[Federal Register: June 14, 2005 (Volume 70, Number 113)]
[Proposed Rules]
[Page 34421-34430]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn05-34]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 284
[Docket No. RM05-2-000]
Order Reaffirming Discount Policy and Terminating Rulemaking
Proceeding
June 7, 2005.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Order Reaffirming Discount Policy and Terminating Rulemaking
Proceeding.
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SUMMARY: On November 22, 2004, the Federal Energy Regulatory Commission
(Commission) issued a Notice of Inquiry (NOI) seeking comments on its
policy regarding selective discounting by natural gas pipeline
companies. The Commission has determined that it will take no further
action in this proceeding and, therefore, it terminated Docket No.
RM05-2-000.
DATES: The termination of this docket is made on June 14, 2005.
FOR FURTHER INFORMATION CONTACT: Ingrid Olson, Office of the General
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426; (202) 502-8406. ingrid.olson@ferc.gov
SUPPLEMENTARY INFORMATION:
Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell,
Joseph T. Kelliher, and Suedeen G. Kelly.
Policy for Selective Discounting by Natural Gas Pipelines
Issued May 31, 2005
1. On November 22, 2004, the Commission issued a Notice of Inquiry
(NOI) seeking comments on its policy regarding selective discounting by
natural gas pipeline companies.\1\ The Commission asked parties to
submit comments and respond to specific inquiries regarding whether the
Commission's practice of permitting pipelines to adjust their
ratemaking throughput downward in rate cases to reflect discounts given
by pipelines for competitive reasons is appropriate when the discount
is given to meet competition from another natural gas pipeline. The
Commission also sought comments on the impact of its policy on captive
customers and on what changes to the policy could be considered to
minimize any impact on captive customers. Comments and responses to the
inquiries were filed by 40 parties.
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\1\ 109 FERC ] 61,202 (2004).
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2. As discussed below, after reviewing the comments, the Commission
finds that its current policy on selective discounting is an integral
and essential part of the Commission's policies furthering the goal of
developing a competitive national natural gas transportation market.
The Commission further finds that the selective discounting policy
provides for safeguards to protect captive customers. If there are
circumstances on a particular pipeline that may warrant special
consideration or additional protections for captive customers, those
issues can be considered in individual cases. This order is in the
public interest because it promotes a competitive natural gas market
and also protects the interests of captive customers.
Background
3. In the NOI, the Commission detailed the background and
development of the selective discount policy. As explained in the NOI,
in providing for open access transportation in Order No. 436, the
Commission adopted regulations permitting pipelines to engage in
selective discounting based on the varying demand elasticities of the
pipeline's customers.\2\ Under these regulations, the pipeline is
permitted to discount, on a nondiscriminatory basis, in order to meet
competition. For example, if a fuel-switchable shipper were able to
obtain an alternate fuel at a cost less than the cost of gas including
the transportation rate, the Commission's policy permits the pipeline
to discount its rate to compete with the alternate fuel, and thus
obtain additional throughput that otherwise would be lost to the
pipeline. In Order No. 436, the Commission explained that these
selective discounts would benefit all customers, including customers
that did not receive the discounts, because the discounts would allow
the pipeline to maximize throughput and thus spread its fixed costs
across more units of service. The Commission further found that
selective discounting would protect captive customers from rate
increases that would otherwise ultimately occur if pipelines lost
volumes through the inability to respond to competition.
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\2\ See Regulations of Natural Gas Pipelines After Partial
Wellhead Decontrol, FERC Stats. & Regs., Regulations Preambles
(1982-1985) ] 30,665 at 31,543-45 (1985).
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4. Further, in the 1989 Rate Design Policy Statement,\3\ the
Commission held that if a pipeline grants a discount in order to meet
competition, the pipeline is not required in its next rate case to
design its rates based on the assumption that the discounted volumes
would flow at the maximum rate, but may reduce the discounted volumes
so that the pipeline will be able to recover its cost of service. The
Commission explained that if a pipeline must assume that the previously
discounted service will be priced at the maximum rate when it files a
new rate case, there may be a disincentive to pipelines discounting
their services in the future to capture marginal firm and interruptible
business. In order to obtain a discount adjustment in a rate case, the
pipeline has the ultimate burden of showing that its discounts were
required to meet competition. The policy of permitting discount
adjustments is consistent with the discussion of the court in
Associated Gas Distributors v. FERC (AGD I) \4\ suggesting that
discount adjustments should be permitted.
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\3\ Interstate Natural Gas Pipeline Rate Design, 47 FERC ]
61,295, reh'g granted, 48 FERC ] 61,122 (1989).
\4\ 824 F.2d 981, 1012 (D.C. Cir. 1987). As explained in the
NOI, the court addressed an argument presented by some pipelines
that the Commission's policy permitting pipelines to offer discounts
to some customers, might lead to the pipelines under-recovering
their costs. The court set forth a numerical example showing that
the pipeline could under-recover its costs, if, in the next rate
case after a pipeline obtained throughput by giving discounts, the
Commission nevertheless designed the pipeline's rates based on the
full amount of the discounted throughput, without any adjustment.
However, the court found no reason to fear that the Commission would
employ this ``dubious procedure,'' and accordingly rejected the
pipelines' contention.
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5. In Order No. 636, the Commission began to move away from the
monopolistic selective discounting model to a competitive model,
[[Page 34422]]
particularly for the secondary market. The institution of capacity
release created competition between shippers and the pipeline with
respect to unused capacity. Thus, competition from capacity release
requires pipelines to discount their interruptible and short-term firm
capacity.
6. Since AGD I and the Rate Design Policy Statement, the issue of
``gas-on-gas'' competition, i.e., where the competition for the
business is between pipelines as opposed to competition between gas and
other fuels, has been raised in several Commission proceedings.\5\ In
these proceedings, certain parties have questioned the Commission's
rationale for permitting selective discounting, i.e., that it benefits
captive customers by allowing fixed costs to be spread over more units
of service. These parties have contended that, while this may be true
where a discount is given to obtain a customer who would otherwise use
an alternative fuel and not ship gas at all, it is not true where
discounts are given to meet competition from other gas pipelines. In
the latter situation, these parties have argued, gas-on-gas competition
permits a customer who must use gas, but has access to more than one
pipeline, to obtain a discount. But, if the two pipelines were
prohibited from giving discounts when competing with one another, the
customer would have to pay the maximum rate to one of the pipelines in
order to obtain the gas it needs. This would reduce any discount
adjustment and thus lower the rates paid by the captive customers.
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\5\ The Illinois Municipal Gas Agency (IMGA) raised this issue
in a petition for rulemaking in Docket No. RM97-7-000. In the NOI,
the Commission stated that it would consider all comments on this
issue in Docket No. RM05-2-000 and terminated the proceeding in
Docket No. RM97-7-000. The Commission explained that the issues
included in Docket No. RM05-2-000 include all the issues raised in
the Docket No. RM97-7-000 proceeding. IMGA did not seek rehearing of
the Commission's decision to terminate the Docket No. RM97-7-000
proceeding and did not in its comments object to the procedural
forum offered to it in Docket No. RM05-2-000.
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7. In Southern Natural Gas Co.,\6\ the Commission rejected the
argument made by one of Southern's customers that no discount
adjustment should be permitted with respect to gas-on-gas competition.
The Commission stated, ``in light of the dynamic nature of the natural
gas market, the Commission believes any effort to prohibit interstate
gas pipelines from discounting to meet gas-on-gas competition would
inevitably result in a loss of throughput to the detriment of all their
customers.'' \7\ The Commission explained that the pipeline faced
competition from intrastate pipelines not subject to the Commission's
jurisdiction, so that the Commission could not prohibit gas-on-gas
competition altogether. The Commission also stated that discounts given
to meet gas-on-gas competition are not readily distinguishable from
discounts given to meet competition from alternative fuels. \8\
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\6\ 67 FERC ] 61,155 (1994).
