Promotion of a More Efficient Capacity Release Market, 37058-37093 [E8-14444]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 73, Number 126 (Monday, June 30, 2008)]
[Rules and Regulations]
[Pages 37058-37093]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-14444]



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Part III





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 284



Promotion of a More Efficient Capacity Release Market; Final Rule

Federal Register / Vol. 73, No. 126 / Monday, June 30, 2008 / Rules 
and Regulations

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-000; Order No. 712]


Promotion of a More Efficient Capacity Release Market

Issued June 19, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: In this Final Rule the Federal Energy Regulatory Commission 
revises its regulations governing interstate natural gas pipelines to 
reflect changes in the market for short-term transportation services on 
pipelines and to improve the efficiency of the Commission's capacity 
release program. The Commission permits market based pricing for short-
term capacity releases and facilitates asset management arrangements by 
relaxing the Commission's prohibition on tying and on its bidding 
requirements for certain capacity releases. The Commission further 
clarifies that its prohibition on tying does not apply to conditions 
associated with gas inventory held in storage for releases of firm 
storage capacity. Finally, the Commission waives its prohibition on 
tying and bidding requirements for capacity releases made as part of 
state-approved retail open access programs.

DATES: This rule will become effective July 30, 2008.

FOR FURTHER INFORMATION CONTACT:
William Murrell, Office of Energy Market Regulation, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
William.Murrell@ferc.gov, (202) 502-8703.
Robert McLean, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, 
Robert.McLean@ferc.gov. (202) 502-8156.
David Maranville, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington DC 20426, 
David.Maranville@ferc.gov, (202) 502-6351.

SUPPLEMENTARY INFORMATION:

Order No. 712

Final Rule

                            Table of Contents
 
                                                              Paragraph
                                                               Numbers
 
I. Background..............................................           2.
    A. The Capacity Release Program........................           2.
    B. The NOPR............................................          15.
    C. Comments............................................          19.
II. Overview of the Final Rule.............................          24.
III. Price Cap Issues......................................          30.
    A. Removal of Maximum Rate Ceiling for Short-Term                30.
     Capacity Releases.....................................
        1. Maximum Rate Ceiling Interferes With Efficient            32.
         Transactions......................................
        2. Assurance of Just and Reasonable Rates..........          38.
            a. Market Conditions Ensure Just and Reasonable          39.
             Rates.........................................
            b. Recourse Rate Protection....................          48.
            c. Short-Term Customers Are Not Captive........          50.
            d. Non-Cost Factors............................          51.
            e. Oversight...................................          55.
        3. Comments........................................          57.
            a. Lack of Competition in Certain Areas........          58.
            b. Benefits From Removing the Price Ceiling....          63.
            c. Promotion of Construction...................          67.
            d. Changed Circumstances.......................          68.
            e. Exemption From Bidding for Short-Term                 72.
             Releases at the Maximum Rate..................
    B. Removal of Price Ceiling for Long-Term Releases.....          74.
    C. Removal of Price Ceiling for Pipeline Short-Term              81.
     Transactions..........................................
        1. Removal of the Price Ceiling Is Not Justified...          82.
        2. Response to Specific Comments...................          87.
            a. Evidentiary Record..........................          87.
            b. Infrastructure Incentives...................          90.
            c. Competitive Market Structure................          92.
            d. Differences in Flexibility Between Pipeline           95.
             Capacity and Released Capacity................
            e. Bifurcation of the Markets..................         103.
IV. Asset Management Arrangements..........................         109.
    A. Background..........................................         110.
    B. Discussion..........................................         118.
        1. Tying...........................................         127.
        2. Bidding.........................................         132.
        3. Definition of AMAs..............................         138.
            a. NOPR Proposal...............................         138.
            b. Comments....................................         141.
            c. Modified Definition.........................         144.
        4. Supply AMAs.....................................         148.
        5. AMA Profit Sharing Arrangements.................         154.
        6. Exemption From Buy/Sell Prohibition.............         163.
        7. Other AMA Terms and Conditions..................         170.
        8. Posting and Reporting Requirements..............         172.
        9. Part 157 Capacity...............................         178.
V. Tying of Storage Capacity and Inventory.................         186.
VI. Liquefied Natural Gas..................................         191.

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VII. State Mandated Retail Unbundling......................         194.
VIII. Implementation Schedule..............................         202.
IX. Information Collection Statement.......................         203.
X. Environmental Analysis..................................         216.
XI. Regulatory Flexibility Act.............................         217.
XII. Document Availability.................................         220.
XIII. Effective Date and Congressional Notification........         223.
 

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, 
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

Order No. 712

Final Rule

Issued June 19, 2008.
    1. In this Final Rule, the Commission revises its Part 284 
regulations concerning the release of firm capacity by shippers on 
interstate natural gas pipelines. First, as proposed in its Notice of 
Proposed Rulemaking,\1\ the Commission will remove, on a permanent 
basis, the rate ceiling on capacity release transactions of one year or 
less. Second, the Commission will modify its regulations to facilitate 
the use of asset management arrangements (AMAs), under which a capacity 
holder releases some or all of its pipeline capacity to an asset 
manager who agrees to either purchase from, or supply the gas needs of, 
the capacity holder. Specifically, the Commission will exempt capacity 
releases made as part of AMAs from the prohibition on tying and from 
the bidding requirements of section 284.8. Third, the Commission 
clarifies that its prohibition on tying does not apply to conditions 
associated with gas inventory held in storage for releases of firm 
storage capacity. Fourth, the Commission will modify its regulations to 
facilitate retail open access programs by exempting capacity releases 
made under state-approved retail access programs from the prohibition 
on tying and from the bidding requirements of section 284.8. This Final 
Rule is designed to enhance competition in the secondary capacity 
release market and to increase shipper gas supply options. This rule 
will become effective 30 days after publication in the Federal 
Register.
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    \1\ Promotion of a More Efficient Capacity Release Market, 72 FR 
65,916, FERC Stats. and Regs. ] 32,625 (November 26, 2007) 121 FERC 
] 61,170 (2007) (NOPR).
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I. Background

