Federal Register: Part II [18 CFR Parts 37, 161, 250, 284 and 358]

DEPARTMENT OF ENERGY

CFR Citation: 18 CFR Parts 37, 161, 250, 284 and 358

Docket ID: [Docket No. RM01-10-000; Order No. 2004]

NOTICE: Part II

DOCUMENT ACTION: Final rule.

SUBJECT CATEGORY: Standards of Conduct for Transmission Providers

EFFECTIVE DATES: The rule will become effective February 9, 2004.

DOCUMENT SUMMARY: The Federal Energy Regulatory Commission is adopting standards of conduct that apply uniformly to interstate natural gas pipelines and public utilities (jointly referred to as Transmission Providers). The standards of conduct will govern the relationships between regulated Transmission Providers and all of their Energy Affiliates. The new standards of conduct will eliminate the loophole in the current regulations that do not cover a Transmission Provider's relationship with Energy Affiliates that are not marketers or merchant affiliates. The Final Rule will ensure that Transmission Providers cannot extend their market power over transmission to wholesale energy markets by giving their Energy Affiliates unduly preferential treatment.

SUMMARY: Energy Department, Federal Energy Regulatory Commission,

DOCUMENT BODY 2: November 25, 2003.

SUPPLEMENTAL INFORMATION

Table of Contents
Paragraph Number I. Background.............................................. 2 II. Current Regulations.................................... 5 III. Need for the Rule..................................... 6 IV. SectionbySection Analysis of Final Rule.............. 16

A. ApplicabilitySec. 358.1......................... 16 i. Regional Transmission Organizations/Independent 17 System Operators.................................. ii. NonPublic Utilities........................... 24 iii. Cooperatives and Small Pipelines and Utilities 25 iv. Delay of Applicability......................... 29

B. General PrinciplesSec. 358.2.................... 30

C. DefinitionsSec. 358.3........................... 32 i. Definition of a Transmission Provider........... 33 ii. Definition of an Energy Affiliate.............. 37 1. LDCs........................................ 41 2. Affiliates not engaged or involved in 45 transmission transactions, e.g., trading and
financial affiliates.......................... 3. Affiliated Transmission Providers........... 49 4. Holding or service companies................ 52 5. Foreign affiliates.......................... 59 6. Affiliates buying power for themselves...... 63 7. Producers, Gatherers, and Processors........ 66 8. Intrastate and Hinshaw Pipelines............ 72 iii. Definition of Marketing, Sales or Brokering... 73 iv. Definition of a Transmission Function.......... 80 v. Definition of a Reseller........................ 81

D. Independent FunctioningSec. 358.4............... 82 i. Background and History of Independent 86 Functioning Requirement
ii. Energy Affiliate Function or Commercial 88 Function.......................................... iii. Sharing of NonTransmission Functions......... 95 iv. Sharing of Senior Officers and Directors....... 102 v. Sharing of Field and Maintenance Personnel...... 105 vi. Transmission Employees that Engage in 107 Operational Purchases............................. vii. Risk Management Employees..................... 109 viii. Costs of compliance.......................... 113 ix. Conclusion..................................... 118

E. Identification of Affiliates on Internet............ 122 i. Posting Organizational Charts................... 123 ii. Posting of Merger Information.................. 126 iii. Transfer of Employees......................... 128

F. Books and Records................................... 132

G. Written Procedures.................................. 133 i. Posting Standards of Conduct Procedures......... 135 ii. Training....................................... 138 iii. Chief Compliance Officer...................... 140

H. NonDiscrimination RequirementsSec. 358.5....... 142 i. Information Access and Disclosure Prohibitions.. 143 A. ``No Conduit'' or ``Automatic 144 Imputation''.............................. B. Sharing of Operational Information...... 151 C. Generation Dispatch..................... 154 D. Voluntary Consent....................... 156 E. Transaction Specific Exemption.......... 158 ii. Implementing Tariffs........................... 162

I. Discounts........................................... 163 V. Conforming Changes...................................... 170 [[Page 69135]]
VI. Additional Policy Changes not Adopted.................. 171 VII. Regulatory Flexibility Act Certification.............. 173 VIII. Information Collection Statement..................... 174 IX. Environmental Statement................................ 202 X. Document Availability................................... 203 XI. Effective Date and Congressional Notification.......... 206 Before Commissioners: Pat Wood, III, Chairman; William L. Massey, and Nora Mead Brownell.

1. The Federal Energy Regulatory Commission is adding Part 358 to its regulations and revising Parts 37 and 161 of its regulations in response to the changing structure of the energy industry.\1\ In this rule, the Commission adopts standards of conduct that apply uniformly to interstate natural gas pipelines and public utilities (jointly referred to as Transmission Providers) that are currently subject to the gas standards of conduct in Part 161 of the Commission's regulations and the electric standards of conduct in Part 37 of the Commission's regulations.\2\ In light of the changing structure of the energy industry, the standards of conduct will govern the relationships between regulated Transmission Providers and all of their Energy Affiliates. The new standards of conduct will eliminate the loophole in the current regulations that do not cover a Transmission Provider's relationship with Energy Affiliates that are not marketers or merchant affiliates. The Final Rule will ensure that Transmission Providers cannot extend their market power over transmission to wholesale energy markets by giving their Energy Affiliates unduly preferential treatment.
\1\ The Commission is also making minor conforming changes in Parts 250 and 284.
\2\ The gas standards of conduct are codified at part 161 of the Commission's regulations, 18 CFR part 161 (2003), and the electric standards of conduct are codified at 18 CFR 37.4 (2003).

I. Background

2. On September 27, 2001, the Commission issued a Notice of Proposed Rulemaking (NOPR) in this proceeding.\3\ One hundred and fiftyfive interested persons submitted comments.\4\ Several commenters requested an opportunity for an oral presentation on the matters raised in the NOPR. On April 25, 2002, the Commission published an ``Analysis of the Major Issues Raised in the Comments'' (Major Issues Analysis), suggesting some possible changes to the proposals in the NOPR. The Major Issues Analysis proposed changes in the definition of an Energy Affiliate, among other things, and provided draft regulatory text. \3\ Standards of Conduct for Transmission Providers, 66 FR 50919 (Oct. 5, 2001), IV FERC Stats. & Regs. Regulation Preambles ] 32,555 (Sept. 27, 2001).

\4\ See Appendix A for a list of commenters.

3. The Major Issues Analysis also gave notice that the Commission would host a fullday technical conference giving interested persons the opportunity to discuss issues raised in the NOPR and the Major Issues Analysis. Approximately 200 participants attended the conference on May 21, 2002. During and following the conference, participants were encouraged to submit drafting options for regulatory text. The Commission then posted all of the proposals on its Internet Website. Since the conference, the Commission has received more than 100 additional comments, many from interested persons who previously submitted comments.