\7\ Id. at 61,458.
\8\ For a more detailed discussion of the background of the
Commission's selective discount policy, see the NOI at P 2-10.
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8. The NOI sought comments from the parties on the effect of the
current policy on captive customers, whether the Commission should
eliminate the discount adjustment for discounts to meet gas-on-gas
competition, and whether the Commission should consider alternative
policy choices to minimize any adverse effects on captive customers.
The Comments in Response to the NOI
9. The Commission received comments from 40 parties in response to
the NOI. Comments in support of the Commission's current discount
policies were filed by BP America Production Company and BP America
Energy Company (BP America), Cinergy Services, Inc. (Cinergy),
Discovery Gas Transmission (Discovery Gas), Dominion Resources
Services, Inc. (Dominion), El Paso Corporation's Pipeline Group (El
Paso), Enbridge Inc. and Enbridge Energy Partners (Enbridge), Florida
Power & Light (Florida Power), Gas Transmission Northwest Corporation
(Northwest), Gulf South Pipeline Co., L.P. (Gulf South), Iowa Utilities
Board, Independent Petroleum Association of America (IPAA), Interstate
Natural Gas Association of America (INGAA), Louisville Gas & Electric
Company (Louisville Gas), Memphis Light, Gas and Water Division
(Memphis Light), Michigan Consolidated Gas Company (Mich Con),
MidAmerican Energy Co. (MidAmerican), Natural Gas Pipeline Co. of
America (Natural), Natural Gas Supply Association (NGSA), Northern
Natural Gas Co. (Northern), Texas Gas Transmission, LLC (Texas Gas),
Nicor Gas, Process Gas Consumers Group and American Forest and Paper
Products (Process Gas), Reliant Energy Services, Inc.(Reliant), Sempra
Global Enterprises (Sempra), Southern California Gas Company and San
Diego Gas & Electric Co. (SoCalGas and San Diego), Transcontinental Gas
Pipeline Corp. (Transco), Williston Basin Interstate Pipeline Co.
(Williston).
10. Generally, the parties supporting the current policy state that
the policy has worked well, is central to the Commission's
procompetitive policies, and sends appropriate price signals to the
market. They argue that a discount adjustment for gas-on-gas
competition is essential to competition in the secondary market.
Further, they assert that there are safeguards that adequately protect
captive customers.
11. In addition, several parties generally support the Commission's
policy, but seek modifications of certain aspects of the policy. These
parties are Calpine Corporation (Calpine), CenterPoint Energy Resources
Corp. (CenterPoint), Memphis Light, Gas, and Water (Memphis Light),
Missouri Public Service Commission (MoPSC), National Fuel Gas
Distribution Corporation and Niagara Mohawk Power Corporation (National
Fuel), and Northwest Industrial Gas Users (Northwest Industrials). The
parties seek modification of the current policy with regard to the
burden of proof on pipelines seeking a discount adjustment, discounts
that result from competition with capacity release, discounts on
expansion capacity, the need for pipelines to make periodic section 4
filings, and the adequacy of the information posted concerning the
discounts.
12. On the other hand, comments opposing the Commission's policy
were filed by the American Public Gas Association (APGA), Arizona
Electric Power Cooperative, Inc. (Arizona Electric), Illinois Municipal
Gas Agency (IMGA),\9\ Northern Municipal Distributor Group and the
Midwest Region Gas Task Force Association (Northern Municipals),
National Association of State Utility Consumer Advocates (NASUCA), and
the Commission's Office of Administrative Litigation (OAL).
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\9\ IMGA also filed a responding affidavit. The NOI did not
provide for reply comments and no other party filed a reply. In
these circumstances, the Commission will not consider IMGA's
response.
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13. Generally, the parties opposing the policy state that the
Commission's rationale in support of the discount policy is flawed
because it does not recognize that one pipeline's gain through
discounting is another pipeline's loss and the policy does not provide
net benefits to captive customers. Further, they assert that even if a
discount produces an increase in throughput, that discount also
contributes to increased wellhead prices. They assert that the current
policy cannot be sustained unless the Commission finds substantial
evidence that captive shippers on the competing pipelines obtain a net
benefit from the
[[Page 34423]]
throughput adjustment. The issues raised by the parties are discussed
below.
Discussion
14. After considering the comments filed in response to the NOI,
the Commission has determined not to modify its current policies
concerning selective discounting. Therefore, the Commission will
continue to allow a pipeline to seek a reduction in the volumes used to
design its maximum rates, if it obtained those volumes by offering
discounts to meet competition, regardless of the source of that
competition. As the Commission stated in Order No. 636:
The Commission's responsibility under the NGA is to protect the
consumers of natural gas from the exercise of monopoly power by the
pipeline in order to ensure consumers ``access to an adequate supply
of gas at a reasonable price.'' [Tejas Power Corp. v. FERC, 908 F.2d
998, 1003 (D.C. Cir. 1990).] This mission must be undertaken by
balancing the interests of the investors in the pipeline, to be
compensated for the risks they have assumed, and the interests of
consumers, and in light of current economic, regulatory, and market
realities.\10\
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\10\ Order No. 636 at 30,392.
In light of existing conditions in the natural gas market, the
Commission concludes that its existing policies concerning selective
discounting are more consistent with the goal of ensuring adequate
supplies at a reasonable price, than any of the alternatives proposed
in the comments in response to the NOI.
A. Discount Adjustments Associated With Gas-on-Gas Competition
15. APGA, IMGA, NASUCA, Northern Municipals, Arizona Electric
Cooperative, and OAL assert that the Commission should revise its
discount policy so as to eliminate any adjustment to rate design
volumes for discounts given to meet competition from other transporters
of natural gas (which we will refer to as gas-on-gas competition). They
point out that the Commission's rationale for permitting selective
discounts is that discounts benefit all customers, including captive
customers that did not receive the discounts, because the discounts
allow the pipeline to maximize throughput and thus spread its fixed
costs across more units of service. A discount adjustment is permitted
in the pipeline's next rate case in order to avoid discouraging such
beneficial discounts. These parties contend that, while this rationale
may justify permitting an adjustment to rate design volumes for
discounts given to obtain a customer who would otherwise use an
alternative fuel and not ship gas at all, it is not true where
discounts are given to meet competition from other gas transporters.
16. In the latter situation, these parties argue, gas-on-gas
competition permits a customer who must use gas, but has access to more
than one pipeline, to obtain a discount. These parties assert that such
a discount does not produce an overall increase in pipeline throughput;
it simply shifts throughput from one pipeline to another. As a result,
they argue, discounts given to meet gas-on-gas competition provide no
net benefit to captive customers as a class. In fact, captive customers
would be better off if competing pipelines were discouraged from
offering discounts in competition with one another, since then the
throughput at issue would flow on one of the pipelines at the maximum
rate rather than at a discounted rate. They conclude that such
discounts should not be encouraged through the availability of a
discount adjustment in the pipeline's next rate case. Rather, to the
extent a pipeline may wish to give a discount in such circumstances,
the pipeline and its shareholders should be required to absorb the cost
of the discount.
17. The remaining commenters generally support continuing to allow
an adjustment to rate design volumes for discounts given to meet gas-
on-gas competition, although some commenters suggest other changes in
Commission policy concerning discounts.
