On March 21, 2024, FERC issued a Notice of Inquiry (“NOI”) seeking additional information on whether the Commission should continue to allow interstate pipelines to package “high value” capacity with non-contiguous and operationally unrelated parcels of capacity in a single auction or open season, thus requiring interested bidders to bid on both segments of capacity.  Initial comments on the NOI are due by June 20, 2024.

According to current Commission regulations, a pipeline is required to post any available firm capacity on its website as soon as it becomes available.  This capacity can be sold in a variety of ways, including on a first-come, first-served basis or through an auction. According to the NOI, it has become more common for pipelines to use an auction method.  Under this approach, pipelines, in accordance with their FERC gas tariffs, can conduct an open season where they announce available capacity as along with the criteria for an acceptable bid, the method for determining the best bid, and the bid closing date.  During the open season, pipelines evaluate the bids for capacity based on their net present value (“NPV”).  In general, the NPV is the discounted cash flow of incremental revenues that the pipeline would receive, which are determined by factors like the price, term, and quantity of the transportation service.

Historically, the Commission has permitted the inclusion of non-contiguous and operationally unrelated segments in capacity postings, in part because it allows pipelines to sell more capacity than they otherwise would, potentially benefiting shippers in the long run. Specifically, the NOI states that the Commission believes that maximum revenues and increased use of pipeline capacity can increase billing determinants, thereby reducing unit fixed costs in a pipeline’s next rate case.  

However, on June 2, 2022, a group of gas associations and shippers petitioned FERC to initiate a rulemaking proceeding regarding interstate pipelines’ use of these so called “junk and jewel” auctions and open seasons, which they believe distort market pricing and ultimately lead to higher prices for natural gas consumers (“Petition”).  The petitioners are particularly concerned that these “junk and jewel” packages effectively deny them access to needed capacity and, in practical terms, result in undue discrimination and unjust and unreasonable rates.

In the NOI, FERC seeks comments from industry participants on what, if any, policy changes the Commission should implement regarding interstate pipelines packaging high value capacity with non-contiguous and operationally unrelated parcels of capacity in a single auction or open season, as well as the potential impacts of any such policy changes.  Specifically, the Commission is soliciting comments on:

1. Additional information and data on interstate natural gas pipeline posting practices related to the packaging of non-contiguous and/or operationally unrelated segments of capacity in a single auction or open season;
2. Relevant information that bears on whether the Commission should reconsider its policy, including the impact of bid aggregation on pipeline rates and whether certain shippers are effectively prevented from bidding on packages of capacity that include segments for which they do not have an operational need; and
3. What regulatory, economic, or policy goals would, or would not, be achieved by modifying the current policy.

Comments are due by June 20, 2024 and reply comments are due by July 22, 2024.

FERC’s NOI, issued in Docket No. in Docket No. RM22-17-000, can be found here.