 824e (2000), no public utility
shall make or grant an undue preference with respect to any
transmission or sale subject to the Commission's jurisdiction.
\6\ Order No. 497, 53 FR 22139 (June 14, 1988), FERC Stats. &
Regs., Regulations Preambles 1986-1990 ] 30,820 (June 1, 1988);
Order No. 497-A, order on reh'g, 54 FR 52781 (Dec. 22, 1989), FERC
Stats. & Regs., Regulations Preambles 1986-1990 ] 30,868 (Dec. 15,
1989); Order No. 497-B, order extending sunset date, 55 FR 53291
(Dec. 28, 1990), FERC Stats. & Regs., Regulations Preambles 1986-
1990 ] 30,908 (Dec. 13, 1990); Order No. 497-C, order extending
sunset date, 57 FR 9 (Jan. 2, 1992), FERC Stats. & Regs.,
Regulations Preambles 1991-1996 ] 30,934 (Dec. 20, 1991), reh'g
denied, 57 FR 5815 (Feb. 18, 1992), 58 FERC ] 61,139 (Feb. 10,
1992); Tenneco Gas v. FERC (affirmed in part and remanded in part),
969 F.2d 1187 (D.C. Cir. 1992); Order No. 497-D, order on remand and
extending sunset date, 57 FR 58978 (Dec. 14, 1992), FERC Stats. &
Regs., Regulations Preambles 1991-1996 ] 30,958 (Dec. 4, 1992);
Order No. 497-E, order on reh'g and extending sunset date, 59 FR 243
(Jan. 4, 1994), FERC Stats. & Regs., Regulations Preambles 1991-1996
] 30,987 (Dec. 23, 1993); Order No. 497-F, order denying reh'g and
granting clarification, 59 FR 15336 (Apr. 1, 1994), 66 FERC ] 61,347
(Mar. 24, 1994); and Order No. 497-G, order extending sunset date,
59 FR 32884 (June 27, 1994), FERC Stats. & Regs., Regulations
Preambles 1991-1996 ] 30,996 (June 17, 1994).
See also Standards of Conduct and Reporting Requirements for
Transportation and Affiliate Transactions, Order No. 566, 59 FR
32885 (June 27, 1994), FERC Stats. & Regs., Regulations Preambles
1991-1996 ] 30,997 (June 17, 1994); Order No. 566-A, order on reh'g,
59 FR 52896 (Oct. 20, 1994), 69 FERC ] 61,044 (Oct. 14, 1994); Order
No. 566-B, order on reh'g, 59 FR 65707 (Dec. 21, 1994), 69 FERC ]
61,334 (Dec. 14, 1994); and Reporting Interstate Natural Gas
Pipeline Marketing Affiliates on the Internet, Order No. 599, 63 FR
43075 (Aug. 12, 1998), FERC Stats. & Regs., Regulations Preambles
1996-2000 ] 31,064 (July 30, 1998).
\7\ Open Access Same-Time Information System (Formerly Real-Time
Information Network) and Standards of Conduct, Order No. 889, 61 FR
21737 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles
1991-1996 ] 31,035 (Apr. 24, 1996); Order No. 889-A, order on reh'g,
62 FR 12484 (Mar. 14, 1997), FERC Stats. & Regs., Regulations
Preambles 1996-2000 ] 31,049 (Mar. 4, 1997); Order No. 889-B, reh'g
denied, 62 FR 64715 (Dec. 9, 1997), FERC Stats. & Regs., Regulations
Preambles 1996-2000 ] 31,253 (Nov. 25, 1997).
See also Promoting Wholesale Competition Through Open Access
Non-Discrimination Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. &
Regs., Regulations Preambles 1991-1996 ] 31,036 (Apr. 24, 1996) at
31,692; order on reh'g, Order No. 888-A, 62 FR 12274 (Mar. 14,
1997), FERC Stats. & Regs., Regulations Preambles 1991-1996 ] 31,048
(Mar. 4, 1997); order on reh'g, Order No. 888-B, 81 FERC ] 61,248
(1997); order on reh'g, Order No. 888-C, 82 FERC ] 61,046 (1998),
aff'd in relevant part sub nom., Transmission Access Policy Study
Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), cert. granted, 69
U.S.L.W. 3574 (Nos. 00-568 (in part) and 00-809), cert. denied (No.
00-800) (U.S. Feb. 26, 2001).
\8\ Each reference to employees includes contractors,
consultants and agents.
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III. Need for the Rule
6. As discussed in the NOPR, significant changes have occurred
since the standards of conduct were first adopted. In Order No. 636,
the Commission required all interstate natural gas pipelines to provide
open-access transportation service and to unbundle their gas sales from
transportation.\9\ Since then, the market has expanded to include both
physical and financial transactions by marketing and non-marketing gas
pipeline affiliates.\10\ In the gas industry, these changes include
unbundling, capacity release, and e-commerce. Today, as a result of
growth and consolidations, many interstate natural gas pipeline
companies also have a much wider array of affiliates in all sectors of
the energy business. The gas industry has experienced consolidations in
every sector--pipelines, producers, marketers, LDC/utilities and
industrials. Examples include the mergers of El Paso Energy
Corporation, Sonat Inc. and the Coastal Corporation, and Columbia
Energy Group and NiSource Inc. Marketing affiliates and non-marketing
affiliates today offer a variety of new services, such as bundled
sales, asset management, price hedging, risk management, and electronic
commodity trading. Recently, some pipelines have reduced or eliminated
some of these services, while others continue to have active merchant,
management and trading functions.
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\9\ Order No. 636, Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing Transportation Under Part
284 of the Commission's Regulations, and Regulation of Natural Gas
Pipelines After Partial Wellhead Decontrol, FERC Stats. & Regs. ]
30,939 (1992), order on reh'g, Order No. 636-A, FERC Stats. & Regs.
] 30,950 (1992), order on reh'g, Order No. 636-B, 61 FERC ] 61,272
(1992), aff'd in part, rev'd in part, United Distribution Cos. v.
FERC, 88 F.3rd 1105 (D.C. Cir. 1996), cert denied, 137 L. Ed 2d 845,
117 S. Ct. 1723 (1997), on remand, Order No. 636-C, 78 FERC ] 61,186
(1997), order on reh'g, Order No. 636-D, 83 FERC ] 61,210 (1998).
\10\ We also have seen the entry of many financial institutions
into the trading arena, e.g., Morgan Stanley Capital Group, Inc.,
Bank of America, N.A., and UBS AG.
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7. Similarly, now that public utility Transmission Providers have
been providing open-access service under Order No. 888 for several
years, there has been a large increase in the number of power marketers
with market-based rates,\11\ an increased market for available
transmission capacity, and an increased number of power transactions.
Electric power is evolving into a more liquid, transparent commodity.
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\11\ As of October 1, 2003, the Commission has granted
approximately 1300 market-based rate authorizations; nearly 880 of
these were approved within the last five years. Of the
authorizations granted within the last five years, about 500 were
granted to investor-owned utilities and their affiliates.
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8. Not only are the affiliated entities changing in size and scope,
so are the Transmission Providers. As a result of an increase in merger
activities there has been a convergence of the gas and electric
industries.\12\ These industry changes mean that interstate natural gas
pipelines and their affiliates not only deal in gas, but also in power,
much of which is generated using natural gas. In one of its recent
regulatory reviews, the Federal Trade Commission (FTC) found that the
proposed acquisition of Panhandle and Trunkline by CMS was likely to
adversely affect industrial plants in the CMS local natural gas
franchise areas that rely on natural gas as a fuel to generate electric
power onsite.\13\
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\12\ Since 1995, the Commission has received 66 public utility
merger applications, 60 of which have been approved, one has been
set for hearing and five have been withdrawn or terminated. Several
mergers joined gas and electric companies, such as NiSource Inc.
with Columbia Energy Group and Dominion Resources, Inc. with
Consolidated Natural Gas Company.
\13\ In the matter of CMS Energy Company and Panhandle Eastern
Pipeline Co. et al., FTC File 991-0046, Analysis of Proposed Consent
Order to Aid Public Comment.
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9. The Commission is concerned that a Transmission Provider's
market power could be transferred to its affiliated businesses because
the existing rules do not cover all affiliate relationships. For
example, an integrated entity could exercise market power in delivered
natural gas service to raise costs of rival generators or inhibit entry
of new generators into wholesale power markets.
10. Although the current standards of conduct limit Transmission
Providers' ability to make or grant undue preferences to their
wholesale merchant functions or to their marketing affiliates, they do
not cover the transmission providers' other non-marketing affiliates,
even though the NGA and FPA prohibit a natural gas pipeline company and
a public utility from giving any entity an undue preference. Non-
marketing affiliates of Transmission Providers compete against non-
affiliates for transmission services, in capacity release transactions,
in power sales, and in siting new generation. For example, in the gas
industry, non-marketing affiliates of interstate natural gas pipelines
control large amounts of capacity on their affiliated pipelines, yet
they are not covered by the current standards of conduct because they
do not actually hold pipeline capacity (functioning instead as asset
managers) or they fit within one of the existing exceptions, e.g.,
producers, gatherers and local distribution companies.\14\ See 18 CFR
161.2 (2003). A comparison of the October 2003 Index of Customers data
to the January 2001 Index of Customers data reveals that the amount of
firm capacity held by marketing affiliates has decreased during that
period, while the amount of firm capacity held by other affiliates has
increased during that period.\15\
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\14\ A review of data from the 85 interstate natural gas
pipelines and certificated storage companies that submitted an Index
of Customers for October 2003, shows that 63 of them transport or
store gas for their affiliates. Thirty-six pipelines transport gas
for their marketing affiliates, which hold an average of 16 percent
of the affiliated pipelines' capacity. Similarly, 13 pipelines with
storage services ``transport'' gas for their marketing affiliates,
which hold an average of 43 percent of the affiliates storage
companies' capacity.
In addition, 33 pipelines transport gas for other (non-
marketing) affiliates that hold an average of 42 percent of the
affiliated pipelines' capacity, and 16 storage companies
``transport'' gas for their other affiliates, which hold an average
of 46 percent of the affiliated storage companies' capacity.
Staff's review, which looked at all interstate natural gas
pipelines that filed Index of Customers is more complete than an
INGAA-sponsored study of select pipelines that showed, during 2000,
that marketing and non-marketing affiliates of natural gas pipelines
contracted for 14.4 percent of the capacity on their affiliated
pipeline.
\15\ The January 2001 Index of Customers data shows that
marketing affiliates held about 18 percent of affiliated interstate
natural gas pipelines' firm capacity and non-marketing affiliates
held an additional 19 percent of the affiliated pipelines' firm
capacity. The October 2003 Index of Customers data shows that
marketing affiliates hold about 16 percent of the affiliated
pipelines' firm capacity and non-marketing affiliates hold an
additional 42 percent of the affiliated pipelines' firm capacity.