A. The Capacity Release Program

    2. The Commission adopted its capacity release program as part of 
the restructuring of natural gas pipelines required by Order No. 
636.\2\ In Order No. 636, the Commission sought to foster two primary 
goals. The first goal was to ensure that all shippers have meaningful 
access to the pipeline transportation grid so that willing buyers and 
sellers can meet in a competitive, national market to transact the most 
efficient deals possible. The second goal was to ensure consumers have 
``access to an adequate supply of gas at a reasonable price.'' \3\
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    \2\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, 57 FR 13,267 (April 16, 1992), FERC Stats. and Regs., 
Regulations Preambles January 1991-June 1996 ] 30,939 (April 8, 
1992), order on reh'g, Order No. 636-A., 57 FR 36,128 (August 12, 
1992), FERC Stats. and Regs., Regulations Preambles January 1991-
June 1996 ] 30,950 (August 3, 1992), order on reh'g, Order No. 636-
B, 57 FR 57,911 (Dec. 8, 1992), 61 FERC ] 61,272 (1992), notice of 
denial of reh'g, 62 FERC ] 61,007 (1993); aff'd in part, vacated and 
remanded in part, United Dist. Companies v. FERC, 88 F.3d 1105 (DC 
Cir. 1996), order on remand, Order No. 636-C, 78 FERC ] 61,186 
(1997).
    \3\ Order No. 636 at 30,393 (citations omitted).
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    3. To accomplish these goals, the Commission sought to maximize the 
availability of unbundled firm transportation service to all 
participants in the gas commodity market. The linchpin of Order No. 636 
was the requirement that pipelines unbundle their transportation and 
storage services from their sales service, so that gas purchasers could 
obtain the same high quality firm transportation service whether they 
purchased from the pipeline or another gas seller. In order to create a 
transparent program for the reallocation of interstate pipeline 
capacity to complement the unbundled, open access environment created 
by Order No. 636, the Commission also adopted a comprehensive capacity 
release program to increase the availability of unbundled firm 
transportation capacity by permitting firm shippers to release their 
capacity to others when they were not using it.\4\
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    \4\ In brief, under the Commission's current capacity release 
program, a firm shipper (releasing shipper) sells its capacity by 
returning its capacity to the pipeline for reassignment to the buyer 
(replacement shipper). The pipeline contracts with, and receives 
payment from, the replacement shipper and then issues a credit to 
the releasing shipper. The replacement shipper may pay less than the 
pipeline's maximum tariff rate, but not more. 18 CFR 284.8(e) 
(2007). The results of all releases are posted by the pipeline on 
its Internet web site and made available through standardized, 
downloadable files.
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    4. The Commission reasoned that the capacity release program would 
promote efficient load management by the pipeline and its customers and 
would, therefore, result in the efficient use of firm pipeline capacity 
throughout the year. It further concluded that, ``because more buyers 
will be able to reach more sellers through firm transportation 
capacity, capacity reallocation comports with the goal of improving 
nondiscriminatory, open access transportation to maximize the benefits 
of the decontrol of natural gas at the wellhead and in the field.'' \5\
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    \5\ Order No. 636 at 30,418.
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    5. In Order No. 636, the Commission expressed concerns regarding 
its ability to ensure that firm shippers would reallocate their 
capacity in a non-discriminatory manner to those who placed the highest 
value on the capacity up to the maximum rate. The Commission noted that 
prior to Order No. 636, it authorized some pipelines to permit their 
shippers to ``broker'' their capacity to others. Under such capacity 
brokering, firm shippers were permitted to assign their capacity 
directly to a replacement shipper, without any requirement that the 
brokering shipper post the availability of its capacity or allocate it 
to the highest bidder.\6\ However, in Order No. 636, the Commission 
found ``there [were] too many potential assignors of capacity and too 
many different programs for the Commission to oversee capacity 
brokering.'' \7\
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    \6\ See Algonquin Gas Transmission Corp., 59 FERC ] 61,032 
(1992).
    \7\ Order No. 636 at 30,416.

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[[Page 37060]]

    6. The Commission sought to ensure that the efficiencies of the 
secondary market were not frustrated by unduly discriminatory access to 
the market.\8\ Therefore, the Commission replaced capacity brokering 
with the capacity release program designed to provide greater assurance 
that transfers of capacity from one shipper to another were transparent 
and not unduly discriminatory. This assurance took the form of several 
conditions that the Commission placed on the transfer of capacity under 
its new program.
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    \8\ Order No. 636-A at 30,554.
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    7. First, the Commission prohibited private transfers of capacity 
between shippers and, instead, required that all release transactions 
be conducted through the pipeline. Therefore, when a releasing shipper 
releases its capacity, the replacement shipper must enter into a 
contract directly with the pipeline, and the pipeline must post 
information regarding the contract, including any special 
conditions.\9\ In order to enforce theprohibition on private transfers 
of capacity, the Commission required that a shipper must have title to 
any gas that it ships on the pipeline.\10\
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    \9\ Order No. 636 emphasized:
    The main difference between capacity brokering as it now exists 
and the new capacity release program is that under capacity 
brokering, the brokering customer could enter into and execute its 
own deals without involving the pipeline. Under capacity releasing, 
all offers must be put on the pipeline's electronic bulletin board 
and contracting is done directly with the pipeline. Order No. 636 at 
30,420 (emphasis in original).
    \10\ As the Commission subsequently explained in Order No. 637, 
``the capacity release rules were designed with [the shipper-must-
have-title] policy as their foundation,'' because, without this 
requirement, ``capacity holders could simply transport gas over the 
pipeline for another entity.'' Regulation of Short-Term Natural Gas 
Transportation Services and Regulation of Interstate Natural Gas 
Transportation Services, Order No. 637, FERC Stats. & Regs. ] 31,091 
at 31,300, clarified, Order No. 637-A, FERC Stats. & Regs. ] 31,099, 
reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd in 
part and remanded in part sub nom. Interstate Natural Gas Ass'n of 
America v. FERC, 285 F.3d 18 (DC Cir. 2002), order on remand, 101 
FERC ] 61,127 (2002), order on reh'g, 106 FERC ] 61,088 (2004), 
aff'd sub nom. American Gas Ass'n v. FERC, 428 F.3d 255 (DC Cir. 
2005).
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    8. Second, the Commission determined that the record of the 
proceeding that led to Order No. 636 did not reflect that the market 
for released capacity was competitive. The Commission reasoned that the 
extent of competition in the secondary market may not be sufficient to 
ensure that the rates for released capacity will be just and 
reasonable. Therefore, the Commission imposed a ceiling on the rate 
that the releasing shipper could charge for the released capacity.\11\ 
This ceiling was derived from the Commission-approved monthly maximum 
tariff rates, necessary for the pipeline to recover its annual cost-of-
service revenue requirement.\12\
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    \11\ Order No. 636-A at 30,560.
    \12\ Order No. 637 at 31,270-71.
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    9. Third, the Commission required that capacity offered for release 
at less than the maximum rate must be posted for bidding, and the 
pipeline must allocate the capacity ``to the person offering the 
highest rate (not over the maximum rate).'' \13\ The Commission 
permitted the releasing shipper to choose a pre-arranged replacement 
shipper who can retain the capacity by matching the highest bid rate. 
The bidding requirement, however, does not apply to releases of 31 days 
or less or to any release at the maximum rate. But all releases, 
whether or not subject to bidding, must be posted.\14\
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    \13\ 18 CFR 284.8(e) (2007) provides in pertinent part that 
``[t]he pipeline must allocate released capacity to the person 
offering the highest rate (not over the maximum rate) and offering 
to meet any other terms or conditions of the release.''
    \14\ 18 CFR 284.8(h)(1) provides that a release of capacity for 
less than 31 days, or for any term at the maximum rate, need not 
comply with certain notification and bidding requirements, but that 
such release may not exceed the maximum rate. Notice of the release 
``must be provided on the pipeline's electronic bulletin board as 
soon as possible, but not later than forty-eight hours, after the 
release transaction commences.''
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    10. Finally, the Commission prohibited tying the release of 
capacity to any extraneous conditions so that the releasing shippers 
could not attempt to add additional terms or conditions to the release 
of capacity. The Commission articulated the prohibition against the 
tying of capacity in Order No. 636-A, where it stated:

