UNITED STATES OF AMERICA

BEFORE THE

FEDERAL ENERGY REGULATORY COMMISSION

Pipeline Customer Coalition Petition For Expedited Complaint Procedures (Docket No. RM96-12-000)

Interstate Natural Gas Association Of America Alternative Petition For Rulemaking (Docket No. RM97-4-000)

COMMENTS OF THE NATURAL GAS SUPPLY ASSOCIATION

Pursuant to the Notice Of Petitions For Rulemaking On Complaint Procedures ("Notice") issued by the Federal Energy Regulatory Commission ("the Commission" or "FERC") on April 17, 1997, the Natural Gas Supply Association ("NGSA") hereby files written comments . . . .

I. NGSA Supports The Pipeline Customer Coalition Petition For An Expedited NGA Section 5 Complaint Procedure

NGSA supports the Pipeline Customer Coalition proposals filed in Commission Docket No. RM96-7 on both May 31, 1996 ("original proposal") and April 3, 1997 ("amended proposal"). Although the amended proposal filed on April 3rd changes some elements of the original proposal, both proposals are firmly rooted in the notion that the Commission regulations should specify expedited complaint resolution timelines for qualifying Section 5 complaints. Considerable time and resources were devoted by the Coalition to craft a proposal which provided an expedited resolution of complaints while providing the Commission with all the flexibility needed to choose the best procedural venue for resolving any particular complaint.

The Coalition also devoted considerable thought to the "bona fides" required to establish whether any particular complaint merits expedited consideration and resolution. These "bona fides" were crafted knowing that the Coalition's expedited complaint procedure, if adopted, would in most instances become the procedural venue of choice by the natural gas community. Thus, these "bona fides" were designed to establish the validity of those complaints filed at the Commission, which seek expedited treatment. Indeed, the Commission's own concerns regarding "frivolous" complaints led the Coalition to amend the original proposal and to require that the complainant also engage in informal complaint resolution procedures, prior to the filing of any formal complaint at the Commission.

Because the Coalition's amended proposal incorporates additional elements which are meant to address concerns raised by both the Commission and the interstate gas pipelines, NGSA believes that the amended proposal represents an appropriate balance between the need for complaints to be resolved on an expedited basis and the need to apply limited gas industry resources, including those of the Commission, as efficiently as possible.

II. Why The Natural Gas Industry Now Needs An Expedited Complaint Process

NGSA has spoken to the need for an expedited Section 5 complaint procedure largely within the context of Commission proposals for "lighter-handed" regulation⁽¹⁾

. However, NGSA also believes that current market realities require an expedited Section 5 complaint procedure, especially in light of the increasingly short-term transactional nature of the interstate gas transportation market.

It is axiomatic that the natural gas industry has undergone significant changes since Commission Order No. 436 was promulgated. These changes are largely responsible for the growing recognition within the pipeline customer community that the industry needs an expedited complaint procedure.

Prior to Commission Order Nos. 436 and 636, the operation of the interstate pipelines was vastly simpler, more predictable, and more transparent. Interstate pipelines were both the sole transporters and merchants of natural gas. Pipelines typically bought natural gas directly from producers, or from upstream pipelines, connected to their system and transported that gas to primarily local gas distributor ("LDC") citygates at which point the gas was resold to the LDC.⁽²⁾

Prior to Order No. 436, only the interstate pipelines were engaged in the merchant gas business, and every pipeline customer in a rate zone paid the same rate for the same set of bundled services. The business conducted by interstate pipelines was completely transparent because every pipeline customer in a rate zone paid identical prices for identical services. Moreover, because the LDCs were still the sole providers of gas behind the citygate and because customer "bypass" of the LDC system was rare, the LDC gas markets were stable and predictable, allowing them to sign long-term contracts of fifteen to twenty years in length. Thus, the opportunities for inappropriate pipeline behavior were considerably more limited than in today's environment. Moreover, given the interstate market's long-term contract stability prior to Order No. 436, the resolution of any complaints that might arise were less pressing because prospective relief would apply to the remaining term of a fifteen to twenty year contact or be subject to review within three years or less.

Since Order Nos. 436 and 636, the character of the interstate gas markets has changed so significantly that LDCs and other potential shippers are likely to reduce subscriptions of firm capacity and sign firm capacity contracts of shorter duration⁽³⁾

. Pipelines no longer buy and sell the gas commodity, but merely transport gas for other gas merchants (including pipeline marketing affiliates). Because of pipeline unbundling and the possibility of rate discounting, the pipeline services provided and the rates charged for those services are no longer necessarily identical. Pipeline customers located in the same rate zone can now receive vastly different services and pay significantly different rates. With the prospect of LDC open-access transportation and unbundling, gas consumers will be increasingly less reliant on their local distributor both to provide the gas commodity and to arrange for its interstate transportation to the citygate. Given the uncertainty of future LDC-served gas loads and the additional flexibility in obtaining LDC gas supplies, LDCs have become increasingly unwilling to sign long term contracts for pipeline capacity.⁽⁴⁾

Consequently, the interstate gas transportation market has become increasingly "commoditized", wherein the contractual commitments longer than a month's duration are increasingly considered "long-term".⁽⁵⁾

Under these current market conditions, pipeline relationships with its various customers is very fluid and not at all transparent. Moreover, given the increasingly shorter-term nature of capacity commitments, the opportunity for any meaningful relief through the current Section 5 complaint procedure is less likely. In sum, the opportunities for inappropriate pipeline behavior has exploded while the short-term transactional nature of the market undercuts the opportunity for complainants to receive timely resolution. Indeed, there is little incentive to employ the current procedure and incur the requisite legal costs, even should one's perspective prevail, if the resolution comes too late to benefit the complainant.