4. This Final Rule is being issued after a review of all the comments filed in this proceeding and will become effective on February 9, 2004. By February 9, 2004, each Transmission Provider is required to file with the Commission and post on the OASIS or its Internet website a plan and schedule for implementing the standards of conduct. By June 1, 2004, all Transmission Providers must comply with the standards of conduct and post procedures on the Internet that will enable customers and the Commission to determine whether Transmission Providers are in compliance with the standards of conduct requirements contained herein. II. Current Regulations

5. The current standards of conduct restrict the ability of interstate natural gas pipelines and public utilities (Transmission Providers) to give their marketing affiliates or wholesale merchant functions undue preferences over nonaffiliated customers. The Commission's goalto prevent unduly discriminatory behaviorreflects FERC's statutory responsibilities under the NGA and FPA.\5\ Both gas \6\ and electric \7\ standards of conduct rely on
[[Page 69136]]
similar mechanisms to prevent transmission from being used in an unduly preferential or discriminatory manner by: (1) Separating employees \8\ engaged in transmission services from those engaged in commodity marketing services, i.e., marketing or sales for resale of natural gas or electric energy; and (2) ensuring that all transmission customers, affiliated and nonaffiliated, are treated on a nondiscriminatory basis. The Commission's goals have not changed. This rule is designed to prevent Transmission Providers from giving undue preferences to any of their Energy Affiliates to ensure that transmission is provided on a nondiscriminatory basis.
\5\ Sections 4 and 5 of the Natural Gas Act (NGA), 15 U.S.C. 717c and 717e (2000), state that no natural gas company shall make or grant an undue preference or advantage with respect to any transportation or sale of natural gas subject to the Commission's jurisdiction. Similarly, under sections 205 and 206 of the Federal Power Act (FPA), 16 U.S.C. 824d and 824e (2000), no public utility shall make or grant an undue preference with respect to any transmission or sale subject to the Commission's jurisdiction. \6\ Order No. 497, 53 FR 22139 (June 14, 1988), FERC Stats. & Regs., Regulations Preambles 19861990 ] 30,820 (June 1, 1988); Order No. 497A, order on reh'g, 54 FR 52781 (Dec. 22, 1989), FERC Stats. & Regs., Regulations Preambles 19861990 ] 30,868 (Dec. 15, 1989); Order No. 497B, order extending sunset date, 55 FR 53291 (Dec. 28, 1990), FERC Stats. & Regs., Regulations Preambles 1986 1990 ] 30,908 (Dec. 13, 1990); Order No. 497C, order extending sunset date, 57 FR 9 (Jan. 2, 1992), FERC Stats. & Regs.,
Regulations Preambles 19911996 ] 30,934 (Dec. 20, 1991), reh'g denied, 57 FR 5815 (Feb. 18, 1992), 58 FERC ] 61,139 (Feb. 10, 1992); Tenneco Gas v. FERC (affirmed in part and remanded in part), 969 F.2d 1187 (D.C. Cir. 1992); Order No. 497D, order on remand and extending sunset date, 57 FR 58978 (Dec. 14, 1992), FERC Stats. & Regs., Regulations Preambles 19911996 ] 30,958 (Dec. 4, 1992); Order No. 497E, order on reh'g and extending sunset date, 59 FR 243 (Jan. 4, 1994), FERC Stats. & Regs., Regulations Preambles 19911996 ] 30,987 (Dec. 23, 1993); Order No. 497F, order denying reh'g and granting clarification, 59 FR 15336 (Apr. 1, 1994), 66 FERC ] 61,347 (Mar. 24, 1994); and Order No. 497G, order extending sunset date, 59 FR 32884 (June 27, 1994), FERC Stats. & Regs., Regulations Preambles 19911996 ] 30,996 (June 17, 1994).

See also Standards of Conduct and Reporting Requirements for Transportation and Affiliate Transactions, Order No. 566, 59 FR 32885 (June 27, 1994), FERC Stats. & Regs., Regulations Preambles 19911996 ] 30,997 (June 17, 1994); Order No. 566A, order on reh'g, 59 FR 52896 (Oct. 20, 1994), 69 FERC ] 61,044 (Oct. 14, 1994); Order No. 566B, order on reh'g, 59 FR 65707 (Dec. 21, 1994), 69 FERC ] 61,334 (Dec. 14, 1994); and Reporting Interstate Natural Gas Pipeline Marketing Affiliates on the Internet, Order No. 599, 63 FR 43075 (Aug. 12, 1998), FERC Stats. & Regs., Regulations Preambles 19962000 ] 31,064 (July 30, 1998).
\7\ Open Access SameTime Information System (Formerly RealTime Information Network) and Standards of Conduct, Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles 19911996 ] 31,035 (Apr. 24, 1996); Order No. 889A, order on reh'g, 62 FR 12484 (Mar. 14, 1997), FERC Stats. & Regs., Regulations Preambles 19962000 ] 31,049 (Mar. 4, 1997); Order No. 889B, reh'g denied, 62 FR 64715 (Dec. 9, 1997), FERC Stats. & Regs., Regulations Preambles 19962000 ] 31,253 (Nov. 25, 1997).

See also Promoting Wholesale Competition Through Open Access NonDiscrimination Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs., Regulations Preambles 19911996 ] 31,036 (Apr. 24, 1996) at 31,692; order on reh'g, Order No. 888A, 62 FR 12274 (Mar. 14, 1997), FERC Stats. & Regs., Regulations Preambles 19911996 ] 31,048 (Mar. 4, 1997); order on reh'g, Order No. 888B, 81 FERC ] 61,248 (1997); order on reh'g, Order No. 888C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub nom., Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), cert. granted, 69 U.S.L.W. 3574 (Nos. 00568 (in part) and 00809), cert. denied (No. 00800) (U.S. Feb. 26, 2001).
\8\ Each reference to employees includes contractors,
consultants and agents.