    The Commission reiterates that all terms and conditions for 
capacity release must be posted and non-discriminatory and must 
relate solely to the details of acquiring transportation on the 
interstate pipelines. Release of capacity cannot be tied to any 
other conditions. Moreover, the Commission will not tolerate deals 
undertaken to avoid the notice requirements of the regulations. 
Order No. 636-A at 30,559 (emphasis in the original).

    11. Subsequent to the Commission's adoption of its capacity release 
program in Order No. 636, the Commission conducted two experimental 
programs to provide more flexibility in the capacity release market. In 
1996, the Commission sought to establish an experimental program 
inviting individual shipper and pipeline applications to remove price 
ceilings related to capacity release.\15\ The Commission recognized 
that significant benefits could be realized through removal of the 
price ceiling in a competitive secondary market. Removal of the ceiling 
permits more efficient capacity utilization by permitting prices to 
rise to market clearing levels and by permitting those who place the 
highest value on the capacity to obtain it.\16\
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    \15\ Secondary Market Transactions on Interstate Natural Gas 
Pipelines, Proposed Experimental Pilot Program to Relax the Price 
Cap for Secondary Market Transactions, 61 FR 41,401 (Aug. 8, 1996), 
76 FERC ] 61,120, order on reh'g, 77 FERC ] 61,183 (1996).
    \16\ 77 FERC ] 61,183 at 61,699 (1996).
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    12. In 2000, in Order No. 637, the Commission conducted a broader 
experiment in which the Commission removed the rate ceiling for short-
term (less than one year) capacity release transactions for a two-year 
period ending September 30, 2002. In contrast to the experiment that it 
conducted in 1996, in the Order No. 637 experiment the Commission 
granted blanket authorization in order to permit all firm shippers on 
all open access pipelines to participate. The Commission stated that it 
undertook this experiment to improve shipper options and market 
efficiency during peak periods. The Commission reasoned that during 
peak periods, the maximum rate cap on capacity release transactions 
inhibits the creation of an effective transportation market by 
preventing capacity from going to those that value it the most and 
therefore the elimination of this rate ceiling would eliminate this 
inefficiency and enhance shipper options in the short-term 
marketplace.\17\
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    \17\ Order No. 637 at 31,263. The Commission also explained why 
it was lifting the price cap on an experimental basis, instead of 
permanently, stating:
    While the removal of the price cap is justified based on the 
record in this rulemaking, the Commission recognizes that this is a 
significant regulatory change that should be subject to ongoing 
review by the Commission and the industry. No matter how good the 
data suggesting that a regulatory change should be made, there is no 
substitute for reviewing the actual results of a regulatory action. 
The two year waiver will provide an opportunity for such a review 
after sufficient information is obtained to validly assess the 
results. Due to the variation between years in winter temperatures, 
the waiver will provide the Commission and the industry with two 
winter's worth of data with which to examine the effects of this 
policy change and determine whether changes or modifications may be 
needed prior to the expiration of the waiver. Order No. 637 at 
31,279-80.
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    13. Upon an examination of pricing data on basis differentials 
between points,\18\ the Commission found that the price ceiling on 
capacity release transactions limited the capacity options of short-
term shippers because firm capacity holders were able to avoid

[[Page 37061]]