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[[Page 69137]]
11. The current standards of conduct do not address the sharing of
confidential shipper information and transportation information with
all Energy Affiliates. For example, if an interstate natural gas
pipeline informs its affiliated asset manager about a proposed pipeline
expansion or upcoming curtailment, the current standards of conduct do
not require it to make that information available to non-affiliates,
unless the asset manager is a Marketing Affiliate. Nor do the current
standards address whether an electric Transmission Provider can share
with its generator affiliates information about generation projects
planned by competitors. Sharing of information between Transmission
Providers and Energy Affiliates undermines and frustrates the efforts
of ``independent'' businesses to buy, sell, build, grow, and provide
competitive alternatives in markets where there are concerns about
market power. Although Transmission Providers' unduly preferential
behavior towards their Energy Affiliates may not violate the current
standards of conduct, we believe it violates the general statutory
prohibitions against undue discrimination and undue preferences in the
provision of interstate transmission services.
12. Many commenters argue generally that the rule is unnecessary.
They maintain that there have been relatively few cases of anti-
competitive behavior. Some commenters urged the Commission to maintain
the status quo. Many public utility Transmission Providers and
interstate natural gas pipeline Transmission Providers argue that there
is no need for a general rule, and individual instances of abuse can be
considered and resolved by the Commission in case-by-case
investigations or in individual Commission proceedings.
13. Some commenters supported the Commission's proposal to develop
uniform standards of conduct. For example, the American Antitrust
Institute said that Transmission Providers have the ability and
incentive to adversely affect electricity or gas prices by frustrating
or precluding a rival's access to electric transmission or gas
transportation. In addition, those companies involved in the converging
energy industry support the Commission's initiative because they
currently operate under both the electric and gas standards of conduct.
Some commenters urge the Commission to adopt stricter prohibitions,
such as structural remedies or capacity limits. NASUCA says that the
lack of complaints is a ``Catch-22.'' NASUCA states that the reason
there have been very few complaints regarding other affiliates is that
anti-competitive transactions involving these transactions do not
violate the current standards of conduct.
14. Having carefully considered all the comments, the Commission is
convinced of the need for a general rule to establish standards of
conduct governing relationships between Transmission Providers and
their Energy Affiliates. With the creation of the Office of Market
Oversight and Investigations (OMOI), the Commission is seeing the
results of a more active enforcement program investigating unduly
discriminatory practices. Recently, the Enforcement Division of OMOI
has uncovered affiliate abuse activity that reveals that some
Transmission Providers are giving their affiliates undue preferences
and violating the standards of conduct.\16\ In addition, several audits
of public utilities, conducted by the Division of Regulatory Audits,
Office of the Executive Director, revealed violations of the standards
of conduct. Specifically, Public Service Company of New Mexico (PNM)
failed to comply with the independent functioning requirement.\17\ In
addition, wholesale merchant function employees had access to computer
terminals that allowed them to access transmission system information
on the EMS (Energy Management System). More recently, an audit of
Ameren Corporation revealed, among other things, that Ameren's
transmission employees had engaged in non-public, off-OASIS
communications with wholesale merchant function employees and other
customers.\18\
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\16\ See e.g., Transcontinental Gas Pipe Line Corp., 102 FERC ]
61,302 (2003) (Transco); National Fuel Gas Supply Corp., 103 FERC ]
61,192 (2003); Idaho Power Corp., 103 FERC ] 61,182 (2003) (Idaho
Power); and Cleco Corp., 104 FERC ] 61,125 (2003) (Cleco).
\17\ April 25, 2000 Letter from John Delaware, Deputy Director
and Chief Accountant, to Public Service Company of New Mexico in
Docket No. FA99-9-000.
\18\ For example, merchant function employees called
transmission function employees to request the most up-to-date, non-
firm ATC information to save time in submitting requests for
transmission service via OASIS. See September 27, 2002 Letter from
John Delaware, Deputy Executive Director and Chief Accountant to
Ameren Corporation in Docket Nos. FA01-5-000, FA01-6-000 and FA01-7-
000.
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15. Transmission Providers continue to have economic incentives to
show undue preferences toward their Energy Affiliates. The Commission
is adopting new rules to close loopholes in existing rules and to give
Transmission Providers specific guidance on how to eliminate undue
discrimination and undue preferences in the provision of interstate
transmission services, consistent with the directions of the NGA and
FPA. The Commission believes that the revised standards of conduct will
ensure that Transmission Providers function independently of all their
Energy Affiliates. Such separation is vital if the Commission is to
ensure that Transmission Providers do not use their access to
information about transmission to unfairly benefit their own or their
affiliates' sales to the detriment of competitive markets.
IV. Section-by-Section Analysis of Final Rule
A. Applicability--Sec. 358.1
16. The NOPR proposed that the standards of conduct would apply to
all Transmission Providers, as discussed in the section below. The NOPR
also stated that the standards of conduct would not apply to
Commission-approved Regional Transmission Organizations (RTOs) that
comply with the requirements of Order No. 2000.\19\ However, RTOs would
be subject to the posting requirements in Sec. Sec. 37.5 and 37.6 of
the Commission's regulations, 18 CFR 37.5 and 37.6 (2003). Finally, the
NOPR provided that a public utility transmission owner that
participates in a Commission-approved RTO and does not operate or
control its transmission facilities may request an exemption from the
standards of conduct. Following a review of the comments, and as
discussed in more detail below, the Commission is adopting this section
with modifications, as follows:
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\19\ Regional Transmission Organizations, Order No. 2000, 65 FR
809 (Jan. 6, 2000), FERC Stats. & Regs., Regulation Preambles July
1999-December 2000 ] 31,089 (Dec. 20, 1999), order on reh'g, Order
No. 2000-A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs.,
Regulation Preambles 1996-2000 ] 31,092 (Feb. 25, 2000), petitions
for review pending sub nom., Public Utility District No. 1 of
Snohomish County, Washington v. FERC (D.C. Cir., Apr. 24, 2000 (Nos.
00-1174, et al.)).
Sec. 358.1 Applicability.
(a) This part applies to any interstate natural gas pipeline
that transports gas for others pursuant to subpart A of Part 157 or
subparts B or G of Part 284 of this chapter.
(b) This part applies to any public utility that owns, operates,
or controls transmission facilities used for the transmission of
electric energy in interstate commerce.
(c) This part does not apply to a Transmission Provider that is
a Commission-approved Regional Transmission Organization (RTO) or
Independent System Operator (ISO). If a public utility transmission
owner participates in a Commission-approved RTO or ISO and does
[[Page 69138]]
not operate or control its transmission facilities and has no access
to transmission or market information covered by Sec. 385.5(b), it
may request an exemption from this part.
(d) A Transmission Provider may file a request for an exemption
from all or some of the requirements of this part for good cause.
i. Regional Transmission Organizations/Independent System Operators
17. The NOPR proposed to exempt Commission-approved RTOs from the
standards of conduct, while Transmission Providers that are members of
RTOs would not automatically be exempt from them. The NOPR stated that
depending on how an RTO is structured, there may be a continuing need
to apply the standards of conduct to public utility Transmission
Providers that are members of RTOs. While an RTO may administer or
manage the transmission facilities, there are instances in which a
transmission owner continues to physically control or operate the
transmission facilities or control centers.\20\
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\20\ See PJM Interconnection, L.L.C. and Allegheny Power, 96
FERC ] 61,060 (2001), where the Commission permitted PJM-West's
transmission assets to be operated through PJM's central control
center, while the physical control of these transmission assets
remained with the transmission owners.
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18. EEI urged the Commission to be flexible to accommodate the
varying operational arrangements that may be worked out between RTOs or
ISOs and participating utilities. EEI, the Kentucky Commission, LG&E
and KU urged the Commission to permit utilities that have joined an
RTO, but still ``technically'' operate transmission facilities, to be
eligible for exemptions from the rule. They argued that because the RTO
``administratively'' controls the transmission facilities, concerns
about improper transfer and use of transmission information are
alleviated.
19. BPA stated that it is unclear whether a Transmission Provider
would be eligible for an exemption if, despite turning over operation
and control, the Transmission Provider retains preferential access to
unposted transmission information and requested that the Commission
exempt a Transmission Provider even if it possesses minimal
transmission information.
20. BPA has highlighted one of the main concerns of the standards
of conduct--information access. If a Transmission Provider operates
transmission facilities, regardless of whether it belongs to an RTO/
ISO, it has the ability to provide an undue preference to an affiliate
and has access to valuable transmission information. Unless the ISO or
RTO has a control center and field employees dedicated to the operation
and maintenance of all transmission facilities under its operation, a
Transmission Provider may be responsible for the operation of the
transmission assets (under the direction of the ISO or RTO) and, more
importantly, have direct access to transmission information.\21\
Participation in an ISO or RTO does not necessarily prevent a
Transmission Provider from sharing information with its affiliates
preferentially or preferentially operating facilities for the benefit
of its Energy Affiliates.
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\21\ RTOs and ISOs centrally monitor the transmission system,
approve transmission service requests through OASIS, and direct
member Transmission Providers in the operation of the transmission
assets. RTOs, ISOs and member Transmission Providers share
transmission information to facilitate safe and reliable operation
of the transmission system.
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21. NYISO requested clarification that it would not be subject to
the rule. The Commission clarifies that NYISO would not be subject to
the rule.
22. LILCO urged the Commission to require RTOs to be subject to the
requirement to implement tariffs in a non-discriminatory fashion under
Sec. 385.5(c) of the Commission's regulations. Similarly, MID and the
Illinois Commission requested that the Commission require RTOs and
comparable entities (ISOs) to comply with the standards of conduct. MID
claimed that RTOs and ISOs often procure Ancillary Services and Energy
to meet their customers' needs and such purchases can have a
significant effect on the market.
23. The Commission will not require ISOs or RTOs to be subject to
the requirements of the standards of conduct as these transmission
organizations have been designed and approved by the Commission to
eliminate unduly preferential practices. Indeed, one of the many
reasons for their creation was to provide a remedy to undue
discrimination rather than relying on the standards of conduct. If
transmission customers observe that an ISO or RTO is not complying with
its Commission-approved tariff or behaving in an unduly discriminatory
fashion, it may file a complaint with the Commission, or contact the
Commission's Enforcement Hotline or the ISO's or RTO's market
monitoring unit (MMU).
ii. Non-Public Utilities
24. The Kentucky Commission, LPPC, Nebraska Public Power District
and SMUD urged the Commission to clarify that the standards of conduct
will apply to non-public utilities, by virtue of the reciprocity
provisions of Order No. 888, in the same manner as the current
standards of conduct apply to non-public utilities. Sempra urged the
Commission to clarify that public power agencies or non-jurisdictional
Transmission Providers that get access to the jurisdictional grid
through reciprocity tariffs under Order No. 888 should be required to
comply with the standards of conduct to eliminate the preferences they
provide to their own merchant operations. The Commission agrees and is
amending the proposed regulation to make it clearer which entities are
subject to the requirements of the standards of conduct. If a non-
public utility voluntarily files a reciprocity open access tariff under
Order No. 888, it shall comply with the Final Rule.
iii. Cooperatives and Small Pipelines and Utilities
25. Several commenters, including Alabama Electric Coop., Arkansas
Electric Coop., Connexus, Seminole Electric Coop., Old Dominion,
Midwest Energy, National Rural Electric Coop. Assoc., Southwest
Transmission Coop., East Texas Electric Coop., Wolverine Power Supply
Coop., Energy East Companies, Empire Electric District, Wells Rural
Electric Coop. and Rural Utilities Service of the Department of
Agriculture, asked the Commission to clarify that small utilities or
cooperatives (coops) that obtained waivers of the standards of conduct
under Order No. 889 would automatically be exempt from the provisions
of the Final Rule.\22\ Along the same lines, B-R Pipeline, Distrigas of
Massachusetts, Hampshire Storage, NiSource, SCG, USG, and U.S. Gypsum
and Washington Gas Light urged the Commission to categorically exempt
small pipelines or those that were built to serve one or several
customers. NRECA requested that the Commission incorporate waiver
provisions in the standards of conduct and continue the effectiveness
of previously issued waivers.