III. Need for the Rule

6. As discussed in the NOPR, significant changes have occurred since the standards of conduct were first adopted. In Order No. 636, the Commission required all interstate natural gas pipelines to provide openaccess transportation service and to unbundle their gas sales from transportation.\9\ Since then, the market has expanded to include both physical and financial transactions by marketing and nonmarketing gas pipeline affiliates.\10\ In the gas industry, these changes include unbundling, capacity release, and ecommerce. Today, as a result of growth and consolidations, many interstate natural gas pipeline companies also have a much wider array of affiliates in all sectors of the energy business. The gas industry has experienced consolidations in every sectorpipelines, producers, marketers, LDC/utilities and industrials. Examples include the mergers of El Paso Energy Corporation, Sonat Inc. and the Coastal Corporation, and Columbia Energy Group and NiSource Inc. Marketing affiliates and nonmarketing affiliates today offer a variety of new services, such as bundled sales, asset management, price hedging, risk management, and electronic commodity trading. Recently, some pipelines have reduced or eliminated some of these services, while others continue to have active merchant, management and trading functions.
\9\ Order No. 636, Pipeline Service Obligations and Revisions to Regulations Governing SelfImplementing Transportation Under Part 284 of the Commission's Regulations, and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, FERC Stats. & Regs. ] 30,939 (1992), order on reh'g, Order No. 636A, FERC Stats. & Regs. ] 30,950 (1992), order on reh'g, Order No. 636B, 61 FERC ] 61,272 (1992), aff'd in part, rev'd in part, United Distribution Cos. v. FERC, 88 F.3rd 1105 (D.C. Cir. 1996), cert denied, 137 L. Ed 2d 845, 117 S. Ct. 1723 (1997), on remand, Order No. 636C, 78 FERC ] 61,186 (1997), order on reh'g, Order No. 636D, 83 FERC ] 61,210 (1998). \10\ We also have seen the entry of many financial institutions into the trading arena, e.g., Morgan Stanley Capital Group, Inc., Bank of America, N.A., and UBS AG.

7. Similarly, now that public utility Transmission Providers have been providing openaccess service under Order No. 888 for several years, there has been a large increase in the number of power marketers with marketbased rates,\11\ an increased market for available transmission capacity, and an increased number of power transactions. Electric power is evolving into a more liquid, transparent commodity. \11\ As of October 1, 2003, the Commission has granted approximately 1300 marketbased rate authorizations; nearly 880 of these were approved within the last five years. Of the
authorizations granted within the last five years, about 500 were granted to investorowned utilities and their affiliates.

8. Not only are the affiliated entities changing in size and scope, so are the Transmission Providers. As a result of an increase in merger activities there has been a convergence of the gas and electric industries.\12\ These industry changes mean that interstate natural gas pipelines and their affiliates not only deal in gas, but also in power, much of which is generated using natural gas. In one of its recent regulatory reviews, the Federal Trade Commission (FTC) found that the proposed acquisition of Panhandle and Trunkline by CMS was likely to adversely affect industrial plants in the CMS local natural gas franchise areas that rely on natural gas as a fuel to generate electric power onsite.\13\
\12\ Since 1995, the Commission has received 66 public utility merger applications, 60 of which have been approved, one has been set for hearing and five have been withdrawn or terminated. Several mergers joined gas and electric companies, such as NiSource Inc. with Columbia Energy Group and Dominion Resources, Inc. with Consolidated Natural Gas Company.
\13\ In the matter of CMS Energy Company and Panhandle Eastern Pipeline Co. et al., FTC File 9910046, Analysis of Proposed Consent Order to Aid Public Comment.

9. The Commission is concerned that a Transmission Provider's market power could be transferred to its affiliated businesses because the existing rules do not cover all affiliate relationships. For example, an integrated entity could exercise market power in delivered natural gas service to raise costs of rival generators or inhibit entry of new generators into wholesale power markets.

10. Although the current standards of conduct limit Transmission Providers' ability to make or grant undue preferences to their wholesale merchant functions or to their marketing affiliates, they do not cover the transmission providers' other nonmarketing affiliates, even though the NGA and FPA prohibit a natural gas pipeline company and a public utility from giving any entity an undue preference. Non marketing affiliates of Transmission Providers compete against non affiliates for transmission services, in capacity release transactions, in power sales, and in siting new generation. For example, in the gas industry, nonmarketing affiliates of interstate natural gas pipelines control large amounts of capacity on their affiliated pipelines, yet they are not covered by the current standards of conduct because they do not actually hold pipeline capacity (functioning instead as asset managers) or they fit within one of the existing exceptions, e.g., producers, gatherers and local distribution companies.\14\ See 18 CFR 161.2 (2003). A comparison of the October 2003 Index of Customers data to the January 2001 Index of Customers data reveals that the amount of firm capacity held by marketing affiliates has decreased during that period, while the amount of firm capacity held by other affiliates has increased during that period.\15\
\14\ A review of data from the 85 interstate natural gas pipelines and certificated storage companies that submitted an Index of Customers for October 2003, shows that 63 of them transport or store gas for their affiliates. Thirtysix pipelines transport gas for their marketing affiliates, which hold an average of 16 percent of the affiliated pipelines' capacity. Similarly, 13 pipelines with storage services ``transport'' gas for their marketing affiliates, which hold an average of 43 percent of the affiliates storage companies' capacity.

In addition, 33 pipelines transport gas for other (non marketing) affiliates that hold an average of 42 percent of the affiliated pipelines' capacity, and 16 storage companies
``transport'' gas for their other affiliates, which hold an average of 46 percent of the affiliated storage companies' capacity.

Staff's review, which looked at all interstate natural gas pipelines that filed Index of Customers is more complete than an INGAAsponsored study of select pipelines that showed, during 2000, that marketing and nonmarketing affiliates of natural gas pipelines contracted for 14.4 percent of the capacity on their affiliated pipeline.
\15\ The January 2001 Index of Customers data shows that marketing affiliates held about 18 percent of affiliated interstate natural gas pipelines' firm capacity and nonmarketing affiliates held an additional 19 percent of the affiliated pipelines' firm capacity. The October 2003 Index of Customers data shows that marketing affiliates hold about 16 percent of the affiliated pipelines' firm capacity and nonmarketing affiliates hold an additional 42 percent of the affiliated pipelines' firm capacity. [[Page 69137]]

11. The current standards of conduct do not address the sharing of confidential shipper information and transportation information with all Energy Affiliates. For example, if an interstate natural gas pipeline informs its affiliated asset manager about a proposed pipeline expansion or upcoming curtailment, the current standards of conduct do not require it to make that information available to nonaffiliates, unless the asset manager is a Marketing Affiliate. Nor do the current standards address whether an electric Transmission Provider can share with its generator affiliates information about generation projects planned by competitors. Sharing of information between Transmission Providers and Energy Affiliates undermines and frustrates the efforts of ``independent'' businesses to buy, sell, build, grow, and provide competitive alternatives in markets where there are concerns about market power. Although Transmission Providers' unduly preferential behavior towards their Energy Affiliates may not violate the current standards of conduct, we believe it violates the general statutory prohibitions against undue discrimination and undue preferences in the provision of interstate transmission services.

12. Many commenters argue generally that the rule is unnecessary. They maintain that there have been relatively few cases of anti competitive behavior. Some commenters urged the Commission to maintain the status quo. Many public utility Transmission Providers and interstate natural gas pipeline Transmission Providers argue that there is no need for a general rule, and individual instances of abuse can be considered and resolved by the Commission in casebycase

investigations or in individual Commission proceedings.