18. After reviewing all the comments, the Commission has concluded
that, in today's dynamic natural gas market, any effort to discourage
pipelines from offering discounts to meet gas-on-gas competition would
do more harm than good. Accordingly, the Commission will not modify its
policy to prohibit pipelines from seeking adjustments to their rate
design volumes to account for discounts given to meet gas-on-gas
competition. However, in individual rate cases, parties remain free to
contend that, in the circumstances of the particular case, a full
discount adjustment may be inequitable.\11\
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\11\ See, e.g., Natural Gas Pipeline Company of America, 73 FERC
] 61,050 at 61,128-29 (1995); El Paso Natural Gas Co., 72 FERC ]
61,083 at 61,441 (1995).
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19. Before explaining our reasons for reaching this conclusion, we
first observe that pipelines face at least three separate categories of
so-called gas-on-gas competition. One category is competition from
other interstate pipelines subject to the Commission's NGA
jurisdiction. The second category is competition from capacity releases
by the pipeline's own firm customers. The third category is competition
from intrastate pipelines not subject to the Commission's jurisdiction.
The commenters opposing discount adjustments for gas-on-gas competition
focus on the first two types of gas-on-gas competition. They generally
recognize that the Commission has no ability to discourage intrastate
pipelines outside the Commission's jurisdiction from offering discounts
in competition with interstate pipelines and therefore interstate
pipeline discounts to avoid loss of throughput to non-jurisdictional
intrastate pipelines do benefit captive customers of the interstate
pipelines. Therefore, our discussion below addresses only the first two
types of gas-on-gas competition. Because the contentions of the parties
and our reasons for allowing discount adjustments for discounts to meet
competition from other interstate pipelines and discounts to meet
competition from capacity release are different, we discuss the two
separately below.
1. Competition From Other Interstate Pipelines
20. In the NOI, the Commission asked several questions concerning
the extent to which interstate pipelines give discounts to meet
competition from other interstate pipelines, including asking IMGA to
explain the basis for its previous statements that over 75 percent of
discounts are for this purpose. None of the commenters have provided
responses that would enable the Commission to estimate with any
precision what percentage of pipeline discounts are currently being
given to meet competition from other interstate pipelines. For example,
IMGA has clarified in its comments that its over 75 percent estimate is
based solely on the testimony of its witness in Southern Natural Gas
Company's section 4 rate case in Docket No. RP92-134-000. That
testimony only analyzed the discounts given by Southern during the
period May 1992 through April 1993.\12\ Clearly, the discounting
practices of one interstate pipeline over ten years ago are not
probative as to the prevalence of gas-on-gas discounting by all
interstate pipelines today.
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\12\ Affidavit of Baker Clay at 16, attached to IMGA's comments.
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21. Nevertheless, all commenters, whether they oppose or support
allowing rate design volume adjustments for discounts to meet gas-on-
gas competition from other interstate
[[Page 34424]]
pipelines, appear to agree that such discounts are, in INGAA's words,
``widespread.'' \13\ Thus, the Commission recognizes that such
discounts make up a significant portion of pipeline discounts. It also
appears that such discounts are more pervasive in some regions than
others. For example, INGAA states that such discounts are pervasive in
the production areas of East Texas, South Louisiana, and South Texas,
as well as in the Midwest and the Western regions.
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\13\ INGAA comments at 17. INGAA states gas-on-gas discounting
is widespread, ``particularly when one takes into consideration''
competition from capacity release and non-jurisdictional pipelines.
However, the Commission does not understand INGAA to dispute that a
significant portion of pipeline discounts are given to meet
competition from other interstate pipelines.
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22. APGA, IMGA, NASUCA, Northern Municipals, Arizona Electric
Cooperative, and OAL all contend that pipeline discounts given to meet
competition from other interstate pipelines do not increase overall
interstate pipeline throughput and therefore do not benefit captive
customers. These commenters assert that the customers who obtain such
discounts are larger LDCs, industrials, or electric generators who may
have access to more than one interstate pipeline but who are not fuel
switchable. These commenters thus assert that such customers would take
the same amount of gas even if required to pay the maximum rate of
whichever pipeline they choose to use. Based on that premise, these
commenters assert that discounts resulting from competition between
interstate pipelines serve only to reduce the revenue contribution of
the customers receiving the discounts, thereby forcing captive
customers without access to more than one pipeline to bear additional
costs. In short, these commenters make the same contention the DC
Circuit described in AGD I,\14\ when it stated, ``It has long been
contended * * * that rate differentials based exclusively on
competition between transporters with similar cost functions may end up
forcing captive customers to bear disproportionate shares of fixed
costs without any offsetting gain in efficiency.''
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\14\ 824 F.2d at 1011-2.
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23. However, the court followed the description of this contention
with the statement, ``The contention is not self evidently true: if the
demand of buyers with access to competing carriers is at all price
elastic, the price reductions they enjoy will raise their demand close
to competitive levels.'' \15\ Based on the comments filed by the
supporters of the Commission's current policy, the Commission finds
that the demand of shippers with access to more then one interstate
pipeline is sufficiently price elastic that discouraging discounts by
competing interstate pipelines would do more harm than good.
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\15\ Id. at 1012.
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24. It does not follow from the fact that a potential pipeline
customer currently lacks the ability to use alternative fuels that its
demand for gas is totally inelastic. Supporters of the current policy
offer many examples of why this is so. Industrial and other business
customers of pipelines, who account for over half of U.S. end-use gas
consumption,\16\ typically face considerable competition in their own
markets and must keep their costs down in order to prosper. Lower
energy costs achieved through obtaining discounted pipeline capacity
can help them increase operations at their plants or at least minimize
the possibility that such customers will outsource their production to
other areas where their product can be produced at lower cost or simply
close their plants due to an inability to compete.\17\ For example
Process Gas Consumers \18\ stated, ``A plant may be able to increase
output based on access to a competitive natural gas source on a
competing pipeline but only if a transportation discount is given. In
that case, a discount based on gas-on-gas competition will actually
increase throughput instead of simply shifting throughput from one
pipeline to another.'' Similarly, as BP America \19\ states,
``Requiring generators to pay maximum rates might result in marginal
generation costs exceeding the market price of power, forcing the
generator to shut down.''
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\16\ As cited by BPAmerica at 12 Fn. 8, the Energy Information
Administration (EIA) reports that non-human needs consumers account
for about 60 percent of end-use consumption.
\17\ Williston at 21-22; INGAA at 11 and the accompanying
Henning Affidavit at 15; Natural at 19.
\18\ Id. at 4.
\19\ Id. at 12.
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25. Discounts may also reduce the incentive for existing non-fuel
switchable customers to install the necessary equipment to become fuel
switchable.\20\ In addition, potential new customers, such as companies
considering the construction of gas-fired electric generators, may be
more likely to build such generators if they obtain discounted capacity
on the pipeline.\21\ In all these situations a discount may cause the
customer to contract for a greater amount of capacity on whichever
pipeline they choose than they would have if the pipeline had not
offered them a discount.
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\20\ Nicor at 5; INGAA, the accompanying Henning Affidavit at
18, Natural, Economic Analysis at 15.
\21\ Reliant Energy Services, Inc. at 6; Gulf South at 28,
INGAA, the accompanying Henning Affidavit at 18; Natural, Economic
Analysis at 15.
