In a very broad initial decision issued last Tuesday, a FERC administrative law judge (ALJ) shot down nearly all of Transcontinental Gas Pipe Line’s arguments in support of rolled-in rates for several Southeast expansions of the pipeline’s system that were built in the late 1990s. Instead, he recommended incremental pricing of the projects, which requires only those customers who directly benefit from expansions to pay the costs.

ALJ David Harfeld, in his 101-page opinion, said it was “unjust and unreasonable” for Transco to roll into system-wide rates the costs of the Mobile Bay Lateral expansion and upstream Cherokee, Pocono and SunBelt projects. He said rolling in the costs of the projects increased non-expansion shippers’ rates by more than the allowed 5% threshold, and resulted in few, if any, system-wide benefits. Rolled-in rates would require all Transco shippers to foot the bills for the expansions, whether they used them or not.

The Commission approved rolled-in rates for Transco’s Mobile Bay Lateral expansion in early 1998, despite opponents’ claims that the pipeline was attempting to segment what they believed was one large expansion into several smaller projects to avoid exceeding the allowed 5% threshold for rolled-in rates. Commissioner William Massey was the only member of FERC to oppose rolled-in rates for Mobile Bay at the time, saying that Transco’s proposal “merited further consideration and curiosity” by the full Commission.

Rolled-in pricing of the Mobile Bay Lateral project was to be included in Transco’s first rate case after the expansion went into operation, provided opponents could not show that “circumstances [had] changed significantly” since the project’s certificate was issued. At the same time, FERC said the Cherokee, Pocono and SunBelt projects were to remain incrementally priced unless Transco could demonstrate a “significant change in circumstance” at its next rate case.

In March 2001, the pipeline filed to roll in the costs of all of the projects as part of a Section 4 rate increase, which FERC accepted and suspended, and set for hearing [RP01-245].

Citing a significant change in circumstances since its certificate was awarded, Harfeld urged the full Commission to reject rolled-in rate treatment for the Mobile Bay expansion. He noted that a Transco affiliate, Transco Energy Marketing Co. (TEMCO), was the only party that benefits from the project, while shouldering only 41% of the cost. “This is an unreasonable subsidization by existing customers and an undue preference between these corporate affiliates,” he wrote.

He further ruled that the Mobile Bay expansion, when considering its cost impact on existing Transco shippers, should be combined with the Cherokee project because they were “similarly situated in regard to timing and location.” Taken together, the revenue impact of the two expansions was pegged at 5.42%, which exceeds the allowed threshold for rolled-in rates.

Harfeld conceded the question of the cost impact of the Mobile Bay expansion on existing Transco shippers was a “close call.” Nevertheless, “I cannot, and nor should this Commission, support a roll-in where the existing customers will bear 62% of the cost of a project that will overwhelmingly benefit only an affiliate of the pipeline. In doing so, the agency would be creating an unduly preferential environment on the Transco pipeline.”

He noted that “even if the 5% threshold [was] not exceeded by combining [Mobile Bay] and Cherokee, though the evidence supports that it does, existing shippers opposed to roll-in have persuasively demonstrated that the ‘system benefits do not warrant even this rate increase.'”

The expansion of Transco’s Mobile Bay Lateral included 72 miles of 24-inch and 30-inch diameter pipeline, extending from an offshore platform in the East Main Pass, Block 261, to a new separation and processing plant owned by Williams Field Services Co. in Mobile County, AL; about four miles of 30-inch pipe to connect the offshore extension to the separation/processing plant; less than a mile of 36-inch pipe to connect the plant to Transco’s mainline; a 15,000 horsepower compression addition; and a new compressor station in Mobile County at the Mobile Bay Lateral.

The Cherokee looping and compression expansion, which was placed into service in late 1998, added about 87 MMDth/d of annual firm transportation capacity to serve markets in Georgia.

With respect to the Cherokee and affiliated Pocono projects, Harfeld ruled, “Transco has neither demonstrated a system benefit that would result in a shift from incremental rates treatment to rolled-in costs, nor has Transco demonstrated that circumstances have changed so that rolled-in rates would be justified.”

Likewise, he recommended the Commission continue to incrementally price Transco’s related SunBelt expansion, rather than award it rolled-in rate treatment. While rolled-in treatment would result in lower rates for shippers in one of the pipelines’ zones served by the expansion, Harfeld noted it would boost rates in a number of other zones.

“I consider the opportunity to lower rates in [Zone One] while increasing costs to other zones under the same project an inconsistent application of the Commission’s [pricing] policy,” he said. “Pipeline expansion projects, as the Commission articulated, should not be divided in a manner just to gain an advantageous rate treatment.”

FERC has the option to accept or reject Harfeld’s decision in full or in part.

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