price ceilings on released capacity by substituting bundled sales 
transactions at market prices (where the market place value of 
transportation is an implicit component of the delivered price). As a 
consequence, the Commission determined that the price ceilings did not 
limit the prices paid by shippers in the short-term market as much as 
the ceilings limit transportation options for shippers. In short, the 
Commission found that the rate ceiling worked against the interests of 
short-term shippers, because with the rate ceilings in place, a shipper 
looking for short-term capacity on a peak day who was willing to offer 
a higher price in order to obtain it, could not legally do so; this 
reduced its options for procuring short-term transportation at the 
times that it needed it most.\19\ Throughout this experiment, the 
Commission retained the rate ceiling for firm and interruptible 
capacity available from the pipeline as well as for long-term capacity 
release transactions.
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    \18\ Among other things, the data showed that the value of 
pipeline capacity, as shown by basis differentials, was generally 
less than the pipelines' maximum interruptible transportation rates, 
except during the coldest days of the year, and capacity release 
prices also averaged somewhat less than pipelines' maximum 
interruptible rates.
    \19\ Order No. 637 at 31,280-81.
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    14. On April 5, 2002, the United States Court of Appeals for the 
District of Columbia Circuit, in Interstate Natural Gas Association of 
America v. FERC,\20\ upheld the Commission's experimental price ceiling 
program for short-term capacity release transactions as set forth in 
Order No. 637.\21\ The court found that the Commission's ``light 
handed'' approach to the regulation of capacity release prices was, 
given the safeguards that the Commission had imposed, consistent with 
the criteria set forth in Farmers Union Cent. Exch. v. FERC.\22\ The 
court found that the Commission made a substantial record for the 
proposition that market rates would not materially exceed the ``zone of 
reasonableness'' required by Farmers Union. The court also found that 
the Commission's inference of competition in the capacity release 
market was well founded, that the price spikes shown in the 
Commission's data were consistent with competition and reflected 
scarcity of supply rather than monopoly power, and that outside of such 
price spikes, the rates were well below the estimated regulated 
price.\23\ The Commission's experiment in lifting the price ceiling for 
short term capacity releases ended on September 20, 2002.\24\
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    \20\ 285 F.3d 18 (DC Cir. 2002) (INGAA).
    \21\ Specifically, the court found that: ``[g]iven the 
substantial showing that in this context competition has every 
reasonable prospect of preventing seriously monopolistic pricing, 
together with the non-cost advantages cited by the Commission and 
the experimental nature of this particular ``light handed'' 
regulation, we find the Commission's decision neither a violation of 
the NGA, nor arbitrary or capricious.'' INGAA at 35.
    \22\ 734 F.2d 1486 (DC Cir. 1984) (Farmers Union) (finding that 
a move from heavy-handed to light-handed regulation can be justified 
by a showing that under current circumstances, the goals and 
purposes of the Natural Gas Act (NGA) will be accomplished through 
substantially less regulatory oversight.
    \23\ Id. at 33.
    \24\ Regulation of Short-Term Natural Gas Transportation 
Services and Regulation of Interstate Natural Gas Transportation 
Services, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,091 (Feb. 9, 2000), order on rehearing, Order 
No. 637-A, FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000, ] 31,099 (May 19, 2000), order on rehearing, Order 
No. 637-B, 92 FERC ] 61,062 (July 26, 2000), aff'd in part and 
remanded in part, Interstate Natural Gas Association of America v. 
FERC, 285 F.3d 18 (DC Cir. Apr. 5, 2002).
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B. The NOPR

    15. On January 3, 2007, the Commission, in response to petitions 
from various gas industry participants concerning issues related to 
capacity releases,\25\ issued a request for comments on the operation 
of the capacity release program and whether changes in any of its 
capacity release policies would improve the efficiency of the natural 
gas market.\26\ The Commission also included in its request for 
comments a series of questions asking whether the Commission should 
lift the price ceiling, remove its capacity release bidding 
requirements, modify its prohibition on tying arrangements, and/or 
remove the shipper-must-have-title requirement.
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    \25\ In August 2006, Pacific Gas and Electric Co. (PG&E) and 
Southwest Gas Corp. (Southwest) filed a petition requesting the 
Commission to amend sections 284.8(e) and (h)(1) of its regulations 
to remove the maximum rate cap on capacity releases. Subsequently, 
in October 2006, a group of large natural gas marketers (Marketer 
Petitioners) requested clarification of the operation of the 
Commission's capacity release rules in the context of asset (or 
portfolio) management services.
    \26\ Pacific Gas & Electric Co., 118 FERC ] 61,005 (2007).
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    16. After review of the petitions, comments, responses to its 
questions, and available data, the Commission issued a Notice of 
Proposed Rulemaking (NOPR), proposing two major changes to its capacity 
release regulations and policies. First, the Commission proposed to 
lift the price ceiling for short-term capacity release transactions of 
one year or less. The Commission determined that the traditional cost-
of-service price ceilings in pipeline tariffs, which are based on 
annual costs recovered over twelve equal monthly payments, are not well 
suited to the short-term capacity release market, because they do not 
reflect short-term variations in the market value of the capacity. 
Therefore, removing the price ceiling for short-term capacity releases 
would permit more efficient utilization of capacity by allowing prices 
to rise to market clearing levels, thereby permitting those who place 
the highest value on the capacity to obtain it. The Commission 
determined that the data obtained by the Commission both during the 
Order No. 637 experiment and more recently indicated that short-term 
release prices reflect market value of the capacity as revealed by 
basis differentials, rather than the exercise of market power. 
Moreover, the Commission reasoned that shippers purchasing capacity 
would be adequately protected because the pipeline's firm and 
interruptible services will provide just and reasonable recourse rates 
limiting the ability of releasing shippers to exercise market power. 
Finally, the Commission stated that reporting requirements in Order No. 
637 and the Commission's implementation of the Energy Policy Act of 
2005, specifically with respect to market manipulation, give the 
Commission an enhanced ability to monitor the market and detect and 
deter abuses. The Commission did not propose to remove the price 
ceiling on either long-term capacity releases or the pipelines' sale of 
their own primary capacity.
    17. Second, the Commission proposed to revise its capacity release 
policies to give releasing shippers greater flexibility to negotiate 
and implement AMAs, based on the Commission's findings that AMAs 
provide significant benefits to participants in the natural gas and 
electric marketplaces.\27\ Recognizing that the linking of 
transportation capacity with gas supply arrangements would violate the 
Commission's prohibition against ``tying'' released capacity to any 
extraneous conditions, the Commission proposed to exempt pre-arranged 
capacity release transactions that met certain criteria \28\ from the 
prohibition against tying.\29\ This proposal would permit a releasing 
shipper in a pre-arranged release to require that the replacement 
shipper agree to supply the releasing shipper's gas requirements and 
take assignment of the releasing shipper's gas supply contracts, as 
well as released transportation capacity on one or more pipelines and 
storage capacity with the gas currently in storage.\30\
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    \27\ NOPR at P 67-74.
    \28\ The Commission's definition of AMA as proposed in the NOPR 
is discussed in detail below.
    \29\ NOPR at P 75-82.
    \30\ In addition, the releasing shipper could require that, upon 
expiration of the AMA, the replacement shipper must return storage 
capacity included in the release with an appropriate level of 
inventory, e.g., to promise to replenish storage inventories to a 
mutually agreed upon level.