---------------------------------------------------------------------------
\22\ Black Creek Hydro, Inc. 77 FERC ] 61,232 (1996).
---------------------------------------------------------------------------
26. The Industrials recommended that the regulatory text contain a
specific exemption provision. Dynegy, on the other hand, urges the
Commission not to create broad categorical exemptions from the rule
but, rather, to evaluate specific claims of hardship on a case-by-case
basis.
27. The Commission will continue the exemptions and partial waivers
for the entities that have previously received
[[Page 69139]]
exemptions and partial waivers under Order No. 889 or Order No. 497.
However, an exemption may be revoked if, after an investigation or
audit, the Commission determines that the entity no longer qualifies
for the exemption or the entity has abused the exemption.
28. In addition, Transmission Providers that did not previously
obtain an exemption may request an exemption from all or some of the
requirements of Part 358. RUS and NRECA requested clarification that
generation and transmission cooperatives and their distribution
cooperatives will not be subject to the Final Rule. The Commission
clarifies that it will treat generation and transmission cooperatives
consistent with the policies established under Order No. 888.\23\
---------------------------------------------------------------------------
\23\ Order No. 888-A at 30,666.
---------------------------------------------------------------------------
iv. Delay of Applicability
29. Alliance urges the Commission to allow Transmission Providers
to delay implementing the Final Rule while the Commission reviews a
Transmission Provider's request for an exemption or waiver from the
standards of conduct. This is inconsistent with Commission policy to
implement rules after reasonable notice; however, apart from the
information filing required in Sec. 358.5(e)(1), the Commission is
giving Transmission Providers until June 1, 2004 to implement the
requirements of the Final Rule. This implementation date should afford
Transmission Providers time to fashion requests for waivers or
exemptions.
B. General Principles--Sec. 358.2
30. The NOPR proposed the following general principles for the
standards of conduct: (1) A Transmission Providers' employees engaged
in transmission system operations must function independently from the
Transmission Providers' sales or marketing employees and from any
employees of their Energy Affiliates,\24\ and (2) a Transmission
Provider must treat all transmission customers, affiliated and non-
affiliated, on a non-discriminatory basis, and cannot operate its
transmission system to benefit preferentially an Energy Affiliate or
Marketing Affiliate.
---------------------------------------------------------------------------
\24\ As noted earlier, when the Commission references employees,
it includes contractors, consultants or agents.
---------------------------------------------------------------------------
31. No comments were received on this section. Therefore, the
Commission is adopting these principles as proposed in the NOPR. These
principles are based on Section 4 of the NGA and Section 205 of the
FPA, which prohibit a natural gas company or a public utility,
respectively, from making or granting an undue preference with respect
to transportation/transmission or sale subject to the Commission's
jurisdiction.
C. Definitions--Sec. 358.3
32. As proposed in the NOPR, Sec. 358.3 combines and revises the
definitions that were previously contained in Sec. Sec. 37.3 and 161.2
of the Commission's regulations, and adds, as appropriate, definitions
for new terms. The Commission is modifying and adopting the definitions
proposed in the NOPR, as discussed below.
i. Definition of a Transmission Provider
33. The NOPR defined a Transmission Provider as:
(1) any public utility that owns, operates or controls facilities
used for transmission of electric energy in interstate commerce; or
(2) any interstate natural gas pipeline that transports gas for
others pursuant to subpart A or Part 157 or subparts B or G of Part
284.
34. The Major Issues Analysis did not address the definition of
Transmission Provider. The Commission has reviewed the commenters'
recommendations, but, as discussed in more detail below, is adopting
the definition of Transmission Provider as proposed.
35. The American Forest and Paper Association (AFPA) urged the
Commission to clarify that the definition of a Transmission Provider
only includes ``any public utility that owns, operates or controls
transmission facilities used for the transmission of electric energy in
interstate commerce and is subject to the open access requirements of
Order No. 888.'' It requested the Commission to clarify that
Transmission Providers do not include industrials that own some
discrete transmission facilities used solely for the purpose of
interconnecting with the electrical grid. Along the same lines, the
Industrials requested clarification that the definition of Transmission
Provider will not apply to industrials with self-generation. The
Industrials were concerned that the definition would include wholesale
sellers such as power marketers and merchant generators with market-
based-rate authority and qualifying facilities (QF) because these
entities self provide ancillary services or that selling ancillary
services would be considered providing ``transmission service.''
Industrials claimed that any generator directly interconnected with an
investor-owned transmission system would be deemed a Transmission
Provider under the proposed definition. Finally, the Industrials were
concerned that owning an interconnect could be interpreted as ownership
of a transmission facility. Similarly, Calpine argued that independent
generators connected to jurisdictional transmission facilities that do
not own transmission facilities, must be excluded from the definition
of Transmission Provider.
36. The revision proposed by AFPA is unnecessary. Consistent with
our implementation of Order No 888, Industrials that merely
interconnect with the interstate transmission grid and sell power would
not be a Transmission Provider as used in the Final Rule. Nor is self-
generation considered transmission in interstate commerce.
ii. Definition of an Energy Affiliate
37. The NOPR's proposed definition of Energy Affiliate yielded the
greatest volume of comments. The NOPR defined the term Energy Affiliate
broadly, as:
an affiliate of a Transmission Provider that (1) engages in or is
involved in transmission transactions; or (2) manages or controls
transmission capacity of a Transmission Provider; or (3) buys,
sells, trades or administers natural gas or electric energy; or (4)
engages in financial transactions relating to the sale or
transmission of natural gas or electric energy.
38. Since the Standards of Conduct seek to prohibit undue
preferences and thereby the transfer of market power from the
Transmission Provider to its affiliates, the term Energy Affiliate must
cover more than the marketers and merchants covered by the existing
rules. A narrow definition of Energy Affiliates will not specifically
prohibit the transmission function from sharing employees and
information with some of its Energy Affiliates who could then receive
an unfair advantage in the competitive marketplace. On the other hand,
too broad a definition of Energy Affiliate will limit some of the
efficiencies gained from certain corporate structures. This language is
also intended to cover affiliates that are indirectly involved in
transportation, such as asset managers or agents.
39. The definition in the NOPR proposed to govern the relationship
between the Transmission Provider, and, among others, affiliated
producers, gatherers, local distribution companies (LDCs) and
processors. Virtually all of the industry groups argued that the
definition of Energy Affiliates is overly broad, and suggested that
some narrowing of the definition would be appropriate.
40. In response to numerous comments, the Major Issues Analysis
recommended various changes to the definition of Energy Affiliate and
provided draft regulatory text. Follow-up comments recommended further
[[Page 69140]]
changes, which are grouped into several categories. As discussed below,
the Commission is revising the definition of Energy Affiliate as
follows:
(1) Engages in or is involved in transmission transactions in
U.S. energy or transmission markets; or
(2) Manages or controls transmission capacity of a Transmission
Provider in U.S. energy or transmission markets; or
(3) Buys, sells, trades or administers natural gas or electric
energy in U.S. energy or transmission markets; or
(4) Engages in financial transactions relating to the sale or
transmission of natural gas or electric energy in U.S. energy or
transmission markets.
(5) An energy affiliate does not include:
(i) A foreign affiliate that does not participate in U.S. energy
markets;
(ii) An affiliated Transmission Provider; or
(iii) A holding, parent or service company that does not engage
in energy or natural gas commodity transactions or is not involved
in transmission transactions in U.S. energy markets; or
(iv) An affiliate that purchases natural gas or energy solely
for its own consumption and does not use an affiliated Transmission
Provider for transmission of natural gas or energy; or
(v) A state-regulated local distribution company that does not
make any off-system sales.
1. LDCs
41. As proposed by the NOPR, Transmission Providers would be
required to apply the standards of conduct to their relationships with
their affiliated LDCs by eliminating the exemption of Order No. 497,
which permitted natural gas pipelines to share employees and
information between their transmission businesses and their affiliated
LDCs that do not make off-system sales.\25\
---------------------------------------------------------------------------
\25\ 18 CFR 161.2(c) (2003).
---------------------------------------------------------------------------
42. Fourteen entities, including producers and unaffiliated gas
marketers, NASUCA, AIA, the Industrials and the FTC supported the
proposed definition of energy affiliate, focusing on LDCs. They
asserted that: (1) Conditions have changed since Order No. 497 was
promulgated, and LDCs compete more vigorously for access to
transmission service; (2) the current exemption is a loophole that
permits LDCs to get preferential access to information, which harms
competition; and (3) the LDC exemption permits pipelines to circumvent
the standards of conduct by using the LDC as a conduit for sharing
information. The Connecticut Commission argued that giving LDCs an
unfair competitive advantage can only hurt the long-term
competitiveness of the market.
43. However, thirty-four commenters, primarily interstate natural
gas pipelines and affiliated marketers, INGAA and AGA opposed applying
the standards of conduct to a Transmission Provider's relationship with
its affiliated LDCs. These commenters recommended that the Commission
retain the current exception in Order No. 497 for LDCs that do not
engage in off-system sales. They argued that: (1) Section 1 of the NGA
makes distribution subject to regulation by the states and not FERC;
(2) there is no evidence or market analysis to support eliminating the
exemption granted under Order No. 497; (3) to require such separation
would cause unnecessary duplication of employees and gas control
facilities, resulting in additional costs to customers; \26\ and (4)
limits on communications with LDCs would impair reliability, and the
``emergency'' exception in the proposed rule is insufficient.
---------------------------------------------------------------------------
\26\ A discussion of the commenters' concerns regarding
additional costs is included in the Independent Functioning
discussion, below.
---------------------------------------------------------------------------
44. The Commission has decided to retain the existing exemption for
LDCs that do not make off-system sales. Specifically, the definition of
Energy Affiliates will exclude those LDCs that are regulated by the
state, provide solely retail service and engage in no off-system sales.
