Term
| Structure of electric industry |
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Definition
1. fuel
2. generation
3. transmission
4. distribution
5. consumption |
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Term
| Structure of gas industry |
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Definition
1. Production
2. Gathering - low pressure, low diameter pipelines that transport raw natural gas from the wellhead to the processing plant
3. Processing – removing things besides pure methane
4. Transmission
5. Distribution
6. Consumption
7. Storage |
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Term
| 3 charachteristics of a monopoly |
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Definition
a. Profoundly influences economy
b. Requires massive capital
c. Affects those around it economically |
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Term
| Define workable competition |
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Definition
| = implies imperfect, but good enough, competition making market power limited due to patterns of market performance such that no one can exercise significant market power for any period of time. Example: if someone has a monopoly on natural gas, they are still competing with fuel oil. |
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Term
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Definition
| i. Nature of business tends toward monopoly: usually where one servicing firm is more efficient than multiple servicing firms. |
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Term
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Definition
| the more you produce, the less it costs (applies to almost everything produced; Some argue there really aren’t natural monopolies, all just really subject to economies of scale) |
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Term
| What if there are economies of scale but no barrier to entry |
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Definition
| Then economies of scale don't matter because anyone can get in the buisiness |
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Term
| Name some barriers to entry |
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Definition
o Price cutting: Established competitors can cut prices to create a barrier to entry against other competitors (railroads, airlines).
o Government grant may be barrier to entry (isn’t natural monopoly, just exclusive rights).
o Economic regulation (this course is partly about this): prohibits discrimination & sets prices, prohibits rebates (form of discrimination)
o Collusion: classic way to restrict competition, now largely illegal (one of least effective). Example: OPEC cartel (cartels fix prices between themselves and agreement not to undercut the other members – way to cheat is that one person cuts prices and takes market)
o Price discrimination Pooling: Agreement not to compete (railroad cartel tried this), didn’t work, tried pooling: took all of their money and put into a pot and divided out (like NFL)
o licensing requirement: prerequisite to do business |
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Term
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Definition
created by interrelationship of activities for services or devices, excludes competitors.
o Best examples: software on personal computers, telecommunications, railroads. (network effect = someone with network won’t let others on to their system).
o Businesses coming together to be more efficient, must regulate industries ability to exclude or may get a monopoly.
o But Note: if costs are low to develop alternatives, may not be so problematic. |
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Term
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Definition
i. Prohibits discrimination through discriminatory pricing
ii. discrimination is
. within market
. also when delivering product between market where there is no other supplier due to location, only one supplier, only one pipeline etc.
. can be a kickback
iii. Protects the entire market by actually setting prices
iv. Requires that terms and conditions be published (“Tariff” on file for public, any changes to tariff or to service must be filed so others can see that there is no discrimination) |
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Term
| What is the downside to regulation |
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Definition
i. discourages entrepreneurial profits
ii. may undermine efficiency (market can work it out itself v. argument that regulators who spread costs and risk around can allocate resources more efficiently)
iii. prevents innovation which would otherwise occur by depriving entrepreneurs of profits
iv. Eliminates Legitimate Ways to compete, such as:
. superior product
. superior quality
. better price |
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Term
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Definition
iv. Supply interruption
v. Contractual obligations
vi. Accidents
vii. Regulatory risks (regulators will never admit this exists, but as Charles River Bridge case shows legislature-regulators can break contracts: some states have reputation of being greater risk, TX lower risk) |
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Term
| The rates a company is allowed to earn must be --- and --- |
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Definition
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Term
| Court said what regarding investors and rates in Hope |
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Definition
| should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. |
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Term
| What case besides Hope did the court ppint to the importnace of attracating capital? |
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Definition
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Term
| Paraphrase investor-centered test from Bluefield |
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Definition
| A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties . . . . The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. |
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Term
| If a company chooses a larger rate base, what happens to the profits? |
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Definition
| They go up. THey are benefitted by spending more money on plants. |
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Term
| In the electric industry, what did they tie to their rate base? |
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Definition
| Reliability. But really, unreliability is more often caused by breakdowns in distribution. |
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Term
| What part of the constitution prevents takings? |
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Definition
| The Fifth and Fourteenth amendments to the Constitution prohibit the government from taking private property for public use without just compensation. |
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Term
| How does the takings parts of the constitution affect rate setting? |
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Definition
| These provisions apply to government regulation of maximum rates, and establish a constitutionally-based floor below which a rate ceiling must be reversed as confiscatory. |
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Term
| Before Hope, what did the court look at to determine maximum rates? |
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Definition
| 1) its rate base; (2) the allowed rate of return; and (3) operating expenses. |
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Term
| Did FPC have to still consider the three factors after Hope? |
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Definition
| Nope. in setting maximum rates, the utility commission would not be "bound to the use of any single formula or combination of formulae in determining rates." 17 Rather, it would be the "result reached[,] not the method employed" that would be controlling. 18 |
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Term
| What does just and reasonable meamn? |
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Definition