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[[Page 37062]]

    18. The Commission's second proposal to facilitate AMAs was to 
exempt pre-arranged releases to implement AMAs from competitive 
bidding.\31\ The Commission stated that, because the asset manager will 
manage the releasing shipper's gas supply operations on an ongoing 
basis, it is critical that the releasing shipper be able to release the 
capacity to its chosen asset manager. Requiring releases made in order 
to implement an AMA to be posted for bidding would thus interfere with 
the negotiation of beneficial AMAs by potentially preventing the 
releasing shipper from releasing the capacity to its chosen asset 
manager. The Commission concluded that in the AMA context the bidding 
requirement creates an unwarranted obstacle to the efficient management 
of pipeline capacity and supply assets. The Commission emphasized that 
AMAs would remain subject to all existing posting and reporting 
requirements.\32\
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    \31\ See NOPR at P 83-90. Section 284.8 of the Commission's 
regulations require capacity release transactions to be posted for 
competitive bidding unless the transactions are at the maximum 
tariff rate or are for a term of 31 days or less.
    \32\ While the NOPR originally required that any comments were 
due January 10, 2008, a number of entities filed for an extension of 
that deadline until February 8, 2008. On January 14, the Commission 
granted an extension of time for filing comments until January 25, 
2008.
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C. Comments

    19. Over 60 entities from all segments of the natural gas industry 
filed comments on the NOPR. The vast majority of those who filed 
comments regarding the Commission's proposal to permanently remove the 
price cap for short-term capacity releases of one year or less support 
the proposal, generally agreeing with the Commission's reasoning in 
support of removing the cap. Many of the local distribution companies 
(LDC), marketers, producers, and end-users who support lifting the 
price cap on short-term capacity releases also support retaining the 
price cap on long-term capacity releases \33\ and/or primary pipeline 
capacity.\34\ These parties generally view retention of these price 
caps as providing valuable safeguards in preventing the exercise of 
market power in the uncapped short-term capacity release market.
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    \33\ Those commenters include Direct Energy Services, LLC 
(Direct Energy), New Jersey Natural Gas Company (NJNG), Oklahoma 
Independent Petroleum Association (OIPA), Reliant Energy Inc. 
(Reliant), Statoil Natural Gas, LLC (Statoil), and Weyerhaeuser 
Company (Weyerhaeuser).
    \34\ Such commenters include Edison Electric Institute (EEI), 
NJNG, NJR Energy Services Company (NJR), Nstar Gas Company (Nstar), 
OIPA, Piedmont Natural Gas Company, Inc. (Piedmont), Statoil, 
Weyerhaeuser, and the Wisconsin Distributor Group (WDG). American 
Gas Association (AGA), American Public Gas Association (APGA), and 
Independent Petroleum Producers of America (IPAA) oppose lifting the 
price cap for primary capacity, arguing that doing so would undercut 
a major premise for lifting the price cap in the short-term 
secondary market, namely, that the availability of recourse rates 
from the pipeline will constrain the exercise of market power in the 
secondary market.
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    20. Two commenters oppose the Commission's proposal to lift the 
price cap for the short-term capacity release market, arguing that the 
Commission has not supported its proposed rule and that the proposed 
rule would fail a cost-benefit test.\35\ Other commenters express 
concern over the potential for capacity owners to exercise market power 
under the proposed rule.\36\ For example, some end-users of gas express 
concerns about the concentration of capacity ownership on lateral 
pipelines and therefore argue that the Commission should either not 
remove the price cap for laterals or do so on a case-by-case basis.\37\ 
Other parties generally urge the Commission to carefully monitor 
markets to ensure that they are functioning properly. Some suggest a 
final test period before permanently removing the cap, periodic 
reassessments of the uncapped market, or a process to revisit the 
determination if the market becomes dysfunctional.\38\
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    \35\ Tenaska Marketing Ventures (Tenaska) and National Energy 
Marketers Association (NEM).
    \36\ See Comments of NEM.
    \37\ Weyerhaeuser, Northwest Industrial Gas Users (NWIGU), and 
Process Gas Consumers (PGC).
    \38\ Direct Energy, OIPA, Honeywell International, Inc. 
(Honeywell), Arizona Public Service Company (APS) (arguing that the 
market currently served by El Paso Natural Gas Pipeline east of 
California is not competitive). Commerce Energy Group, Inc. 
(Commerce Energy) suggests including a contingency for replacing the 
price cap in ``exceptional capacity situations.''
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    21. In general, commenters also overwhelmingly supported the 
Commission's efforts to facilitate the development of AMAs.\39\ Those 
commenters agree with the Commission's assessment that AMAs provide 
value and benefits to market participants and to natural gas markets 
overall. Virtually all who commented support the steps proposed by the 
Commission to facilitate AMAs, though many of those that support the 
Commission's proposal regarding AMAs request that the Commission modify 
or clarify the proposal in various ways in order to permit broader use 
of AMAs and greater flexibility in the terms of permitted AMAs. They 
request, for example, that the Commission permit uncapped AMA releases 
of a year or less to be rolled over without bidding, clarify that 
profit sharing arrangements in an AMA do not violate any applicable 
price cap, relax the requirements concerning the replacement shipper's 
obligation to deliver gas to the releasing shipper, exempt AMAs from 
the Commission's prohibition against buy/sell arrangements, and allow 
supply side AMAs. Williston Basin commented that exempting AMAs from 
the tying prohibition and bidding requirements would encourage 
discrimination against pipelines and provide preferential treatment to 
asset managers.
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    \39\ See e.g., Comments of the AGA at 1-2, Comments of APGA at 
2-4; Comments of Atmos Energy Corporation (Atmos) at 2-4, Comments 
of BG Energy Merchants (BGEM) at 1-2, Comments of BP Energy Company 
(BP) at 2, Comments of Direct Energy at 3-4, Comments of Duke Energy 
Corporation (Duke Energy) at 3, Comments of the EEI at 6, Comments 
of the Electric Power Supply Association (EPSA) at 2, Comments of 
Florida Cities at 2, Comments of the Interstate Natural Gas 
Association of America (INGAA) at 6, Comments of Marketer 
Petitioners at 2, Comments of National Grid Delivery Companies 
(National Grid) at 2, Comments of NJNG at 1, Comments of the Natural 
Gas Supply Association (NGSA) at 3, Comments of NJR at 1, Comments 
of NWIGU at 6, Comments of Nstar at 1-2, Comments of the Ohio Gas 
Marketers Group (OGMG) at 1, Comments of Piedmont at 1, Comments of 
PPM Energy, Inc., (PPM) at 1-3, Comments of PGC at 5, Comments of 
the Public Utilities Commission of Ohio (PUCO) at 5-7, Comments of 
Puget Sound Energy, Inc. (Puget Sound) at 8-9, Comments of Sequent 
Energy Management, L.P. (Sequent) at 5-6, Comments of the Financial 
Institutions Energy Group (FEIG) at 6-7, Comments of Turlock 
Irrigation District (Turlock) at 5, Comments of Ultra Petroleum 
Corporation (Ultra) at 4, Comments of the WDG at 3, and Comments of 
the Wyoming Pipeline Authority at 5.
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    22. The Commission also received favorable comments on whether it 
should clarify its prohibition against tying agreements to allow a 
releasing shipper to include conditions in a storage release concerning 
the sale and/or repurchase of gas in storage inventory outside the AMA 
context. All comments that addressed this issue supported removing this 
prohibition for storage services. They assert that a shipper releasing 
storage capacity should be permitted to require the replacement shipper 
to take assignment of any gas that remains in the released storage 
capacity at the time the release takes effect; and/or to return the 
storage capacity to releasing shipper at end of the release with a 
specified amount of gas in storage.\40\ Commenters note that tying 
storage capacity with storage inventory will enable transactions to be 
consummated more readily and that the nature of the relationship 
between storage capacity and storage inventory calls out for a waiver 
of the tying rule. Others add that the ability of releasing shippers to 
``tie'' storage capacity with storage inventory such that releasing