13. Some commenters supported the Commission's proposal to develop uniform standards of conduct. For example, the American Antitrust Institute said that Transmission Providers have the ability and incentive to adversely affect electricity or gas prices by frustrating or precluding a rival's access to electric transmission or gas transportation. In addition, those companies involved in the converging energy industry support the Commission's initiative because they currently operate under both the electric and gas standards of conduct. Some commenters urge the Commission to adopt stricter prohibitions, such as structural remedies or capacity limits. NASUCA says that the lack of complaints is a ``Catch22.'' NASUCA states that the reason there have been very few complaints regarding other affiliates is that anticompetitive transactions involving these transactions do not violate the current standards of conduct.

14. Having carefully considered all the comments, the Commission is convinced of the need for a general rule to establish standards of conduct governing relationships between Transmission Providers and their Energy Affiliates. With the creation of the Office of Market Oversight and Investigations (OMOI), the Commission is seeing the results of a more active enforcement program investigating unduly discriminatory practices. Recently, the Enforcement Division of OMOI has uncovered affiliate abuse activity that reveals that some Transmission Providers are giving their affiliates undue preferences and violating the standards of conduct.\16\ In addition, several audits of public utilities, conducted by the Division of Regulatory Audits, Office of the Executive Director, revealed violations of the standards of conduct. Specifically, Public Service Company of New Mexico (PNM) failed to comply with the independent functioning requirement.\17\ In addition, wholesale merchant function employees had access to computer terminals that allowed them to access transmission system information on the EMS (Energy Management System). More recently, an audit of Ameren Corporation revealed, among other things, that Ameren's transmission employees had engaged in nonpublic, offOASIS
communications with wholesale merchant function employees and other customers.\18\
\16\ See e.g., Transcontinental Gas Pipe Line Corp., 102 FERC ] 61,302 (2003) (Transco); National Fuel Gas Supply Corp., 103 FERC ] 61,192 (2003); Idaho Power Corp., 103 FERC ] 61,182 (2003) (Idaho Power); and Cleco Corp., 104 FERC ] 61,125 (2003) (Cleco).
\17\ April 25, 2000 Letter from John Delaware, Deputy Director and Chief Accountant, to Public Service Company of New Mexico in Docket No. FA999000.
\18\ For example, merchant function employees called
transmission function employees to request the most uptodate, non firm ATC information to save time in submitting requests for transmission service via OASIS. See September 27, 2002 Letter from John Delaware, Deputy Executive Director and Chief Accountant to Ameren Corporation in Docket Nos. FA015000, FA016000 and FA017 000.

15. Transmission Providers continue to have economic incentives to show undue preferences toward their Energy Affiliates. The Commission is adopting new rules to close loopholes in existing rules and to give Transmission Providers specific guidance on how to eliminate undue discrimination and undue preferences in the provision of interstate transmission services, consistent with the directions of the NGA and FPA. The Commission believes that the revised standards of conduct will ensure that Transmission Providers function independently of all their Energy Affiliates. Such separation is vital if the Commission is to ensure that Transmission Providers do not use their access to information about transmission to unfairly benefit their own or their affiliates' sales to the detriment of competitive markets.
IV. SectionbySection Analysis of Final Rule

A. ApplicabilitySec. 358.1

16. The NOPR proposed that the standards of conduct would apply to all Transmission Providers, as discussed in the section below. The NOPR also stated that the standards of conduct would not apply to Commissionapproved Regional Transmission Organizations (RTOs) that comply with the requirements of Order No. 2000.\19\ However, RTOs would be subject to the posting requirements in Sec. Sec. 37.5 and 37.6 of the Commission's regulations, 18 CFR 37.5 and 37.6 (2003). Finally, the NOPR provided that a public utility transmission owner that participates in a Commissionapproved RTO and does not operate or control its transmission facilities may request an exemption from the standards of conduct. Following a review of the comments, and as discussed in more detail below, the Commission is adopting this section with modifications, as follows:
\19\ Regional Transmission Organizations, Order No. 2000, 65 FR 809 (Jan. 6, 2000), FERC Stats. & Regs., Regulation Preambles July 1999December 2000 ] 31,089 (Dec. 20, 1999), order on reh'g, Order No. 2000A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs., Regulation Preambles 19962000 ] 31,092 (Feb. 25, 2000), petitions for review pending sub nom., Public Utility District No. 1 of Snohomish County, Washington v. FERC (D.C. Cir., Apr. 24, 2000 (Nos. 001174, et al.)).

Sec. 358.1 Applicability.
(a) This part applies to any interstate natural gas pipeline that transports gas for others pursuant to subpart A of Part 157 or subparts B or G of Part 284 of this chapter.
(b) This part applies to any public utility that owns, operates, or controls transmission facilities used for the transmission of electric energy in interstate commerce.
(c) This part does not apply to a Transmission Provider that is a Commissionapproved Regional Transmission Organization (RTO) or Independent System Operator (ISO). If a public utility transmission owner participates in a Commissionapproved RTO or ISO and does [[Page 69138]]
not operate or control its transmission facilities and has no access to transmission or market information covered by Sec. 385.5(b), it may request an exemption from this part.
(d) A Transmission Provider may file a request for an exemption from all or some of the requirements of this part for good cause. i. Regional Transmission Organizations/Independent System Operators

17. The NOPR proposed to exempt Commissionapproved RTOs from the standards of conduct, while Transmission Providers that are members of RTOs would not automatically be exempt from them. The NOPR stated that depending on how an RTO is structured, there may be a continuing need to apply the standards of conduct to public utility Transmission Providers that are members of RTOs. While an RTO may administer or manage the transmission facilities, there are instances in which a transmission owner continues to physically control or operate the transmission facilities or control centers.\20\
\20\ See PJM Interconnection, L.L.C. and Allegheny Power, 96 FERC ] 61,060 (2001), where the Commission permitted PJMWest's transmission assets to be operated through PJM's central control center, while the physical control of these transmission assets remained with the transmission owners.

18. EEI urged the Commission to be flexible to accommodate the varying operational arrangements that may be worked out between RTOs or ISOs and participating utilities. EEI, the Kentucky Commission, LG&E and KU urged the Commission to permit utilities that have joined an RTO, but still ``technically'' operate transmission facilities, to be eligible for exemptions from the rule. They argued that because the RTO ``administratively'' controls the transmission facilities, concerns about improper transfer and use of transmission information are alleviated.

19. BPA stated that it is unclear whether a Transmission Provider would be eligible for an exemption if, despite turning over operation and control, the Transmission Provider retains preferential access to unposted transmission information and requested that the Commission exempt a Transmission Provider even if it possesses minimal transmission information.

