FERC Issues Notice of Inquiry to Update Rules on Allocating Interstate Pipeline Capacity

In response to a Petition for Rulemaking filed on June 22, 2022 (Petition), the Federal Energy Regulatory Commission (FERC or Commission) issued a Notice of Inquiry (NOI) on March 21, 2024, seeking additional information concerning the practices of interstate natural gas pipelines related to the packaging of noncontiguous and/or operationally unrelated segments of capacity in a single auction or open season and the aggregation of bids across those segments to determine the highest-value bid for the purpose of allocating capacity.

Specifically, FERC seeks comment on:

• additional information and data on interstate natural gas pipeline posting practices related to the packaging of noncontiguous and/or operationally unrelated segments of capacity in a single auction or open season, including the frequency of the inclusion of aggregated noncontiguous segments in capacity postings and the impacts of bid aggregations on pipeline rates
• relevant information that bears on whether the Commission should reconsider its policy
• what regulatory, economic or policy goals would or would not be achieved by modifying the current policy

Reason for Petition

In their Petition, several associations representing gas shippers and consumers alleged that the interstate natural gas pipeline practice of packaging high market value capacity with noncontiguous and/or operationally unrelated parcels of capacity with little or no market value had become increasingly commonplace in the market, producing unjust and unreasonable rates, distorted market pricing and reduced incentives for pipelines to build needed capacity and constituting illegal tying. Petitioners argued that that this practice effectively denies shippers access to needed capacity and unduly discriminates against industrial gas consumers, municipal gas systems and local distribution utilities, which ultimately results in higher prices for consumers.

Extensive comments and protests were filed in the response to the Petition. Supporters agreed that some pipelines sold excess peak capacity tied to useless capacity at elevated rates on a seasonal or short-term basis to maximize their revenues, and included specific examples of capacity-tying arrangements evidencing the harm. Supporters maintained that packaging noncontiguous capacity with desired capacity effectively increased the cost of the desired capacity above the maximum tariff rate the pipeline could have charged for that one segment of capacity alone.

Supporters further asserted that public utility shippers may effectively be required to bid on packaged capacity where the desired capacity is needed to serve retail and commercial load growth or changes in customer demand. Failing to bid would risk losing needed capacity to other shippers who can afford to submit above-market bids for the entire package. These parties argued that only by requiring separate bids for noncontiguous segments could the Commission ensure that the pipelines cannot exercise market power and artificially inflate market outcomes by packaging valuable and less valued capacity.

Conversely, the Petition's opponents asserted that the Commission's policy benefits customers and pipelines by permitting the packaging of noncontiguous segments of capacity. Opponents argued that a fundamental component of the Commission policy governing capacity allocation seeks to assure that capacity will go to the shipper that values it the most, thereby maximizing the value of the capacity to the pipeline. Opponents attacked the Petition as relitigating issues previously raised in pipeline tariff proceedings and criticized its proposed alternatives as failing to ensure that capacity would go to the shipper valuing it the most. Further, they contended that the Petition failed to demonstrate that shippers were required to bid on unwanted segments of capacity and that the Petition's proposed prohibition would significantly impede a pipeline's ability to make available unsold capacity and maximize the value of such capacity efficiently and transparently.

Next Steps

In the NOI, FERC invites interested persons to submit comments and reply comments on the issues addressed, including any related matters or alternative proposals that commenters may wish to discuss. FERC is specifically soliciting commentary on discrete matters, including:

• In the Petition, Petitioners provided 15 examples of what they describe as "junk and jewel" postings from 2018 through 2022. If available, please provide the Commission with any more recent examples of postings pairing desirable, high-value capacity with unwanted, low-value capacity.
• Please provide information on how and why noncontiguous and/or operationally unrelated segments are chosen to package together in the same open season. Comment as to what extent capacity that Petitioners label as "junk" is still required to serve certain markets.
• Please explain whether and how shippers do or do not receive the benefit of a rate reduction related to capacity awards of short-term capacity in rate cases (i.e., including billing determinants and revenues in the test period, along with selection of the test period itself).
• Please explain or provide specific examples of how certain shippers such as local distribution companies and municipal gas systems might not have the creditworthiness to bid on multiple unrelated paths to increase their chance of winning valuable capacity or how they might be subject to a prudence review from state regulators for bidding on noncontiguous and/or operationally unrelated capacity packages.
• Please comment on whether the Commission should change its current policy, which allows bid aggregation on noncontiguous segments so long as shippers are not required to bid on undesired segments of capacity.

Comments are due 90 days after the NOI is posted in the Federal Register, with any reply comments being due 30 days thereafter. Comments must refer to Docket No. RM22-17-000 and include the commenter's name, organization represented, if applicable, and address.

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