[[Page 37063]]

shippers would be permitted to require that replacement shippers take 
inventory as a condition of release, even in circumstances outside the 
AMA context, will provide benefits to the marketplace similar to those 
provided by AMAs.\41\
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    \40\ Public Service Commission of New York (PSCNY) comments at 
20-21.
    \41\ Comments of Marketer Petitioners.
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    23. The Commission also received numerous comments on its inquiry 
whether pre-arranged capacity release deals necessary to implement 
retail access programs should be treated as similar to releases made as 
part of an AMA, and thus accorded the same exemptions. The majority of 
comments on this issue advocated affording capacity releases under 
state retail choice programs the same blanket exemptions from the tying 
prohibition \42\ and bidding requirements as those granted to asset 
managers.\43\ AGA, for example, recommends that the Commission add an 
exemption from the bidding requirements for any prearranged, recallable 
capacity release from an LDC to a natural gas marketer in accordance 
with the terms of a retail choice program approved by a State 
commission. AGA also asks that the Commission clarify that LDC releases 
to retail choice marketers would be entitled to the same partial 
exemption from the tying prohibition as would be releases under AMAs. 
The SPSCNY would extend the AMA exemption from the tying prohibition to 
releases of storage capacity conducted according to state retail access 
programs.
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    \42\ Those commenters include AGA, Commerce Energy, Duke Energy, 
Hess Corporation (Hess), Interstate Gas Supply (IGS), NJNG, New York 
State Electric and Gas Corporation (NYSEG), Rochester Gas & Electric 
Corporation (RG&E), OGMG, the Public Service Commission of North 
Carolina (PSNC), South Carolina Electric and Gas Company (SCE&G), 
SCANA Energy Marketing (SEMI), PSCNY, and Sequent.
    \43\ Those commenters include the AGA, Boardwalk Pipeline 
Partners (Boardwalk), BP, Commerce Energy, Direct Energy, Duke 
Energy, FPL Energy, LLC (FPL Energy), Hess, IGS, NJNG, NYSEG, RG&E, 
Nstar, OGMG, Peoples Gas System, a Division of Tampa Electric 
Company (Peoples), PG&E, PSCNY, PUCO, SEMI, Sequent, and the WDG.
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II. Overview of the Final Rule

    24. In this Final Rule, the Commission is modifying its policies 
and regulations concerning the release of capacity by firm shippers on 
interstate pipelines in order to enhance the efficiency and 
effectiveness of the secondary capacity release market. The 
Commission's capacity release program has created a successful 
secondary market for capacity.\44\ As a result, natural gas markets in 
general, and the secondary release market in particular, have undergone 
significant development and change in the sixteen years since Order No. 
636 and the inception of the capacity release program. As this market 
has developed, shippers and potential shippers have sought greater 
flexibility in the use of capacity. They seek to better integrate 
capacity with the underlying gas transactions, and are looking for more 
flexible methods of pricing capacity to better reflect the value of 
that capacity as revealed by the market price of gas at different 
trading points. They also seek to implement AMAs, in which capacity 
holders release their capacity to asset managers (generally marketers) 
that have greater expertise in maximizing the value of pipeline 
capacity and negotiating beneficial transactions in the gas commodity 
markets.
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    \44\ As the Commission observed in 2005, the ``capacity release 
program together with the Commission's policies on segmentation, and 
flexible point rights, has been successful in creating a robust 
secondary market where pipelines must compete on price.'' Policy for 
Selective Discounting by Natural Gas Pipelines, 111 FERC ] 61,309, 
at P 39-41, order on reh'g, 113 FERC ] 61,173 (2005).
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    25. In this Final Rule the Commission is taking actions to respond 
to the industry's request for greater flexibility in the capacity 
release market and to revise its policies and regulations to reflect 
the changes and developments in the marketplace. The first major 
revision is the removal of the price ceiling on short term capacity 
releases. The permanent elimination of the price ceiling for short term 
releases will enable shippers to offer competitively-priced 
alternatives to pipelines' negotiated rate offerings and will permit 
short-term capacity release prices to rise to market clearing levels, 
thereby allocating capacity to those that value it the most. It will 
also provide more accurate price signals concerning the market value of 
pipeline capacity.
    26. The Commission is also revising its regulations and policies to 
accommodate and facilitate AMAs, a relatively recent development in the 
industry. AMAs provide significant benefits to many participants in the 
natural gas and electric marketplaces and to the secondary marketplace 
itself. They maximize the utilization and value of capacity by creating 
a mechanism for capacity holders to use third party experts to both (1) 
manage their gas supply arrangements and (2) use that capacity to make 
gas sales or re-releases of the capacity to others when the capacity is 
not needed to serve the releasing shipper. AMAs result in ultimate 
savings for end-use customers by providing for lower gas supply costs 
and more efficient use of the pipeline grid.\45\ The Commission's goal 
in facilitating AMAs in this rule is to make the capacity release 
program more efficient by bringing it into line with the realities of 
today's secondary gas marketplace.
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    \45\ See Comments of BGEM at 2, Comments of BP at 5, Comments of 
Nstar at 8, Comments of Piedmont at 4-5, Comments of PUCO at 7, 
Comments of WDG at 3.
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    27. To that end, the Commission in this rule is adopting its NOPR 
proposal to exempt capacity releases made to implement AMAs from the 
prohibition on tying and the bidding requirements of section 284.8. The 
Commission is also making several revisions to the definition of AMAs 
as proposed in the NOPR. The Final Rule modifies the definition of AMAs 
proposed in the NOPR to relax the delivery obligation of the 
replacement shipper to the releasing shipper and to permit supply side 
AMAs. The Final Rule also clarifies that short term AMAs may be rolled 
over without bidding. Further, the Final Rule clarifies that the price 
ceiling does not apply to any consideration provided by an asset 
manager to the releasing shipper as part of an AMA. These steps, 
requested by many industry commenters that support the Commission's 
efforts in the NOPR to facilitate AMA's, will further enhance the 
efficiency of AMAs by allowing greater flexibility for parties to 
customize arrangements to meet unique customer needs while at the same 
time ensuring that capacity releases that qualify for the exemptions 
from tying and bidding granted in this rule are bona fide AMAs. The 
rule also extends the benefits of AMAs to sellers of natural gas, 
creating an even greater diversity of potential suppliers and 
participants in the secondary market.
    28. The Commission is also revising its policies to reflect the 
realities of today's marketplace by allowing a releasing shipper to 
include conditions in a release concerning the sale/and repurchase of 
gas in storage inventory, even outside the AMA context. Allowing such 
arrangements reflects the fact that in the storage context, storage 
capacity is inextricably linked to storage inventory. By permitting the 
tying of releases of storage capacity to conditions on storage 
inventory, the Commission will enhance the efficient use of storage 
capacity while at the same time ensuring that releasing shippers will 
have adequate storage inventories for the winter.
    29. The Final Rule also extends the blanket exemptions from the 
prohibition against tying and from bidding granted to AMAs to capacity 
releases made to a

