Koch's Market-Based Rates Shot Down at FERC
In a reversal of an ALJ initial decision viewed as potentially
precedent-setting, FERC last week denied market-based rates for
transportation to Koch Gateway Pipeline after finding it fell far
short of substantiating its claim that it lacked market power. It
marked the first time that the Commission had considered a request
for market-based transportation rates on a major long-haul gas
pipeline. In 1996, FERC approved similar rate authority for K N
Interstate Gas Transmission's Buffalo Wallow system, but that
involved short-haul transportation.
Commissioner Curt Hebert Jr., who supported the decision, used
the case to voice his concern that FERC may be setting standards
that are unreachable for pipelines seeking market-based rates.
"While I do not disagree with the Commission's finding that Koch
did not show that it lacked market power as required by the
Commission's policy statement for market-based rates, I am
concerned that the policy statement may present too impenetrable a
standard if the Commission's goal is to foster an environment
receptive to and supportive of market-based approaches to
ratemaking," Hebert said at last Tuesday's open meeting.
"I am troubled that if a pipeline, such as Koch which heavily
discounts many of its services in order to meet the competition,
cannot be found under the policy statement to be lacking market
power, [then] under what circumstances will it be possible for the
policy statement to encourage market-based rates." He raised the
possibility of the Commission revisiting its policy statement to
consider lowering the bar for obtaining market-based transportation
Commissioner Linda K. Breathitt also said the case underscored
the need to re-evaluate FERC's test for market-based rate
authority. In light of the July proposed rulemaking on short-term
market issues, where lifting price caps is a key issue, "this is an
appropriate time to see if our current standards are appropriate in
today's natural gas market."
Despite the negative ruling for Koch, the senior members of the
Commission affirmed their support for market-based rates for
pipelines, but they stopped short of calling for a re-opening of
the policy statement. Chairman James Hoecker noted that "some
important steps" taken by FERC in late July - the notice of
proposed rulemaking (NOPR) on short-term pipeline capacity and a
notice of inquiry addressing the long-term market - would "begin to
mitigate individual market power and...address these issues,"
suggesting perhaps that pipelines then would have a better shot at
market-based rate authority.
Commissioner William Massey likewise cited the July NOPR as
evidence that FERC is moving forward "fairly aggressively" in
trying to achieve market pricing for transportation capacity. "...I
do not think that today's decision should be viewed as the
Commission's unwillingness to consider market-oriented approaches."
In reversing the administrative law judge's August 1997
decision, the Commission found that adjacent pipeline systems,
located within five miles of Koch's receipt and delivery points,
that were identified by Koch as suitable alternatives to its system
capacity were, in fact, not "good alternatives" because Koch's
existing customers would not be "physically connected" to them. The
existence of these alternatives were crucial to the Commission's
awarding of market-based rate authority to Koch because they would
give the pipeline's existing customers other transportation options
in the event Koch tried to exert undue influence over them.
In addition to not being connected, FERC noted the alternatives
identified by Koch wouldn't have been available soon enough to
allow Koch's customers to use them as substitutes. Moreover, it
said Koch had failed to show that the prices on the alternative
systems would be low enough to permit customers to use them, or
would offer sufficient quality of service. Significantly, the
Commission also concluded that Koch had been able to exercise
market power in the past during peak periods - sustaining price
increases of 10% or more.
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