FERC’s Standards of Conduct: Back to the Drawing Board

On November 17, 2006, the United States Court of Appeals for the District of Columbia Circuit’s decision in National Fuel Gas Supply Corp., v. FERC, No. 04-1183 (2006), vacated and remanded the portion of Federal Energy Regulatory Commission (“Commission”) Order No. 2004. Specifically, the Court rejected Order No. 2004’s attempt to expand the reach of the Commission’s Standards of Conduct for Transmission Providers (“Standards”) to the non-marketing affiliates of natural gas companies. Because the appeal involved only the Standards as applied to interstate pipelines, not electric transmission utilities, the Standards applicable to electric transmission utilities remain intact. At this time, it is unclear what affiliate standards, if any, currently remain in force regarding natural gas pipelines.

Order No. 2004 had extended existing rules governing interstate pipelines’ relationships with their marketing affiliates to relationships with non-marketing affiliate companies, such as producers, gatherers and traders. The rules required, among other things, independent functioning of pipeline employees, nondiscriminatory access to information, and informational postings to facilitate public access to information. In this way, the Commission sought to prevent pipelines from providing information to their energy affiliates that could improperly favor those affiliates in various gas market transactions. At the time, several Commissioners -- including the Commission’s current Chairman -- dissented, concluding that the record provided no evidence of an existing problem with non-marketing affiliates in need of correction.

On appeal, the Court agreed with the dissenting Commissioners. The Court criticized the Commission for relying on largely theoretical concerns, unsupported by any real evidence of anti-competitive conduct by non-marketing affiliates. Indeed, the Court’s found that the evidence before the Commission contained not a single example of abuse between a pipeline and a non-marketing affiliate, but instead consisted of examples of abuse by pipelines and affiliated marketers, which were already covered by the existing rules. The Court reserved judgment concerning whether, on remand, the Commission could justify Order No. 2004 on the basis of theoretical abuse alone, and provided specific guidance regarding what would be required if FERC chose to re-promulgate the vacated Order No. 2004 provisions relying solely on a theoretical threat.