Issues » Comments on Rules and Regulations

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
Regulation of Short-Term Natural Gas Transportation Docket No. RM98-10
Regulation of Interstate Natural Gas Docket No. RM98-12 Transportation Services

MOTION FOR STAY OF INDICATED SHIPPERS AND THE INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA

Pursuant to Rule 212 of the Commission’s Rules of Practice and Procedure, 18 C.F.R. ó 385.212, and Section 705 of the Administrative Procedure Act ("APA"), 5 U.S.C. ó 705, Indicated Shippers and the Independent Petroleum Association of America ("IPAA") hereby seek a stay of certain portions of Order No. 637. In particular, the Commission should stay the removal of the rate caps for short-term released capacity transportation transactions pending the outcome of the Commission’s reconsideration of Order No. 637 on rehearing and of any subsequent judicial review of Order No. 637.

As discussed more fully below, in the event that the Commission does not issue a stay of the limited-term waiver of the rate cap on released capacity, Indicated Shippers and IPAA request that the Commission impose an obligation under which releasing shippers would be required to refund amounts received in excess of pipelines’ applicable maximum rates. This refund obligation would be triggered in the event that either the Commission or the courts later conclude that the Commission has erred by lifting rate caps as provided in Order No. 637.

1. BACKGROUND

On July 29, 1998, the Commission issued a Notice of Proposed Rulemaking regarding the Regulation of Short-Term Natural Gas Transportation Services ("NOPR") and a Notice of Inquiry regarding Regulation of Interstate Natural Gas Transportation Services ("NOI"). In the NOPR, the Commission proposed to release the rate caps on all short-term secondary market transactions, i.e. capacity release, short-term firm and interruptible transportation transactions. The imposition of market-based rates for those transactions was to be accompanied by a mandatory capacity auction, to ensure that pipelines and firm capacity holders did not exert market power or engage in undue discrimination with respect to these transactions. Numerous parties, including Indicated Shippers and IPAA, filed comments in which they objected to the lifting of the rate caps unless it was demonstrated that the pipelines and releasing shippers lacked market power or the Commission established mechanisms that constrained market power. Specifically, Indicated Shippers and IPAA asserted that any adoption of market-based rates for short-term transportation must be accompanied by an appropriate mechanism, such as an effective mandatory capacity auction, to constrain market power and protect shippers from the harm that would occur as a result of market power abuses.

On February 25, 2000, the Commission issued Order No. 637. Even though it had not performed a detailed market study to determine that the market for short-term released capacity was workably competitive at all times of the year and at all points on the national pipeline grid, the Commission granted a limited-term waiver of the rate caps for all short-term capacity release transactions on a nationwide basis throughout the year. Further, in a significant shift from the proposal outlined in the NOPR, the Commission failed to adopt any sort of market power constraint mechanism as an accompaniment to the authorization of market-based rates. Moreover, Order No. 637 contains no express obligation under which releasing shippers would be required to refund amounts collected in excess of the pipelines’ maximum rates in the event that the Commission or the courts conclude that the Commission erred in lifting rate caps.

On March 10, 2000, Indicated Shippers and IPAA filed requests for rehearing of Order No. 637. Among other things, these requests seek rehearing of the Commission’s decision in Order No. 637 to lift rate caps on short-term released capacity without the adoption of an effective mechanism, such as a mandatory auction, to constrain market power.

2. SUMMARY OF ARGUMENT

The portion of Order No. 637 granting a waiver of rate caps on short-term released capacity transactions should be stayed. The public interest supports such a stay. Order No. 637 embarks on a dramatic reversal of well-established Commission policy and of the Commission’s own longstanding interpretation of its obligations under the Natural Gas Act. For the first time the Commission eliminates the applicable cost-based rate caps from a broad category of interstate transportation transactions on a nationwide basis. The Commission takes this sweeping action without any investigation to determine whether specific geographic markets are sufficiently competitive throughout the year to ensure that the market-based rates will be just and reasonable. Moreover, the rate cap waiver is not accompanied by an effective mandatory auction or other mechanism to constrain market power.