If the Commission were to enact the Coalition's expedited complaint procedure, it might be true that the Commission may face an increase in the number of complaints filed at the Commission. However, NGSA believes that this increase would not be attributable to the expedited complaint procedure, per se, but rather would be a reflection of: 1) a marketplace which provides pipelines a myriad of opportunities to engage in inappropriate behavior and 2) a currently uncertain and potentially unresponsive complaint procedure⁽⁶⁾

.

III. Why The INGAA Proposal Is Not Responsive To The Needs Of Pipeline Customers

NGSA believes that the pipeline proposal for voluntary arbitration is meant to create the illusion of an expedited process while providing none of the substance. NGSA's understanding of the arbitration proposal is that the complaint resolution would go into effect at the end of a hundred (100) day period.⁽⁷⁾

As attractive as this arbitration scheme might seem, the supposed benefits of any voluntary arbitration process are completely illusory because the pipeline can voluntarily refuse to engage in the proposed arbitration process. If the pipelines refuse to arbitrate, then the complainant's only recourse is to file a complaint under the current procedures. In this sense, the pipeline proposal for voluntary arbitration provides no assurance of any expedited resolution of complaints.

The INGAA arbitration proposal allows for parties to appeal the arbitration panel's decision to the Commission (INGAA at 10). Given this opportunity for Commission appeal, it is likely that many arbitrated disputes will merely become a prelude to a Commission review of the decision, thereby undermining any notion that this approach is either expedited or relieves the Commission of the resource burden in adjudicating complaints.

NGSA does not oppose voluntary arbitration procedures. Clearly, voluntary arbitration could be a practical means of resolving certain types of disputes. In this regard, NGSA believes that this avenue for complaint resolution is already available to parties. However, NGSA is concerned that INGAA's arbitration proposal might be construed as somehow alleviating the need for, or as being an adequate substitute for, the incorporation of a truly expedited complaint procedure into the Commission's regulations, which is simply not the case.

IV. Conclusion

NGSA believes that the Coalition's proposal for an expedited complaint procedure is a well designed addition to the Commission's current regulations because it accommodates the interests of all parties. NGSA also believes that such an expedited complaint proposal is needed for today's market environment. Any further Commission movement toward "lighter-handed" regulation will only increase the imperative for an expedited complaint procedure. Finally, NGSA believes that the INGAA proposal does not satisfy the current customer requirement for an expedited complaint procedure.

¹ See NGSA comments filed in the following Commission proceedings regarding: 1) the "Regulation of Negotiated Transportation Services of Natural Gas Pipelines" (Docket No. RM96-7-000) on May 30, 1996 at 15 - 17; 2) the "Secondary Market Transactions on Interstate Natural Gas Pipelines" (Docket No. RM96-14-000) on October 7, 1996 at 10; and 3) the "Issues and Priorities for the Natural Gas Industry" (Docket No. PL97-1-000) on April 28, 1997 at 25 - 27. The NGSA comments filed in these Commission dockets are hereby incorporated into these comments by reference.

² Although some of the gas transported on interstate gas pipelines prior to Order No. 436 was sold by the pipeline directly to a few large industrial consumers, this was the exception rather than the rule.

³ See "An Issue Paper Regarding Future Unsubscribed Pipeline Capacity", prepared by the LDC Caucus of the American Gas Association, December 1995. This paper describes at greater length the reasons why LDCs are likely to reduce their firm capacity subscriptions.

⁴ See "The Effect Of Restructuring On Long-Term Contracts For Interstate Pipeline Capacity", Interstate Natural Gas Association of America, Issue Analysis report No. 95-5, September 1995. As stated in that report's Executive Summary: "Between 1994 and 2002, the amount of contracted firm capacity is expected to decline from 96% to 87% of total capacity. Long-term contracts will also be of shorter duration. Over half of the resubscribed capacity will be for contract terms of 4 years or less."

⁵ The commoditization of the gas molecule has also contributed to the increasing "commoditization" of interstate gas transportation. Some gas producers, for example, sell a significant portion of their production into the daily gas market. As a result, their corresponding commitments to pipeline capacity are increasingly of a shorter-term nature.

⁶ "Potentially unresponsive" because the Commission has the full discretion to decide whether it will even consider any specific complaint filed at the FERC.

⁷ The INGAA proposal is not clear as to the exact timeline for the arbitration procedure because some of the discussion refers to "business days" while other references are only to "days" without any specification as to whether these "days" are "business days" or "calendar days". Irrespective of this interpretive problem, it appears that 30 days of the process are allotted to setting up the arbitration panel, an additional 40 days are provided for the panel to render a decision, and the final thirty (30) days are provided to appeal the decision before that decision goes into effect. (INGAA's April 10, 1997 comments at 8 - 10.)

This page was last updated August 31, 1997.