20. BPA has highlighted one of the main concerns of the standards of conductinformation access. If a Transmission Provider operates transmission facilities, regardless of whether it belongs to an RTO/ ISO, it has the ability to provide an undue preference to an affiliate and has access to valuable transmission information. Unless the ISO or RTO has a control center and field employees dedicated to the operation and maintenance of all transmission facilities under its operation, a Transmission Provider may be responsible for the operation of the transmission assets (under the direction of the ISO or RTO) and, more importantly, have direct access to transmission information.\21\ Participation in an ISO or RTO does not necessarily prevent a Transmission Provider from sharing information with its affiliates preferentially or preferentially operating facilities for the benefit of its Energy Affiliates.
\21\ RTOs and ISOs centrally monitor the transmission system, approve transmission service requests through OASIS, and direct member Transmission Providers in the operation of the transmission assets. RTOs, ISOs and member Transmission Providers share transmission information to facilitate safe and reliable operation of the transmission system.

21. NYISO requested clarification that it would not be subject to the rule. The Commission clarifies that NYISO would not be subject to the rule.

22. LILCO urged the Commission to require RTOs to be subject to the requirement to implement tariffs in a nondiscriminatory fashion under Sec. 385.5(c) of the Commission's regulations. Similarly, MID and the Illinois Commission requested that the Commission require RTOs and comparable entities (ISOs) to comply with the standards of conduct. MID claimed that RTOs and ISOs often procure Ancillary Services and Energy to meet their customers' needs and such purchases can have a significant effect on the market.

23. The Commission will not require ISOs or RTOs to be subject to the requirements of the standards of conduct as these transmission organizations have been designed and approved by the Commission to eliminate unduly preferential practices. Indeed, one of the many reasons for their creation was to provide a remedy to undue discrimination rather than relying on the standards of conduct. If transmission customers observe that an ISO or RTO is not complying with its Commissionapproved tariff or behaving in an unduly discriminatory fashion, it may file a complaint with the Commission, or contact the Commission's Enforcement Hotline or the ISO's or RTO's market monitoring unit (MMU).

ii. NonPublic Utilities

24. The Kentucky Commission, LPPC, Nebraska Public Power District and SMUD urged the Commission to clarify that the standards of conduct will apply to nonpublic utilities, by virtue of the reciprocity provisions of Order No. 888, in the same manner as the current standards of conduct apply to nonpublic utilities. Sempra urged the Commission to clarify that public power agencies or nonjurisdictional Transmission Providers that get access to the jurisdictional grid through reciprocity tariffs under Order No. 888 should be required to comply with the standards of conduct to eliminate the preferences they provide to their own merchant operations. The Commission agrees and is amending the proposed regulation to make it clearer which entities are subject to the requirements of the standards of conduct. If a non public utility voluntarily files a reciprocity open access tariff under Order No. 888, it shall comply with the Final Rule.

iii. Cooperatives and Small Pipelines and Utilities

25. Several commenters, including Alabama Electric Coop., Arkansas Electric Coop., Connexus, Seminole Electric Coop., Old Dominion, Midwest Energy, National Rural Electric Coop. Assoc., Southwest Transmission Coop., East Texas Electric Coop., Wolverine Power Supply Coop., Energy East Companies, Empire Electric District, Wells Rural Electric Coop. and Rural Utilities Service of the Department of Agriculture, asked the Commission to clarify that small utilities or cooperatives (coops) that obtained waivers of the standards of conduct under Order No. 889 would automatically be exempt from the provisions of the Final Rule.\22\ Along the same lines, BR Pipeline, Distrigas of Massachusetts, Hampshire Storage, NiSource, SCG, USG, and U.S. Gypsum and Washington Gas Light urged the Commission to categorically exempt small pipelines or those that were built to serve one or several customers. NRECA requested that the Commission incorporate waiver provisions in the standards of conduct and continue the effectiveness of previously issued waivers.

\22\ Black Creek Hydro, Inc. 77 FERC ] 61,232 (1996).

26. The Industrials recommended that the regulatory text contain a specific exemption provision. Dynegy, on the other hand, urges the Commission not to create broad categorical exemptions from the rule but, rather, to evaluate specific claims of hardship on a casebycase basis.

27. The Commission will continue the exemptions and partial waivers for the entities that have previously received
[[Page 69139]]
exemptions and partial waivers under Order No. 889 or Order No. 497. However, an exemption may be revoked if, after an investigation or audit, the Commission determines that the entity no longer qualifies for the exemption or the entity has abused the exemption.

28. In addition, Transmission Providers that did not previously obtain an exemption may request an exemption from all or some of the requirements of Part 358. RUS and NRECA requested clarification that generation and transmission cooperatives and their distribution cooperatives will not be subject to the Final Rule. The Commission clarifies that it will treat generation and transmission cooperatives consistent with the policies established under Order No. 888.\23\ \23\ Order No. 888A at 30,666.

iv. Delay of Applicability

29. Alliance urges the Commission to allow Transmission Providers to delay implementing the Final Rule while the Commission reviews a Transmission Provider's request for an exemption or waiver from the standards of conduct. This is inconsistent with Commission policy to implement rules after reasonable notice; however, apart from the information filing required in Sec. 358.5(e)(1), the Commission is giving Transmission Providers until June 1, 2004 to implement the requirements of the Final Rule. This implementation date should afford Transmission Providers time to fashion requests for waivers or exemptions.

B. General PrinciplesSec. 358.2

30. The NOPR proposed the following general principles for the standards of conduct: (1) A Transmission Providers' employees engaged in transmission system operations must function independently from the Transmission Providers' sales or marketing employees and from any employees of their Energy Affiliates,\24\ and (2) a Transmission Provider must treat all transmission customers, affiliated and non affiliated, on a nondiscriminatory basis, and cannot operate its transmission system to benefit preferentially an Energy Affiliate or Marketing Affiliate.
\24\ As noted earlier, when the Commission references employees, it includes contractors, consultants or agents.

31. No comments were received on this section. Therefore, the Commission is adopting these principles as proposed in the NOPR. These principles are based on Section 4 of the NGA and Section 205 of the FPA, which prohibit a natural gas company or a public utility, respectively, from making or granting an undue preference with respect to transportation/transmission or sale subject to the Commission's jurisdiction.

C. DefinitionsSec. 358.3

32. As proposed in the NOPR, Sec. 358.3 combines and revises the definitions that were previously contained in Sec. Sec. 37.3 and 161.2 of the Commission's regulations, and adds, as appropriate, definitions for new terms. The Commission is modifying and adopting the definitions proposed in the NOPR, as discussed below.

i. Definition of a Transmission Provider

33. The NOPR defined a Transmission Provider as: (1) any public utility that owns, operates or controls facilities used for transmission of electric energy in interstate commerce; or (2) any interstate natural gas pipeline that transports gas for others pursuant to subpart A or Part 157 or subparts B or G of Part 284.

