In a reversal of an ALJ initial decision viewed as potentiallyprecedent-setting, FERC last week denied market-based rates fortransportation to Koch Gateway Pipeline after finding it fell farshort of substantiating its claim that it lacked market power. Itmarked the first time that the Commission had considered a requestfor market-based transportation rates on a major long-haul gaspipeline. In 1996, FERC approved similar rate authority for K NInterstate Gas Transmission’s Buffalo Wallow system, but thatinvolved short-haul transportation.

Commissioner Curt Hebert Jr., who supported the decision, usedthe case to voice his concern that FERC may be setting standardsthat are unreachable for pipelines seeking market-based rates.”While I do not disagree with the Commission’s finding that Kochdid not show that it lacked market power as required by theCommission’s policy statement for market-based rates, I amconcerned that the policy statement may present too impenetrable astandard if the Commission’s goal is to foster an environmentreceptive to and supportive of market-based approaches toratemaking,” Hebert said at last Tuesday’s open meeting.

“I am troubled that if a pipeline, such as Koch which heavilydiscounts many of its services in order to meet the competition,cannot be found under the policy statement to be lacking marketpower, [then] under what circumstances will it be possible for thepolicy statement to encourage market-based rates.” He raised thepossibility of the Commission revisiting its policy statement toconsider lowering the bar for obtaining market-based transportationrates.

Commissioner Linda K. Breathitt also said the case underscoredthe need to re-evaluate FERC’s test for market-based rateauthority. In light of the July proposed rulemaking on short-termmarket issues, where lifting price caps is a key issue, “this is anappropriate time to see if our current standards are appropriate intoday’s natural gas market.”

Despite the negative ruling for Koch, the senior members of theCommission affirmed their support for market-based rates forpipelines, but they stopped short of calling for a re-opening ofthe policy statement. Chairman James Hoecker noted that “someimportant steps” taken by FERC in late July – the notice ofproposed rulemaking (NOPR) on short-term pipeline capacity and anotice of inquiry addressing the long-term market – would “begin tomitigate individual market power and…address these issues,”suggesting perhaps that pipelines then would have a better shot atmarket-based rate authority.

Commissioner William Massey likewise cited the July NOPR asevidence that FERC is moving forward “fairly aggressively” intrying to achieve market pricing for transportation capacity. “…Ido not think that today’s decision should be viewed as theCommission’s unwillingness to consider market-oriented approaches.”

In reversing the administrative law judge’s August 1997decision, 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 systemcapacity were, in fact, not “good alternatives” because Koch’sexisting customers would not be “physically connected” to them. Theexistence of these alternatives were crucial to the Commission’sawarding of market-based rate authority to Koch because they wouldgive the pipeline’s existing customers other transportation optionsin the event Koch tried to exert undue influence over them.

In addition to not being connected, FERC noted the alternativesidentified by Koch wouldn’t have been available soon enough toallow Koch’s customers to use them as substitutes. Moreover, itsaid Koch had failed to show that the prices on the alternativesystems would be low enough to permit customers to use them, orwould offer sufficient quality of service. Significantly, theCommission also concluded that Koch had been able to exercisemarket power in the past during peak periods – sustaining priceincreases of 10% or more.

Susan Parker

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