FERC Issues Revised Interim Standards of Conduct for Interstate Natural Gas Pipelines

In Order No. 2004, FERC combined its previously separate standards of conduct for interstate natural gas pipelines (adopted in Order No. 497) and electric utilities (adopted in Order No. 889), and collectively called these entities “transmission providers.” Order No. 2004 also expanded the application of the standards of conduct to govern transmission providers’ relationships with their “energy affiliates.” For natural gas pipelines, this change extended the application of the standards of conduct to cover, not only relationships with marketing affiliates (as provided by Order No. 497), but also relationships with, for example, affiliated gas processors, gatherers, producers, intrastate pipelines, and local distribution companies.

At the D.C. Circuit Court of Appeals, a number of provisions were challenged: (1) extension of the standards of conduct to non-marketing affiliates of natural gas pipelines; (2) extension of the standards of conduct to entities that do not hold or control capacity on their affiliated pipelines, including the elimination of the exemption for local distribution companies that make off-system sales only on nonaffiliated pipelines; (3) the favorable treatment of local distribution companies as compared to producers, gatherers, and processors with respect to the exemption for local distribution companies that make only on-system sales; (4) restrictions on sharing risk management employees between natural gas pipelines and their marketing/energy affiliates; (5) restrictions on sharing lawyers between natural gas transmission providers and their marketing/energy affiliates; (6) the requirement that natural gas pipelines post all discretionary actions under their tariffs; and (7) when newly certificated pipelines become subject to the standards of conduct. The application of Order No. 2004 to electric utilities was not challenged.

In November 2006, the court of appeals vacated and remanded Order No. 2004 as it applies to natural gas pipelines, finding that FERC had failed to justify expanding the standards of conduct to cover pipelines’ non-marketing affiliates. The court did not address challenges to other provisions of the order.

Order No. 690 repromulgates, on an interim basis, those elements of the Order No. 2004 standards of conduct not challenged at the court of appeals. The interim rule maintains a single set of standards for natural gas pipelines and electric utilities, but modifies the application of the standards to cover pipelines’ relationships with their marketing affiliates, but not their energy affiliates. Order No. 690 also eliminates those provisions challenged in National Fuel, including those challenged provisions the court did not address. In lieu of provisions challenged on judicial review, the interim rule adopts the narrower approaches taken in the prior Order No. 497. Order No. 690 also clarifies that waivers or exemptions that the Commission issued under Order No. 2004 are not adversely affected by the National Fuel decision.

The Commission stated that it will issue a notice of proposed rulemaking for a permanent rule in the near future, and that Order No. 690 is intended to eliminate uncertainty regarding how the standards of conduct apply to natural gas pipelines pending issuance of a new final rule.

Order No. 690 makes the following changes to the standards of conduct applicable to natural gas pipelines:

Narrowed Application of the Standards of Conduct. Section 358.1 is modified to state that the standards of conduct “do not govern the relationship between a natural gas Transmission Provider and its Energy Affiliates.” The standards apply only to the relationship between a natural gas pipeline. . . and its marketing affiliates. Despite the challenge to Order No. 2004’s extension of the standards of conduct to entities that do not hold or control capacity on their affiliated pipelines, Order No. 690’s regulatory text does not reinstate Order No. 497’s explicit requirement that a pipeline “conduct transportation transactions” with a marketing affiliate as a prerequisite to triggering the application of the standards of conduct.

Exceptions from the Definition of “Marketing or Brokering.” Consistent with narrowing of the application of the standards of conduct, Order No. 690 reinstates the pre-Order No. 2004 exceptions from the definition of “marketing or brokering” to exclude an affiliate selling gas from its own production or its own gathering or processing facilities, or the seller is an intrastate natural gas pipeline or local distribution company making an on-system sale.

Removal of the Restriction on Sharing Risk Management Employees. Order No. 2004 restricted sharing of risk management employees between transmission providers and marketing or energy affiliates, if such employees are engaged in transmission functions or sales or commodity functions. Order No. 690 relieves natural gas pipeline of this restriction.

Narrowing of Requirement to Post All Acts of Discretion Under Tariff. Order No. 690 modifies § 358.5(c)(4) to reinstate the pre-Order No. 2004 requirement that natural gas pipelines “maintain a written log of waivers that [the pipeline] grants with respect to tariff provisions that provide for such discretionary waivers,” in lieu of the broader requirement that natural gas pipelines maintain a log “detailing the circumstances and manner in which they exercised their discretion under any terms of the tariff.”

Restriction on Sharing Lawyers Clarified. Order No. 690 clarifies that participating in a business decision by rendering legal advice does not make a lawyer for a natural gas pipeline a transmission function employee who cannot be shared with energy or marketing affiliates.

Pipeline Compliance with Standards of Conduct Not Required until Transportation for a Marketing Affiliate Commences. Order No. 690 clarifies that newly formed natural gas pipelines are not required to observe the standards of conduct until they commence transportation transactions with their marketing affiliates.

In response to the National Fuel remand, the Commission soon will initiate a rulemaking proceeding to reconsider its standards of conduct. The current composition of the Commission is quite different from that of the Commission that approved Order No. 2004, and the outcome of a rulemaking proceeding is uncertain. The Commission could seek to re-promulgate the Order No. 2004 standards of conduct for interstate pipelines, with more fulsome justification, or could issue a final rule that reflects the narrower approach taken in the interim rule. In addition, the rulemaking will likely provide a forum for considering revisions to the standards of conduct as they are applied to electric utilities.