[[Page 37064]]

marketer participating in a state approved retail access program, 
finding that such programs provide benefits similar to AMAs.

III. Price Cap Issues

A. Removal of Maximum Rate Ceiling for Short-Term Capacity Releases

    30. In this Final Rule, the Commission amends section 284.8 of its 
regulations to eliminate the price ceiling for short-term capacity 
release transactions of one year or less. The Commission finds that 
this action will improve shipper options and market efficiency, 
particularly during peak periods, by allowing the prices of short-term 
capacity release transactions to reflect short-term variations in the 
market value of that capacity. This will enable shippers to better 
integrate capacity with the underlying gas transactions, and will 
permit more flexible methods of pricing capacity to better reflect the 
value of that capacity as revealed by the market price of gas at 
different trading points. The Commission has previously provided 
pipelines with the flexibility to enter into negotiated rate 
transactions which are permitted to exceed the maximum rate ceiling, 
and this rule will permit releasing shippers similar flexibility in 
pricing release transactions.
    31. At the same time, we are convinced that the rates resulting 
from removal of the price cap for capacity release will be just and 
reasonable. The data collected over many years shows that the value of 
short term capacity only exceeds the price ceiling in times when 
capacity is scarce. These data are confirmed by the data gathered 
during the experimental release of the price ceiling which showed that 
capacity release prices exceed the price ceiling only for brief periods 
of constraint. Moreover, we are not relying solely on competition to 
ensure just and reasonable prices. We are maintaining the rate cap on 
pipeline services that will provide the same protection for capacity 
release transactions as it now does for pipeline negotiated rate 
transactions. Further, we have required informational postings of 
capacity release transactions that will provide transparency and 
facilitate the filing of complaints if circumstances warrant. The 
Commission will also continue to actively monitor the release market.
1. Maximum Rate Ceiling Interferes With Efficient Transactions
    32. As we explained in Order No. 637,\46\ the traditional cost-of-
service maximum rates in pipeline tariffs are not well suited to the 
short-term capacity release market.\47\ Under the traditional 
ratemaking methodology, the Commission develops a maximum annual 
transportation rate for each pipeline that, when applied to the 
pipeline's contract demand and throughput levels, will enable the 
pipeline to recover its annual cost-of-service revenue requirement. 
Each pipeline's maximum rates for services of less than a year are 
simply the maximum annual rate prorated over the shorter period.
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    \46\ Order No. 637 at 31,271-75.
    \47\ While the Commission offered pipelines the opportunity to 
propose other types of rate designs, such as seasonal and term-
differentiated rates, only a very few pipelines have sought to make 
such rate design changes, although many pipelines have taken 
advantage of negotiated rate authority.
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    33. Such prorated annual rates bear no relationship to the 
competitive rates that would be established in the short-term capacity 
market, particularly during peak periods. The market value of 
transportation service from the production area to the downstream 
market may be inferred by comparing the downstream delivered gas price 
in bundled sales to the market price at upstream market centers in the 
production area.\48\ As the DC Circuit recognized in INGAA, ``if the 
difference between field prices and city gate prices in a particular 
pathway is only $.07, people will not pay more than $.07 for the 
unbundled transportation.'' \49\ As discussed in more detail below, the 
data set forth in Order No. 637 and the updated data in Figures 1 
through 3 below concerning the implicit value of transportation in the 
bundled sales market demonstrates the variability of transportation 
value in the short-term market and the divergence between the 
transportation value and cost-of-service rates. This data shows that 
during most of the year, the value of transportation service is 
significantly less than the pipelines' annual cost-of-service maximum 
transportation rates, but during brief, peak demand periods, the value 
of transportation service is measurably greater than the maximum 
transportation rates.
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    \48\ In Order No. 637, the Commission explained ``gas commodity 
markets now determine the economic value of pipeline services in 
many parts of the country. Thus, even as FERC has sought to isolate 
pipeline services from commodity sales, it is within the commodity 
markets that one can see revealed the true price for gas 
transportation.'' Order No. 637 at 31,274 (quoting M. Barcella, How 
Commodity Markets Drive Gas Pipeline Values, Public Utilities 
Fortnightly, February 1, 1998 at 24-25).
    \49\ INGAA at 31.
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    34. Because the existing capacity release price ceiling does not 
reflect short-term variations in the market value of the capacity, the 
price ceiling inhibits the efficient allocation of capacity and harms, 
rather than helps, the short-term shippers it is intended to protect. 
The price ceiling operates to prevent the shipper most valuing short-
term capacity on a peak day from being able to obtain it, because that 
shipper cannot offer a releasing shipper the full value the shipper 
places on that capacity. The price ceiling may also reduce the amount 
of released capacity available during peak periods. As the Commission 
explained in Order No. 637, ``As a result of the maximum rate, firm 
capacity holders may not find it sufficiently profitable to make their 
capacity available for release. For instance, a dual fuel industrial 
customer might determine that it would be more economic not to use gas, 
and to substitute a different fuel, if it could obtain a sufficiently 
high price for its released capacity.'' \50\ Thus, during a peak day 
the price ceiling may only serve to limit a purchasing shipper's 
capacity options, with the result that it must purchase gas in a 
bundled transaction in the downstream market at a price reflecting the 
market-determined value of the transportation.
---------------------------------------------------------------------------