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26. Commenters opposing discount adjustments for gas-on-gas
competition also complain that larger LDCs may use their access to more
than one pipeline to obtain discounts for capacity that, absent the
willingness of the pipelines to offer discounts in competition with one
another, the LDC would contract for at the maximum rate. LDCs in the
business of distributing gas obviously do not have the option of
switching to an alternative fuel. However, that does not mean that they
would necessarily contract for the same amount of interstate pipeline
capacity regardless of the price of that capacity. An LDC's need for
interstate pipeline capacity depends upon the demand of the LDC's
customers for gas, and that demand is elastic. LDCs typically have
customers who are fuel switchable. They also have non-fuel switchable
industrial or business customers whose gas usage may vary depending
upon cost for the same reasons as the similar customers directly served
by the pipelines discussed above. Moreover, LDCs may have the option of
building more facilities of their own as a substitute for some of their
interstate capacity.\22\ Thus, a discount may cause such an LDC to
contract for more firm capacity than it would have, if it had been
unable to obtain discounted capacity on any pipeline.
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\22\ Nicor at 8. (``In a number of instances, Nicor Gas had
found it more economical to use discounted capacity rather than to
construct additional facilities.'').
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27. Pipeline discounts may also enable natural gas producers to
keep marginal wells in operation for a longer period and affect their
decisions on whether to explore and drill for gas in certain areas with
high production costs. For example, the Natural Gas Supply Association
\23\ stated, ``If forced to pay maximum tariff rates to move gas out of
certain production areas, particularly offshore, or for marginal wells,
in some circumstances this could impact development or even lead to
premature abandonment of existing gas wells.'' Also, many producers
sell gas under net-back arrangements, under which the price they
receive for sale of the gas commodity is the market price for delivered
gas in the consuming area minus the cost of transportation.\24\ Thus, a
higher cost of transportation translates into a lower price for the gas
[[Page 34425]]
commodity, which may render some production activities uneconomic.\25\
Therefore, once again a discount in this situation could lead to
increased throughput.
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\23\ NGSA at 8. See also INGAA at 111-12, Henning Affidavit at
18, 22.
\24\ IPAA at 4.
\25\ Williston at 26 (``Pipeline revenues industry wide could
fall significantly as some producers, particularly those with
already low operating margins, shut their wells rather than
transport gas to market at maximum rate.''); INGAA, Henning
Affidavit at 22.
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28. Finally, on many pipeline systems, the bulk of the pipelines'
discounts are given to obtain interruptible shippers. All interruptible
shippers may reasonably be considered as demand elastic, regardless of
whether they are fuel switchable. Their very choice to contract for
interruptible service shows that they do not require guaranteed access
to natural gas.\26\ Otherwise, they would have purchased firm
interstate pipeline capacity. Thus, absence of a discount could cause
such a shipper to take less service or discontinue service altogether,
since the shipper has already indicated it does not require service.
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\26\ Williston at 22.
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29. The Commission thus finds no basis to conclude that overall
interstate pipeline throughput would remain at the same level, if the
Commission discouraged interstate pipelines from giving discounts in
competition with one another. Rather, it seems clear that such
discounts do play a role in increasing throughput on interstate
pipelines. The Commission thus rejects the fundamental premise of the
commenters seeking to have the Commission disallow any discount
adjustment in Natural Gas Act (NGA) section 4 rate cases for discounts
given in competition with another interstate pipeline.
30. Apart from the issue of the extent to which such discounts
increase overall throughput on interstate pipelines, the Commission
finds that discounts arising from competition between interstate
pipelines provide other substantial public benefits, which would be
lost if the Commission sought to discourage such discounting. Such
discounting leads to more efficient use of the interstate pipeline
grid, by enabling pipelines to adjust the price of their capacity to
match its market value. Any effort to discourage interstate pipelines
from offering discounts when necessary to reduce their rates to the
market value of their capacity would lead to harmful distortions in
both the commodity and capacity markets.
31. As the Commission found in Order No. 637, the deregulation of
wellhead natural gas prices, together with the requirement that
interstate pipelines offer unbundled open access transportation
service, has increased competition and efficiency in both the gas
commodity market and the transportation market. Market centers have
developed both upstream in the production area and downstream in the
market area. Such market centers enhance competition by giving buyers
and sellers a greater number of alternative pipelines from which to
choose in order to obtain and deliver gas suppliers. As a result,
buyers can reach supplies in a number of different producing regions
and sellers can reach a number of different downstream markets.
32. The development of spot markets in downstream areas means there
is now a market price for delivered gas in those markets. That price
reflects not only the cost of the gas commodity but also the value of
transportation service from the production area to the downstream
market. The difference between the downstream delivered gas price and
the market price at upstream market centers in the production area
(referred to as the ``basis differential'') shows the market value of
transportation service between those two points. As a result, ``gas
commodity markets now determine the economic value of pipeline
transportation services in many parts of the country. Thus, even as
FERC has sought to isolate pipeline services from commodity sales, it
is within the commodity markets that one can see revealed the true
price for gas transportation.'' \27\ These basis differentials may vary
on a daily and seasonal basis.
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\27\ Order No. 637 at 31,274 (quoting M. Barcella, How Commodity
Markets Drive Gas Pipeline Values, Public Utilities Fortnightly,
February 1, 1998 at 24-25).
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33. Discounting pipeline capacity to the market value indicated by
the basis differentials provides greater efficiency in the production
and distribution of gas across the pipeline grid, promoting optimal
decisions concerning exploration for and production of the gas
commodity and transportation of gas supplies to locations where it is
needed the most. First, such discounting helps minimize the distorting
effect of transportation costs on producer decisions concerning
exploration and production. The various interstate pipelines competing
in the same downstream markets may bring gas from different supply
basins. For example, different interstate pipelines serving California
are attached to supply basins in the Texas, Oklahoma, Gulf Coast area;
the Rocky Mountain area, and Canada. Without discounts by the higher
cost pipelines, producers in supply basins served by higher cost
pipelines would generally face the burden of any price reductions
necessary to meet the market price for delivered gas in the downstream
areas.\28\ As a result, gas reserves from supply areas served by lower
cost pipelines would have a built-in cost advantage over gas reserves
served by higher cost pipelines. Thus, lack of discounting could cause
production of reserves served by higher cost pipelines to be delayed or
reduced, even though those reserves might have similar or greater
potential. This is inconsistent with the goal of ensuring consumers
access to an adequate supply of gas at reasonable costs.
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\28\ Reliant Energy at 11; Gulf South at 30.
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34. Second, if several interstate pipelines serve the same
downstream market, discounting can help minimize short-term price
spikes in response to increases in demand. In a situation where the
maximum rate of the higher cost pipeline is greater than the basis
differential between its supply area and the market area in question,
then absent a discount adjustment, that pipeline may not be willing to
transport additional supplies at a discount until the basis
differential rises to its maximum rate. Thus, discouraging discounting
by the higher cost pipeline could delay the supply increases in the
downstream market necessary to moderate the price spike.\29\
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\29\ Duke Energy at 19.
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35. Third, discounting also enables interstate pipelines with
higher cost structures to compete with lower cost pipelines for
customers, enabling the capacity of both pipelines to be utilized in
the most efficient manner possible.\30\ In the absence of such
discounts, existing customers of the higher cost pipeline with access
to the lower cost pipeline would likely switch to the lower cost
pipeline to the extent it has available capacity. Similarly, new
customers would contract first with the lower cost pipeline.\31\ Fewer
customers contributing to the fixed costs of the higher cost pipeline
would lead to higher rates on that pipeline, to the detriment of its
captive customers.\32\ Moreover, the demand for service on the lower
cost pipeline combined with increasing rates on the higher cost
pipeline could trigger an expansion of the lower cost pipeline despite
the existence of unused capacity on the higher cost pipeline, as long
as the expansion could be priced at less than the higher cost
pipeline's maximum
[[Page 34426]]
rate. However, if the higher cost pipeline could discount, then an
expansion would be unnecessary, and thereby lead to a more efficient
result.
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\30\ Sempra at 6; Nicor at 6; Gulf South at 34.