34. The Major Issues Analysis did not address the definition of Transmission Provider. The Commission has reviewed the commenters' recommendations, but, as discussed in more detail below, is adopting the definition of Transmission Provider as proposed.

35. The American Forest and Paper Association (AFPA) urged the Commission to clarify that the definition of a Transmission Provider only includes ``any public utility that owns, operates or controls transmission facilities used for the transmission of electric energy in interstate commerce and is subject to the open access requirements of Order No. 888.'' It requested the Commission to clarify that Transmission Providers do not include industrials that own some discrete transmission facilities used solely for the purpose of interconnecting with the electrical grid. Along the same lines, the Industrials requested clarification that the definition of Transmission Provider will not apply to industrials with selfgeneration. The Industrials were concerned that the definition would include wholesale sellers such as power marketers and merchant generators with market basedrate authority and qualifying facilities (QF) because these entities self provide ancillary services or that selling ancillary services would be considered providing ``transmission service.'' Industrials claimed that any generator directly interconnected with an investorowned transmission system would be deemed a Transmission Provider under the proposed definition. Finally, the Industrials were concerned that owning an interconnect could be interpreted as ownership of a transmission facility. Similarly, Calpine argued that independent generators connected to jurisdictional transmission facilities that do not own transmission facilities, must be excluded from the definition of Transmission Provider.

36. The revision proposed by AFPA is unnecessary. Consistent with our implementation of Order No 888, Industrials that merely interconnect with the interstate transmission grid and sell power would not be a Transmission Provider as used in the Final Rule. Nor is self generation considered transmission in interstate commerce.

ii. Definition of an Energy Affiliate

37. The NOPR's proposed definition of Energy Affiliate yielded the greatest volume of comments. The NOPR defined the term Energy Affiliate broadly, as:
an affiliate of a Transmission Provider that (1) engages in or is involved in transmission transactions; or (2) manages or controls transmission capacity of a Transmission Provider; or (3) buys, sells, trades or administers natural gas or electric energy; or (4) engages in financial transactions relating to the sale or

transmission of natural gas or electric energy.

38. Since the Standards of Conduct seek to prohibit undue preferences and thereby the transfer of market power from the Transmission Provider to its affiliates, the term Energy Affiliate must cover more than the marketers and merchants covered by the existing rules. A narrow definition of Energy Affiliates will not specifically prohibit the transmission function from sharing employees and information with some of its Energy Affiliates who could then receive an unfair advantage in the competitive marketplace. On the other hand, too broad a definition of Energy Affiliate will limit some of the efficiencies gained from certain corporate structures. This language is also intended to cover affiliates that are indirectly involved in transportation, such as asset managers or agents.

39. The definition in the NOPR proposed to govern the relationship between the Transmission Provider, and, among others, affiliated producers, gatherers, local distribution companies (LDCs) and processors. Virtually all of the industry groups argued that the definition of Energy Affiliates is overly broad, and suggested that some narrowing of the definition would be appropriate.

40. In response to numerous comments, the Major Issues Analysis recommended various changes to the definition of Energy Affiliate and provided draft regulatory text. Followup comments recommended further [[Page 69140]]
changes, which are grouped into several categories. As discussed below, the Commission is revising the definition of Energy Affiliate as follows:
(1) Engages in or is involved in transmission transactions in U.S. energy or transmission markets; or
(2) Manages or controls transmission capacity of a Transmission Provider in U.S. energy or transmission markets; or
(3) Buys, sells, trades or administers natural gas or electric energy in U.S. energy or transmission markets; or
(4) Engages in financial transactions relating to the sale or transmission of natural gas or electric energy in U.S. energy or transmission markets.
(5) An energy affiliate does not include:
(i) A foreign affiliate that does not participate in U.S. energy markets;
(ii) An affiliated Transmission Provider; or
(iii) A holding, parent or service company that does not engage in energy or natural gas commodity transactions or is not involved in transmission transactions in U.S. energy markets; or
(iv) An affiliate that purchases natural gas or energy solely for its own consumption and does not use an affiliated Transmission Provider for transmission of natural gas or energy; or
(v) A stateregulated local distribution company that does not make any offsystem sales.

1. LDCs

41. As proposed by the NOPR, Transmission Providers would be required to apply the standards of conduct to their relationships with their affiliated LDCs by eliminating the exemption of Order No. 497, which permitted natural gas pipelines to share employees and information between their transmission businesses and their affiliated LDCs that do not make offsystem sales.\25\

\25\ 18 CFR 161.2(c) (2003).

42. Fourteen entities, including producers and unaffiliated gas marketers, NASUCA, AIA, the Industrials and the FTC supported the proposed definition of energy affiliate, focusing on LDCs. They asserted that: (1) Conditions have changed since Order No. 497 was promulgated, and LDCs compete more vigorously for access to transmission service; (2) the current exemption is a loophole that permits LDCs to get preferential access to information, which harms competition; and (3) the LDC exemption permits pipelines to circumvent the standards of conduct by using the LDC as a conduit for sharing information. The Connecticut Commission argued that giving LDCs an unfair competitive advantage can only hurt the longterm

competitiveness of the market.

43. However, thirtyfour commenters, primarily interstate natural gas pipelines and affiliated marketers, INGAA and AGA opposed applying the standards of conduct to a Transmission Provider's relationship with its affiliated LDCs. These commenters recommended that the Commission retain the current exception in Order No. 497 for LDCs that do not engage in offsystem sales. They argued that: (1) Section 1 of the NGA makes distribution subject to regulation by the states and not FERC; (2) there is no evidence or market analysis to support eliminating the exemption granted under Order No. 497; (3) to require such separation would cause unnecessary duplication of employees and gas control facilities, resulting in additional costs to customers; \26\ and (4) limits on communications with LDCs would impair reliability, and the ``emergency'' exception in the proposed rule is insufficient. \26\ A discussion of the commenters' concerns regarding additional costs is included in the Independent Functioning discussion, below.

