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New York Regulators Seek Rate Design Inquiry

New York Regulators Seek Rate Design Inquiry

The New York Public Service Commission (PSC) has urged FERC to initiate a proposed rulemaking for the purpose of opening up an inquiry into the appropriate rate design for interstate natural gas pipelines.

The current straight-fixed variable (SFV) rate design, which allows pipelines to recover all of their fixed costs in the reservation component, isn't working as the gas industry moves towards greater competition and shorter term contracts, the New York PSC said. It believes the time is ripe for the Commission to consider a rate design that would enable pipelines to recover a portion of their fixed costs in the usage component.

"The movement of fixed costs to pipeline usage rates will encourage pipelines to compete for increased throughput on a day-to-day basis," state regulators noted, adding it is a "necessary step" to ensure that FERC regulation keeps up with the trend towards short-term transactions. Such a rate design "also will discourage pipelines from inflating their equity ratios," and will encourage retail access, the New York commission said.

It dismissed arguments that a departure from SFV rate design, which was established as part of Order 636, could serve to distort producer wellhead prices. If anything, the state commission contends a non-SFV rate design would have a number of benefits: it could make turned-back pipeline capacity more marketable by reducing reservation charges; encourage the entrance of new suppliers into the retail markets; and reduce the need for discounting and mitigate rate disparities between captive and non-captive customers.

Moreover, state regulators believe a shift from SFV rate design would put recourse, or standard, rates on a more even scale with negotiated rates. FERC's present policy permits pipelines to negotiate rates that diverge from SFV, but it requires recourse rates to be calculated using the SFV rate design. "New York is concerned that if the market is demanding a move away from SFV, but not all customers have the leverage to obtain the pipeline's [negotiated] agreement, the recourse rate has lost its validity unless it too moves away from SFV."

Susan Parker

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