\31\ Duke Energy at 27-28.
\32\ Reliant Energy at 9.
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36. Fourth, discounting helps facilitate discretionary shipments of
gas into storage during off-peak periods. Some marketers and others may
only move gas into storage when existing seasonal prices and/or
tradeable basis differentials allow them to hedge their financial
risks. If pipelines are discouraged from discounting the price of their
capacity to the seasonal basis differential, some customers may find it
too risky to put gas into storage.\33\ This may then lead to higher
peak period gas costs, when the supply of gas in storage is lower than
it otherwise would have been.
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\33\ BP America at 13.
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37. Finally, selective discounting helps pipelines more accurately
assess when new construction is needed. When the basis differential
between two points equals or exceeds the applicable maximum tariff
rates for prolonged periods of time, that fact indicates a need for
more capacity between those points. In contrast, basis differentials
below maximum rates indicate additional capacity between the relevant
points is not needed. Discouraging discounting would distort these
price signals, since a high basis differential could simply be the
result of the lack of discounting as opposed to an indication of a
capacity constraint.\34\ Moreover, it is only efficient to construct
new pipeline facilities when the stand-alone cost of the new facilities
is less than the incremental cost of serving the same customer using
the facilities of an existing pipeline. However, if the existing
pipeline is discouraged from discounting, the construction of new
pipeline facilities could occur in selected locations where the stand-
alone cost of the new pipeline is less than the embedded cost rate of
an existing higher cost pipeline. Thus, discouraging existing pipelines
from offering discounts in such situations could distort investment
decisions.\35\
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\34\ Gulf South at 18-19.
\35\ Kinder Morgan, Declaration of David Sibley and Michael
Doane at 16. Nicor at 4. Enbridge at 8.
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2. Competition From Capacity Release
38. APGA, National Fuel, NASUCA, Northern Municipals, and OAL
oppose inclusion of a discount adjustment in pipeline rates for
discounts that result from competition with the pipeline's own
customers who are participating in capacity release. These parties
argue that when pipelines receive a discount adjustment for discounts
given in competition with capacity releases made by the pipeline's
captive customers, the pipeline has a competitive advantage over the
releasing shippers because the cost of the discount is subsidized by
those same releasing shippers. They argue that to the extent the
pipeline is able to sell this capacity by offering a discount, the
releasing shipper is harmed by not being able to capture revenues from
the release. NASUCA argues that if the shipper who is competing with
the pipeline through attempts to release capacity is an LDC, retail
consumers are doubly burdened, first, by the loss of the release
revenues to offset high cost or stranded capacity and, second, in the
payment of the subsidy for the discount given by the pipeline.
39. The goal of the Commission in creating the capacity release
market in Order No. 636 was to create a robust secondary market for
capacity where the pipeline's direct sale of its capacity must compete
with its firm shipper's offers to release their capacity. Capacity
release requires pipelines to discount, or suffer the loss of those
sales.\36\ Capacity release has made it more difficult for pipelines to
obtain additional throughput through selective discounting. As the
Commission explained in Order No. 636, capacity release reduces the
pipeline's sale of interruptible service because potential purchasers
of interruptible service would have the option of purchasing released
firm capacity.
---------------------------------------------------------------------------
\36\ See Order No. 636-A, FERC Stats. & Regs ] 30,950 at 30,562;
Order No. 636-B, 61 FERC ] 61,272 at 61,999.
---------------------------------------------------------------------------
40. Further, as the court recognized in INGAA v. FERC,\37\ the
establishment in Order No. 636 of segmentation and flexible point
rights was intended to enhance the value of firm capacity and promote
competition in the secondary market between shippers releasing their
capacity and pipelines, as well as between releasing shippers
themselves. In Order No. 637, the Commission took additional actions to
enhance flexibility and competition in the secondary market by
requiring pipelines to permit a shipper to segment its capacity either
for its own use or for the purpose of capacity release. This enhances
shippers' ability to compete in the capacity release market by giving
them the right to segment capacity and sell their capacity in separate
packages.
---------------------------------------------------------------------------
\37\ 285 F.3d 18, 36 (D.C. Cir. 2002).
---------------------------------------------------------------------------
41. The capacity release program together with the Commission's
policies on segmentation, and flexible point rights, has been
successful in creating a robust secondary market where pipelines must
compete on price. To prevent pipelines from competing effectively in
this market would defeat the purpose of capacity release and eliminate
the competition that capacity release has created. Competition between
the pipeline and its shippers will be stifled if the pipeline's ability
to offer service at a price below the maximum rate is hampered by lack
of a discount adjustment. Diminished competition in the secondary
market will tend to raise prices to the detriment of all shippers.
42. Capacity release provides benefits to captive customers by
allowing them to compete with the pipeline for the sale of their unused
capacity. To the extent they are able to sell their unused capacity in
the capacity release market at a discount, they will be able to offset
a portion of their transportation costs. It is not unreasonable to
require them to compete with the pipeline for the sale of this
capacity, and the Commission has provided shippers with flexible point
rights and the ability to segment their capacity to enhance their
ability to compete in the secondary market. The releasing shipper has
an additional competitive advantage over the pipeline because the
capacity that is being released by the shipper is firm capacity, while
the pipeline may be limited to offering interruptible service because
it has already sold the capacity to the releasing shipper on a firm
basis. Therefore, the service being released by the shipper has a
higher value. Moreover, any discount adjustment received by the
pipeline is not a subsidy, but simply gives the pipeline an opportunity
to recover its costs, consistent with the court's admonition in AGD I
\38\ and is subject to review in the rate case.
---------------------------------------------------------------------------
\38\ 824 F.2d 981, 1012 (D.C. Cir. 1987). In AGD I, the court
addressed an argument presented by some pipelines that the
Commission's selective discount policy might lead to the pipelines
under-recovering their costs. The court set forth a numerical
example showing that the pipeline could under-recover its costs, if,
in the next rate case after a pipeline obtained throughput by giving
discounts, the Commission nevertheless designed the pipeline's rates
based on the full amount of the discounted throughput, without any
adjustment. However, the court found no reason to fear that the
Commission would employ this ``dubious procedure,'' and accordingly
rejected the pipelines' contention.
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3. The Discount Adjustment and Expansion Capacity
43. IMGA, NASUCA, Northern Municipals, and OAL argue that the
Commission should modify its policy and disallow discount adjustments
for discounts given on expansion capacity. These parties argue that
permitting such
[[Page 34427]]
a discount artificially reduces the true price of the new capacity,
interferes with the workings of the market, and artificially influences
the economic decisions made by those parties participating in the
project. Further, they argue, there is no justification for requiring
captive customers to subsidize new construction.
44. Moreover, these parties argue that permitting a discount
adjustment for discounts on expansions is at odds with the Commission's
policy concerning new projects which requires that they be
incrementally priced where existing customers receive no benefits from
the expansion project.\39\ NASUCA states that the Commission adopted
its pricing policy for expansion projects to send accurate price
signals to market participants as to the cost of new capacity, and that
discount adjustments would distort those price signals and essentially
result in rolled-in rates if the difference between the discount and
the actual cost of expansion projects were recovered in rates from pre-
expansion, non-discounted shippers. IMGA states that in order for a
pipeline to construct new facilities, there should be a market demand
for those facilities and if a pipeline must discount expansion capacity
in order to compete, the expansion is probably not necessary.
---------------------------------------------------------------------------
\39\ They cite Certification of New Interstate Natural Gas
Pipeline Facilities, 88 FERC ] 61,277 (1999), order on
clarification, 90 FERC ] 61,128 (2000), order on further
clarification, 92 FERC ] 61,094 (2000) (Certificate Pricing Policy
Statement).
