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BP Amoco Pushes for Annual Rate Changes

BP Amoco Pushes for Annual Rate Changes

BP Amoco is starting a quiet, behind-the-scenes campaign aimed at bringing pipeline rate-setting out of the realm of the archaic, making it current and market-responsive by building in annual re-calculations to adjust return on equity.

"We're interested in developing a consensus. We've put a proposal out there that we think is a start in the right direction. It may not be the ultimate solution, but we hope others will contribute," said Bill Benham, vice president of regulatory affairs for natural gas. Benham and BP Amoco's Jeff Holligan have been meeting with representatives of other industry segments to promote the idea. The producer's proposal is for rate adjustments based on annual assessments of costs and volumes provided in Form 2 filings by pipelines at the Federal Energy Regulatory Commission.

"The current rate-making scheme is one-sided. Pipelines are protected on the downside, but there's no customer protection on the upside. It's not balanced. There is no incentive for pipelines to cut rates," Benham said. As a result pipeline profits have been increasing at the same time throughput volumes have gone down.

BP Amoco's plan would compare annual revenues with the previous year and apply 50% of the difference either as a surcharge or a credit on the next year's rates. For instance, if operating costs are cut by $10 million from the previous year, the pretax return on the most recent year is increased by $5 million and a new return on equity is calculated. Conversely, if costs on a per unit basis go up the pipeline would be penalized with a lower return on equity. The idea is to reward the pipeline for cutting customer costs.

Under current regulations pipelines no longer are required to file regular rate cases and "they have the opportunity to game the system using test period results," Benham said. I'm not blaming the pipelines, I would do the same in their place. The system now favors the pipelines. FERC needs to make it beneficial for other parts of the industry also."

"We're hoping this initiative can gain momentum," Benham said. He noted that pipeline customers, producers, end users and LDCs, need to be unified and persistent in seeking changes in rate regulations. "Pipelines have a tremendous advantage in that their senior management is attuned to FERC," he said pointing to the pipeline association's new office location two blocks from the Commission. CEOs for some producers and end users "don't even know what FERC does. We have to build up sufficient political weight to be noticed." He also advised there is "growing evidence the courts are not happy with a regulatory scheme that is just good for the pipelines and not for the rest of the industry."

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