| The "just and reasonable" standard in utility ratemaking statutes is a term of art, and typically requires a balancing between the interests of the owners of the utility (i.e., the utility investors) and the utility's customers. 25 This balancing recognizes that while utility customers should pay rates that are reasonable, the rates must be sufficient to produce a profit level that enables the utility to maintain its financial integrity and attract capital. 26 In turn, these standards require that the interests of utility shareholders be balanced with the interests of utility customers. 27 In achieving this balance, there is a constitutional minimum, established in Bluefield and reaffirmed by Hope, which must be satisfied. 28 |
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Term
| Does the just and reasonable standard mean any result is reasonable? |
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Definition
| The "just and reasonable" standard in utility ratemaking statutes is a term of art, and typically requires a balancing between the interests of the owners of the utility (i.e., the utility investors) and the utility's customers. 25 This balancing recognizes that while utility customers should pay rates that are reasonable, the rates must be sufficient to produce a profit level that enables the utility to maintain its financial integrity and attract capital. 26 In turn, these standards require that the interests of utility shareholders be balanced with the interests of utility customers. 27 In achieving this balance, there is a constitutional minimum, established in Bluefield and reaffirmed by Hope, which must be satisfied. |
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Term
| what does bluefield say abput rates changing over time? |
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Definition
| A rate of return may be reasonable one time, then become too high or too low depending on market, etc. |
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Term
| What are types of argument made about proxy groups |
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Definition
which companies are appropriate risk for selection, plus argue over what adjustments to make to proxy group figures once proxy companies selected
ii. Supreme Court says proxy group must be risk-appropriate
iii. Returns must be sufficient to allow subject company to attract capital at reasonable rates (otherwise can’t make investments it needs to make to serve public and attract investors) |
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Term
| Does gas flowing in a state from another state make it subject to federal regulation? |
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Definition
| f. Just flowing in and used for own purposes (no sale or resale), OK, no fed reg. But once it is piped out again it is intrastate and fed jurisdiction. |
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Term
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Definition
| receives gas at state border (exporting state will be considered subject to federal jurisdiction); Hinshaw pipelines receive and are kept completely within state. State company buying and transporting from out-of-state and purchased oil does not leave state. If incoming oil then crosses out, it is subject to federal jurisdiction (then interstate). |
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Term
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Definition
| ): Intrastate company can receive and transport out of state IF doing behalf of another state, or through affiliate (e.g., Florida to California through Texas) “pursuant to Section 311” under most circumstances, INTERSTATE and INTRASTATE could interconnect without causing intrastate pipeline to be subject to federal jurisdiction. Intrastate pipelines still guard their intrastate status. |
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Term
| How did PURPA affect federalism? |
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Definition
| established a process whereby Congress set standards [*85] that state commissions must consider when designing a state energy policy. |
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Term
| Becuase Congress thought electric utilities were not diversifying, they passed PURPA. How did it make them diversify? |
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Definition
| the Act made utilities buy electricity from certain other sources ("Qualifying Facilities") as long as that power could match the utilities' "avoided cost." |
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Term
| Why is FERC trying to increase number of electric generators? |
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Definition
| They think it will increase competition |
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Term
| Why is FERC trying to increase number of electric generators? |
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Definition
| They think it will increase competition, improve efficientcy, and promote bulk power trades |
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Term
| Explain electricty transmission and wheeling. |
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Definition
| FERC has been concerned that companies aren't sharing transmission lines. Wheeling is moving power from a generator to a distribution co using a third party's lines |
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Term
| What did the court hold in Otter Tail re wheeling? |
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Definition
| "there is no authority granted the Commission under Part II of the Federal Power Act to order [wheeling]." |
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Term
| How does PURPA relate to wheeling? |
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Definition
granted FERC limited authority to order wheeling by adding sections 211 and 212 to the FPA. FERC could issue a wheeling order if [*551] it found that such order: (1) was in the public interest; (2) would conserve energy, promote efficiency, or improve reliability; and (3) met the criteria of section 212. 28 Section 212 prohibited issuance of a wheeling order if such order: (1) was not likely to result in a reasonably ascertainable uncompensated economic loss for any affected utility; 29 (2) would not place an undue burden on any affected utility; (3) would not unreasonably impair the reliability of any affected utility; or (4) would not impair the ability of any electric utility affected by the order to render adequate service to its customers. 30
BUt FERC didn't have the authority to enforce this, so these sections really didn't matter |
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Term
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Definition
| created major exception to application of Holding Company Act = for purposes of assuring reliability, an interconnection is permitted w/o causing intrastate utilities to be subject o federal regulation. Limited exception relates only to reliability. |
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Term
| How does PURPA relate to small power producers and cogenerators? |
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Definition
| includes provisions which require utilities to purchase power from cogenerators and small power producers. |
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Term
| Holding in attleboro regarding states ability to regulate |
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Definition
| finding that the rate increase amounted to a direct burden on interstate commerce. 37 Furthermore, the Court stated that the rate was "not subject to regulation by either of the two States . . .; but, if such regulation is required it can only be attained by the exercise of the power vested in Congress." |
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Term
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Definition
The PURPA provisions designed to encourage efficient electricity generation and the use of renewable resources focus on incentives for the development of cogeneration and small power production facilities. 63 In order to encourage cogenerators and small power producers, Congress recognized the need to ensure a market for power produced by those facilities. 64 Toward that end, PURPA requires that utilities interconnect with cogenerators and small power producers that meet certain qualifications for the purpose of purchasing electric power. 65 PURPA also establishes standards for determining the rates that a utility must pay for such power. Additionally, PURPA requires that state utility commissions exempt from regulation those cogenerators and small power producers that meet federally-prescribed statutory qualifications. 66 PURPA delegated to the Federal Energy Regulatory Commission (FERC) authority to promulgate regulations with regard to small power production and cogeneration.