    \50\ Order No. 637 at 31,279.
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    35. The increased use by pipelines and shippers of negotiated rate 
transactions based on gas price differentials demonstrates that buyers 
and sellers value the ability to calibrate the price of transportation 
to its value in the market. The maximum rate ceiling applied to 
capacity release transactions denies releasing and replacement shippers 
the same ability to negotiate transactions that reflect the market 
value of capacity at all times. As the Commission has found, providing 
the ability to negotiate capacity release transactions based on price 
differentials will help in providing short-term capacity to replacement 
shippers, such as gas-fired electric generators.\51\ With the price 
ceiling in effect, releasing shippers are unable to effectively use 
price differentials as a measure of capacity value because they are 
denied the ability to recover the value of capacity during peak periods 
when that value exceeds the maximum rate cap.
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    \51\ Standards for Business Practices for Interstate Natural Gas 
Pipelines, Notice of Proposed Rulemaking, 71 FR 64,655 (November 3, 
2006), FERC Stats. & Regs. Proposed Regulations ] 32,609, P 17 (Oct. 
25, 2006), Order No. 698, 72 FR 38,757 (July 16, 2007), FERC Stats. 
& Regs. Regulations Preambles ] 31,251 at P 51 (Jun. 25, 2007).
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    36. The price ceiling also harms captive customers holding long-
term contracts on the pipeline. Those customers pay maximum rates for 
both peak and off-peak periods. During off-

[[Page 37065]]

peak periods, they can only recover a small portion of the capacity 
cost through capacity release because of the low market value of off-
peak capacity. However, during peak periods, the price ceiling prevents 
those customers from releasing their capacity for its full market 
value.
    37. Finally, the price ceiling reduces the dissemination of 
accurate capacity pricing information. That is because the price 
ceiling causes transactions to move to the bundled sales market during 
peak periods, so that there is no separate capacity transaction to be 
reported.
2. Assurance of Just and Reasonable Rates
    38. As the court stated in INGAA, the Commission may depart from 
cost of service ratemaking upon:

    A showing that * * * the goals and purposes of the statute will 
be accomplished `through the proposed changes.' To satisfy that 
standard, we demanded that the resulting rates be expected to fall 
within a `zone of reasonableness, where [they] are neither less than 
compensatory nor excessive.' [citation omitted]. While the expected 
rates' proximity to cost was a starting point for this inquiry into 
reasonableness, [citation omitted], we were quite explicit that 
`non-cost factors may legitimate a departure from a rigid cost-based 
approach,' [citation omitted]. Finally, we said that FERC must 
retain some general oversight over the system, to see if competition 
in fact drives rates into the zone of reasonableness `or to check 
rates if it does not.' \52\
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    \52\ INGAA at 31.

Accordingly, we analyze below (1) the extent to which market conditions 
and other factors may be expected to keep short-term capacity release 
prices within a reasonable zone despite the removal of the price 
ceiling, (2) the non-cost factors supporting a removal of the price 
ceiling, and (3) our oversight of the short-term capacity release 
market after removal of the price ceiling.
a. Market Conditions Ensure Just and Reasonable Rates
    39. The Commission finds that the short-term capacity release 
market is generally competitive. Therefore competition, together with 
our continuing requirement that pipelines must sell short-term firm and 
interruptible services to any shipper offering the maximum rate, and 
the Commission's ongoing monitoring efforts will keep short-term 
capacity release rates within the ``zone of reasonableness'' required 
by INGAA and Farmers Union.
    40. In Order Nos. 636 and 637, the Commission instituted a number 
of policy revisions which have enhanced competition between releasing 
shippers as well as between releasing shippers and the pipeline. These 
revisions provide shippers with enhanced market mechanisms that will 
help ensure a more competitive market and mitigate the potential for 
the exercise of market power. The Commission required pipelines to 
permit releasing shippers to use flexible point rights and to fully 
segment their pipeline capacity. Flexible point rights enable shippers 
to use any points within their capacity path on a secondary basis, 
which enables shippers to compete effectively on release transactions 
with other shippers. Segmentation further enhances the ability to 
compete because it enables the releasing shipper to retain the portion 
of the pipeline capacity it needs while releasing the unneeded portion. 
Effective segmentation makes more capacity available and enhances 
competition. As the Commission explained in Order No. 637:

    The combination of flexible point rights and segmentation 
increases the alternatives available to shippers looking for 
capacity. In the example,\53\ a shipper in Atlanta looking for 
capacity has multiple choices. It can purchase available capacity 
from the pipeline. It can obtain capacity from a shipper with firm 
delivery rights at Atlanta or from any shipper with delivery point 
rights downstream of Atlanta. The ability to segment capacity 
enhances options further. The shipper in New York does not have to 
forgo deliveries of gas to New York in order to release capacity to 
the shipper seeking to deliver gas in Atlanta. The New York shipper 
can both sell capacity to the shipper in Atlanta and retain the 
right to inject gas downstream of Atlanta to serve its New York 
market.\54\
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    \53\ In the example used in Order No. 636, a shipper holding 
firm capacity from a primary receipt point in the Gulf of Mexico to 
primary delivery points in New York could release that capacity to a 
replacement shipper moving gas from the Gulf to Atlanta while the 
New York releasing shipper could inject gas downstream of Atlanta 
and use the remainder of the capacity to deliver the gas to New 
York.
    \54\ Order No. 637 at 31,301.

    41. In addition to enhancing competition through expansion of 
flexible point rights and segmentation, the Commission in Order No. 637 
also required pipelines to provide shippers with scheduling equal to 
that provided by the pipeline, so that replacement shippers can submit 
a nomination at the first available opportunity after consummation of 
the capacity release transaction. The change makes capacity release 
more competitive with pipeline services and increases competition 
between capacity releasers by enabling replacement shippers to schedule 
the use of capacity obtained through release transactions quickly 
rather than having to wait until the next day.
    42. The data accumulated by the Commission during the Order No. 637 
experiment, as well as review of more recent data, confirm that 
capacity release prices reflect competitive condi