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FERC Affirms Role of Selective Discounting in Promoting Gas-On-Gas Competition

FERC has upheld a prior order retaining its existing policy on selective discounting for interstate natural gas pipelines, allowing them to offer discounts to shippers to compete effectively with other gas pipelines as well as alternate fuels.

In a rehearing order issued earlier this month, the Federal Energy Regulatory Commission rejected the challenges of the Illinois Municipal Gas Agency (IMGA) and the Northern Municipal Distributor Group/Midwest Region Gas Agency (Northern Municipals), to a May order, which held that selective discounting was an "integral and essential part" of the agency's policies aimed at developing a competitive transportation market [RM05-2-001].

The IMGA and Northern Municipals argued that FERC's decision was not supported by "substantial evidence," but rather was based on theory and speculation. Specifically, Northern Municipals claimed that the Commission failed to provide any hard proof that selective discounting would increase overall pipeline throughput and benefit captive shippers. They called on the agency to carry out a cost/benefit analysis of the policy.

Although they had no qualms with pipeline discounts to compete with alternate fuels, the parties asked the Commission to establish a blanket rule that would prohibit pipes from seeking discount adjustments to meet competition with other pipelines.

The Commission noted that its May decision was based on the results of a November 2004 notice of inquiry [NOI) in which it asked industry to comment on whether it should change its policy on selective discounting, particularly with respect to discounts that are given to enhance competition between gas pipelines. The overwhelming majority of the gas industry -- interstate pipelines, local distribution companies, independent and major gas producers and large industrial customers -- at the time urged FERC to keep its discount policy intact (see NGI, May 30).

"Because the Commission provided all interested parties with an opportunity to present evidence [in the NOI], it need not now undertake a separate and independent analysis," FERC said in its latest order.

FERC's selective discounting policy permits interstate pipelines to adjust their ratemaking throughput downward in rate cases to reflect discounts given by pipes for competitive reasons to meet competition with other pipelines as well as alternate fuel providers. "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 regulations permit the pipeline to discount the rates to compete with the alternate fuel, and thus obtain throughput that would otherwise be lost to the pipeline," the order said. The same policy applies to discounts to meet gas-on-gas competition, FERC ruled.

"These discounts benefit all customers, including customers that do not receive the discounts, because the discounts allow the pipeline to maximize throughput and thus spread fixed costs across more units of service," it noted.

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