FERC has blocked Kern River Gas Transmission’s attempt to force shippers within the same class whose contracts are expiring to agree to renew for the same term or face higher rates.

“Kern River has not provided any viable reason for its proposal to require that a shipper either choose the same term as all the other shippers or receive a default 10-year term [at higher rates]…Accordingly the Commission rejects this proposal,” the Federal Energy Regulatory Commission said in an order issued Monday, responding to Kern River’s compliance tariff records.

Kern River proposed that if all shippers within a respective shipper group do not select the same 10- or 15-year contract term when their existing contracts expire, the pipeline will give the shippers 20 business days to mutually agree upon a term of service for the group, or it will impose a default contract term of 10 years.

A number of shippers — BP Energy, Anadarko E&P Co. LP, Chevron USA Inc., Occidental Energy Marketing Inc., Shell Energy North America (US), Southwest Gas Corp. and WPX Energy Marketing LLC — protested the alleged contract arm-twisting by Kern River, saying it was contrary to the FERC-issued Opinion 486-E, which requires that eligible shippers be offered the option of entering into either 10- or 15-year contracts for services during Period Two (see Daily GPI, Aug. 19).

Opinion 486-E was issued in July and addressed the step-down rates to which Kern River’s firm shippers would be entitled when their current contracts expire. In a 1990 order approving the Kern River pipeline, the Commission authorized it to charge separate levelized rates for three different periods: the 15-year term of the firm shippers’ initial contracts (Period One); the period from the expiration of those contracts to the end of Kern River’s depreciable life (Period Two); and the period thereafter (Period Three).

In Monday’s order, FERC accepted the tariff records addressing Period Two shipper eligibility requirements, subject to conditions to be effective Sept. 1, and said it will address the tariff record with respect to rates for Period Two to be effective on Oct. 1 in a subsequent order.

“The Commission’s acceptance of the tariff sheets listed in Appendix A effective Sept. 1 is subject to the requirement that Kern River…remove all provisions related to the requirement that all shippers whose Period One contracts expire on the same date must enter into Period Two contracts of the same duration,” the order said [RP11-2356].

“The Commission rejects Kern River’s proposal to require all shippers whose Period One contracts expire on the same date to have the same Period Two contract term. First, Kern River’s sole justification for this proposal appears to be its assertion that ‘these provisions are consistent with the initial decision and Opinion 486-E.’

“However, the Commission did not, in Opinion 486-E, authorize such a requirement. Opinion 486-E expressly found that ‘Kern River may require Period One shippers to enter into Period Two contracts with terms of either 10 or 15 years at the shipper’s election and that the entire remaining balance of Kern River’s original capital investments may be levelized during the term of those contracts,” the order said. Furthermore, it said “the shippers participating in the original allocation of risk and entering into contracts for Period One service did so as individuals, not as a group.”

In Opinion 486-E, “the Commission intended this same approach to be followed when each of existing Period One contracts expire. For example, there are two [pre-expansion] Original System shippers with 10-year contracts expiring on Sept. 30. The Commission intended that each of those shippers be given the option to choose a 10-year Period Two contract or a 15-year Period Two contract, without regard to the choice of the other shipper as to its contract term. Individual shippers have different needs depending upon the type of customers they serve and numerous other factor,” the order said.

“Therefore it is not just and reasonable for the contract term choice of one shipper to be subject to modification because other shippers in the same group with different commercial needs prefer a different length of contract.”

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