interest). Under the second method, FERC may, on its own motion or based on a complaint, initiate a
proceeding seeking to compel the company to change its rates, terms and/or conditions of service. If FERC
determines that the existing rates, terms and/or conditions of service are unjust, unreasonable, unduly
discriminatory or preferential, then any rate reduction or change that it orders generally will be effective
prospectively from the date of FERC order requiring this change.
The natural gas industry historically has been heavily regulated; therefore, there is no assurance that a
more stringent regulatory approach will not be pursued by FERC and Congress, especially in light of potential
market power abuse by marketing affiliates of certain pipeline companies engaged in interstate commerce. In
response to this issue, Congress, in the Energy Policy Act of 2005, or EPACT 2005, and FERC have
implemented requirements to ensure that energy prices are not impacted by the exercise of market power or
manipulative conduct. EPACT 2005 prohibits the use of any “manipulative or deceptive device or contrivance”
in connection with the purchase or sale of natural gas, electric energy or transportation subject to FERC
jurisdiction. In addition, EPACT 2005 gave FERC increased penalty authority for these violations. FERC may
now issue civil penalties of up to $1.0 million per day per violation, and possible criminal penalties of up to
$1.0 million per violation and five years in prison. FERC may also order disgorgement of profits obtained in
violation of FERC rules. FERC adopted the Market Manipulation Rules and the Market Behavior Rules to
implement the authority granted under EPACT 2005. These rules, which prohibit fraud and manipulation in
wholesale energy markets, are subject to broad interpretation. In the past two years, FERC has relied on its
EPACT 2005 enforcement authority in issuing a number of natural gas enforcement actions giving rise to the
imposition of aggregate penalties of approximately $40.0 million and aggregate disgorgements of
approximately $6.0 million. These orders reflect FERC’s view that it has broad latitude in determining whether
specific behavior violates the rules. Given FERC’s broad mandate granted in EPACT 2005, if energy prices are
high, or exhibit what FERC deems to be “unusual” trading patterns, FERC will investigate energy markets to
determine if behavior unduly impacted or “manipulated” energy prices.
Intrastate Natural Gas Pipeline Regulation
Intrastate natural gas pipeline operations are not generally subject to rate regulation by FERC, but they are
subject to regulation by various agencies in the respective states where they are located. While the regulatory
regime varies from state to state, state agencies typically require intrastate gas pipelines to file their rates with
the agencies and permit shippers to challenge existing rates or proposed rate increases. However, to the extent
that an intrastate pipeline system transports natural gas in interstate commerce, the rates, terms and conditions
of such transportation service are subject to FERC jurisdiction under Section 311 of the Natural Gas Policy Act,
or NGPA. Under Section 311, intrastate pipelines providing interstate service may avoid jurisdiction that would
otherwise apply under the NGA. Section 311 regulates, among other things, the provision of transportation
services by an intrastate natural gas pipeline on behalf of a local distribution company or an interstate natural
gas pipeline. Under Section 311, rates charged for transportation must be fair and equitable, and amounts
collected in excess of fair and equitable rates are subject to refund with interest. Rates for service pursuant to
Section 311 of the NGPA are generally subject to review and approval by FERC at least once every five years.
The rate review may, but does not necessarily, involve an administrative-type hearing before FERC staff panel
and an administrative appellate review. Additionally, the terms and conditions of service set forth in the
intrastate pipeline’s Statement of Operating Conditions are subject to FERC approval. Failure to observe the
service limitations applicable to transportation services provided under Section 311, failure to comply with the
rates approved by FERC for Section 311 service, and failure to comply with the terms and conditions of service
established in the pipeline’s FERC-approved Statement of Operating Conditions could result in the assertion of
federal NGA jurisdiction by FERC and/or the imposition of administrative, civil and criminal penalties. Among
other matters, EPACT 2005 amends the NGPA to give FERC authority to impose civil penalties for violations
of the NGPA up to $1.0 million per day per violation and possible criminal penalties of up to $1.0 million per
violation and five years in prison for violations occurring after August 8, 2005. For violations occurring before
August 8, 2005, FERC had the authority to impose civil penalties for violations of the NGPA up to $5,000 per
violation per day. The Pelico and EasTrans systems are subject to FERC jurisdiction under Section 311 of the
NGPA.
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