However, the Commission notes that an affiliated LDC that engages in
any off-system sale is an Energy Affiliate, and subject to the
standards of conduct. An off-system sale would include a situation in
which the affiliated LDC had contractually committed for more gas than
it needed to serve its on-system customers and sold that gas off its
system, e.g., at a hub or on the spot market. Moreover, affiliated LDCs
are prohibited from being conduits for improperly sharing information
covered by the Final Rule. We also remind Transmission Providers that
they are required to comply with the undue discrimination and undue
preferences provisions of the NGA vis-[agrave]-vis their behavior with
their affiliated LDCs and will be subject to greater scrutiny
prospectively.
2. Affiliates Not Engaged or Involved in Transmission Transactions,
e.g., Trading and Financial Affiliates
45. Thirteen entities, including Ad Hoc Marketers, INGAA and
interstate natural gas pipelines, opposed the proposed definition of
Energy Affiliates because it does not require the Energy Affiliate to
be engaged or involved in transmission transactions on the Transmission
Provider's system. These commenters urged the Commission to narrow the
definition of Energy Affiliates to apply only to affiliates that are
involved in transportation on affiliated Transmission Providers'
systems. Similarly, several commenters, including Ad Hoc Marketers,
INGAA, Gulf South, and four public utility Transmission Providers
requested that the Commission exclude from the definition of Energy
Affiliates entities that trade power or are engaged in financial
transactions. Gulf South argued that gas futures contracts are traded
only for delivery in the future and are unrelated to the current spot
market price of gas.
46. The Commission disagrees with the commenters. Although an
affiliate may not be directly involved in transmission transactions,
the transmission markets and energy-related financial markets are so
interconnected that a Transmission Provider does have the ability to
operate its transmission system in a manner that gives a trading
affiliate an undue preference or provides the trading affiliate with
unduly preferential information. For example, a transmission constraint
directly impacts the value of the commodity being transported.
Preferential access to information about such a constraint could
provide a significant benefit to an affiliate engaged in speculative
trading of the commodity and cause the price of the commodity to rise
to the detriment of the market, even if the trader is not using the
affiliated Transmission Provider.
47. Entities involved in the trading of power or gas or in
financial transactions related to the sale, purchase or transmission of
power or gas are an integral part of the financial and transmission
markets. The monthly volume of futures contracts on the NYMEX has grown
from approximately 170,000 per month in January 1982 to 7,000,000 per
month in January 2000.\27\ As seen in the chart below, the financial
natural gas (futures) markets and the physical (or spot) markets are
closely linked. For example, NYMEX futures prices strongly correlate
with transactions to buy and sell natural gas at Henry Hub, the
physical delivery point specified in the NYMEX futures contracts.\28\
---------------------------------------------------------------------------
\27\ ``Derivatives and Risk Management in the Petroleum, Natural
Gas and Electricity Industries,'' http://www.eia.doe.gov/oiaf/sesrviceerpt/derivative/index
(Oct. 24, 2003).
\28\ See, e.g., Fact-Finding Investigation of Potential
Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2-
000, Final Report on Price Manipulation in Western Market, March
2003 (Chapter IX at pp. IX-2 to IX-9).
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BILLING CODE 6717-01-P
[[Page 69141]]
[GRAPHIC] [TIFF OMITTED] TR11DE03.004
BILLING CODE 6717-01-C
48. The financial natural gas markets are so interconnected with
the natural gas physical markets and the transmission market, that a
Transmission Provider has the ability to operate its transmission
system in a manner so as to give a trading affiliate an undue
preference or to provide the trading affiliate with unduly preferential
information. Therefore, the definition of Energy Affiliates in the
Final Rule incorporates trading and financial affiliates to the extent
they are engaged in transactions in the U.S. energy or gas commodity or
transmission markets.
3. Affiliated Transmission Providers
49. Twenty-seven entities, the majority of which are in the
interstate natural gas pipeline industry, pointed out that the
definition of Energy Affiliate would appear to require Transmission
Providers to treat affiliated Transmission Providers as Energy
Affiliates. Many argued that such a broad definition of Energy
Affiliate would restrict the joint operations of jurisdictional
transmission facilities and would mandate unnecessary duplication of
jointly operated facilities. INGAA and others pointed out that putting
limitations on the relationship between affiliated Transmission
Providers would be inconsistent with recent Commission policy. They
cited the Commission's orders that required Dominion Transmission, Inc.
to apply the gas standards of conduct to its Energy Affiliates as a
merger condition.\29\ There, the Commission specifically excluded
affiliated Transmission Providers from the definition of Energy
Affiliates because they are already subject to the non-discrimination
provisions of the standards of conduct.
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\29\ Dominion Resources, Inc. and Consolidated Natural Gas Co.,
89 FERC ] 61,162 (1999), order on compliance filing, 91 FERC ]
61,140 (2000), order denying reh'g, 93 FERC ] 61,214 (2000), vacated
and remanded, (D.C. Cir. No. 01-1169 Slip. Op. issued on April 19,
2002), order on remand pending.
---------------------------------------------------------------------------
50. The Major Issues Analysis proposed an exemption that would
exclude FERC-jurisdictional Transmission Providers from the definition
of Energy Affiliate and provided draft regulatory text for comment.
Numerous follow-up comments supported this proposed revision, including
those filed Cinergy, Entergy, First Energy, NiSource, INGAA, and KM
Interstate.
51. The Commission agrees; FERC-jurisdictional interstate natural
gas pipelines coordinating transactions with affiliated FERC-
jurisdictional interstate natural gas pipelines should be permitted to
share transmission function employees and information, since both are
bound by the standards of conduct requirements and are prohibited from
sharing transmission, customer or market information with their Energy
Affiliates. Similarly, a public utility Transmission Provider
[[Page 69142]]
may share transmission function employees and information with other
public utility Transmission Providers. Nor does it appear that
communications between FERC-regulated gas Transmission Providers and
FERC-regulated public utility Transmission Providers is a problem for
the same reason. Moreover, the focus of the standards of conduct is to
prevent transmission market power from extending to other products or
services, so Transmission Provider to Transmission Provider
communications should not violate the purpose of the rule. The
definition of energy affiliates, therefore, is clarified to exclude
affiliated Transmission Providers. Many commenters expressed support
for the language proposed in the Major Issues Analysis, and we will
adopt it.
4. Holding or Service Companies
52. Several commenters, including INGAA, Dominion, EEI, NiSource,
and Williams, argued that the definition of Energy Affiliates could be
construed to include service or holding companies because the
definition includes affiliates that engage in financial transactions
related to the transmission of natural gas or electricity. The
commenters argued that this could limit the ability of senior officers
and directors of the holding or service companies to exercise their
fiduciary duties for their subsidiaries.
53. As discussed in the Major Issues Analysis, holding and service
companies typically do not participate in the energy or transmission
markets, and if they do not participate in those markets, they would
not be considered Energy Affiliates. As discussed above, affiliates
engaged in financial transactions that concern energy or natural gas
commodity or transmission markets will be considered Energy Affiliates.
Therefore, the Major Issues Analysis recommended that the Commission
adopt a definition of Energy Affiliate that excludes holding or service
companies that do not engage in and are not involved in energy or
natural gas commodity or transmission transactions. The Major Issues
Analysis also recommended that the Commission prohibit any affiliate,
including holding companies or others exempt from the standards of
conduct, from acting as a conduit for improperly sharing information.
54. Supplemental comments in response to the language proposed by
the Major Issues Analysis were generally supportive of the holding
company exception, including those filed by DTE, Gulf South, National
Grid, and PacifiCorp and PSE&G. However, several commenters expressed
concern that the revision recommended in the Major Issues Analysis was
insufficient. They claimed that, even with the narrowing proposed in
the Major Issues Analysis, they could not comply with the standards of
conduct and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which
requires senior corporate executives to be fully informed about the
financial conditions of their corporations and their subsidiaries.\30\
As noted by various commenters, including EEI and Duke, a parent
company with an electric utility or gas distribution system as an
operating division would not qualify for the exception proposed by the
Major Issues Analysis. They claimed that separating the management or
forming a holding company would require corporate reorganization, could
be costly, and might trigger the restrictive requirements of the Public
Utility Holding Company Act (PUHCA).\31\
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\30\ See Section 302 of the Sarbanes-Oxley Act, Pub. L. 107-204,
Sec. 9, 116 Stat. 745, 777 (2002).
\31\ Public Utility Holding Company Act of 1935, 15 U.S.C. 79a
et seq. (2000).
---------------------------------------------------------------------------
55. For example, Duke argued that complying with the Final Rule and
the Sarbanes-Oxley Act would be difficult because the Duke Power
Division of Duke Energy, which engages in transmission and wholesale
and bundled electric sales, would be considered an Energy Affiliate of
its interstate natural gas pipeline subsidiaries, and the pipeline
subsidiaries would be prohibited from sharing information with the
senior management of its Energy Affiliate/parent company, Duke Energy.
56. The Major Issues Analysis specifically excluded holding and
service companies, but did not mention ``parent companies.'' Duke
encouraged the Commission to extend the holding company exemption to
apply to parent companies that may not fall within the legal definition
of ``holding company,'' as set forth by PUHCA. NGSA, APGA and IPAA all
support Duke's proposal to the extent that the parent companies are not
involved in energy transactions. The Commission is adopting this
recommendation and will include ``parent'' companies that are not
involved in energy or transmission transactions in the ``holding
company'' exception from the definition of Energy Affiliate.
57. Several commenters were also concerned about Transmission
Providers with service corporation subsidiaries that employ virtually
all corporate employees, including those who do work for Transmission
Providers and Energy Affiliates. The Commission clarifies that if a
Transmission Provider utilizes a service corporation or other
subsidiary as the mechanism for employment, all the employees assigned,
dedicated or working on behalf of a particular entity, e.g., a
Transmission Provider or Energy Affiliate, are subject to the standards
of conduct requirements as if they were directly employed by the
Transmission Provider or Energy Affiliate.
58. In addition, in follow-up comments, National Grid encouraged
the Commission to clarify that the holding company exclusion extends to
companies engaged or involved in markets not related to energy, power
or transmission. The Commission so clarifies.
5. Foreign Affiliates
59. Thirteen commenters, including INGAA, six interstate natural
gas pipelines, EEI, five public utility Transmission Providers and
Shell objected to the proposed definition of Energy Affiliates to the
extent that it included foreign affiliates. They are concerned that
Transmission Providers will be required to treat affiliates in Europe,
South America and the Caribbean as Energy Affiliates. The Major Issues
Analysis urged the Commission to exclude foreign affiliates and revised
the draft regulatory text accordingly. Virtually all follow-up comments
supported the staff's proposal.
60. The Commission sees no reason to be concerned about the
possibility that a Transmission Provider will extend its market power
by giving foreign affiliates undue preferences where the foreign
affiliates do not participate in energy markets in the United States.