The removal of the rate caps for short-term capacity release transactions will result in the disruption of the natural gas market and irreparable harm to replacement shippers as well as producers, end-users and other consumers. Lifting rate caps will result in unjust and unreasonable rates, market power and affiliate abuses by capacity holders, and the withholding of capacity from the marketplace. Given this harm, the Commission should stay its action to protect the public interest and to avoid irreparable harm to shippers and others during the pendency of rehearing and court review.

3. ARGUMENT
1. The Commission’s Standard For Grant Of A Stay.

The standard for granting a stay under Section 705 of the APA is whether "justice so requires." In determining whether a party seeking a stay has met this standard, the Commission will consider the following three factors:

1. Whether the moving party will suffer irreparable injury;
2. Whether the grant of the stay will harm other parties; and
3. Whether the stay is in the public interest.

In applying the APA standard, the Commission must balance the interests of the movant against the overall public interest and determine whether the movant will sustain irreparable harm in the absence of a stay.

The Commission has held that where the standard is not met, its general policy is to deny motions for stay of its orders, based on the need for finality of its proceedings. However, the Commission has granted stays of its orders where it has determined that parties could be irreparably affected by a change in regulatory scheme imposed by a Commission order. Further, the Commission has granted a stay of a pending proceeding to permit a party to provide additional evidence regarding anticompetitive behavior.

As discussed more fully below, a stay of the portion of Order No. 637 providing for the elimination of rate caps on short-term capacity releases is plainly warranted under the applicable standards.

2. A Stay Of Order No. 637 Is Warranted By The Public Interest.

The Commission should stay the removal of rate caps from short-term released capacity transactions. The removal of rate caps conflicts with the Commission’s obligations under the Natural Gas Act and departs from the Commission’s own longstanding policies. Given the fundamental issues of law and policy raised by the Commission’s removal of rate caps, the Commission should stay its implementation of the action until the Commission has acted on rehearing and the courts have completed review of Order No. 637.

A stay is appropriate when the public interest is frustrated due to an agency’s failure to comply with its governing statute. Further, the public has a general interest in ‘"the meticulous compliance with the law by public officials.’" In this instance, the Commission’s removal of rate caps without an effective mechanism to constrain market power violates the Commission’s governing statutory authority. Further, the Commission’s rate cap removal contradicts its own prior policy and precedent. Therefore, the public interest warrants a stay of Order No. 637’s limited-term rate cap waiver.

1. It Is In The Public Interest To Stay The Action Pending Further Review Because The Commission Has Exceeded Its Governing Statutory Authority.

The Commission is constrained by the scope of the statutory authority granted to it by Congress. The NGA requires that the Commission’s ratemaking principles ensure that all jurisdictional rates are just and reasonable and do not reflect undue discrimination or preference. 15 U.S.C. ó717c(a). The NGA allows for no exceptions to the requirement that the Commission must ensure that all jurisdictional rates are just and reasonable. As expressly provided under NGA Section 4(a), "[a]ll rates and charges . . . shall be just and reasonable. . . " (emphasis supplied). Moreover, the Commission has an obligation to protect consumers against exploitation by natural gas companies.

The Commission has conceded that there are opportunities for market power abuses in the short-term market. NOPR at 33,440. Yet Order No. 637 fails to ensure that this market power is constrained. The courts have made it clear that the Commission may implement market-based rates for jurisdictional services only when the market for the service is sufficiently competitive to ensure that the resulting rates will be just and reasonable. This means that the Commission may only rely on market forces to set transportation rates if it first establishes that there will be a sufficient number of sellers and a sufficient amount of available capacity to ensure that competition will prevent the sellers from raising prices without losing business to competitors. Only where such market discipline is shown to exist can the Commission fulfill its statutory obligation to ensure that rates are just and reasonable. There is no precedent that supports the wholesale lifting of rate caps on a nationwide basis during all times of the year without a finding of sufficient competition to ensure that the market will set just and reasonable rates.

Moreover, Order No. 637 fails to institute a mechanism to constrain market power. Although the NOPR stated that it was essential to institute a mandatory auction or some other effective mechanism to ensure that market power is constrained, Order No. 637 abandons that portion of the proposal without an effective substitute mechanism. The removal of the rate caps without an appropriate mechanism, such as a mandatory auction, contradicts applicable precedent and governing law.

