FERC expected to clarify ‘convergence’ companies rules

By the OGJ Online Staff

HOUSTON, Sept. 18, 2001 — The Federal Energy Regulatory Commission is expected to clarify standards regulating the relationship between affiliates of regulated and nonregulated energy companies owning gas and power units at its Sept. 26 meeting.

FERC previously prohibited regulated natural gas companies from sharing nonpublic information with gas marketing affiliates in Order 497 and prohibited similar exchanges between regulated electric transmission operators and electric power marketing affiliates in Order 889.

Christine Uspenski and Debra G. Coy, analysts for Schwab Capital Markets LP, Washington, DC, said tightening standards could restore public and political confidence in electricity restructuring and possibly reignite investor interest in stocks of so-called “convergence” companies.

But the extent of the potential upside depends on the electric industry’s ability to repair the black eye it received in the wake of the California energy debacle, they said in this week’s electricity bulletin.

The agency order issued approving Dominion Resources Inc.’s acquisition of Consolidated Natural Gas Co. could serve as a guide to FERC’s future action, they said. In that case, FERC prohibited regulated affiliates of the combined company from sharing nonpublic information with any unregulated corporate affiliate.

The Schwab analysts said the order extended standards of conduct that prohibited the CNG’s regulated pipeline from sharing nonpublic information with its gas trading desk, to sharing it with any other unregulated affiliate, including Dominion’s power trading desk.

Similarly, Dominion’s regulated electric utility was prohibited from sharing information with any other nonregulated affiliate, including the unregulated gas trading desk.

While the regulated businesses are prohibited from sharing nonpublic information, the order doesn’t stop the nonregulated businesses from working together and developing new synergies to increase profitability, the analysts said.

“We do not see the extension of Dominion-CNG to the balance of the market as a restriction on trading operations,” said

They said FERC might choose one of several options, including:

— Issuing a policy statement stating affiliate standards of conduct already established for gas companies and electric companies now apply to convergence companies.

— Making a regulatory determination through a case currently before the commission.

— Initiating a full rulemaking process with a proposal, comment period, and final order.

“For all intents and purposes, we believe the moment the FERC articulates its intentions on this issue, it will have put the industry on notice of the direction it plans to take, and participants would be well advised by counsel to observe it de facto,” they said.

The long-term potential for energy trading operations, despite some possible short-term padding, should not be “submarined” by slightly higher FERC standards regulating communications of integrated energy companies, Uspenski and Coy said. A ” ‘cleaner’ market, in which marketers are not viewed as fleecing their customers by trading on information entrusted to them, is of greater benefit in the long run to participants, including the trading firms themselves,” they added.

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