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Koch's Market-Based Rates Shot Down at FERC

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 rates.

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.

Susan Parker

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