44. The Commission has decided to retain the existing exemption for LDCs that do not make offsystem sales. Specifically, the definition of Energy Affiliates will exclude those LDCs that are regulated by the state, provide solely retail service and engage in no offsystem sales. However, the Commission notes that an affiliated LDC that engages in any offsystem sale is an Energy Affiliate, and subject to the standards of conduct. An offsystem sale would include a situation in which the affiliated LDC had contractually committed for more gas than it needed to serve its onsystem customers and sold that gas off its system, e.g., at a hub or on the spot market. Moreover, affiliated LDCs are prohibited from being conduits for improperly sharing information covered by the Final Rule. We also remind Transmission Providers that they are required to comply with the undue discrimination and undue preferences provisions of the NGA vis[agrave]vis their behavior with their affiliated LDCs and will be subject to greater scrutiny prospectively.
2. Affiliates Not Engaged or Involved in Transmission Transactions, e.g., Trading and Financial Affiliates

45. Thirteen entities, including Ad Hoc Marketers, INGAA and interstate natural gas pipelines, opposed the proposed definition of Energy Affiliates because it does not require the Energy Affiliate to be engaged or involved in transmission transactions on the Transmission Provider's system. These commenters urged the Commission to narrow the definition of Energy Affiliates to apply only to affiliates that are involved in transportation on affiliated Transmission Providers' systems. Similarly, several commenters, including Ad Hoc Marketers, INGAA, Gulf South, and four public utility Transmission Providers requested that the Commission exclude from the definition of Energy Affiliates entities that trade power or are engaged in financial transactions. Gulf South argued that gas futures contracts are traded only for delivery in the future and are unrelated to the current spot market price of gas.

46. The Commission disagrees with the commenters. Although an affiliate may not be directly involved in transmission transactions, the transmission markets and energyrelated financial markets are so interconnected that a Transmission Provider does have the ability to operate its transmission system in a manner that gives a trading affiliate an undue preference or provides the trading affiliate with unduly preferential information. For example, a transmission constraint directly impacts the value of the commodity being transported. Preferential access to information about such a constraint could provide a significant benefit to an affiliate engaged in speculative trading of the commodity and cause the price of the commodity to rise to the detriment of the market, even if the trader is not using the affiliated Transmission Provider.

47. Entities involved in the trading of power or gas or in financial transactions related to the sale, purchase or transmission of power or gas are an integral part of the financial and transmission markets. The monthly volume of futures contracts on the NYMEX has grown from approximately 170,000 per month in January 1982 to 7,000,000 per month in January 2000.\27\ As seen in the chart below, the financial natural gas (futures) markets and the physical (or spot) markets are closely linked. For example, NYMEX futures prices strongly correlate with transactions to buy and sell natural gas at Henry Hub, the physical delivery point specified in the NYMEX futures contracts.\28\ \27\ ``Derivatives and Risk Management in the Petroleum, Natural Gas and Electricity Industries,'' http://www.eia.doe.gov/oiaf/sesrviceerpt/derivative/index (Oct. 24, 2003).
\28\ See, e.g., FactFinding Investigation of Potential Manipulation of Electric and Natural Gas Prices, Docket No. PA022 000, Final Report on Price Manipulation in Western Market, March 2003 (Chapter IX at pp. IX2 to IX9).
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BILLING CODE 671701C

48. The financial natural gas markets are so interconnected with the natural gas physical markets and the transmission market, that a Transmission Provider has the ability to operate its transmission system in a manner so as to give a trading affiliate an undue preference or to provide the trading affiliate with unduly preferential information. Therefore, the definition of Energy Affiliates in the Final Rule incorporates trading and financial affiliates to the extent they are engaged in transactions in the U.S. energy or gas commodity or transmission markets.

3. Affiliated Transmission Providers

49. Twentyseven entities, the majority of which are in the interstate natural gas pipeline industry, pointed out that the definition of Energy Affiliate would appear to require Transmission Providers to treat affiliated Transmission Providers as Energy Affiliates. Many argued that such a broad definition of Energy Affiliate would restrict the joint operations of jurisdictional transmission facilities and would mandate unnecessary duplication of jointly operated facilities. INGAA and others pointed out that putting limitations on the relationship between affiliated Transmission Providers would be inconsistent with recent Commission policy. They cited the Commission's orders that required Dominion Transmission, Inc. to apply the gas standards of conduct to its Energy Affiliates as a merger condition.\29\ There, the Commission specifically excluded affiliated Transmission Providers from the definition of Energy Affiliates because they are already subject to the nondiscrimination provisions of the standards of conduct.
\29\ Dominion Resources, Inc. and Consolidated Natural Gas Co., 89 FERC ] 61,162 (1999), order on compliance filing, 91 FERC ] 61,140 (2000), order denying reh'g, 93 FERC ] 61,214 (2000), vacated and remanded, (D.C. Cir. No. 011169 Slip. Op. issued on April 19, 2002), order on remand pending.

50. The Major Issues Analysis proposed an exemption that would exclude FERCjurisdictional Transmission Providers from the definition of Energy Affiliate and provided draft regulatory text for comment. Numerous followup comments supported this proposed revision, including those filed Cinergy, Entergy, First Energy, NiSource, INGAA, and KM Interstate.

51. The Commission agrees; FERCjurisdictional interstate natural gas pipelines coordinating transactions with affiliated FERC jurisdictional interstate natural gas pipelines should be permitted to share transmission function employees and information, since both are bound by the standards of conduct requirements and are prohibited from sharing transmission, customer or market information with their Energy Affiliates. Similarly, a public utility Transmission Provider [[Page 69142]]
may share transmission function employees and information with other public utility Transmission Providers. Nor does it appear that communications between FERCregulated gas Transmission Providers and FERCregulated public utility Transmission Providers is a problem for the same reason. Moreover, the focus of the standards of conduct is to prevent transmission market power from extending to other products or services, so Transmission Provider to Transmission Provider communications should not violate the purpose of the rule. The definition of energy affiliates, therefore, is clarified to exclude affiliated Transmission Providers. Many commenters expressed support for the language proposed in the Major Issues Analysis, and we will adopt it.

4. Holding or Service Companies

52. Several commenters, including INGAA, Dominion, EEI, NiSource, and Williams, argued that the definition of Energy Affiliates could be construed to include service or holding companies because the definition includes affiliates that engage in financial transactions related to the transmission of natural gas or electricity. The commenters argued that this could limit the ability of senior officers and directors of the holding or service companies to exercise their fiduciary duties for their subsidiaries.

53. As discussed in the Major Issues Analysis, holding and service companies typically do not participate in the energy or transmission markets, and if they do not participate in those markets, they would not be considered Energy Affiliates. As discussed above, affiliates engaged in financial transactions that concern energy or natural gas commodity or transmission markets will be considered Energy Affiliates. Therefore, the Major Issues Analysis recommended that the Commission adopt a definition of Energy Affiliate that excludes holding or service companies that do not engage in and are not involved in energy or natural gas commodity or transmission transactions. The Major Issues Analysis also recommended that the Commission prohibit any affiliate, including holding companies or others exempt from the standards of conduct, from acting as a conduit for improperly sharing information.