c. Created a market for non-utility electric power producers forcing electric utilities to buy power from these producers at the “avoided cost” rate, which was the cost the electric utility would incur were it to generate or purchase form another source. Generally, considered to be the fuel costs incurred in the operation of a traditional power plant. |
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Term
| What is cogeneration (related to PURPA) |
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Definition
| • Cogeneration: idea was that those producers who qualified would produce steam (thermal energy) and use first in an industrial application, then use second to produce electricity. Most typical situation: build thermal plant to support industrial plant = could sell power w/o being utility under state law or regulation under PUHA (Public Utility Holding Act). PURPA passed to encourage efficiency. |
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Term
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Definition
: created new type of electric power producers, no longer treated as utility and could sell power without being subject to regulation.
• Also required vertically integrated utility to buy from small power and independent power producers. |
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Term
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Definition
what the utility would have built had it not sold power (like nuclear power plant). 1982 = peak of market for energy costs, about that time line term contracts were entered into to buy power. Similar situation to “take or pay” contracts. 1979 Three Mile Island Incident: nuclear accident. Effect = nobody built any more nuclear power plants. 1982 no more building nuclear power plants.
The regulations provide that the standards of PURPA section 210(b) 152 will be met if, after considering the capacity of both the utility and the qualifying facility and the ability of the utility to defer costs by relying on the qualifying facility's power, 153 the public utility commission establishes a rate equal to the utility's avoided costs. 154 The Commission indicated that a state public utility commission could establish a rate less than full avoided cost if it found such a rate to be consistent with the provisions of PURPA section 210(b) and "sufficient to encourage cogeneration and small power production." |
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Term
| Interstate commerce act prohibits 2 things |
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Definition
| Price discrimination and collusion |
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Term
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Definition
| iv. Gave FPC jurisdiction over interstate gas, as long as it wasn’t for private consumption. Rates had to be just and reasonable and non discriminatory |
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Term
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Definition
i. Transportation of natural gas in interstate commerce (Sect 1(b));
ii. Sale in interstate commerce of NG, for resale for ultimate public consumption (domestic, commercial, industrial or any other use)(1(b));
iii. To natural gas companies engaged in such transportation of sale |
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Term
| NGA says all rates must be |
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Definition
| just and reasonable and nondiscr in praice and tye of service |
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Term
| “Certificate of Public Convenience” required for all companies subject to jurisdiction of FPC to |
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Definition
a. For NG company or person to construct or engage in the transportation of natural gas;
b. undertake construction of any facilities therefor,
c. or acquire/operate any such facilities |
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Term
| section 201 of fpa give fpc authority to |
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Definition
a. FPC has jurisdiction over all facilities for transmission or sale of electric energy
b. FPC does NOT have jurisdiction over:
i. facilities use for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or
ii. over facilities for the transmission of electric energy consumed wholly by the transmitter. |
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Term
| How is the nondiscr part of NGA written? |
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Definition
Unlawful to: a. make or grant any undue preference or advantage to any person, or subject any person to undue prejudice or
b. maintain any unreasonable difference in rates, charges, service, facilities b/w localities or classes of service. |
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Term
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Definition
a. Limited operations to one state (so they were subjected to state regulations) or
b. Forcing divestitures so they were each a single system serving a limited geographic area |
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Term
| How did PUHCA make the FPC simplify corporate hoco structures? |
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Definition
”: the FPC has the duty to examine the corporate structure of every registered holding company and subsidiary company thereof (inter-relationships b/w company, holding company system) and the character of its interests and properties owned or controlled thereby to determine the extent to which the corporate structure could be simplified:
a. unnecessary complexities eliminated
b. voting power fairly and equitably distributed among the security holders
c. properties and business thereof confined to those necessary or appropriate to the operations of the integrated public-utility system: |
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Term
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Definition
| a. says in a nutshell that if subject to NGA (as described in statute) you have to get an authorization before you can build or operate an interstate transmission company, called a “Certificate of Public Convenience and Necessity”. |
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Term
| How are gas and elec different? |
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Definition
| Gas was used first. More efficient to tport. Gas had long pipelines and when they crossed state lines, they were more efficient to transport. |
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Term
| After Phillips came down, how did FERC eventually deal with them? |
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Definition
| g. 1974, FPC determined area wide pricing was unfeasible. In effort to find system of wellhead price regulation that worked, FPC adopted national price ceilings for the sale of NG into interstate pipelines. (significantly higher than cost of service pricing, but less than market) |
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Term
| Why was NGPA passed in 1978 |
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Definition
| had “disastrous affects” on US natural gas market. Resulted in artificially low ceilings. While consumers got low prices, there was little incentive for gas exploration of new natural gas reserves. Cost more to find gas than new reserve gas could be sold for |
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Term
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Definition
| create a single national natural gas market, Equalize supply with demand, Allow market forces to establish the wellhead price of natural gas. |
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Term
| NGA said what about new pipelines |
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Definition
| ii. Said no new pipeline could be built to serve a market already served by another pipeline. This was extended to mean you had to have a permit from FPC to build any new interstate pipeline. |