The Final Rule clarifies that the definition of Energy Affiliates
excludes foreign affiliates that do not participate in the United
States (U.S.) energy or transmission markets.
61. In addition, where a foreign affiliate has an ownership
interest in a jurisdictional Transmission Provider, that affiliate is,
by virtue of its ownership interest, participating in the U.S. energy
or transmission markets. For example, a joint venture U.S.-Canadian
pipeline would have to treat as Energy Affiliates its Canadian
affiliates that buy, sell or trade natural gas or electric energy or
engage in or are involved in transmission transactions in U.S. energy
markets.
62. On a slightly different note, several pipelines including
Alliance, Maritimes and Northeast Pipeline, as well as Duke Energy,
Canadian Association of Petroleum Producers and the Alberta Department
of Energy,
[[Page 69143]]
expressed concerned about affiliated pipelines that cross the U.S. and
Canadian borders. These companies argued that under the exception
proposed by the Major Issues Analysis, affiliated pipelines that cross
or interconnect at the U.S. and Canadian borders would fall within the
definition of Energy Affiliate. The commenters argued that they should
be treated as affiliated pipelines because their operations are closely
coordinated and transmission services are shared even though they cross
the international border. The Commission agrees and will permit these
companies to share their transmission function activities and
coordinate along both sides of the border as long as neither of the
Transmission Providers shares employees or information with any of its
Marketing or Energy Affiliates.
6. Affiliates Buying Power for Themselves
63. Several commenters, including Dominion, Calpine and KM, argued
that the Commission needs to clarify the definition of Energy
Affiliates because including the terms ``buy,'' ``sell,'' or
``administer'' could be construed to include an affiliated entity that
is purchasing power for its own consumption, such as a communications
affiliate that is purchasing power to heat its office building. They
argued that under the NOPR, if an affiliate is simply ``buying'' power
for its own energy consumption and not using the affiliated
Transmission Provider for transmission, the Transmission Provider would
be required to post the organizational charts and job descriptions for
the Energy Affiliates, which the commenters argue would be burdensome.
64. In response to these comments, the Major Issues Analysis
recommended that the Commission exclude an affiliate of a Transmission
Provider that is purchasing electricity or natural gas for its own
consumption and is not using an affiliated Transmission Provider for
transmission.
65. Although these purchases can have an impact on the energy
markets, nonetheless, there is little potential for competitive harm if
the definition of Energy Affiliates is clarified to exclude any
affiliate of the Transmission Provider that is solely purchasing power
or natural gas for its own consumption and is not using an affiliated
Transmission Provider for transmission. Therefore, the Commission will
adopt this recommendation in the Final Rule. However, this exception is
not intended to create a loophole that circumvents the intent of rule,
and does not apply to Energy Affiliates that use natural gas or power
to produce another source of energy, e.g., generation affiliates.
7. Producers, Gatherers, and Processors
66. The NOPR defined Energy Affiliate to include producers,
gatherers and processors. The NOPR states that whether a producer or
gatherer is making an on-system sale or an off-system sale, it is still
competing for access to the interstate transmission system. NGSA stated
that upstream services and transportation services are frequently
offered as a single package by pipelines or their affiliates, which
allows a pipeline to leverage its market power in the transportation
market to gain an advantage in the upstream market. The comments
regarding affiliated producers, gatherers, and processors were mostly
included in the comments about affiliated LDCs. Commenters, including
El Paso Energy Partners, Shell Offshore and Shell Gas, argued that: (1)
The Commission does not have jurisdiction over producers, gatherers or
intrastate pipelines; (2) there is no evidence to support eliminating
the exemption granted under Order No. 497; (3) to require separation
would cause unnecessary duplication of employees and gas control
facilities, resulting in additional costs to customers; \32\ and (4)
restrictions on communication would impair reliability.
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\32\ A discussion of the commenters' concerns regarding
additional costs is included in the Independent Functioning
discussion, below.
---------------------------------------------------------------------------
67. The Commission is adopting the proposed regulation. The
Commission is not asserting jurisdiction over the producers, gatherers
or processors. The Commission has ample authority to ensure that the
interstate pipeline treats all customers, affiliated and unaffiliated,
on a non-discriminatory basis by regulating the behavior of the
Transmission Provider. Staff's review of the October 2003 Index of
Customers indicates that 14 interstate natural gas pipelines transport
gas for their production and gathering affiliates, which hold an
average of 46% of the affiliated pipelines' capacity. But, unlike LDCs,
producers, gatherers and processors are not generally subject to state
regulation.
68. Several commenters argue that Section 1 of the NGA makes
production and gathering subject to regulation by the states and not
the Commission. The Commission is not asserting jurisdiction over
producers, gatherers or processors. The Commission has ample authority
to ensure that the Transmission Provider treats all customers,
affiliated and non-affiliated, on a non-discriminatory basis by
regulating the conduct of the transmission provider's interactions with
affiliated producers, gatherers or processors.
69. The commenters voiced practical concerns about how the proposed
standards of conduct would impact communications between a Transmission
Provider and affiliated producers, gatherers, and processors. During
the May 21 Conference there was much discussion about the possibility
that expanding the standards of conduct would harm deepwater operations
and future off-shore development efforts. Several participants stated
that competing producers had worked cooperatively on affiliated
pipelines to develop deepwater gas reserves. On the other hand, BP
argued that Transmission Providers should not be permitted to share any
information regarding a shipper's use of the pipeline or information
regarding the operations or customers of non-affiliated gatherers that
compete with the affiliate. BP argued that the definition of Energy
Affiliate should not include affiliate gas processing plants. However,
as discussed in more detail below, the Commission is permitting
transmission providers to share crucial operational information with
certain of its Energy Affiliates.
70. Commenters also argued that there was no evidence that
pipelines had unduly favored their producers, gatherers or processing
affiliates. However, in a recent example, Transcontinental Gas Pipe
Line Corporation and its gathering affiliate, Williams Field Services
Company, acted as one entity for purposes of gathering and transporting
natural gas in interstate commerce in a monopolistic fashion and abused
their market power.\33\
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\33\ Shell Offshore Inc. v. Transcontinental Gas Pipe Line
Corp., et al., 100 FERC ] 61,254 (2002), order on reh'g, 103 FERC ]
61,177 (2003), appeal filed June 27, 2003 (D.C. Cir. No. 03-1179).
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71. The Commission's focus is to ensure comparability of service.
To retain a loophole that permits the transmission provider to share
employees or give its affiliated producers, gatherers or processors
preferential information is inconsistent with the Commission's goal of
non-discriminatory interstate transmission service. Producers that are
selling energy are competing with other non-affiliated shippers for
access to the pipelines' transmission systems. Whether a producer is
selling gas from its own production or from the production of another,
it is competing
[[Page 69144]]
with non-affiliates for access to the pipeline's transportation system.
We conclude that providing a producer, gatherer or processor with
preferential access to the pipeline's transmission system or
information concerning the pipeline's system is inconsistent with NGA
Section 4's prohibition against undue preferences or discrimination in
the provision of interstate transportation services; accordingly, this
Final Rule will prevent such conduct.
8. Intrastate and Hinshaw Pipelines
72. Although the NOPR did not specifically address intrastate or
Hinshaw pipelines,\34\ the definition of Energy Affiliate proposed in
the NOPR would include intrastate and Hinshaw pipelines. Several
commenters, including the Association of Texas Intrastate Natural Gas
Pipelines, SCE&G and CMS, opposed including intrastate and Hinshaw
pipelines in the definition of Energy Affiliate and urged the
Commission to retain the current exemption at Sec. 161.2(c)(3) of the
Commission's regulations, 18 CFR 161.2(c)(3) (2003), that permits
intrastate pipelines to make on-system sales without triggering the
standards of conduct. The arguments raised mirror those raised with
respect to producers, gatherers or processors, which currently enjoy
the same exemption. The Commission's definition of Energy Affiliate in
the Final Rule will include intrastate and Hinshaw pipelines. Providing
an intrastate pipeline or Hinshaw pipeline preferential access to a
transmission system or information concerning a transmission system
would be inconsistent with NGA Section 4's prohibitions against undue
preferences or discrimination in the provision of interstate
transportation service.
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\34\ Hinshaw pipelines are exempt from Commission regulation
under the NGA, but they may have limited jurisdiction certificates
to provide interstate transportation services like an intrastate
pipeline under the Natural Gas Policy Act.
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iii. Definition of Marketing, Sales or Brokering
73. The NOPR proposed to define marketing, sales or brokering as:
A sale for resale of natural gas or electric energy in
interstate commerce. Sales and marketing employee or unit includes:
(1) Any pipeline's sales operating unit, to the extent provided in
Sec. 284.286 of this chapter, and (2) an electric transmission
provider's sales unit, including those employees that engage in
wholesale merchant sales or bundled retail sales.\35\
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\35\ The term bundled retail sales employees, means those
employees of the public utility Transmission Provider or its
affiliates who market or sell the bundled electric energy product
(including generation, transmission, and distribution) delivered to
the transmission provider's firm and non-firm retail customers.
74. The NOPR proposed that ``marketing'' would include a public
utility Transmission Provider's sales unit, including all employees
that engage in wholesale merchant sales or bundled retail sales
functions.\36\ This would eliminate the exemption of Order No. 889,
which permitted a public utility Transmission Provider to use the same
employees for its interstate transmission business and its bundled
retail sales business.
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\36\ Section 284.286 of the Commission's regulations currently
requires an interstate natural gas pipeline to separate its
interstate transmission function from its unbundled sales service,
essentially treating the pipeline's sales business as the equivalent
of an affiliated marketing company. See 18 CFR 284.286 (2003).
---------------------------------------------------------------------------
75. Fourteen commenters, including the FTC, Cooperatives, Calpine,
ELCON, EPSA, NEMA, Transmission Access Policy Group, Transmission
Group, several state commissions, and AAI supported the NOPR's proposal
to treat retail function employees as marketing affiliate employees.
They argued that the Commission can assert jurisdiction over the
organizational structure of the jurisdictional public utility and the
dissemination of information acquired through the operation of
jurisdictional assets. In addition, they argued that: (1) The
Commission must ensure that transmission service is not unduly
discriminatory; (2) the bundled retail sales represent a large
percentage of utilities' sales, and the utilities have little incentive
to promote comparability, to improve OASIS or to provide equal quality
service; and (3) the distinction between wholesale and retail is
artificial and the conditions in the retail market impact the wholesale
market.