---------------------------------------------------------------------------
45. On the other hand, INGAA, Duke, El Paso, Reliant, Williston, BP
America, CenterPoint, Louisville, MidAmerican, Nicor, SoCalGas and
SDG&E, and Transco argue the selective discount policy should be
applicable to expansions and that a prohibition against selective
discounting would discourage pipeline expansions.
46. The Commission finds no basis for creating an exemption from
the selective discounting policy for expansion projects. As the
Commission has moved from a regulatory model to a model based on
greater competition, it has recognized that new construction is no
longer undertaken solely for the purpose of serving new markets, but
also to provide natural gas customers with competitive alternatives to
existing service.\40\ Developing policies that encourage pipelines to
actively compete with each other provides producers and end users with
new market opportunities and provides customers with different supply
options, which tends to reduce the delivered price of gas.
---------------------------------------------------------------------------
\40\ Independence Pipeline Co., 89 FERC ] 61,283 at 61,843
(2000).
---------------------------------------------------------------------------
47. Eliminating the discount adjustment for new capacity could
discourage pipeline expansion into areas to compete with existing
service. For a pipeline to undertake an expansion into markets that are
currently receiving interstate service, the new pipeline must have the
flexibility to price the project to compete with the incumbent pipeline
and still earn a reasonable return on that project. There would be no
incentive for a pipeline to expand into an area served by another
pipeline if it were required to charge a rate higher than the existing
rates in the territory. Therefore, the new pipelines will need the
flexibility to discount some aspect of its transportation rate.
48. Moreover, as a result of recent expansions, there are fewer
captive customers,\41\ and policies that encourage these expansions
will provide more options to customers that are currently captive and
thus enable them to benefit from the competitive markets. The
Commission's policies should encourage pipelines to construct new
capacity into captive markets, and the elimination of the discount
adjustment for expansion capacity would not be consistent with that
goal.
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\41\ INGAA states that since the implementation of the Order No.
636, substantial new capacity has been built, leading to more gas-
on-gas competition and thus fewer captive customers. INGAA states
that the 36 pipeline companies that responded to a 2005 INGAA survey
reported that they spent $19.6 billion for interstate pipeline
infrastructure between 1993 and 2004.
---------------------------------------------------------------------------
49. In receiving approval for the expansion project, the pipeline
must meet the criteria set forth in the Certificate Pricing Policy
Statement,\42\ and if the expansion does not benefit current customers,
the services must be incrementally priced. The Commission would not
approve a discount adjustment in circumstances that would shift the
costs of an expansion to existing customers that did not benefit from
the expansion because this would be contrary to the Commission's
policy.
---------------------------------------------------------------------------
\42\ 88 FERC ]61,277 (1999), order on clarification, 90 FERC ]
61,128 (2000), order on further clarification, 92 FERC ] 61,094
(2000).
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50. Calpine states that the goal of discounting, to spread fixed
costs over more customers and thereby lower costs to captive customers,
is not necessarily met when discounts are provided on expansions.
Calpine asserts that because discounts on expansion capacity involve
the potential sharing of new fixed costs among new or existing
shippers, these discounts also should bear a higher level of scrutiny
before they are included in a discount adjustment.
51. As explained above, the issue of whether rates on expansion
capacity are incremental or rolled-in will be determined in accordance
with the Certificate Pricing Policy Statement and allowing an
adjustment in a rate case for the discounts does not make the rates
rolled-in. There is no reason to change the burden of proof with regard
to discounts on expansions. As with all other discounts, the ultimate
burden of proof is on the pipeline to show that the discounts were
granted to meet competition.
4. Protections for Captive Customers
52. Opposition to the Commission's discount adjustment policy does
not come from a wide range of interests, but from a group of publicly-
owed municipal gas companies that represents a small percentage of
throughput on the national pipeline system. APGA implies that all
captive customers are opposed to the selective discount policy.\43\
However, there are captive customers that do not oppose the
Commission's selective discount policy. As the Commission explained in
Order No. 637, if a customer is truly captive and has no alternatives
for service it is likely that its contracts will be at the maximum
rate.\44\ There are many shippers that pay the maximum rate, and it is
only the small publicly-owned municipal gas companies that have
objected to the selective discount policy. It is possible to adopt
measures to protect these customers in circumstances where the
Commission's policy works an undue hardship on them and at the same
time retain the competitive benefits of the policy for the majority of
shippers.
---------------------------------------------------------------------------
\43\ APGA states that if captive customers benefited from the
discounts, they would support them, but instead, captive customers
are the staunchest critics of such discounts. APGA at 5-6.
\44\ Order No. 637 at 217. In Order No. 637, the Commission
concluded that captive customers paying the maximum rate need the
protection of the right of first refusal, but that customers with
alternatives that pay less than the maximum rate do not need this
protection.
---------------------------------------------------------------------------
53. The captive customers that oppose the Commission's selective
discount policy argue that they are being harmed because it has
resulted in increased rates for them. Northern Municipals gives as an
example the circumstances on Northern Natural Gas Company (Northern)
where Northern gave a large discount to an existing customer,
Centerpoint, to prevent it from taking its business to a new intrastate
pipeline. Northern Municipals states that these discounted rates will
be in effect until 2019 and that Northern will attempt to
[[Page 34428]]
recover this discount from its captive shippers. Northern Municipals
states that no significant additional volumes will flow as a result of
the discount. Moreover, Northern Municipals states, under the present
policy, Northern does not have the burden of proof to show that the
discounts were either necessary or reasonable.
54. Northern Municipals does not allege that any harm has occurred
to them as yet, but anticipates that the harm will occur when Northern
seeks a discount adjustment in its next rate case. This harm is
therefore speculative. Further, Northern Municipals' statement that
Northern has no obligation to show that the discounts were necessary or
reasonable is not accurate. Northern has the ultimate burden of showing
that this long-term discount was in fact necessary to meet
competition.\45\ Further, the Commission has the obligation to assure
that rates to all customers are just and reasonable and can consider
mitigating measures where the rate impact on captive customers is
inequitable. The circumstances described by Northern Municipals do not
warrant the Commission's abandoning its selective discount policy that
has provided substantial competitive benefits to a large number of
shippers on the national grid.
---------------------------------------------------------------------------
\45\ See the discussion on the burden of proof below.
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55. There are already rate measures in place on many pipelines that
give small captive customers special rates that provide them
protection. For example, Northern Natural states that on its system,
small shippers pay volumetric rates. Other pipelines also offer special
favorable rates to small captive shippers.\46\ Small shippers paying
volumetric rates do not pay a reservation charge to reserve capacity
and their rates are often developed using an imputed load factor that
is higher than the customer's actual use of the system. Small customers
therefore pay less for their service than they would if their rates
were developed in the same manner as other shippers, and other shippers
on the system subsidize the rates of the small shippers.
---------------------------------------------------------------------------
\46\ For example, El Paso and Tennessee have special rates for
small customers.
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56. Further, to the extent that the Commission's discount policy
furthers competition, it should encourage other pipelines to compete
for the business of these captive customers. As the national pipeline
grid becomes more competitive, there will be fewer captive customers,
and captive customers therefore will ultimately benefit from the
Commission's policies that encourage competition.