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Term
| ---- abolished FPC, replaced with FERC |
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Definition
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Term
| How did prices change for consumers with NGPA |
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Definition
| iv. Prices for end-users increased, but were mitigated by the pipelines, which blended the cost of gas under the new Ks with regulated gas under the old Ks when selling bundled products to customers |
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Term
| WHat is the result of NGPA |
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Definition
| vi. Result of NGPA: spurred investment into discovery of new natural gas, but created oversupply due to increase in price. Also, customers purchased their own gas from producers and transported it over interstate pipelines, instead of purchasing the bundled product directly from the pipelines. |
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Term
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Definition
| a. Established a voluntary framework under which interstate pipelines could act solely as transporters of natural gas, rather than filling the role of a natural gas merchant |
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Term
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Definition
| : “take or pay” contracts under which pipelines still obligated, per DC Cir. Ct of Appeals, FERC issues Order No. 500 in 1987. Order 500 essentially encouraged interstate pipelines to buy out costly take or pay contracts, and allowed them to pass a portion of the cost of doing so through to their sales customers. The LDCs to which these costs were passed through were allowed by state regulatory bodies to further pass them on to retail customers. |
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Term
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Definition
i. Transportation function became primary function of pipelines, as opposed to offering the bundled merchant service
ii. A wide variety of natural gas purchasing and transportation patterns and practices emerged due to availability of choices to the end user
iii. New pricing patterns emerged, known as “netback” pricing, in which a reasonable price was set at the point of consumption, and that minus the cost of distribution, minus the cost of transportation, gave the “netback” price to the producer at the wellhead. |
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Term
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Definition
| Amended NGPA and repealed all remaining regulated prices on wellhead sales. As of 1/1/3, all remaining NGPA price regulations were eliminated allowing market to completely determine the price of natural gas at the wellhead. |
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Term
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Definition
: gives all natural gas sellers equal footing in moving natural gas from the wellhead to the end-user or LDC. Allows the complete unbundling of transportation, storage, and marketing; the customer now chooses the most efficient method of obtaining its gas.
c. Completed the final steps toward unbundling by making pipeline unbundling a requirement.
d. Order 636 states that pipelines must separate their transportation and sales services, so that all pipeline customers have a choice in selecting their gas sales, transportation, and storage services from any provider, in any quantity. |
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Term
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Definition
| : Transaction Costs theorem: when there are no transaction costs and initial distribution of property is important, then bargaining will lead to the most efficient outcome. Transactions costs are costs imposed on society due to inefficiencies in dealing with third parties in our legal system |
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Term
| Parties' agruments in Charles River Bridge |
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Definition
a. Harvard (Charles River): interference by legislature establishing the competing bridge was unconstitutional interference with right to contract (this is a contract case on its face, but underlying issue is state’s constitutional right to make improvements that are for the public good, and to withhold exclusive contract rights to any one company).
b. Warren Bridge: legislature is entrusted with duty to provide safe & convenient ways for resources to be used for public good; exclusive rights in Charles Bridge contrary to public good. |
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Term
| Majority's opinion in CRB |
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Definition
Taney said it was unconstitutional for the state legislature to block the state from creating competing improvements for public good (esp. were there is no exclusivity clause in the K).
c. Taney noted that this was a situation of public good:
i. Transportation affected whole country
ii. Granting monopolies in transportation would prevent innovation which would otherwise occur due to rise in technology (canals/RRs would not give way to highways etc).
iii. Pro Adam Smith “Wealth of Nations”: mercantile monopolies were bad |
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Term
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Definition
i. Said consequence of strict constructionist view (majority) discourages entrepreneurs (profits could be jeopardized - original owners no longer owned contract, other investors had become involved at high price based on continuing viability of K.
ii. some monopolies were good IF in public good (most bad), e.g., good for public travelers; permissible to regulate rare instance where it is in the public interest. |
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Term
| Union Pacific RR v. USA (US Dist. MO 1941) - rule |
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Definition
| : The city built a new terminal and gave concessions to certain vendors. RR was the leading and dominating force in this project, so the court found that the payments were in regards to interstate transportation. Discrimination in interstate transportation by a carrier is subject to the Interstate Commerce Acts and is unlawful under the Elkins Act. (Elkins Act: makes it illegal for a person or corporation to discriminate, give or receive concessions to discriminate. |
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Term
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Definition
| Elkins Act in applicable – basically rejected the “leading and dominant force” argument by majority. Said City owned building, city did not furnish transportation or facilities of transportation, transactions did not involve payments/concessions or discrimination by carrier, facilities were authorized by state law for City’s benefit. |
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Term
| Hope asked what question about rates? |
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Definition
| What rates are just and reasonable? |
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Term
| Talk about Hope and rate base |
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Definition
| Hope tried to include extra stuff in rate base. There were expenses that they previously capitalized that couldn't be included |
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Term
| Did FPC give Reproduction cost new or trended original value any weight? |
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Definition
| No, and court said it's ok |
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Term
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Definition
a. Rule #1: Validity of PC rates to be determined by judicial review.
