In a decision siding with Sempra Energy, FERC Administrative LawJudge (ALJ) Herbert Grossman last week found that postage-stamprates on Kern River Gas Transmission are “unjust and unreasonable.”Instead, he ruled in favor of a distance-sensitive zonal ratedesign, which was proposed by Sempra.

The initial decision adopting zonal rates, which was issued lastTuesday, applies only to Sempra, but Grossman indicated that therate design should be considered in Kern River’s future rate cases.

The dispute over Kern River’s rate design stemmed from a 1999settlement in which the pipeline agreed to reduce its maximum rateand establish a three-year moratorium on future rate increases.Sempra was the only party to contest the settlement, andsubsequently was severed from it so it could litigate the issue ofrate design.

Sempra argued that while postage-stamp rates, which don’treflect mileage, may have been an appropriate rate design when allof the gas that Kern River picked up in Wyoming supply basins wasdelivered directly to the California market (no deliveries weremade along the way), this was no longer the case today[RP99-274-003]. It was estimated that about 20% of the gastransported on Kern River is now delivered to markets upstream ofCalifornia – Utah and Nevada.

“Consequently, we cannot blindly continue the initial ratedesign, even if it had been approved by the Commission, in thatthere has been a substantial change in operations that should beconsidered in determining whether the postage stamp rate is stillappropriate. Nor should we consider ourselves bound to thepostage-stamp rate by the commitments made at the inception of thepipeline,” Grossman said.

Kern River contends that zonal rates would allow upstreamcustomers (Utah, Nevada) to “piggyback,” or take advantage of, the”large-scale economies” of the 900-mile pipeline system that itcredits to the California customers.

“Far from negating the benefits to the downstream customers ofthe economies of scale, as Kern River alleges, the net effect ofhaving the upstream customers pay for their costs of capacity, evenon a zonal basis, would added to these benefits,” Grossman noted.

He further said that since “the large diameter downstream[portion of the] pipe does not benefit the upstream customers atall…they should not have to pay for it” through postage-stamprates, “except to the extent that they are effectively using it orrendering it unusable.”

Sempra’s zonal rate proposal, which Grossman adopted, wouldseparate Kern River’s system into three zones based – Zone 3extends from the Goodspring Compressor Station near theNevada-California border to the terminus of Kern River’s system;Zone 2 extends from the Filmore Compressor Station to theGoodspring station; and Zone 3 extends from where Kern Riverorginates to the Filmore station. The proposed rates are: Zone 1,$0.1434, Zone 2, $0.4577, and Zone 3, $0.6800.

Susan Parker

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