Further, the measures outlined in Order No. 637 contradict the Commission’s responsibility to protect all shippers from undue discrimination. Specifically, the rate cap removal is designed to benefit long-term firm customers, which the Commission suggests are synonymous with captive customers. Order No. 637 at 33 (citing United Distribution Cos. v. FERC, 88 F.3d 1105, 1123 (D.C. Cir. 1996), cert. denied, 520 U.S. 1224 (1997)). In fact, Order No. 637 explains that the benefit to long-term firm shippers will come at the expense of short-term shippers, who, as a result of the removal of the rate caps, will bear more of the burden of paying for peak period usage. Order No. 637 at 77.

The NGA and pertinent court precedent define the Commission’s constituency as all shippers subject to exploitation by pipelines. There is no exception from the Commission’s statutory obligations for short-term services. As noted above, NGA Section 4(a) requires that the Commission ensure that all rates shall be just and reasonable. Further, just as long-term shippers are not necessarily captive shippers, short-term shippers may be captive to certain pipelines. Nevertheless, Order No. 637 concludes that short-term shippers are not as worthy of market power protections as long-term shippers because they allegedly elected to take the risk that capacity will be unavailable during peak periods and are willing to pay the price to obtain gas from alternate sources. Order No. 637 at 87. This lack of concern for short-term shippers not only contravenes the Commission’s statutory obligations, but it also lacks any foundation in fact. The Commission provides no support for the proposition that all short-term shippers are not captive and all freely elect to take short-term services. Short-term shippers can be physically captive and where the pipeline to which they are attached is fully subscribed, such shippers have no option but to take short-term service.

Finally, the experimental nature of the limited-term rate cap waiver does not insulate the Commission from its failure to comply with its statutory authority. Although the courts have accorded the Commission greater deference to implement limited-term experiments than they have for the promulgation of new, permanent regulatory initiatives, the Commission may not characterize a regulatory initiative as an experimental program simply to bootstrap an initiative that otherwise violates the Commission’s statutory authority. Moreover, the Commission must demonstrate that the benefits of the experimental program will outweigh any perceived harms or objections raised by opposing parties. Having failed to undertake any analysis of the market power held in individual geographic markets, the Commission has not even attempted to weigh the benefits of the experiment with the harms to shippers and others that will be impacted by unjust and unreasonable rates.

As discussed above, the removal of the rate caps does not comport with the Commission’s statutory authority. In addition, the Commission has failed to provide any reasoned justification for its speculation that the benefits of the program will outweigh any perceived harms. Although the rate cap waiver has a limited-term, the breadth of the program indicates that it in fact constitutes an across-the-board departure from the Natural Gas Act. As discussed more fully below, such a departure will result in irreparable harm to replacement shippers, producers, end-users and other consumers.

For these reasons, Order No. 637 plainly contravenes the Commission’s governing statutory authority. Accordingly, a stay is warranted to protect the public interest.

2. A Stay Is Warranted Because Order No. 637 Contradicts Prior Commission Policy and Precedent.

The Commission has the authority to revise its policies provided that the change is founded on a reasoned basis. Order No. 637 fails to meet this standard. Specifically, Order No. 637 provides no explanation for the Commission’s departure from its prior policy relating to market-based rates.

The Commission has previously recognized that the NGA places the burden on capacity holders to prove that they lack market power. The Commission previously operated under a Policy Statement that set forth the criteria the Commission used to assess the lawfulness of market-based rates under the just and reasonable standard of the NGA. This Policy Statement required an applicant for market-based rates to demonstrate that it lacks market power in the relevant product and geographic markets. Market power is defined as the ability "to profitably maintain prices above competitive levels for a significant period of time."

In applying this policy, the Commission required that the capacity seller must analyze its market power by assessing "its market share and the market concentration in each path, origin, and destination market." The calculations must be based on sales or capacity data. In addition, the Commission examined other relevant considerations bearing on market power, such as ease of market entry and the market power of the buyers.

