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FERC Reinstates Limits on Selective Shipper Discounts, Mulls Future of Policy

Acting on remand, FERC last Wednesday reinstated a policy of permitting interstate pipelines to limit selective shipper discounts to the primary receipt and delivery points specified in a shipper's contract (RP00-463-006). At the same time, the natural gas industry signaled that, for the most part, it was satisfied with the agency's selective discounting policy as is.

The agency remand decision came nearly a year after the U.S. Court of Appeals for the District of Columbia Circuit vacated a 2002 ruling in which FERC ordered Williston Basin Interstate Pipeline to permit a shipper with a discounted rate to retain its discount when using secondary points or segmenting its capacity, if a similarly situated shipper is receiving a discount at those points (see NGI, Feb. 23, 2004).

In ordering an expanded discount rate policy, FERC argued before the court that it was seeking to encourage a robust secondary market for capacity through flexible receipt and delivery points and allow shippers to economically switch from one pipeline to another for different parts of the trip. Williston Basin countered that because its system was "reticulated [web-type] rather than a linear pipeline, the...policy [was] harmful both to its shippers and to its system."

FERC's "rejection of the pipeline's objections...must be responsive to the particular concerns raised by the pipeline," the three-judge panel said. But "in this case, the Commission did not adequately address Williston's concern...that the [policy] would compromise the pipeline's ability to target discounts at particular receipt/delivery points, subsystems or other defined geographical areas."

In its order last Wednesday, FERC said it could not justify, as required under the Natural Gas Act, that the intended benefits of increased competition derived from its expanded discounts would outweigh the costs to captive customers of reduced revenue from selective discounting. The Commission said it would allow Williston Basin and other pipelines with similar expanded discounting provisions to remove them from their tariffs.

The debate is not over, however. Approaching the question from another angle, FERC late last year issued a notice of inquiry (NOI) asking for comments on whether it should change its policy on selective discounting, particularly with respect to discounts that are given to enhance competition between natural gas pipelines (gas-on-gas competition).

There appears to be almost unanimous agreement within the natural gas industry that the Federal Energy Regulatory Commission should continue its existing policy on selective discounting, which allows interstate gas pipelines to provide customer discounts to compete with both alternative fuel providers and other gas pipelines.

In comments filed with the Commission last Wednesday, interstate gas pipelines, some local distribution companies (LDCs), independent and major gas producers, and large industrial gas consumers called on FERC not to change its current discounting approach. But the American Public Gas Association (APGA), which represents municipal gas utilities, stood apart from the majority, and asked the agency to prohibit discount adjustments.

"It is time for the Commission squarely to face the facts. The supposed beneficiaries of selective discounting, the captive shippers [such as APGA members], are not benefited on a national basis because the discounting, which largely stems from gas-on-gas competition, does not increase throughput...If discounting provided the promised benefits, captive shippers would be its staunchest supporters; the fact that captive shippers have over the years been the harshest critics of selective discounting should tell the Commission all that it needs to know about this misguided policy," the APGA told FERC [RM05-02, RM97-7].

The APGA said it believes that if the Commission "eliminates discount adjustments except in those few instances where interstate pipeline throughput would be really affected (such as to compete with another fuel or in competition with intrastate pipelines), pipelines would have a strong incentive to get rid of the two-tier rate structure now in place -- high rates for captive customers and discounted rates for everyone else -- which would make the need for any discounts rare indeed because the base rates would be reduced to reflect costs."

At a minimum, FERC should prohibit pipeline rate adjustments where the discounting pipeline has not met the burden of proving that the discount was needed to enhance overall gas throughput in the interstate pipeline industry and would provide benefits to captive customers, the municipal gas group said.

But Nicor Inc. implored the Commission to keep its discount policy as is. "Nicor fully supports the Commission's proactive approach in examining important issues affecting the natural gas industry. The use of generic rulemakings is an effective means to correct industry-wide regulatory problems and inefficiencies. In this case, however, there is simply no significant evidence of a systemic problem resulting from the Commission's current selective discounting policy," the Naperville, IL-based LDC said.

Specifically, it noted that a "move to generically prohibit discount adjustments for gas-on-gas competition may well lead to a host of unanticipated negative consequences in the market and would represent a giant step back in the Commission's efforts to create a competitive natural gas market." The Interstate Natural Gas Association of America (INGAA), which represents interstate gas pipelines, agreed.

"A policy that either bars gas-on-gas competition outright, or discourages it by disallowing rate case adjustments to reflect lower revenue from discounted volumes, would not be a minor 'tweak' to the competitive market for pipeline capacity that the Commission has fostered," but rather it "could unravel the new competitive framework," and would have a "number of predictable, adverse effects" on the gas market, INGAA said.

Reduced discounting "will undermine the hub and market-area competition that has developed, where basis differentials set the intrinsic transportation prices and make them transparent;" would "inhibit longer term contracting, and promote increased reliance on interruptible service;" obscure price signals and make planning for capacity expansion more speculative; and undermine competition in the market for released capacity and place interstate pipes at an even greater competitive disadvantage with intrastate pipelines than they already face, among other things, the pipe group noted.

INGAA and other groups also took issue with comments from FERC's Office of Administrative Litigation, which "seemingly advocates discouraging pipeline discounts as a means of encouraging conservation and dampening demand for natural gas."

The Process Gas Consumers Group and American Forest & Paper Association (industrial customers) expressed their support as well for the continuation of FERC's discount policies, including discounts given for gas-on-gas competition. "Industrials have been the beneficiaries of selective discounting both as recipients of selective discounts and as customers on pipelines that have selectively discounted," they said.

"Restricting discounts and discount adjustments," as some have called for, "is not the answer because it would deny to captive customers any benefit from discounting just because some captive customers may not be receiving all of the benefits from discounting. Instead, the Commission needs to be more vigilant in its oversight of pipeline rates...Only by serious review of pipeline rates can the Commission be assured that the general economic theory that selective discounting accrues to the benefit of captive customers is realized," industrials noted.

The Natural Gas Supply Association (NGSA), which represents major producers, urged the Commission to "refrain from trying to 'fix' something that is not broken."

Absent the ability to "discount to meet gas-on-gas competition, pipelines lose an invaluable tool to compete in the marketplace," NGSA said. "Discounts provided to meet gas-on-gas competition are important for pipelines to both attain incremental new load and to maintain their existing customer base...A change in current discounting practices could lead to...unintended consequences in the natural gas market," including adversely impacting investment decisions by pipelines and other energy sectors, such as liquefied natural gas (LNG) and new gas-fired generation, it noted. In addition, "it could result in disincentives for producers to find much-needed supply and in greater balkanization of the market."

The Independent Petroleum Association of America, which represents independent producers, said it agreed with FERC Commissioner Nora M. Brownell, who, in a concurring statement that accompanied the NOI, expressed concern "that we are again creating market uncertainty with the specter of regulatory intervention, on a generic basis, in a discounting program that works well, promotes competition, provides regulatory safeguards and ultimately benefits gas consumers."

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