Viking Pricing Proposal --- A 'Watershed' Event or Bust
Based on its own interpretation of FERC's new policy on capacity
pricing, Viking Gas Transmission is seeking authority to charge
higher incremental rates for historically lower-priced capacity as
it becomes available on its system without filing a new rate case.
Some believe Viking's proposal - the first of its kind - may prove
to be a "watershed" event for the Commission's still-evolving
policies on the pricing of interstate pipeline capacity.
Even shippers that aren't customers of Viking Gas are worried
about the "precedental effect" of this case. A group of Florida
Cities, which hold firm capacity on the incrementally priced
Florida Gas Transmission (FGT) system, have intervened because they
believe FERC's ruling on the Viking proposal could ultimately
affect FGT and other pipelines.
Dynegy echoed the concerns of many when it called the Viking
pricing proposal a "transparent attempt" to over-recover the
pipeline's cost-of-service until its next rate case in late 2001
without undergoing any rate scrutiny. Dynegy, the Florida Cities
and other Viking customers urged FERC to reject the proposal
outright, or at least require it to meet the "just and reasonable"
burden of Section 4 rate cases. Some customers called for FERC to
suspend it for the maximum five months --- which Viking anticipates
the Commission will do --- and hold a technical conference.
Specifically, Viking Gas wants to be able to incrementally price
capacity that opens up on its system through capacity turnback,
permanent capacity release, contract renewal or
right-of-first-refusal (ROFR) at a level warranted by the market.
The price for such capacity would be capped at the FT-D rate,
Viking's highest. The pipeline fetched an FT-D rate of 45 cents/Mcf
for firm service from the Canadian border to Marshfield, WI, on its
most recent expansion.
Currently, Viking has four different levels of firm rates,
ranging from about 11.4 cents to 13 cents to 23.7 cents to 45
cents. The aim is to achieve some uniformity in firm rates, as well
as those for interruptible, capacity release and authorized overrun
transportation (AOT) services. But Viking President Greg Palmer
doesn't expect to achieve rate equality quickly. "We've got
contracts that go anywhere from 30 days up to 14 years, so it's
going to take a period of time."
Given the disparity in contract expirations, Dynegy said it was
particularly concerned that some Viking shippers, whose contracts
aren't due to expire for years, will have an "unreasonable
competitive advantage" over other shippers "because their rates
[will be] capped at a much lower rate that is more representative
of Viking's cost basis."
If the proposal is approved, shippers served by Viking's
original system, which was built in the 1960s, could wind up paying
four times more for the same capacity when their firm contracts
come up for renewal. And shippers served by two other expansions
(FT-B and FT-C) that were constructed in the late 1990s could see
their firm rates double or more. But Viking won't "hoard all [of]
the windfall," as one shipper noted. The pipeline proposes to
refund 90% of the excess revenues to the shippers paying the higher
incremental rates for firm, IT and AOT services. With temporary
releases, the releasing shippers would keep whatever additional
revenues they reap.
Although shippers will face higher rates for available capacity,
Palmer said he doubted it would be the full FT-D rate of 45 cents.
"The last capacity we sold from Emerson to Marshfield was at 45
cents. But if I'm out selling today, I probably can't get that same
45 cents. Maybe I can get 20 cents or something like that. It just
depends on what the market's willing to pay. But it's not going to
be the [full] FT-D rate."
If Viking were to charge the full 45-cent rate, the pipeline's
existing shippers already have indicated they will take their
business elsewhere, he told NGI. "We've had quite a few
conversations with the shippers on this. And they've told me in no
uncertain terms that they're not going to pay 45 cents." Palmer
expected a "number of protests" to Viking's proposal to be filed at
FERC. "They've told me that they've got to look out for their
customers. Their preference would be to keep the capacity at the
grandfathered rate as long as they can."
Some shippers, however, have markets captive to the Viking
system, such as Northern States Power (Minnesota) and Northern
States Power (Wisconsin).
Palmer said incremental pricing of "available" system capacity
is allowed under the policy on new pipeline construction, which
FERC approved in September. "Our reading is...that when contracts
are renewed or extended that's the point in time when you roll up
that cost along with the incremental rates that you're charging on
your system," he noted. "Our belief is that you need this type of
policy to have equal treatment between customers. You can either do
it this way or you can allow rolled-in rates during rate cases. But
you shouldn't have a perpetual system where you charge your
customers four different rates."
But Dynegy questioned whether the new policy provides Viking
with such a mandate outside of a rate case. Specifically, the
policy statement says "whether and to what extent costs can be
shifted is an issue to be resolved in the incumbent pipeline's rate
case..." In light of this, "it puzzles Dynegy why Viking would
think it appropriate to impose costs relating to an individual
expansion on all customers without heeding the Commission's mandate
to first file an NGA Section 4 rate case."
Florida Cities said the policy statement "invites
incrementally-priced pipelines [such as Viking] to consider using
the higher incremental rate as the standard for
right-of-first-refusal purposes on expiration of lower-priced
contracts." But it believes Viking has gone far beyond what is
permitted by the policy statement.
In addition to providing rate uniformity, Viking Gas believes
its proposal "will provide better price signals to the market," and
"will encourage longer term contracts." But Dynegy is concerned it
would eliminate "rate certainty" for power generators and give
pipeline marketing affiliates, which would hold lower-priced
capacity, a decided advantage over their competitors.
The Commission's new pricing policy is of "special importance to
Viking and its shippers" given that contracts covering more than
one-half of the pipeline's capacity are scheduled to expire during
the upcoming year. Palmer estimated contracts for more than 250
MMcf/d will terminate by Nov. 1, 2000. So far, shippers
representing about 120 MMcf/d of that capacity have elected to
extend their contracts. Viking Gas said it is "by no means certain"
it can subscribe all of the capacity that opens up on its system at
the higher rates. As a result, it has asked FERC for the authority
to discount the capacity to whatever the market will bear.