Particularly with regard to the market for transportation services, the Commission applied this policy strictly and rejected market-based rate applications that failed to make the required showing. The Commission held that the lack of market power cannot be assumed in the absence of a specific product and geographic market analysis. Past efforts to treat an entire pipeline as the relevant geographic market were rejected, on grounds that a single pipeline system can encompass numerous individual geographic markets. Rather, the Commission required a market power analysis for each receipt and delivery point in order to ensure that market power cannot be exerted at individual points. Similarly, the Commission previously rejected claims that existing capacity itself necessarily equates to a good alternative available to shippers. The Commission found that the proponent of market-based rates must show that the capacity is actually available in the marketplace and not otherwise subscribed.

The Commission’s prior policy was also specifically concerned about market power in the production area. Where producer/shippers have no good alternatives, the Commission previously required that market power be mitigated through providing an option to the producer/shippers to select cost-based rates in order to ensure that market-based rates did not result in increased transportation costs that would reduce producer/shipper netback prices.

Order No. 637 departs from this prior policy without reasoned explanation. In lieu of the specific evidence previously required to demonstrate the absence of market power in specific product and geographic markets, Order No. 637 lifts rate caps on short-term released capacity on a nationwide basis for all periods of the year. Order No. 637 requires no showing that market power is constrained in any specific geographic market, or that shippers have good alternatives to short-term released capacity throughout the national pipeline grid and throughout the year. This is a radical departure from prior Commission policy for which the Commission provides no reasonable explanation or justification.

Although the Commission claims that Order No. 637 contains protective measures to encourage competition and to identify potential instances of market power abuse, the Commission lifts rate caps without ensuring that all of Order No. 637’s alleged protections are in place. While Order No. 637 provides that the authority for lifting rate caps will be effective on March 27, 2000 (30 days after the publication of Order No. 637 in the Federal Register), pipelines are not required to submit revised tariff filings to comply with the regulations governing the scheduling of capacity release transactions and segmentation until May 1, 2000. Similarly, pipelines need not comply with the enhanced reporting requirements under Order No. 637 until September 1, 2000. As a result, rate caps will be lifted at least five months prior to the date on which the tariff changes and reporting requirements designed to protect against market power will be fully in place. The Commission provides no explanation or justification for lifting rate caps before the effectiveness of all the protections the Commission believes are necessary to protect against the market power of capacity holders.

The Commission has stayed its own orders when the implementation of the order will serve to effect a wholesale change on its regulatory scheme. In Kansok, the Commission determined that Kansok and its intrastate affiliates were functioning not as a consortium of non-jurisdictional pipelines, but as an integrated interstate natural gas pipeline. The Commission required the pipelines to file for Section 7(c) certificate authority to operate as an interstate facility. Kansok and others sought rehearing of the order and requested a stay of the certificate requirement pending reconsideration on rehearing. The Commission concluded that a stay was necessary to avoid hardship and inequity to Kansok’s customers, including the possible disruption of service during the winter heating season. The Commission explained that the public interest would not be served by upsetting the current scheme of regulation exercised by the state public utility commissions while the request for rehearing was pending.

Similarly, in Western Systems Power Pool, the Commission granted a stay of its order terminating an experimental power pool program. There, the Commission held that the stay was appropriate so that consumers would not be subjected to rates that were above the upper end of the zone of reasonableness while it decided this issue on rehearing. The Commission also noted that a stay was appropriate because of time constraints. The order in question concerned a limited-term proposal that could have conceivably expired prior to the issuance of an order on rehearing. Therefore, the grant of a stay permitted parties to seek rehearing without incurring the risk that their concerns would be rendered moot by operation of law.

These decisions support the issuance of a stay in the instant proceeding. The circumstances that favored the grant of the stay in Kansok are even more appropriate when applied to the lifting of the rate caps in the short-term capacity release market. While the Kansok proceeding concerned one pipeline system, the imposition of market-based rates on a nationwide basis, and during all times of the year, represents a dramatic departure from prior policy. Indeed, Order No. 637 would lift rate caps on a nationwide basis for two full heating seasons. The potential for harm in the aftermath of Order No. 637 dwarfs the potential harm in Kansok.

