NATURAL GAS: FERC ORDER 637

Federal Energy regulatory Commission (FERC) removed price cap on short-term capacity releases until September 2002, determines to allow peak/off peak and term-differentiated rates and adopts some other regulatory revisions; FERC also vows to begin new monitoring effort and dialogue with industry to examine need for more fundamental regulatory changes.

Approved unanimously by all four current commissioners, order 637 adopted six changes to the Commission’s current regulatory model. of which the major one is lifting of the price cap on short-term capacity releases (less than one year) for a two-year period until 9/30/2002. The Order also adopted these additional changes.

Permission for pipelines to propose peak/off peak rates for all short-term services, subject to current cost-based revenue requirements, to better reflect seasonal market demands.

Permission for pipelines to propose term-differential rates, again subject in the aggregate to the pipeline’s annual revenue requirement, to better reflect the underlying contracting risks of both pipelines and shippers.

Changes in scheduling procedures to eliminate current disadvantages for released capacity relative to pipeline capacity, enlargement of segmentation rights for firm capacity holders. Revision of penalty policy to require that pipelines provide greater imbalance management services (to reduce the need for penalties), minimize the use of operational flow orders (OFOs), assess penalties only to the extent necessary to protect system reliability, and credit penalty revenues to shippers

Narrowing of the right of first refusal (ROFR) mechanism to limit its application in the future only to maximum rate contracts for 12 or more months of consecutive service.

Expansion, modification and consolidation of interstate pipeline reporting requirements to provide improved price transparency and permit more effective monitoring for the exercise of market power and undue discrimination.