76. However, thirty-six commenters, including EEI, NASUCA, NARUC,
many public utility Transmission Providers, several cooperatives and
ten state commissions, opposed treating retail function employees as
Marketing Affiliate employees. Many commenters questioned the need to
change the standards of conduct for public utility Transmission
Providers when the current rules appear to be adequate.\37\ For the
most part, they contend that: (1) The Commission is exceeding its
statutory authority under Section 201 of the FPA, which gives states
regulatory authority over facilities used in local distribution,
intrastate commerce or retail consumption; (2) there are no competitive
concerns because retail service is state regulated; (3) the
Transmission Provider may not be able to maintain reliability and would
have difficulty in coordinating generation dispatch; (4) some
Transmission Providers could not fulfill their state-mandated
obligations to be providers of last resort; (5) the Transmission
Provider would not be able to engage in integrated resource planning;
and (6) separating employees engaged in the bundled sales function for
retail load from interstate transmission employees would cause
expensive duplication of staff and facilities, without any
countervailing competitive benefit.\38\
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\37\ The Commission does not have detailed data on the amount of
transmission used for retail electric service.
\38\ A discussion of the commenters' concerns regarding
additional costs is included in the Independent Functioning
discussion, below.
---------------------------------------------------------------------------
77. The Major Issues Analysis recommended retaining the proposal in
the NOPR. Many commenters submitted follow-up comments opposing the
Staff's recommendation. In contrast with some commenters' statements,
there have been several recent examples of affiliate abuse in the
electric industry. In 2002, Idaho Power favored its wholesale merchant
function and marketing affiliate by accepting their representations
that certain non-firm transmission requests were necessary to serve
native load, when in fact they were not.\39\ More recently, the
Commission approved a settlement with Cleco Corp. for its 1999-2002
violations of the standards of conduct, including, among other things,
sharing of a trading floor by employees engaged in wholesale merchant
functions and in retail sales functions.\40\
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\39\ 103 FERC ] 61,182 (2003).
\40\ 104 FERC ] 61,125 (2003).
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78. The Commission has ample authority to regulate the behavior of
the public utility that owns, operates or controls transmission in
interstate commerce and its relationship with any Energy Affiliates.
Nevertheless, the Final Rule will retain the exemption of Order No.
889, which permits a public utility Transmission Provider to use the
same employees for its interstate transmission business and its bundled
retail sales business. However, as stated in Order No. 888-A, ``if
unbundled retail transmission in interstate commerce occurs voluntarily
by a public utility or as a result of a state retail access program,
the Commission has exclusive jurisdiction over the rates, terms and
conditions of such transmission.\41\ The standards of conduct will
apply to merchant employees who are engaged in sales or purchase of
power that will be resold at retail pursuant to state retail wheeling
[[Page 69145]]
programs.\42\ The Commission is also clarifying, however, that if a
retail sales function employee engages in any wholesale sales, such as
selling excess generation to a non-retail customer, the retail function
will be treated as a wholesale merchant function. It is not appropriate
for an entity that participates in the wholesale market to obtain an
undue preference when competing with non-affiliates for transmission
capacity.
---------------------------------------------------------------------------
\41\ FERC Stats. & Regs., Regulation Preambles January 1991-June
1996 ] 31,036 at 51,781.
\42\ American Electric Power Service Corporation, 81 FERC ]
61,332 (1997).
---------------------------------------------------------------------------
79. Under the Final Rule, the definition of Marketing, Sales and
Brokering includes: A sale for resale of natural gas or electric energy
in interstate commerce. Sales and marketing employee or unit includes:
(1) any interstate natural gas pipeline's sales operating unit, to the
extent provided in Sec. 284.286 of this chapter, and (2) a public
utility Transmission Provider's energy sales unit, unless such unit
engages solely in bundled retail sales. If a retail sales unit engages
in any wholesale sales, the separation of functions requirement will
apply.
iv. Definition of a Transmission Function Employee
80. Although the NOPR did not provide a definition for the term
``Transmission Function employee,'' many commenters, including Duke,
urged the Commission to adopt a definition to provide additional
clarity to the regulations. Following the May 21 Conference, several
commenters provided draft regulatory text. In response to the comments,
the Commission will add a definition for the term ``Transmission
Function'' to the Final Rule, as follows:
Transmission Function employee means an employee, contractor,
consultant or agent of a Transmission Provider who conducts
transmission system operations or reliability functions, including,
but not limited to, those who are engaged in day-to-day duties and
responsibilities for planning, directing, organizing or carrying out
transmission-related operations.
v. Definition of a Reseller
81. The NOPR defined a ``reseller'' as any transmission customer
who offers to sell transmission capacity it has purchased. As noted by
Duke, Carolina Power and Light, FPA and several other commenters, the
definition of ``reseller'' was used in the NOPR, but was not used in
the rest of the regulatory text. They request that the term be deleted.
The Commission agrees and is deleting the term from the Final Rule.
D. Independent Functioning--Sec. 358.4
82. The NOPR proposed Sec. 358.4, as follows:
(a) Separation of functions.
(1) Except in emergency circumstances affecting system
reliability, the transmission function employees of the Transmission
Provider must function independently of the Transmission Provider's
marketing or sales employees and its energy affiliates' employees.
(2) Notwithstanding any other provisions in this section, in
emergency circumstances affecting system reliability, Transmission
Providers may take whatever steps are necessary to keep the system
in operation. Transmission Providers must report to the Commission
and post on the OASIS or Internet website, as applicable, each
emergency that resulted in any deviation from the standards of
conduct, within 24 hours of such deviation.
(3) The Transmission Provider is prohibited from permitting its
sales and marketing employees or employees of its energy affiliates
from: (i) conducting transmission system operations or reliability
functions; and (ii) having access to the system control center or
similar facilities used for transmission operations or reliability
functions that differs in any way from the access available to other
transmission customers.
83. Several commenters proposed an alternative ``functional
approach,'' while others focused on implementation of the proposed
independent functioning requirement, including: (1) Sharing of senior
management between Transmission Providers and their Marketing and
Energy Affiliates (corporate governance); (2) sharing of non-
transmission support employees between Transmission Providers and
Marketing and Energy Affiliates; (3) sharing of field and maintenance
employees between Transmission Providers and Marketing and Energy
Affiliates; (4) allowing Transmission Provider employees to engage in
operational or cash-out sales.
84. In response to the NOPR, commenters focused on whether certain
types of non-transmission function employees could be shared between
Transmission Providers and their Energy and Marketing Affiliates. The
Major Issues Analysis recommended that the Commission adopt the
language proposed in the NOPR, with some clarifications to permit the
sharing of ``support-type'' employees. During the May 21 Conference and
in follow-up comments, several entities made recommendations regarding
an alternative approach.
85. As discussed in more detail below, the Commission is adopting
the independent functioning requirement with the modifications
discussed below. The independent functioning requirement in the Final
Rule is as follows:
(a) Separation of functions.
(1) Except in emergency circumstances affecting system
reliability, the transmission function employees of the Transmission
Provider must function independently of the Transmission Provider's
Marketing or Energy Affiliates' employees.
(2) Notwithstanding any other provisions in this section, in
emergency circumstances affecting system reliability, a Transmission
Provider may take whatever steps are necessary to keep the system in
operation. Transmission Providers must report to the Commission and
post on the OASIS or Internet website, as applicable, each emergency
that resulted in any deviation from the standards of conduct, within
24 hours of such deviation.
(3) The Transmission Provider is prohibited from permitting
Marketing or Energy Affiliates' employees from: (i) conducting
transmission system operations or reliability functions; and (ii)
having access to the system control center or similar facilities
used for transmission operations or reliability functions that
differs in any way from the access available to other transmission
customers.
(4) Transmission Providers are permitted to share support
employees and field and maintenance employees with their Marketing
and Energy Affiliates.
i. Background and History of Independent Functioning Requirement
86. The principle underlying proposed Sec. 358.4 is that when
employees engaged in transmission services function independently,
there are significantly fewer opportunities to give unduly preferential
treatment to affiliates engaged or involved in commodity transactions
or other business activities that compete with non-affiliated customers
of the Transmission Providers. Section 358.4(a) combines the separation
of functions requirements of current Sec. Sec. 161.3(g) \43\ and
37.4(a)(1) and (2), ensures that the transmission function employees of
the Transmission Provider function independently of the Transmission
Provider's sales and marketing employees and employees of the Energy
Affiliates. Like the separation of functions requirement in current
Sec. 37.4(a)(1) and (2), employees engaged in transmission functions
would be required to function
[[Page 69146]]
independently; but, in the event of emergencies affecting system
reliability, may take whatever steps are necessary to keep the
transmission systems in operation, including, if needed, using
affiliates' employees.
---------------------------------------------------------------------------
\43\ 43 Under Standard G, 18 CFR 161.3(g) (2003), to the maximum
extent practicable, a pipeline's operating employees and the
operating employees of its marketing affiliate must function
independently of each other. In Order No. 497-E, the Commission
defined operating employees as, in part, those who are engaged in
day-to-day duties and responsibilities for planning, directing,
organizing or carrying out gas-related operations, including gas
transportation, gas sales or gas marketing activities. Order No.
497-E at 30,996.
---------------------------------------------------------------------------
87. Currently, under Sec. 37.4(a)(2), if the transmission function
of a public utility Transmission Provider utilizes the services of a
wholesale merchant function employee during an emergency circumstance
affecting system reliability, the public utility Transmission Provider
posts each such event on its OASIS and reports it to the Commission in
an ``EY'' docket within 24 hours of a deviation. The Final Rule holds
interstate natural gas pipeline Transmission Providers to the same
requirement under proposed Sec. 358.4(a). Since 1998, the Commission
has received as few as eight and as many as 18 reports of emergency
circumstances necessitating deviations from the separation of functions
requirement per year.
ii. Energy Affiliate Function or Commercial Function
88. The NOPR proposed to govern the relationship between the
Transmission Provider and all of its Energy Affiliates. This approach
recognizes that the Commission has jurisdiction over the Transmission
Provider and is exercising that jurisdiction by governing the behavior
of the Transmission Provider to ensure that it does not provide any
Energy Affiliate with any undue preferences. Thus, this approach, which
focuses on the corporate entities (e.g., the Transmission Provider) and
its employees, restricts the behavior and communications between the
regulated Transmission Provider and its Energy Affiliates (Energy
Affiliate Approach). The Commission uses this approach in the existing
standards of conduct, i.e., the standards of conduct govern the
relationship between the interstate natural gas pipeline and its
Marketing Affiliates and the public utility Transmission Provider and
its wholesale merchant function and affiliated power marketer(s).
89. The majority of commenters supported the Energy Affiliate
approach.\44\ The Energy Affiliate approach recognizes some of the
efficiencies of vertical integration by permitting sharing of certain
``support'' type functions and service.
---------------------------------------------------------------------------
\44\ However, not all commenters supported the breadth of the
definition of Energy Affiliates, i.e., expanding it beyond marketing
affiliates.