Accordingly, a stay is warranted during the pendency of rehearing and judicial review. The public interest would not be served by the implementation of such a radical departure from prior policy before the change is ultimately upheld as lawful.

3. In The Absence Of A Stay, Producers And Others Will Suffer Irreparable Harm.

In the absence of a stay, producers and others will be irreparably harmed by the imposition of market-based rates for short-term released capacity. As explained more fully below, the Commission itself has admitted that the removal of rate caps in the short-term capacity release market will result in harm to short-term shippers. These shippers will be subjected to higher rates and to exercises of market power and affiliate abuses by firm capacity holders. Moreover, the resulting harm will go beyond the harm experienced by replacement shippers who must pay unjust and unreasonable market-based rates. Producers, end-users, and other consumers will also be harmed by the increased cost of transportation. These added costs will result from the ability of capacity holders and pipelines, particularly when both are owned by the same corporate entity, to exercise market power to obtain rates in excess of the levels that would result in a truly competitive market. The impact of these unjust and unreasonable rates will be felt by producers, end-users and consumers. Higher transportation rates will be borne by someone along the chain of transactions from the wellhead to the burnertip. Sometimes the higher costs will be absorbed by producers in the form of reduced netbacks, and sometimes the higher costs will be passed on as part of the total price for gas to end-users and consumers. While the harm to replacement shippers may be remediable if the Commission provides refund protection, such refunds will not remedy the harm to producers, end-users and consumers.

1. The Commission Has Acknowledged That Substantial Harm Will Result From The Removal Of Rate Caps For Short-Term Capacity Release Transactions Unless A Mandatory Auction Or Other Mechanism Is Adopted To Constrain Market Power.

In the NOPR, the Commission recognized that the short-term capacity market is not universally workably competitive, and that there are opportunities for market power abuses in that market. Pipelines and capacity holders may exercise market power over short-term transportation transactions. To mitigate such market power, the Commission proposed a mandatory auction mechanism, under which pipelines would be required to sell all available daily capacity at market-clearing prices below the otherwise applicable maximum lawful rate.

Notwithstanding the Commission’s concern over the market power of pipelines and capacity holders, Order No. 637 removes rate caps without establishing a mandatory auction or other mechanism to constrain market power. By so doing, the Commission withholds any protection against the exercise of market power, and fails to ensure that short-term rates will be just and reasonable. The fact that the Commission did not remove rate caps from short-term firm and interruptible pipeline capacity does not eliminate the ability of those who control capacity to exercise market power, and an effective mechanism to constrain such market power is still necessary if any rate caps are lifted. The Commission has specifically acknowledged that the lifting of rate caps will increase the rates for short-term capacity, particularly during periods of peak demand. Order No. 637 at 52-69, 77. In the absence of an investigation to ensure that the market for short-term released capacity is workably competitive, the Commission has no foundation for its belief that the increased prices will be the product of an efficient and competitive market rather than the result of the market power of capacity sellers.

Accordingly, as the Commission itself predicted in the NOPR, Order No. 637 will harm natural gas markets because it fails to constrain market power. Lifting rate caps will increase rates for short-term capacity above just and reasonable levels because those entities that control capacity will be able to utilize their market power to collect higher rates than would arise in a truly competitive market.

2. The Removal Of Rate Caps Will Disrupt The Natural Gas Market.

The removal of the rate caps for the short-term capacity release market on a nationwide basis will adversely affect more than simply the replacement shippers that must pay unjust and unreasonable rates. The impact of the unjust and unreasonable rates paid by replacement shippers will also be felt by producers, end-users, and consumers through lower netbacks and higher prices for delivered gas. While the pain of the higher rates for released capacity will be shared among shippers, producers and consumers, ultimately producers’ netbacks will be reduced and the cost of delivered gas to consumers will be increased. Further, Order No. 637 will enhance the ability of pipelines and capacity holders to engage in mutually beneficial transactions to the detriment of competing shippers, other participants in the value chain and ultimately to consumers.