i. Burden is on challenger of review.
ii. Rate base per FPC = “Actual legitimate cost” of co’s interstate property, less depletion and depreciation, plus allowances for unoperated acreage, working capital and future net capital additions.
iii. NOT considered or given any weight: “Reproduction cost new” and “trended original cost”
b. Rule #2: Rates which enable a natural gas company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed (even though they may only produce “meager” return). FPC found 8% return unreasonable, but 6% fair (just & reasonable) rate of return.
c. Rule #3: FPC not required to consider indirect benefits. |
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Term
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Definition
vii. Jackson – dissent – said there was a big problem with regulating the entire business as one. It was really two separate businesses
viii. Dissent – lots of practical considerations that led them to argue to use replacement value. One big point is you have to consider how price will affect production of gas (i.e. investments in the future) |
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Term
|
Definition
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Term
| Holding in the pipeline cases |
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Definition
| Yes, even if as here, Standard Oil purchased the oil before transporting it (to circumvent the Hepburn Act) then sold it at end of transporting it so that there was not “interstate exchange” of the transportation, it is essentially an interstate transportation and the Hepburn Act regulates. |
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Term
| dissent in pipeline cases |
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Definition
a. unconstitutional taking of private property,
b. key: this was not a real monopoly situation that should be regulated because a competitor could build another pipeline (questionable),
c. PROF SAYS: big mistake b/c not giving exploration and production company the benefit of the risk. |
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Term
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Definition
| i. Hepburn act made carriers refrain from transporting their own commodities. It also extended the authority of the ICC to pipelines and brought pipelines under the authority of ICA (which originally only applied to railroads) |
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Term
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Definition
| i. The Supreme Court held that the sale of electricity between the two companies was interstate commerce even though, because each utility owned the in-state segment of the transmission system, the delivery actually took place at the state line. The Court found that the Rhode Island Commission's order was an attempt to regulate interstate commerce and was in violation of the Commerce Clause. The majority opinion concluded that, though the states could regulate the intrastate sale of electricity, only Congress could authorize state regulation over the essentially national activity of interstate wholesale electric sales. |
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Term
| Attleboro basically said state ---- |
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Definition
| can't regulate interstate pipelines |
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Term
| How did Congress respond to Attleboro |
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Definition
| iii. Congress responded by enacting the FPA. The legislation gave an agency then called the Federal Power Commission and now named the Federal Energy Regulatory Commission (FERC) the authority to regulate interstate sales of electricity. Though the FPA granted the federal government exclusive authority over wholesale power sales that affected interstate commerce, the act followed the Attleboro Court and left regulation of retail sales from distribution companies to retail customers to the states. The states' authority to regulate the final customer sale of electricity was also exclusive and included regulation of the sale of electricity that had previously traveled in interstate commerce. |
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Term
| Why is it interstate commerce even if sold at border? |
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Definition
| It is “interstate commerce” even if sold at border, as here, because it has a direct affect on interstate commerce. |
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Term
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Definition
| , Narragansett was intrastate company b/c “essentially local”: oil was produced and distributed within RI b/c stopped at the border. Therefore rate regulation an unconstitutional taking of private property. |
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Term
| Proxy Group meets three requirements |
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Definition
a. Stock publicly traded
b. Company recognized as natural gas company and is tracked by investment information service, and
c. Pipeline operations are “high proportion” of company’s business (which constitutes at least 50% of company’s assets or operating income over recent 3 year period) |
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Term
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Definition
a. ROE = (Dividends/Price) + future growth rate of dividends
b. ROE =( 4/100) + 3.7% |
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Term
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Definition
| : relaxed the requirement that the natural gas business account for at least 50% of corporation’s assets or operating income. Instead, can use corporation’s in the Value Line Investment Survey “Natural Gas Diversified Industry” publication that own FPC regulated natural gas pipelines. |
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Term
|
Definition
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|
Term
| A diversified natural gas company can be included in a proxy group if |
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Definition
i. Corporation’s LDC business has similar risk to its pipeline biz, OR
ii. The lower risk of the LDC business is offset by the higher risk of the market-oriented components and neither substantially outweighs the pipeline business.
