The Federal Energy Regulatory Commission (FERC or the Commission) yesterday issued a Notice of Proposed Rulemaking (NOPR) to amend its rules to prohibit multiple affiliated companies from bidding for interstate natural gas pipeline capacity in a single open season in which the pipeline may allocate

capacity on a pro rata basis, unless each affiliate has “an independent business reason for submitting a bid.” The NOPR also would prohibit the subsequent release of any such capacity obtained pursuant to a pro rata allocation to any affiliate. Comments on the proposed rule will be due 45 days after publication in the Federal Register.

In two separate but related orders, FERC also approved settlements resolving two Show Cause Orders alleging the use of affiliates to “game” the pro rata allocation of capacity in an open season. It is clear by the timing of the proposed rule and yesterday's settlement orders that the NOPR stems from the Commission's frustrated efforts to prosecute companies for alleged schemes to “game” pro rata allocation mechanisms under its anti-fraud and manipulation rule. In essence, the NOPR would enable the Commission to pursue the same conduct it has attempted to prosecute as manipulation without having to prove the elements of manipulation. The NOPR also would turn what had been a single manipulative scheme into two separately punishable violations: (1) multiple affiliates bidding in a single open season and (2) the subsequent assignment of the awarded capacity. FERC’s $1 million per day, per violation penalty authority applies equally to any single rule violation as to violations of FERC’s anti-manipulative rule. Therefore, the NOPR would double the potential penalties for schemes FERC previously sought to prosecute as manipulation.

Proposed Rule

The Commission proposes to add new Section 284.15 to its regulations to prohibit multiple affiliates of the same entity from participating in an open season for interstate pipeline capacity offered under subparts B and G of the Commission's regulations if the pipeline may allocate capacity on a pro rata basis, “unless each affiliate has an independent business reason for submitting a bid.” For purposes of this proposed rule, FERC will consider companies to be “affiliates” if they satisfy the definition of affiliate in Section 358.3 of its rules which is based on common control (including the rebuttable presumption that a voting interest of 10% or more constitutes control).