1. The Rate Cap Removal Will Result in Rates that Are Unjust And Unreasonable.

The courts have held that market-based rates are only just and reasonable if they are the result of the "discipline" of a competitive market that ensures that sellers cannot raise prices above competitive levels without losing business. Order No. 637 provides no assurance that market-based rates for released capacity will be just and reasonable. To the contrary, the Commission’s failure to establish a mechanism to constrain market power will enable capacity sellers to set market-based rates that are unjust and unreasonable because the rates will exceed the levels that would exist in a truly competitive market.

In a dramatic departure from prior policy, the Commission failed to ensure that market power cannot be exerted in individual geographic markets. By lifting rate caps on a nationwide basis, the Commission failed to ensure that in individual geographic markets there will be an adequate number of short-term capacity sellers and an adequate amount of short-term capacity available for sale so as to establish a competitive market. As a result, in individual markets where there is inadequate competition, the market-based rates will not be just and reasonable. Instead, the rates will reflect the market power of the capacity sellers, and rise above the levels that would be set in a truly competitive market.

The Commission has also failed to determine if there are comparable services that will serve to keep released capacity prices in check. The Commission has provided no evidence that pipelines have sufficient IT and short-term firm capacity available during peak periods to provide competition to released capacity. Indeed, the Commission itself has concluded that IT is not a good alternative to firm service. Additionally, the Commission has provided no evidence that IT service is comparable to released firm capacity. IT is typically not a good substitute for released firm capacity. Released capacity has a higher priority, which is of critical importance during peak periods. In fact, releasing shippers can capitalize on the interruptible nature of IT to enhance the value of their capacity. During peak periods, IT shippers must gamble that other shippers will not buy released capacity and that there will not be an interruption. By fully utilizing their capacity periodically, capacity holders will ensure the interruption of IT service and the disruption of transactions relying on such service, thereby reducing the value of IT while enhancing the value of released capacity.

Further, the Commission did not demonstrate that lifting rate caps would increase the amount of available capacity on a nationwide basis. The Commission simply assumed that upon the elimination of rate caps, existing capacity holders would have economically attractive alternatives that will allow them to offer more released capacity and that pipelines will construct new capacity to relieve bottlenecks. Order No. 637 at 79-81. The Commission has provided no reasoned basis for its assumptions. The Commission offers no evidence that throughout the national pipeline grid, there is a significant amount of capacity held by shippers having alternatives that will allow them to offer more released capacity. Capacity can be held by those having no options either by reason of regulatory obligation (such as LDCs that have an obligation to serve) or essential business requirements. Thus, even if it were assumed that capacity holders would put all available capacity up for sale, many firm shippers need all of their capacity for their own uses. Similarly, contrary to the Commission’s hypothesis, construction of needed capacity is not assured. Shippers’ need for capacity to relieve a bottleneck does not necessarily equate to a reason for a pipeline to construct new capacity. The bottleneck may only exist for a portion of the year, so that overall annual demand is insufficient to justify the cost of construction. A pipeline may also have little incentive to relieve a bottleneck if its affiliates hold capacity and stand to profit from market-based rates.

Order No. 637 does not even ensure that all available existing capacity will be put up for sale by pipelines and releasing shippers to provide a sufficiently competitive market. Order No. 637 preserves the right of releasing shippers to enter into prearranged deals for less than 31 days or for rates at (or now above) the maximum lawful rate. Order No. 637 at 77, 250. This allows capacity holders to favor affiliates or others and serves to reduce the pool of available capacity in the open market. Similarly, capacity holders can utilize recall rights to maximize their market power. Through recall rights the capacity holders can sell capacity but recall it when capacity supplies tighten. The capacity holders can then re-release the capacity under a prearranged deal to an affiliate to take advantage of the increased market prices.

Order No. 637 also preserves the ability of pipelines to withhold capacity, particularly in off-peak periods. In deciding not to adopt an auction to mitigate market power, the Commission failed to establish any requirement that pipelines sell capacity at market-clearing prices that are less than the applicable maximum lawful price. Releasing shippers are under no obligation to sell capacity at any price. The Commission’s approach only enhances the ability of pipelines and capacity holders to exercise their market power by extracting monopoly rates and engaging in preferential releases to marketing affiliates and other favored shippers.