Case by case basis! |
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Term
| Arguments made against proxy group |
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Definition
a. The members of the proxy group are “substantially less risk” than the subject company
b. Lower dependence on interruptible output
c. Lower shipper credit risk
d. Longer average contract return
e. Strong growth in its delivery market
f. Increasing reserves and demand in its production market
g. Little risk of entry into the market for competitors
h. Likely growth in the subject market
i. Demonstrated success in market
j. May also argue against cost allocation: assignment of fixed v. variable costs |
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Term
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Definition
| i. A Texas company tried to say the gas they sold in California was not interstate because it was not a “sale for resale”. The company they were selling it to was using it for for fuel and has to closely watch how much fuel they used, and it had to exceed the amount of gas that was sold in California. Also, at issue was not just the gas that was going to be sold in California, but the whole pipeline, which had commingled gas. |
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Term
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Definition
ii. Held – Douglas – a substantial part of the gas was going to be sold out of state, so federal jurisdiction is over everything.
iii. the line between "jurisdictional" and "non- jurisdictional" sales could be drawn by the Commission on a case-by-case basis through the use of its adjudicatory power, without the exercise of its rule-making power.
iv. Federal jurisdiction if interstate and sale for resale. But you can’t contract around resale.
v. You’re not separating the gas, so it all gets intermingled, so some of the gas ends up getting resold |
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| According to Lovaca, federal jurisdiction if |
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Definition
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| What happened after lovaca |
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| LoVaca went back to purely intrastate pipeline, no other TX companies every built across state lines and took exhaustive steps to avoid being regulated as interstate pipeline. |
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| unintended consequences of hope and phillips |
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Definition
: understood at time to have certain consequences, but one unintended was segmentation of natural gas industry into 3 parts: (1) production & gathering (2) transmission, and (3) distribution. (#3 Public Utility Holding Act resulting in separation of distribution, first 2 others were unintended).
2. Phillips decision: even more profound unintended consequence |
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| Under 118 FERC, when does regulation of pipeline affiliates fall under NGA jurisdiction? |
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Definition
| : (1) the affiliate acted in concerted action with a pipeline, (2) to frustrate FPC jurisdiction and policies. If so, FPC will assert jurisdiction. |
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| Examples of when FPC can assert jurisdiction |
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Definition
a. The shipper also entered into a K with the affiliated pipeline for long-term firm service rather than short-term firm or interruptible transportation service. ( This could enable the pipeline to obtain more profitable contracts for its jurisdictional transportation service than it otherwise would, b/c the FPC requires pipelines to accept a maximum rate bid for a short-term service, absent a higher net present value bid for a longer term service.
b. In situations where an affiliated, long-haul pipeline is interconnected with other interstate pipelines in the production area, the affiliated gatherer could refuse service or charge higher rates, unless the shipper also entered into a long-haul transportation K with the affiliated pipeline for the entire haul to the market area, rather than using an unaffiliated interconnecting pipeline to reach the market area. This would similarly enable the pipeline to obtain a more profitable K than it otherwise could b/c, under the FPC’s open access requirements, pipelines must accept maximum rate bids for short haul service, absent a higher net present value bid for long haul service. |
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| FERC 30,107 (11/30/79) “Interstate Pipeline Transportation on Behalf of Other Interstate Pipelines” says |
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: FERC adopts a blanket certificate procedure to permit interstate pipelines to transport natural gas for delivery to other interstate pipelines, without prior FERC approval of each individual transaction.
2. GAP IN SECTION 311 AUTHORITY: NGPA SECTION 311 authorizes FERC to authorize transportation by an interstate pipeline on behalf of any intrastate company or LDC. However, transportation by an interstate pipeline on behalf of a 2nd interstate pipeline is beyond the scope of Section 311.
3. Held: FERC adopts blanket certificate procedure to permit interstate pipelines to transport natural gas for delivery to other interstate pipelines under terms applicable to NGPA Section 311, without prior approval of each individual transaction, effective immediately. |
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4. Held: FERC ordered execution of Interconnection Agreement (IA) b/w Kiowa and Oncor directing Oncor to provide an interconnection at Oncor’s Valley Switching Station located in ERCOT, with interconnection facilities Kiowa will build associates with its natural gas-fired generating facility being constructed in Pittsburg County, Oklahoma, and to provide transmission services into the ERCOT grid at the point of interconnection with Oncor, effective 5/31/02 – said the interconnection was in the public interest. Oncor directed to make a compliance filing of the IA. “Compliance with this order and the settlement shall not make Oncor, Reliant or any other entity a “public utility” as defined by Sect. 201 of the FPA and subject to the jurisdiction of the Commission for any purpose other than carrying out the provisions of Sections 210-212 of the FPA.
Basically they could be interconnected without being deemed a utility |
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| before an agency grants a license, it must grant a full comparative hearing to each applicant that has filed for a mutually exclusive permit or license |
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." A company can argue that Ashbacker requires that another company’s application to be held until previously filed traditional applications are ready for a comparative analysis. But in the example case, the Court rejected this argument, holding that Ashbacker required "only that an agency "use the same set of procedures to process the applications of all similarly situated persons who come before it seeking the same license.' " An applicant willing to assume the financial risk of the project was clearly not "similarly situated" to an applicant seeking a guaranteed return.
2. Another example case: The court cited the FERC's decision that the proposals, while sharing similar routes, did not necessarily serve the same production areas or customers and noted that ANR was in a position to compete with Nautilus in other projects for markets and shippers. While the court acknowledged that ANR was at something of a disadvantage since Nautilus was already in place, and on a short-term basis the pipelines were "in some sense exclusive," the court found the FERC's decision that they were not exclusive for Ashbacker comparative hearing purposes reasonable. |
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: the FPA does not insulate a power company (Otter Tail) from anti-trust prosecution. No basis to conclude that the limited authority of the FPC to order interconnections was intended to substitute for, or to immunize OT from, antitrust regulation for refusing to deal with municipal corporations.