57. Moreover, the Commission has a responsibility to protect
captive customers and can take action to protect these customers in
case-specific situations. The Commission has always looked at the
particular circumstances of each case and has adopted special
protections for captive customers where circumstances warrant. For
example, in Natural Gas Pipeline Company of America,\47\ the Commission
stated that it was ``mindful of our obligation to protect the
pipeline's captive customers, who have little or no alternative to
obtaining service over Natural's facilities,'' and rejected the
pipeline's proposal to recover the costs associated with unsubscribed
capacity from its captive customers. The Commission explained that it
would not allow a pipeline to shift costs to its captive customers
without considering the adverse effects this would have on those
customers.\48\ The Commission continues to be mindful of its obligation
to captive customers and will consider the impact of any discount
adjustment on those customers in specific proceedings.
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\47\ 73 FERC ] 61,050 at 61,128-29 (1995).
\48\ See also El Paso Natural Gas Co., 72 FERC ] 61,083 at
61,441 (1995).
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B. Other Issues
58. As discussed above, several parties generally support the
selective discount policy, but suggested certain modifications to the
policy. Specifically, these parties have suggested modifications to the
policy with regard to the burden of proof, requirements for periodic
rate filings, and informational postings. These proposed modifications
are discussed below.
1. Burden of Proof
59. Under the Commission's current policy, in order to obtain a
discount adjustment in a rate case, the pipeline has the ultimate
burden of showing that its discounts were required to meet competition.
However, the Commission has distinguished between the burden of proof
the pipeline must meet, depending upon whether a discount was given to
a non-affiliate or an affiliate. In the case of discounts to non-
affiliated shippers, the Commission has stated that it is a reasonable
presumption that a pipeline will always seek the highest possible rate
from such shippers, since it is in the pipeline's own economic interest
to do so. Therefore, once the pipeline has explained generally that it
gives discounts to non-affiliates to meet competition, parties opposing
the discount adjustment have the burden of producing evidence that
discounts to non-affiliates were not justified by competition. To the
extent those parties raise reasonable questions concerning whether
competition required the discounts given in particular non-affiliate
transactions, then the burden shifts back to the pipeline to show that
the questioned discounts were in fact required by competition.
60. APGA, Calpine, Centerpoint, Cinergy, NASUCA, Northwest
Industrials, and MoPSC argue that the Commission should change this
aspect of the policy and place a higher burden of proof on pipelines to
justify discounts given to non-affiliates. These parties argue that the
pipeline should bear a heavy burden of proof and should be required to
provide sufficient and specific evidence that the discount was
necessary to accomplish the transaction and that the transaction
provided concrete benefits to captive customers by contributing to the
recovery of fixed costs. APGA argues that the pipeline should be
required to show that the discount is necessary to increase throughput
in interstate commerce, not just on the discounting pipeline, and as a
result, provides net benefits to captive shippers.
61. The Commission finds that its current policy regarding the
burden of proof is based on accurate assumptions and produces a just
and reasonable result. As explained above, the pipeline always has the
ultimate burden of proof on this issue. However, in the case of non-
affiliates, the Commission presumes that the pipeline will seek the
highest price possible because it is in its best interest to do so.
This is a reasonable presumption. A pipeline, like any other business,
will act in its own best economic interest. As the Commission stated in
Order No. 436, ``[u]nder economic theory, price discounting is a
rational policy to pursue only when the pipeline perceives it is better
to earn less than a full return on a service than to risk losing the
service and failing to achieve the volumes on which its rates for the
period in question were based.'' \49\ It is not the case, as NASUCA
suggests, that if a discount adjustment is available, the pipeline
offering the discount has no incentive to minimize the level of
discount. It is always in the pipeline's best economic interest to
obtain the
[[Page 34429]]
highest price possible from a non-affiliate for its services.
---------------------------------------------------------------------------
\49\ Order No. 436, Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, FERC Stats. & Regs., Regs. Preambles
1982-1985 ] 30,665 at 31,543 (1985).
---------------------------------------------------------------------------
62. Moreover, a hearing in a rate case gives all the parties an
opportunity to seek discovery regarding the purpose and level of any
discount. Therefore, Commission Staff and other parties can use this
opportunity to seek an explanation of each discount, and if the
pipeline cannot support any discount, this issue can be raised at the
hearing.
63. In view of the reasonableness and accuracy of the presumption
that pipelines will seek the highest rate from non-affiliated shippers,
requiring the pipeline to substantiate the necessity for all
unaffiliated discounts would be unduly burdensome and would discourage
a pipeline from discounting. As discussed above, discounting furthers
the Commission's goals of fostering a competitive natural gas market
where prices reflect the market value of the capacity rather than the
maximum regulated rate. It would be contrary to those goals for the
Commission to adopt a policy that discourages discounting to meet
competition. Similarly, where the discount results in additional
throughput on the pipeline, this will necessarily provide additional
revenue over which to spread the fixed costs and it is reasonable to
assume that this benefits all the pipeline's customers.
64. Calpine states that short-term discounts on existing capacity
may benefit shippers, but that pipelines should bear a higher burden of
proof with regard to long-term discounts. The Commission finds that
there is no reason to change the burden of proof with regard to long-
term discount transactions.
65. In Iroquois Gas Transmission System, L.P.,\50\ where the
pipeline sought an adjustment for several long-term discounts, the
Commission explained that in rebutting the presumption that non-
affiliate discounts are generally given to meet competition, the
parties challenging the discount adjustment need not prove conclusively
that the discount was not required to meet competition, but rather must
merely introduce evidence to raise a reasonable question concerning
whether in fact competition required the discount. Then, the burden is
shifted back to the pipeline to introduce evidence to show that
competition required it to grant those discounts.
---------------------------------------------------------------------------
\50\ 84 FERC ] 61,086 at 61,477 (1998), reh'g denied, 86 FERC ]
61,216 (1999) (Iroquois).
---------------------------------------------------------------------------
66. In Iroquois, the Commission disallowed the adjustment for the
long-term discounts.\51\ The Commission stated that while short-term
and spot market data may justify a short-term discount, market
conditions change over time and a long-term discount cannot be
justified based solely on current market data. As the Commission
explained, in the case of a long-term discount, the pipeline must
present a thorough analysis of whether competition required such a
long-term discount. The burden of proof is the same, but because of the
nature of the transaction, the evidence required to meet that burden is
different in the case of a long-term discount. The current policy
therefore applies an appropriate burden of proof to both short-term and
long-term discounts and the Commission finds that no change in the
burden of proof is warranted.
---------------------------------------------------------------------------
\51\ See also, Trunkline Gas Co., 90 FERC ] 61,017 at 61,092-95
(2002) (denying a request for an adjustment for a discounted long-
term contract).
---------------------------------------------------------------------------
2. Require Pipelines That Discount To File Periodic Rate Cases
67. In the NOI, the Commission stated that pipelines are no longer
required to file periodic rate cases and that many pipelines have not
filed a rate case for a number of years. The Commission asked the
parties to address the question of how the discount policy has affected
captive customers in the absence of a section 4 rate case.
68. Memphis Light, IMGA, NASUCA, NGSA, Northern Municipals,
Northwest Industrials, and OAL argue that captive customers have been
harmed by the absence of section 4 rate cases and that the Commission
should reinstate the periodic rate filing requirement as a condition to
pipelines providing discounted transportation service. These parties
argue that without this requirement, pipelines can manipulate the
timing of their rate filings to provide themselves with the greatest
benefit. Thus, IMGA states that in the five or six years after the
Commission established its discount policy, virtually all the pipelines
sought and received substantial rate increases based primarily on the
throughput adjustment, but also on the high interest rates and capital
costs of the time. IMGA states that in recent years, interest rates and
capital costs have decreased dramatically and it believes that but for
the Commission's discount policy, there should have been and would have
been rate proceedings producing rate reductions for most pipelines.