Finally, a substantial amount of long-term capacity is held by shippers possessing a right of first refusal. Accordingly, long-term capacity is not available to all shippers on equal terms. Since short-term capacity is only available from holders of long-term capacity, the preferential control over long-term capacity prevents the creation of a truly competitive short-term capacity market. Indeed, lifting rate caps serves only to encourage holders of capacity to hoard it, particularly on fully subscribed pipelines, because of the new opportunity to profit.

Given the absence of any effective mechanism to ensure the availability of capacity, Order No. 637 will give capacity holders the right to impose market-based pricing on short-term capacity during peak periods and cost-based pricing in the off-peak periods. As a result, shippers will be forced to bear higher rates in the peak without assurances of any offsetting reductions in the off-peak. The increased value of capacity will encourage more capacity holders to keep capacity for themselves or to release it to their affiliates.

For these reasons, there is no basis in the record to support the conclusion that there will be a sufficient number of capacity sellers and a sufficient amount of capacity for sale in all geographic markets throughout the nation to ensure a competitive market. The market power held by pipelines and capacity holders will enable them to charge rates above the levels that would be set in a competitive market. Longstanding court and Commission precedent make clear that in such circumstances, market-based rates are unjust and unreasonable.

2. Order No. 637 Will Harm Producers, End-Users And Other Consumers.

As described above, purchasers of released capacity will be harmed by Order No. 637 because the market-based rates for such capacity will be unjust and unreasonable. But the harm from Order No. 637 goes beyond the harm to replacement shippers that must pay the unjust and unreasonable rates. The harm of unjust and unreasonable rates also falls on producers upstream of the transportation and on end-users and consumers downstream of the transportation.

Increases in the cost of transportation will have an adverse impact on producers and consumers because it cannot be reasonably assumed that the replacement shippers will simply absorb the full brunt of the higher costs. Rather, these higher costs will be reflected either in lower producer netbacks or higher delivered gas costs to consumers.

The Commission has previously recognized that the imposition of market-based rates can have a detrimental effect on producer netbacks. In fact, the Commission has held that producers relying on short-term transportation services are entitled to mitigation measures to protect them from market power abuses. In KN, the Commission approved certain market-based rates, but noted that pipeline market power could affect producers’ netbacks. As a consequence, the Commission ordered specific mitigation measures to ensure that these netbacks were not affected by market-based rates for transportation service.

Order No. 637 represents a reversal of the Commission’s prior position. Not only does Order No. 637 fail to consider the interests of producers, it effectively concedes that the revised regulatory scheme will harm producers by increasing the costs of short-term transportation. The Commission’s failure to take into account the anticompetitive consequences of market-based rates on producers is arbitrary and capricious.

Similarly, end-users and other consumers will be harmed by the increased costs of transportation. The Commission’s primary obligation is to protect consumers against the exploitation by natural gas companies holding monopoly power. Here the Commission exposes consumers to higher total prices for gas through increased rates for short-term transportation services. See, e.g. Order No. 637 at 52-69, 77.

The Commission’s effort to dismiss the importance of higher short-term transportation rates is misplaced. The NGA requires, without exception, that all rates for interstate transportation must be just and reasonable. No exception is made for short-term transportation rates. Moreover, the Commission’s assertion that short-term shippers are not captive and therefore less worthy of its protection under the NGA has no factual foundation. Short-term shippers can be physically captive to a pipeline, yet still need to avail themselves of short-term services. For example, a producer whose producing fields are connected to a single pipeline may be physically captive to the pipeline. End-users or LDCs served by only one pipeline are also captive shippers. The Commission’s assumption that these shippers are not captive simply because they may utilize short-term services is preposterous--particularly on fully-subscribed pipelines where long-term services are not even an option.

For these reasons, the unjust and unreasonable rates resulting from Order No. 637 will harm producers, end-users and consumers by increasing the total cost of transportation to unjust and unreasonable levels. Ultimately, while the pain of these higher costs will be shared among shippers, producers and consumers, these added costs will reduce producers’ netback prices and increase the delivered price of gas to consumers.

