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FERC Issues NOPR to Limit Affiliate Bidding in Pipeline Open Seasons
April 11, 2011
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FERC has issued a NOPR to prohibit multiple affiliates of the same entity from bidding in an open season for pipeline capacity in which the pipeline may allocate capacity on a pro rata basis, unless each affiliate has an "independent business reason" for submitting a bid (RM11-15).
Additionally, FERC also proposed that if more than one affiliate of the same entity participates in such an open season, then none of those affiliates may release any capacity obtained in that open season pursuant to a pro rata allocation to any affiliate, or otherwise allow any affiliate to obtain the use of the allocated capacity.
"These proposals would prevent anticompetitive gaming of the pro rata allocation methodology by using multiple affiliates of the same entity to acquire a larger share of the available capacity than one affiliate would be able to acquire by itself," FERC said.
The Commission reported that some entities have developed and applied a strategy of bidding with multiple affiliates in open seasons for available capacity in order to defeat the pro rata allocation tiebreaker mechanism and obtain a greater share of the available capacity than a single bidder could have acquired by itself. "In theory, a company could employ this strategy to the extreme by bidding hundreds or even thousands of affiliates in a single open season to squeeze out competitors and give that company a dominant share of the capacity. The affiliates bidding would not need to have any direct customers or employees to confer the competitive advantage to the affiliate designed to benefit from the multiple affiliate bidding - in fact, a company could create affiliate corporations merely for the sake of bidding in open seasons to obtain the benefit of multiple affiliate bidding," FERC said.
Regarding what behavior constitutes an "independent business reason" and would not be prohibited under the rule, FERC said that, "[i]t is impossible to describe in advance every situation that demonstrates an independent business reason."
"This phrase is intended to assure companies bidding for capacity that our rule will not prohibit transactions with economic substance, in which the bidding affiliate is providing service of value to its customers that is facilitated or enhanced by the capacity being acquired," FERC added.
FERC said that it, "recognizes that not all multiple affiliate bidding is used to defeat a pro rata allocation mechanism. In some cases, affiliates may have independent business reasons for submitting their bids. For example, a marketing arm of an energy company may bid to secure capacity for its wholesale customers and a retail operation of the same company may bid to secure capacity to serve its retail customers, and each would have an independent business reason for its bid. Or a marketing company may have two or more affiliates operating in different geographic areas, thus serving distinct markets all of which may be served by transportation on the same pipeline."
"Those scenarios are illustrative of situations in which a business unit uses awarded capacity to serve its own customers or otherwise acts consistently with its business plan, interests, and obligations. Indications that a company is not acting independently would be if the business unit is used by its parent or affiliate in a way that differs from its usual business operations, is used to perform transactions that an affiliate or parent could not, or is acting as an 'alter ego' of an affiliate or parent," FERC added.
Additionally, in order to prevent the use of capacity release or other mechanisms as part of a scheme to game a pro rata allocation by transferring the benefit of the capacity to the affiliate that has a business use for the capacity, the Commission proposes to prohibit affiliates from releasing any capacity obtained in an open season pursuant to a pro rata allocation to any affiliate, or otherwise allowing any affiliate to effectively obtain the use of the allocated capacity.
"This will not inhibit two or more affiliates from obtaining and using valuable pro rated capacity where they each have an independent business reason for their bids. If the affiliate has an independent business reason for initially bidding on the capacity, it presumably has a need for the capacity once it has been awarded it. Therefore, requiring the capacity-winning affiliate to retain the capacity in such a circumstance should present little, if any, hardship to such affiliate. If a company believes that retaining capacity in a certain case would in fact create a hardship to an affiliate, the company can seek a waiver of the prohibition," FERC said.
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