69. Similarly, NASUCA states that the reason many pipelines have
not filed rate cases in recent years is related to the status of their
earnings. NASUCA states that the Natural Gas Supply Association
annually computes the status of pipeline over-earnings and their
studies show that at least 13 pipelines have earned significantly more
than authorized in recent years. NASUCA states that because pipelines
that are over-earning their authorized returns have not filed rate
cases in recent years, consumers on those systems are not seeing the
benefit of increased throughput over which the pipeline's fixed costs
could be spread. NASUCA states that only by analyzing all elements of
cost, throughput and discounts in a section 4 rate case would the
Commission be able to determine that the net result of offsetting
discount adjustments and increased throughput would be zero on
consumers.
70. Northwest Industrials states that because the pipelines retain
all the benefits of discounted transportation between rate cases, the
Commission should employ a revenue sharing mechanism to benefit
customers as appropriate between rate cases.
71. NASUCA and Northern Municipals state that while customers have
the right under section 5 of the NGA to file over-earnings complaints
against pipelines, the lack of information posted related to discounts
and pipeline throughput, the insufficiency of FERC Form 2 to provide
rate case data, the shift of the burden of proof, and the prospective
nature of relief under section 5 combine to make it an inadequate
remedy in these circumstances.
72. On the other hand, Enbridge, INGAA, and Northwest assert that
captive customers benefit from the absence of rate cases. INGAA states
that for the last decade, pipeline rates have remained stable in
nominal dollars and have gone down in real dollars. It asserts that
timing of rate cases is now generally dictated by customer settlements
or other economic or market forces. Further, INGAA states that rate
cases create uncertainty, are expensive and time-consuming, and
generally result in a rate increase, not a decrease. In addition, INGAA
states, without the triennial review, pipelines have an incentive for
cost containment and efficient operation to meet the risks associated
with shorter contracts and price competition.
73. Similarly, Northwest states that that the absence of section 4
periodic rate cases has provided an additional safeguard for captive
customers because the discount adjustment becomes relevant only when a
pipeline seeks to adjust its rates. Northwest states that discounting
encourages the pipeline to operate its system efficiently and
[[Page 34430]]
maximize its use of its system which results in the delay or
elimination of the need for a rate case, resulting in long-term rate
certainty for shippers.
74. At the time the discount policy was originally adopted,
pipeline rates were set every three years under the terms of the
Purchased Gas Adjustment (PGA) clause in their tariff. Order No. 636
eliminated the three year rate review and the PGA clause, and section 4
rate cases have been filed much less frequently by the pipelines since.
However, as explained below, the Commission has determined that
selective discounting does not provide a basis for reinstating a
requirement that pipelines file periodic rate cases.
75. Under section 4 of the NGA, the decision to file a rate case is
that of the pipeline. It has always been the option of the pipeline to
file a rate case at a time when it is advantageous for it to do so.
Therefore, IMGA's statement if it were not for the Commission's
discount policy, there would have been rate proceedings producing rate
reductions for most pipelines is not accurate. This issue is not
whether pipelines can choose the timing of their rate case, but whether
there is something about the discount adjustment policy that, like the
PGA, justifies the requirement that pipelines file periodic rate cases.
The Commission concludes that there is not.
76. Under the Commission's PGA regulations, pipelines could recover
projected changes in their cost of gas using periodic purchase gas
adjustments instead of filing an entire section 4 rate case. In
exchange for this ability to change only one cost element pipelines
agreed to a reexamination of all their costs and rates at three year
intervals to assure that gas cost increases were not offset by
decreases in other costs. The PGA was a special rate adjustment
mechanism by which pipelines could pass through certain costs to
customers between rate cases.
77. Under the selective discount policy, customer's rates are not
affected until the pipeline files a rate case. There is no special rate
adjustment mechanism that permits pipelines to change their rates and
pass additional costs through to customers between rate cases.
Therefore, we find no reason to impose a periodic rate review
requirement on pipelines that engage in discounting. Selective
discounting does not affect the rates of other customers on the system
unless a rate case is filed. In these circumstances, the procedures
provided for in sections 4 and 5 of the NGA provide sufficient
protection to a pipeline's customers.
3. Informational Posting Requirements for Discount Transactions
78. NASUCA recommends that the Commission amend its regulations to
require pipelines to post the reasons for each selective discount
granted. NASUCA states that the Commission should provide a check-off
format of reasons, including gas-on-gas competition, adverse economic
conditions that could cause a customer to go out of business, existing
alternative fuel capability, planned alternative fuel capability, and
other reasons. The pipeline should be required to check all the
relevant reasons.
79. Cinergy, on the other hand, states that the Commission's
posting and reporting requirements provide the necessary transparency
to the marketplace of discount transactions. However, Cinergy states
that its review of the informational postings of some pipelines has
revealed that much of the required information is missing. Cinergy asks
the Commission to emphasize in this proceeding the importance of
compliance with its posting and reporting requirements.
80. Under section 284.13(b), pipelines are required to post on
their website information concerning any discounted transactions,
including the name of the shipper, the maximum rate, the rate actually
charged, the volumes, receipt and delivery points, the duration of the
contract, and information on any affiliation between the shipper and
the pipeline. Further, section 358.5(d) of the regulations requires
pipelines to post on their website any offer of a discount at the
conclusion of negotiations contemporaneous with the time the offer is
contractually binding. This information provides shippers with the
price transparency needed to make informed decisions and to monitor
transactions for undue discrimination and preference. The Commission
will not change its informational posting requirements at this time.
However, the Commission takes Cinergy's concerns seriously and will
refer allegations of non-compliance with the Commission's posting and
reporting requirements to the Office of Market Oversight and
Investigation for a potential audit. Furthermore, as part of the
Commission's ongoing market monitoring program, the Commission will
continue to conduct audits on its own.
The Commission orders:
(A) The Commission's selective discount policy is reaffirmed.
(B) This rulemaking proceeding is hereby terminated.
By the Commission. Chairman Wood concurring in part with a
separate statement attached. Commissioner Kelly dissenting in part
with a separate statement attached.
Linda Mitry,
Deputy Secretary.
WOOD, Chairman, concurring in part:
While I support today's decision to reaffirm the Commission's
selective discounting policy, I believe that it would be more
efficient, for future Commission auditing purposes, to require
pipelines to specify the reason why a discount is given to a
customer. In periodic audits, our staff auditors are called upon to
determine whether a discount is given for legitimate business
purposes. This is not only useful in designing rates in future gas
pipeline rate cases, it also is necessary to comply with the
Commission's regulations ensuring that pipeline transportation rate
discounting not violate section 4(b) of the Natural Gas Act. Making
this audit task more transparent at minimal cost is a good
government step we ought to take.
Pat Wood, III,
Chairman.
KELLY, Commissioner, dissenting in part:
As stated in this order, the Commission's current regulations
require pipelines to post certain information on their Web site
related to discounted transactions, including the name of the
shipper, the maximum rate, the rate actually charged, the volumes,
receipt and delivery points, the duration of the contract, and any
affiliation between the shipper and the pipeline. In their comments
filed in this proceeding, the National Association of State Utility
Consumer Advocates (NASUCA) states that what is missing from this
list of information is the reason for the discount. I would have
supported NASUCA's recommendation to require pipelines to post a
check-off list noting the reason that they provided a discount to a
particular shipper. I think that requiring such information would
not be unduly burdensome on the pipelines, would help shippers to
determine whether they are similarly situated and thus eligible for
a similar discount, and would help the Commission to ensure that
selective discounting is not unduly discriminatory under sections 4
and 5 of the Natural Gas Act. Therefore, I dissent in part from this
order.
Suedeen G. Kelly.
[FR Doc. 05-11660 Filed 6-13-05; 8:45 am]
BILLING CODE 6717-01-P