Basically, federal regulation is not a defense of SEC violations |
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| Repeal of antitrust laws is --- |
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| : Commission does not need expert opinion to determine rate base. If Commission’s rate is not confiscatory, there is no deprivation of property rights (constitutional taking) even if Commission did not determine whether “value of service” would justify a rate which does not yield a fair return |
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| Why is market street different from a normal utility? |
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Definition
| ). This was a failed company, would never build it again, couldn’t get rates near its book cost. Subject of intense destructive competition. |
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| Held to be regulated by FPC becuase its activiites had an effect on interstate commerce |
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a. Sales for re-sale: Philips admitted it was engaged in “the sale in interstate commerce of natural gas for resale”
b. NGA Sect. 1(b) exclusion: Sales by Phillips are not a part of the “production or gathering of natural gas” which are excluded from FERC’s jurisdiction under NGA Sect. 1(b)
c. NGA Sect. 4: NGA Sect. 4 gives FPC to regulate the “rates and charges made, demanded, or received by any natural-gas company for or in connection with the transportation or sale of natural gas subject to the jurisdiction of the FPC.
d. Affiliates: Regulation of sales in interstate commerce for resale made by a so-called independent natural gas producer is not essentially different from regulation of such sales when made by an affiliate of an interstate pipeline company. |
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Definition
1. Congress did not intend to regulate only interstate pipeline companies. Rather, congress intended to give the Commission jurisdiction over the rates of ALL wholesales of natural gas in interstate commerce, whether by a pipeline company or not and whether occurring before, during, or after transmission by an interstate pipeline company.
2. NGA Sect. 2(6) defines “natural gas company” to mean “a person engaged in the transportation of Distinction being made: Congress was saying FPC couldn’t regulate safety regulations, conservation regulations, etc. Majority was saying Congress was not intending to exempt everything else (like rates and production itself). |
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ii. Douglas dissent - Regulation of price at which the “independent producer” can sell his gas is very important (“profound”) and regulates entire business. Why? Because the price at which the “independent producer” can sell his gas determines the price he can sell it (if he buys from other wells), and the sales price determines its profits. The profit which can be made determines the rate of production, methods of production and that old wells continue in production, new wells are explored, etc. E and P is being discouraged.
iii. Clark dissent - Congress meant to prevent “gap” abuses at distribution end of the transmission process, Court has upheld states right to regulate production and gathering, Potential conflict of FPC regulation with state |
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| Maryland People's counsel v. FERC |
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Definition
ii. Held the FPC is supposed to be to protect consumers who use to heat homes, hospitals to function for patients, schools, etc., and what it has done is allow everyone else: big industrialists -- preferential treatment. Failed agency’s “prime constituency” which is the consumers that the “NGA was designed to protect against exploitation by the natural gas companies”
iii. left the FERC with a choice: either remedy the undue discrimination by opening up its transportation programs to captive customers, or else discontinue its transportation programs as a means to get competitively priced gas to markets and relieve pipelines of their deliverability problems. FERC's response was Order 436 in which it imposed open access condition on any blanket transportation certificate issued pursuant to NGA section 7. |
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| Associated Gas Distr holding |
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Definition
: Court found Natural Gas Pipelines were common carriers covered by NGA, cannot discrimination unfairly. Lead to unbundling of services per this Order 636. Court remanded to FERC for further proceedings, upholding the substance of Order 636 but requiring legal authority and more reasoned decision-making, particularly to address the problem created by uneconomic producer-pipeline contracts (pipelines’ jeopardy from take-or-pay contracts).
a. Now permissible for pipelines to discriminate and make differences based on competitive factors (if you have to give customer discount to compete in a particular competitive circumstance).
b. Judge Williams send back to FPC: didn’t get right in Maryland’s People, didn’t get right here. Can’t take monopoly power away from pipeline without addressing “take and pay” contracts b/w producers & pipelines. Order 436 vacated, case in its entirety remanded. This case elevated Ramsey Pricing to an accepted regulatory principle. |
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a. First Alternative; Equity-sharing approach: Pipeline could recover all of its prudently incurred costs in its commodity sales charges (difficult for pipelines with shrinking sales-customer bases). A pipeline offering open access transportation could, if it voluntarily absorbed b/w 25%-50% of the costs, recover an equal share of the costs through a “fixed charge” and recover the remaining amount (up to 50%) through a volumetric surcharge based on total throughput.
b. Second alternative “cost spreading” aka “value of service”: FERC authorized pipelines not recovering take-or-pay costs in any other manner to impose a “gas inventory charge” (GIC), a fixed charge for “standing ready” to deliver gas – the sales analogue to a reservation charge. Pipelines were authorized to recover take or pay costs for customers that were open access customers or Section 7.