54. Supplemental comments in response to the language proposed by the Major Issues Analysis were generally supportive of the holding company exception, including those filed by DTE, Gulf South, National Grid, and PacifiCorp and PSE&G. However, several commenters expressed concern that the revision recommended in the Major Issues Analysis was insufficient. They claimed that, even with the narrowing proposed in the Major Issues Analysis, they could not comply with the standards of conduct and the SarbanesOxley Act of 2002 (SarbanesOxley Act), which requires senior corporate executives to be fully informed about the financial conditions of their corporations and their subsidiaries.\30\ As noted by various commenters, including EEI and Duke, a parent company with an electric utility or gas distribution system as an operating division would not qualify for the exception proposed by the Major Issues Analysis. They claimed that separating the management or forming a holding company would require corporate reorganization, could be costly, and might trigger the restrictive requirements of the Public Utility Holding Company Act (PUHCA).\31\
\30\ See Section 302 of the SarbanesOxley Act, Pub. L. 107204, Sec. 9, 116 Stat. 745, 777 (2002).
\31\ Public Utility Holding Company Act of 1935, 15 U.S.C. 79a et seq. (2000).

55. For example, Duke argued that complying with the Final Rule and the SarbanesOxley Act would be difficult because the Duke Power Division of Duke Energy, which engages in transmission and wholesale and bundled electric sales, would be considered an Energy Affiliate of its interstate natural gas pipeline subsidiaries, and the pipeline subsidiaries would be prohibited from sharing information with the senior management of its Energy Affiliate/parent company, Duke Energy.

56. The Major Issues Analysis specifically excluded holding and service companies, but did not mention ``parent companies.'' Duke encouraged the Commission to extend the holding company exemption to apply to parent companies that may not fall within the legal definition of ``holding company,'' as set forth by PUHCA. NGSA, APGA and IPAA all support Duke's proposal to the extent that the parent companies are not involved in energy transactions. The Commission is adopting this recommendation and will include ``parent'' companies that are not involved in energy or transmission transactions in the ``holding company'' exception from the definition of Energy Affiliate.

57. Several commenters were also concerned about Transmission Providers with service corporation subsidiaries that employ virtually all corporate employees, including those who do work for Transmission Providers and Energy Affiliates. The Commission clarifies that if a Transmission Provider utilizes a service corporation or other subsidiary as the mechanism for employment, all the employees assigned, dedicated or working on behalf of a particular entity, e.g., a Transmission Provider or Energy Affiliate, are subject to the standards of conduct requirements as if they were directly employed by the Transmission Provider or Energy Affiliate.

58. In addition, in followup comments, National Grid encouraged the Commission to clarify that the holding company exclusion extends to companies engaged or involved in markets not related to energy, power or transmission. The Commission so clarifies.

5. Foreign Affiliates

59. Thirteen commenters, including INGAA, six interstate natural gas pipelines, EEI, five public utility Transmission Providers and Shell objected to the proposed definition of Energy Affiliates to the extent that it included foreign affiliates. They are concerned that Transmission Providers will be required to treat affiliates in Europe, South America and the Caribbean as Energy Affiliates. The Major Issues Analysis urged the Commission to exclude foreign affiliates and revised the draft regulatory text accordingly. Virtually all followup comments supported the staff's proposal.

60. The Commission sees no reason to be concerned about the possibility that a Transmission Provider will extend its market power by giving foreign affiliates undue preferences where the foreign affiliates do not participate in energy markets in the United States. The Final Rule clarifies that the definition of Energy Affiliates excludes foreign affiliates that do not participate in the United States (U.S.) energy or transmission markets.

61. In addition, where a foreign affiliate has an ownership interest in a jurisdictional Transmission Provider, that affiliate is, by virtue of its ownership interest, participating in the U.S. energy or transmission markets. For example, a joint venture U.S.Canadian pipeline would have to treat as Energy Affiliates its Canadian affiliates that buy, sell or trade natural gas or electric energy or engage in or are involved in transmission transactions in U.S. energy markets.

62. On a slightly different note, several pipelines including Alliance, Maritimes and Northeast Pipeline, as well as Duke Energy, Canadian Association of Petroleum Producers and the Alberta Department of Energy,
[[Page 69143]]
expressed concerned about affiliated pipelines that cross the U.S. and Canadian borders. These companies argued that under the exception proposed by the Major Issues Analysis, affiliated pipelines that cross or interconnect at the U.S. and Canadian borders would fall within the definition of Energy Affiliate. The commenters argued that they should be treated as affiliated pipelines because their operations are closely coordinated and transmission services are shared even though they cross the international border. The Commission agrees and will permit these companies to share their transmission function activities and coordinate along both sides of the border as long as neither of the Transmission Providers shares employees or information with any of its Marketing or Energy Affiliates.

6. Affiliates Buying Power for Themselves

63. Several commenters, including Dominion, Calpine and KM, argued that the Commission needs to clarify the definition of Energy Affiliates because including the terms ``buy,'' ``sell,'' or ``administer'' could be construed to include an affiliated entity that is purchasing power for its own consumption, such as a communications affiliate that is purchasing power to heat its office building. They argued that under the NOPR, if an affiliate is simply ``buying'' power for its own energy consumption and not using the affiliated Transmission Provider for transmission, the Transmission Provider would be required to post the organizational charts and job descriptions for the Energy Affiliates, which the commenters argue would be burdensome.

64. In response to these comments, the Major Issues Analysis recommended that the Commission exclude an affiliate of a Transmission Provider that is purchasing electricity or natural gas for its own consumption and is not using an affiliated Transmission Provider for transmission.

65. Although these purchases can have an impact on the energy markets, nonetheless, there is little potential for competitive harm if the definition of Energy Affiliates is clarified to exclude any affiliate of the Transmission Provider that is solely purchasing power or natural gas for its own consumption and is not using an affiliated Transmission Provider for transmission. Therefore, the Commission will adopt this recommendation in the Final Rule. However, this exception is not intended to create a loophole that circumvents the intent of rule, and does not apply to Energy Affiliates that use natural gas or power to produce another source of energy, e.g., generation affiliates. 7. Producers, Gatherers, and Processors

66. The NOPR defined Energy Affiliate to include producers, gatherers and processors. The NOPR states that whether a producer or gatherer is making an onsystem sale or an offsystem sale, it is still competing for access to the interstate transmission system. NGSA stated that upstream services and transportation services are frequently offered as a single package by pipelines or their affiliates, which allows a pipeline to leverage its market power in the transportation market to gain an advantage in the upstream market. The comments regarding affiliated producers, gatherers, an

FOR FURTHER INFORMATION CONTACT Demetra Anas, Office of Market Oversight and Investigation, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC, (202) 5028178.