---------------------------------------------------------------------------
90. As an alternative, several commenters proposed the ``functional
approach.'' Under a functional approach, the standards of conduct would
govern the relationship between the ``transmission functions'' of a
Transmission Provider and its Energy Affiliates and the ``commercial
functions'' \45\ or the ``energy functions'' \46\ of the Transmission
Provider and its Energy Affiliates (Commercial Function Approach). In a
Commercial Function approach, the transmission function of a pipeline
and the transmission function(s) of its affiliated LDCs, affiliated
intrastate pipelines and other affiliates with transmission services
would be able to share employees and communications with each other,
and the sales function of a pipeline and the sales functions of any of
its affiliates would be able to share employees and communications with
each other. But the sales and transmission functions would be
prohibited from sharing employees and information with each other. The
functional approach prohibits the Transmission Provider's
``transmission function'' from sharing employees or information with
the ``commercial'' or ``energy'' function of the energy affiliates, but
permits the sharing of employees and information with other ``non-
commercial'' functions of the Energy Affiliates.
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\45\ Dominion proposed defining commercial function employees as
those who engage in certain day-to-day activities such as
transmission transactions, buy, sell or trade gas or energy or
manage or control transmission capacity.
\46\ Entergy proposed defining energy function employees as
those who engage in purchases for resale, sale, or trade of natural
gas or electric energy, but does not capture those that ``control''
capacity, but do not ``hold'' it (asset managers).
---------------------------------------------------------------------------
91. The functional approach was the subject of much discussion at
the May 21 Conference, and 13 commenters supported the functional
approach in their supplemental comments.\47\ NASUCA opposed the
commercial function approach. Many of the trade associations that
submitted comments on specific aspects of the NOPR were silent on the
type of approach that should be used. Some of the proponents of the
functional approach, including Portland, argue that the Commission's
approach in the NOPR represents a departure from the requirements of
Order No. 889.
---------------------------------------------------------------------------
\47\ AEP, Cinergy, Duke (partially), Dominion, Entergy, EEI
(partially), FPL, Keyspan, National Grid, PG&E, Portland General
Electric, Ohio Commission and Xcel.
---------------------------------------------------------------------------
92. The Commission has carefully considered the comments and
alternative proposals for structuring the Final Rule and is adopting
the Energy Affiliate approach. With respect to the Energy Affiliate
approach, the regulated Transmission Provider is responsible for
ensuring separation of functions and compliance with information
disclosure prohibitions between itself and its Energy Affiliates. Under
the Commercial Function approach, the responsibility for ensuring
compliance would be shared by the transmission function of the
Transmission Provider and the non-jurisdictional transmission functions
of the unregulated Energy Affiliates. The Commission does not believe
that such shared responsibility is workable. The Commission is
concerned that it would not be able to enforce compliance with the
standards of conduct based on a commercial function approach.
93. The advocates of the Commercial Function approach argued that
Transmission Providers would be permitted to share more ``support-
type'' employees than they would under the Energy Affiliate approach.
While it may be less costly for some companies to implement the
Commercial Function approach, particularly for those companies that are
already structured on a functional basis, such as Dominion and Cinergy,
the Commission is concerned that it does not have the jurisdiction to
direct unregulated Energy Affiliates on how to structure their
functions, operations and communications.
94. The Energy Affiliate approach has worked successfully in the
past and avoids concerns whether FERC has jurisdiction to direct an
unregulated Energy Affiliate on how to structure its functions,
operations and communications.
iii. Sharing of Non-Transmission Functions
95. Forty-six commenters, including interstate natural gas
pipelines, public utility Transmission Providers, AGA, Cleco Power,
EEI, First Energy, INGAA, NGSA and Industrials, were very concerned
because the NOPR was silent on whether the Commission would implement
the independent functioning requirement consistent with the case law
that has developed under the current standards of conduct. Several
commenters, including INGAA, asked that the Commission specify which
``support employees'' and ``field personnel'' can be shared between the
Transmission Provider and its Energy Affiliates. Several commenters,
including Cinergy and LG&E, requested that the Commission codify the
proposed exception that allows the sharing of field and maintenance
employees or identify the types of employees who would qualify as non-
operating, e.g., legal, accounting, human resources, and information
technology.
[[Page 69147]]
96. Historically, the Commission has recognized that different
Transmission Providers are faced with different practical circumstances
in reviewing the appropriate degree of separation between the
Transmission Provider's transmission function and the marketing
affiliate or wholesale merchant function. Under the current standards
of conduct, the Commission has permitted the transmission function to
share with its marketing affiliate or wholesale merchant function non-
operating officers or directors and personnel performing various non-
operating functions such as legal, accounting, human resources, travel
and information technology.\48\
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\48\ Under Standard G, a pipeline's operating employees and the
operating employees of its marketing affiliate must function
independently of each other to the maximum extent practicable. See
18 CFR 161.3(g) (2003). In Order No. 497-E, the Commission defined
operating employees as, in part, those that are engaged in the day-
to-day duties and responsibility for planning, directing, organizing
or carrying out gas-related operations, including gas
transportation, gas sales or gas marketing activities. See Order No.
497-E, FERC Stats. & Regs., Regulations Preambles 1991-1996, at
30,996.
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97. By permitting such sharing of non-operating employees, the
Commission has allowed the Transmission Provider to realize the
benefits of cost savings through integration where the shared employees
do not have duties or responsibilities relating to transmission, and
generally, would not be in a position to give a marketing affiliate
undue preferences. In these circumstances, the sharing of transmission
business employees with marketing affiliate employees was not
considered to be likely to be harmful to shippers, consumers or
competition. The Commission has also recognized that under normal
circumstances, highly placed employees, such as officers or directors,
are not involved in day-to-day duties and responsibilities and can be
shared between a Transmission Provider and its marketing affiliate so
long as these individuals comply with the information disclosure
prohibitions.\49\
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\49\ Id. at 30,996.
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98. When the Commission reviewed public utilities standards of
conduct filings, it used a similar approach. The Commission stated that
Transmission Providers may allow senior managers, officers or directors
to have ultimate responsibility for both transmission system operations
and wholesale merchant functions, as long as the persons with shared
responsibilities do not participate in directing, organizing or
executing transmission system operations or reliability functions or
wholesale merchant functions. Further, the Commission stated that
Transmission Providers may share ``support'' staff, such as legal
counsel, accounting services and data processing who do not participate
in operating activities.\50\
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\50\ AEP, 81 FERC at 62,515.
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99. The Commission has previously allowed the sharing of billing,
accounting and legal employees. The rationale was that accountants and
lawyers were obliged by professional responsibility to maintain the
confidentiality of transmission or customer information. For those
employees involved in ``billing,'' the rationale was that the employees
produced the bills after the transmission took place, and those
involved in billing would have little opportunity to give marketing
affiliates undue preferences. However, the recent investigations
indicate that staff has been improper conduits of transmission
information.
100. With respect to accountants, at most Transmission Providers,
there are accountants who are responsible for day-to-day accounting
functions, which may include billing, gas accounting and invoicing.
There are also accountants or a ``finance department'' responsible for
pulling together information for the corporation as a whole. The level
of sharing of the accounting employees varies among Transmission
Providers. In the Transco investigation, the Commission learned that
marketing affiliate employees involved in billing and accounting had
access to significant amounts of transmission information and
confidential shipper information through shared databases and provided
non-affiliate customer information to marketing affiliate
employees.\51\ In an investigation of Cleco, the Commission learned
that accounting and billing employees improperly re-designated certain
power sales transactions between the utility's the wholesale merchant
function and its affiliated power marketer.\52\
---------------------------------------------------------------------------
\51\ Transco, 102 FERC ] 61,302 (2003).
\52\ Cleco, 104 FERC ] 61,125 (2003).
---------------------------------------------------------------------------
101. Accountants and personnel involved in billing have the ability
to provide preferential information, or, as in the case of Cleco, alter
the books after transactions, to benefit an affiliate. While the
Commission recognizes the efficiencies in allowing Transmission
Providers to share accountants and employees involved in billing with
their Energy Affiliates, we are concerned about their behavior and
ability to provide preferential treatment. Therefore, the Commission
will require that Transmission Providers train all shared support
employees regarding the standards of conduct and that shared employees
sign affidavits that they will not be a conduit for sharing
transmission, market or customer information with a Marketing or Energy
Affiliate.
iv. Sharing of Senior Officers and Directors
102. Many commenters urge the Commission to permit Transmission
Providers to share senior officers and directors with their Marketing
and Energy Affiliates consistent with current Commission practices.\53\
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\53\ On several occasions, the Commission has specifically
addressed the sharing of employees. For example, in reviewing ANR
Pipeline Company's standards of conduct, the Commission stated that
the potential for abuse when there are shared officers or directors
is minimized because the shared officers or directors normally
should not receive confidential information from nonaffiliated
shippers or potential nonaffiliated shippers nor would they be
likely to receive transportation information.
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103. The Major Issues Analysis recommended that the Commission
retain this exception. In follow-up comments, this proposal received
support from virtually all the commenters. This exception, which
impacts the ability of the senior officers and directors to engage in
corporate governance functions is important and merits retention.
Therefore, the Commission will codify this exception in the regulatory
text.
104. In the Final Rule, the Commission will continue to allow
senior officers and directors who do not engage in transmission
functions, including day-to-day duties and responsibilities for
planning, directing, organizing or carrying out transmission-related
operations to share such positions with the Transmission Provider and
its Marketing or Energy affiliates. These shared executives may not
serve as a conduit for sharing transmission, customer or market
information with a Marketing or Energy Affiliate.
v. Sharing of Field and Maintenance Personnel
105. Numerous commenters urged the Commission to permit
Transmission Providers to share field and maintenance personnel with
their Marketing and Energy Affiliates, consistent with the Commission's
current practices. In Order No. 497-F and in reviewing Tennessee's
standards of conduct, the Commission found that ``field employees,''
such as those who perform manual work (dig trenches) or purely
technical duties (operate and
[[Page 69148]]
maintain the pipeline's equipment),\54\ are supportive in nature and
would not have direct operational responsibilities. Similarly, field
technicians or mechanics and their immediate supervisors would not be
considered operating employees. The Commission added, however, that if
supervisory field personnel can control a gas pipeline's operations,
they are operating employees. The Commission also stated that if a
supervisor has the ability to restrict or shut down the operation of a
particular section of the pipeline, that supervisor is considered an
operating employee.\55\
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\54\ Additional examples of field or maintenance employees
include: those who read meters, locate lines, do snow removal and
maintain the roadways.
\55\ Order No. 497-F, 66 FERC ] 61,347 at 62,165; Tennessee Gas
Pipeline Company, 55 FERC ] 61,285 (1990).
---------------------------------------------------------------------------
106. The Major Issues Analysis recommended that the Commission
retain this exception. In follow-up comments, this proposal received
support from all the commenters. This exception merits retention.
Therefore, the Final Rule will codify this exception in the regulatory
text. In the Final Rule, the Commission will continue to allow the
sharing of field and maintenance personnel.
vi. Transmission Employees That Engage in Operational Purchases
107. Several interstate natural gas pipelines, as well as INGAA,
noted that the NOPR does not appear to retain the historical exclusion
that permits transportation function employees to buy and sell gas for
operational reasons, including to balance fuel usage, for storage
operations, to effectuate cashouts and deplete or replenish line
pack.\56\
---------------------------------------------------------------------------
\56\ See, e.g., East Tennessee Natural Gas Co., 63 FERC ]
61,578, order on reh'g, 64 FERC ] 61,159 (1993).