3. There Is No Adequate Redress For The Injury That Will Result From The Imposition Of Market-Based Rates.

A showing of irreparable harm can be diluted by the availability of an adequate refund remedy. In this instance, however, no adequate remedy is available to undo the harm that will result from the removal of the rate caps in the short-term capacity release market.

Even if the Commission were to institute an express refund protection, the refunds would only protect the replacement shippers that are harmed by the imposition of unjust and unreasonable market-based rates. The Commission’s refund protection will not redress injuries to non-shippers whose interests are adversely affected by market power abuses in the capacity release market. For example, refund requirements would not compensate a producer for any negative impact on its netbacks unless the producer was itself the overcharged replacement shipper. Similarly, end-users and consumers whose total gas costs are increased by reason of higher transportation costs attributable to the elimination of rate caps will not be recompensed through refunds except where they are the overcharged replacement shippers.

In sum, the Commission simply does not have the ability to redress the myriad impacts on producers, end-users, and consumers that will arise from the removal of the rate caps. Even if the Commission exercises its refund authority, such a remedy cannot undo damage to producers, end-users, and consumers resulting from the imposition of unjust and unreasonable market-based rates. Therefore, a stay is warranted because there is no adequate remedy for the harm that will occur as a result of the rate cap waiver.

1. The Grant Of A Stay Will Not Harm Other Parties.

When considering whether to issue a stay, the Commission has the responsibility to consider the impact of the stay on other affected interests. Granting a stay of Order No. 637 will not result in any detriment to other parties. Firm capacity holders have no vested right to sell short-term capacity above the maximum lawful pipeline rate. Thus, a stay of Order No. 637 would simply maintain the status quo that has been in place since Order No. 636 established the released capacity market.

While the stay would obviously have the effect of delaying the implementation of market-based rates in the short-term capacity release market, this delay will ensure that market-based rates are not implemented in a market in which capacity holders possess unconstrained market power and could utilize such power to impose unjust and unreasonable rates. Accordingly, any harm from a stay of the authorization of market-based rates for short-term capacity releases does not outweigh the harm to shippers, producers and consumers from the immediate implementation of Order No. 637.

2. In The Event That The Commission Does Not Issue A Stay, The Commission Should Implement The Rate Cap Waiver Subject To Refund.

A stay is the only means to protect all affected parties from the imposition of unjust and unreasonable rates under Order No. 637. A refund obligation would only protect replacement shippers that are harmed by unlawful transportation rates. A refund obligation would not protect non-shippers, such as producers, end-users, and consumers, that are harmed by unjust and unreasonable transportation rates.

Nevertheless, in the event that the Commission denies a stay it should at least provide the partial protection afforded by a refund obligation. Specifically, the Commission should expressly provide for a refund of all capacity release revenues collected above the otherwise applicable maximum lawful price. Although it is true that refunds of rates collected in excess of the maximum lawful price will not make producers, end-users and consumers whole, a refund requirement will serve to mitigate at least some of the harm caused by lifting rate caps under Order No. 637. Accordingly, the Commission should require that in the event that either the Commission or the courts later conclude that the Commission has erred by lifting rate caps as provided in Order No. 637, releasing shippers would be required to refund amounts received in excess of otherwise applicable maximum rates.

4. CONCLUSION

For the reasons discussed above, Indicated Shippers and IPAA respectfully request that the Commission issue a stay of the removal of the rate caps for short-term released capacity transportation transactions pending the outcome of the Commission’s reconsideration of Order No. 637 on rehearing and of any subsequent judicial review of Order No. 637. In the event that the Commission does not issue a stay of the limited-term waiver of the rate caps on released capacity, Indicated Shippers and IPAA request that the Commission impose an obligation under which releasing shippers would be required to refund amounts received in excess of pipelines’ applicable maximum rates in the event that either the Commission or the courts later conclude that the Commission had erred by lifting rate caps as provided in Order No. 637.

Respectfully submitted,

____________________________________

Dated: March 15, 2000

CERTIFICATE OF SERVICE

I hereby certify that the foregoing document has been served this date by first-class mail on the parties on the Commission’s official service list.

Dated at Washington, D.C. this 15th day of March 2000.

___________________________________

Thomas J. Eastment