i. Section7 customers objected because they were not merely transportation customers and not responsible for the take or pay liabilities. Court held that this was an inconsistent application to section 7a customers, and it remanded to FERC for reconsideration regarding how take or pay liability should be applied to Section 7a customers. Liability was appropriately applied to Section 7. |
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Term
| What is uniform capacity release? |
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Definition
| vi. FERC adopted a uniform capacity-release program, which is a regulated market that allows capacity-holders to re-sell the rights to pipeline firm-transportation capacity: shipper with excess capacity lists that capacity on the pipeline’s electronic bulletin board (EBB) = central clearing house for the secondary capacity market. State “buy/sell arrangements” preempted by FERC’s capacity-release program. |
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| Commission’s requirement [UPHELD] that pipelines adopt a new rate design methodology known as straight fixed/variable (SFV), meaning pipelines must allocate fixed costs to the reservation charge, and variable costs to the usage charge. (purpose: to prevent fixed costs, which vary greatly b/w pipelines, would not affect the usage charge and thus distort the national gas-sales market that Order No. 636 fosters). Shift from previous modified fixed/variable (MFV) rate design which disadvantaged low-load-factor customers. REMANDED: issues of why mitigation measures applied to individual customers and others on a customer-class basis, why pipelines not required to offer small-customer discounts to former customers of downstream pipelines. |
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Term
| 636 established pregranted abandonment. Give more details: |
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Definition
a. NOTE: buyer not subject to regulation, so could stop buying whenever it wanted, but pipeline could not stop selling
b. So FERC came up with “pregranted abandonment” just meaning could get out of contract BUT…
i. Trade off is that old customer got right of first refusal over new customer. Before pipeline could abandon customer, they had to offer same price and terms to old customer.
ii. DC Circuit did not, however, like 20 year requirement b/c there was no explanation where it came from (as anti-LDC), sent back. LDC’s didn’t want to be locked into 20 year contract.
iii. Basic right of first refusal mechanism provides protections form pipeline market power required for pre-granted abandonment (if existing customer willing to pay the maximum approved rate, right-of-first-refusal mechanism ensures that the pipeline may not abandon the certificated service, thus, captive customer served by a single pipeline can exercise its right of first refusal and retain its long-term-firm-transportation service against rival bidders). |
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| What is capacity release? |
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Definition
d. 1148: Secondary Market: “Capacity –Release” very important. “Subletting your own capacity”, where shipper competitor/lessee drops off capacity at his passing points, thus creates competition of multiple companies trying to drop off capacity
i. Mechanism whereby someone who owns capacity can sell on secondary market. (Kind of like renting or subrenting an apartment complex).
ii. Creates competition where there might not have been before
iii. Can sublet, sublet (release) parts, can partially release capacity while picking up other capacity elsewhere
iv. Segmentation: if you want to drop off and release just part of capacity
v. Flexible Receipt Forms: right to drop off on points where you have right to pass by.
vi. Commission did away with capacity brokering and came up w/ this, working well
vii. FERC has jurisdiction overcapacity release: (1) pipeline releasing to shipper and (2) contracting with replacement shipper
viii. NGA gives FERC jurisdiction over the interstate transportation of interstate pipelines, when gas sales is severed (unbundled) and transportation occurs over local mains, or gas just sold for retail, then states have jurisdiction
ix. FERC’s jurisdiction over capacity release includes municipalities
x. Buy sell (end user found gas to purchase and LDC orchestrated the transaction)- if the agreement was made before 636, it was allowed to stay in place but notice of the agreement had to be published electronically.
. There was an argument that this provision preempted the states because they would normally regulate this type of transaction, but the court said it was ok-no federal preemption because FERC excluded policies of the states that reasonably conflicted. |
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Term
| how were stranded costs and bypass costs dealt with in uited gas distr |
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Definition
i. Stranded costs can’t e directly allocated to customers when service is unbundled. They have to have been prudent investments and no longer used and useful under order 636.
ii. Court found in favor of FERC. As long as they are acting in the interest of ratepayers and investors, it’s acceptable.
iii. Bypass – possibility of large retail customers bypassing LDCs and buying from pipelines. FERC said they can’t come up with one rule to fix this—they would take it on a case by case basis, and the court upheld this. |
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Definition
1. Mandatory unbundling: convert purchase and sale contracts into transportation only-type service, which not only transforms contract but gives rights across system. Now customers control system. Now pipelines didn’t have say how customers could use system.
2. it eliminated continuing obligation to serve customers through “pregranted abandonment”.
3. % of time to deal with old contracts, court sent back for reconsideration of 20 years
• Now, pipelines complete unbundled, just in transportation business |
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Definition
Order 637: allowed segmentation & flexible receipt points.
• Segmentation: allows a gas owner, based on value it could receive (economics) to segment out part of its capacity and sell to a third party along the way at flexible release points:
o chances capacity; capacity market (market for pipeline capacity) fits a managed and regulated market
o market for capacity is strictly controlled by FERC: you can only compete on price.
o Flexi be release points: locations along pipelines where gas can be dropped off at flexible receipt points OR can subdivided (like tenant) capacity and sell separately
o Now in NY there is a market price for gas due to capacity |
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