Alliance Pipeline L.P. contends its 1,900-mile Canada-to-Midwest system and a number of other new pipelines that have cropped up over the past six years wouldn’t have been built if it hadn’t been for FERC’s negotiated rate policy. If some pipes are abusing the policy, then the Commission should make specific changes to remedy the situation, but it shouldn’t throw the baby out with the bath water, the pipeline said.

“The very existence of the Alliance Pipeline system is a concrete example demonstrating the success of the Commission’s negotiated rate program. The opportunity to offer prospective shippers an alternative to traditional recourse rates was critical to Alliance’s success in marketing sufficient capacity to support development of its innovative pipeline project…At the same time, the negotiated rate approach permitted Alliance to ensure the financeability of its project,” the pipeline told FERC.

The use of the negotiated/recourse rate structure has become a “recognized component of new pipeline project development,” it noted. FERC “should maintain this important regulatory option as the industry continues to strive toward development of much-needed infrastructure additions.”

Alliance filed the comments as part of a Commission notice of inquiry (NOI) exploring the “breadth and direction” of the agency’s negotiated rate program. In issuing the NOI in late July, FERC cited its concerns about the emergence of negotiated rate deals based on price differentials [PL02-6]. It asked industry to comment on whether such negotiated rate arrangements should be barred in the future, or whether limits or restraints should be placed on them. It also sought comments on whether the recourse rate option effectively mitigated the market power of interstate pipelines (see NGI, July 22).

FERC opened the NOI at the same time it suspended for one year the authority of Enron subsidiary Transwestern Pipeline to negotiate rates based on basis differentials and ordered it to pay shipper refunds for excess charges, which at times were 100 times the maximum regulated rate during the California energy crisis in 2000-2001.

Alliance noted that the Commission issued its 1996 policy statement on negotiated rates about the time it was “contemplating” the terms of its open season for the pipeline. “Because of the flexibility provided in the policy statement, Alliance was able to propose a negotiated rate structure that satisfied lenders’ financing requirements while offering long-term arrangements that would be attractive to prospective shippers.”

Moreover, the negotiated rate approach was “instrumental in the development” of several other pipeline projects that have expanded the takeaway capacity at the Chicago hub, Alliance said. It cited the Chicago-to-Dawn Vector Pipeline, the Guardian Pipeline and the Horizon Pipeline. In addition to the Chicago hub projects, it noted “numerous [other] new pipeline projects on the basis of the negotiated rate approach” have been proposed: Kern River Gas Transmission’s High Desert Lateral, East Tennessee Natural Gas Co.’s Patriot pipeline project in Tennessee and Virginia, and the North Baja Pipeline to serve Southern California and northern Mexico gas demand.

“In each of these cases, the availability of the negotiated rate option provided the sponsors with the necessary flexibility to attract the financial and shipper support required to permit the projects to go forward,” Alliance said.

It said it believes the existence of the recourse rate option effectively protects shippers against pipeline market power. “Obviously, shippers cannot be ‘coerced’ into agreeing to a proposed negotiated rate which they do not view as beneficial, as long as they have the alternative to simply select a Commission-approved cost-based recourse rate for the same service.”

There is no need to place “arbitrary limits” on negotiated rates that shippers and pipelines may freely choose to accept, Alliance said, adding that such limits would “unnecessarily restrict the very flexibility that is the hallmark of the negotiated rate program.”

Unless there is “clear evidence in a specific circumstance” that shippers are being forced into accepting negotiated rates against their will, “there can be no justification for unnecessarily tampering with the current format of the demonstrably successful negotiated rate program,” Alliance noted. “Even if such a circumstance [abuse] were to be identified, modifications to the negotiated rate program should be tailored and limited to cure the specific identified abuse, not applied on an across-the-board basis.”

FERC opened the NOI because of its concerns that capacity at the recourse rate had been withheld from shippers so pipelines could extract a higher negotiated rate. “Alliance agrees…that a refusal to make capacity freely available at the recourse rate would undermine the protections that provide the justification for the negotiated/recourse rate program. The flaw in such an instance, however, does not lie in the nature of the negotiated rate, but rather in the impermissible withholding of recourse-rate capacity.

“Therefore, rather than limiting the negotiated rate approaches that may be available to willing shippers, Alliance submits that the Commission should focus its efforts on ensuring that pipelines are complying with their open and non-discriminatory access obligations.”

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