---------------------------------------------------------------------------
108. The Major Issues Analysis recommended that the Commission
retain this exception. In follow-up comments, this proposal received
support from many commenters, including AdHoc Marketers. This
exception, which impacts practical operations of the transmission
system is important and merits retention. Therefore, the Commission
will codify this exception in the regulatory text.
vii. Risk Management Employees
109. Many commenters, including Ad Hoc Marketers, Basin Electric
Coop, Florida Power Corp., Gulf South, Carolina Power & Light, Cinergy,
PGE, EEI, INGAA, NEMA, NiSource, Pinnacle West, BPA, Atlantic City and
Delmarva, urged the Commission to permit the sharing of risk-management
employees or functions. Discussions during the May 21 Conference
revealed that there are many different definitions, uses and
applications of the term risk management and credit management. For
example, risk management functions can include: (1) Managing corporate-
wide business risk exposure of the corporation and/or its affiliates;
(2) business risk exposure for third parties; (3) managing overall
corporate investment for the entire corporation; (4) assessing credit
risk for counter-parties; (5) approving expansion projects; and (6)
establishing spending, trading and capital authorities for each
business unit. EEI claims that corporate-wide risk management employees
must understand the exposure of the entire corporation, including the
Transmission Provider, the wholesale merchant function and Energy
Affiliates, so that the corporation may fulfill its fiduciary duties to
shareholders and corporate lending covenants. NiSource claims that risk
management mitigates the corporation's overall risk and does not profit
from transmission or energy commodity markets.
110. There are two issues that relate to risk management: (1)
Whether it may be a shared function; and (2) if so, how to handle the
transmission, customer and market information received by the risk
management employees. According to Carolina Power & Light, Florida
Power Corp. and EEI, risk information from business units filters up to
senior management or a risk management committee, but then the risk
management function does not provide any operational unit with
information derived from any other business units and will not be a
conduit for sharing information.
111. Several commenters, including FirstEnergy, state that risk
management has become a core concern of the ratings organizations and
urge the Commission to permit shared risk management. Portland General
Electric states that risk management employees cannot use their access
to transmission information to the detriment of third parties.
112. Risk management employees are in a position to use
transmission, customer and market information to give Energy Affiliates
an undue advantage where the members of the risk management committee
are made up of employees from the transmission function and the Energy
Affiliates. Therefore, any shared risk management employees may not be
operating employees of either the Transmission Providers or the
Marketing or Energy Affiliates nor can they be a conduit for improperly
sharing information.
viii. Costs of Compliance
113. In determining the extent of independent functioning between
the Transmission Providers and Energy Affiliates, the Commission has to
balance the associated costs of separating shared functions against the
benefit to competition and the elimination of discriminatory behavior.
114. As noted by many of the commenters, there will be costs, and
for some transmission companies that have fully integrated production,
gathering, generation, transmission and distribution functions, those
costs could be considerable. In their comments, gas Transmission
Providers provided one-time cost estimates to function independently of
their affiliated LDCs that ranged from $8,000,000 (Pauite) to
$210,000,000 (Questar),\57\ while annual cost estimates ranged from
$5,000,000 (Paiute) to $16,000,000 (National Fuel). Similarly, public
utility Transmission Providers provided one-time cost estimates to
function independently of their retail function that ranged from
$750,000 (Colorado Springs) to $1,000,000 (DTE), while annual cost
estimates ranged from $1,500,000 (Conectiv) to $95,000,000
(Cinergy).\58\
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\57\ Questar's estimate includes capital investments,
transmission investments, investment in additional systems, legal
fees, design engineers, state regulatory efforts, duplicate SCADA
and duplicate field operations.
\58\ Few public utility transmission providers provided one-time
cost estimates; several, like Cinergy and Southern provided
estimates over a multi-year basis, $180,000,000 over two years and
$350,000,000 over five years, respectively.
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115. Commenters provided estimates of costs in varying levels of
detail, but the majority of the commenters' projected costs the
independent functioning requirement reflect the ``worst-case''
scenario, that assumed the Commission would require a complete
separation of affiliated Transmission Providers, holding companies and
other Energy Affiliates as well as prohibit the sharing of support
services and field personnel.\59\ As Duke recognized, however, the
magnitude of these increased costs depends on whether an LDC or load
serving entity is defined as an Energy Affiliate, how the separation is
implemented and whether specific functions, like administrative or
support functions, and certain information, like specific transaction
or reliability information, can be shared between the
[[Page 69149]]
transmission function and the retail sales function.
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\59\ Generally, the projected costs included: duplication of
system control or control center facilities; duplication of field,
maintenance, human resources, information technology, travel and
other support-type personnel, duplication of customer service, load
forecasting and scheduling employees, duplication of office
facilities, computers, software, SCADA, as well as administrative
and leasing costs.
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116. The Final Rule will not be as costly as anticipated by the
commenters because the Final Rule excludes certain categories of
affiliates, such as LDCs making only on-system sales, from the
definition of Energy Affiliate, does not include solely bundled retail
sales employees in the definition of Marketing Affiliate, allows the
sharing of certain support and field personnel, and adopts the no-
conduit rule as well as other exceptions to the informational
disclosure prohibitions. The level of separation of functions required
by the Final Rule is needed to ensure that Transmission Providers do
not use their access to information about transmission to the detriment
of customers or competitors. EPSA states that the long-term benefits
could amount to several billion dollars.
117. The Commission disagrees with commenters' arguments that there
is no harm to the market under the current level of sharing between
Transmission Providers and their Energy Affiliates. There is harm to
the market. For example, unduly preferential behavior in favor of a
marketing affiliate harmed the retail customers of Idaho in the amount
of $5.8 million until the Commission required a refund as a condition
of a settlement.\60\ Similarly, the retail customers of Louisiana were
harmed approximately $2.1 million until the Commission required a
refund as a condition of settlement.\61\ Although there was no specific
quantification of harm caused by the unduly preferential behavior
described in the Transco settlement, it was of sufficient magnitude
that the Commission required the marketing affiliate to exit the
market, and Transco paid a record civil penalty of $20 million.
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\60\ Idaho Power Co., IDACORP Energy, L.P., and IDACORP, Inc.,
103 FERC ] 61,182 (2003).
\61\ Cleco, 104 FERC ] 61,125 (2003).
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ix. Conclusion
118. The independent functioning requirement is a central component
of the standards of conduct which limits the ability of the
Transmission Provider to use its market power to preferentially benefit
an Energy Affiliate. Nonetheless, it is necessary to recognize the
practicalities of operating a transmission system, and, therefore, the
Commission will continue to permit the sharing of certain non-
transmission function employees between the Transmission Provider and
its Marketing and Energy Affiliates in the Final Rule.
119. However, in an investigation of Transco, the Commission
learned that there are instances in which a shared information
technology function provided a marketing affiliate an undue
preference.\62\ Specifically, a shared IT employee designed a software
program for the marketing affiliate that gave the marketing affiliate
access to the pipeline's mainframe databases and used the pipeline's
modeling information to optimize the marketing affiliate's nominations
on the pipeline's transmission system. In these circumstances, the IT
employees were no longer ``support'' employees, and gave the marketing
affiliate unduly preferential access to valuable transmission
information.
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\62\ Transco, 102 FERC ] 61,302 (2003).
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120. Similarly, if lawyers are participating in directing,
organizing or executing transmission system operations or reliability
functions or direct the policy of the Transmission Provider, they are
not ``support staff,'' rather they are transmission function operating
employees who are subject to the standards of conduct. The exemption of
``support employees'' is not a mechanism to circumvent the prohibition
on providing a Marketing or Energy Affiliate an undue preference
relating to transmission or preferential access to transmission
information.
121. Although the majority of ``support employees'' are genuinely
performing supporting functions, some have or receive access to
transmission or customer information. Therefore, the Final Rule will
require Transmission Providers to train all of the ``support''
employees in the standards of conduct and prohibit them from acting as
conduits for sharing information with marketing or Energy Affiliates.
In addition, Transmission Providers with shared support employees will
be subject to greater audit scrutiny.
E. Identification of Affiliates on Internet
122. Section 358.4(b) requires all Transmission Providers to post
information with respect to their marketing and sales employees and
energy affiliates on their OASIS or Internet Web sites, as applicable.
Gas pipelines already post this information with respect to their
marketing affiliates under Sec. 161.3(l). Although the current
regulations do not require public utility Transmission Providers to
post the names and addresses of their marketing affiliates on the
OASIS, the Commission did require the posting of organizational charts
and job descriptions when it reviewed the electric Transmission
Providers' implementation of the standards of conduct.\63\ The Major
Issues Analysis recommended that the Commission revise some of the
posting requirements consistent with some of the commenters'
suggestions. Commenters have submitted follow-up comments, which make
additional arguments and suggestions. The Final rule requires:
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\63\ American Electric Power Service Corporation, 81 FERC ]
61,332 (1997), order on reh'g, 82 FERC ] 61,131 (1998); order on
reh'g, 83 FERC ] 61,357 (1998).
(1) A Transmission Provider must post the names and addresses of
its sales and marketing units and Energy Affiliates on its OASIS or
Internet Web site.
(2) A Transmission Provider must post on its OASIS or Internet
Web site, as applicable, a complete list of the facilities shared by
the Transmission Provider and its marketing or sales units or any
Energy Affiliates, including the types of facilities shared and
their addresses.
(3) A Transmission Provider must post comprehensive
organizational charts showing:
(i) The organizational structure of the parent corporation with
the relative position in the corporate structure of the Transmission
Provider, marketing and sales units and any Energy Affiliates;
(ii) For the Transmission Provider, the business units, job
titles and descriptions, and chain of command for all positions,
including officers and directors, with the exception of clerical,
maintenance, and field positions. The job titles and descriptions
must include the employee's title, the employee's duties, whether
the employee is involved in transmission or sales, and the name of
the supervisory employees who manage non-clerical employees involved
in transmission or sales.
(iii) For all employees who are engaged in transmission
functions for the Transmission Provider and marketing or sales
functions or who are engaged in transmission functions for the
Transmission Provider and are employed by any of the Energy
Affiliates, the Transmission Provider must post the name of the
business unit within the marketing or sales unit or the energy
affiliate, the organizational structure in which the employee is
located, the employee's name, job title and job description in the
marketing or sales unit or energy affiliate, and the employee's
position within the chain of command of the marketing or sales unit
or energy affiliate.
(iv) The Transmission Provider must update the information on
its OASIS or Internet website, as applicable, required by Sec. Sec.
358.4(1), (2) and (3) within seven business days of any change,
posting the date on which the information was updated.
(v) The Transmission Provider must post information concerning
potential merger partners as affiliates within seven days after the
merger is announced.
(vi) |
