ANR Pipeline Company’s long-standing rate settlement won approval from the Federal Energy Regulatory Commission last week, but without FTS-3 short-term service rates, and without the Commission agreeing to lift the “at-risk” condition on several projects, as the pipeline had hoped it would.

The decision does end, however, a four-year odyssey through the Commission for the pipeline and its customers, which began with a proposed rate increase filed in November 1993, led to a rate hearing in 1996 that produced over 50 witnesses and 7,500 pages of testimony and a lengthy decision by a FERC Administrative Law Judge in January 1997 that was promptly challenged by the pipeline and various parties.

The settlement itself had three major components. The first consisted of uncontested rates that reflect about $573 million in revenue and a $28.6 million reduction. ANR will refund $66.6 million to its customers, has agreed not to file a new rate case until Nov. 1, 1999, will seek dismissal of a number of appeals pending before the D.C. Circuit Court of Appeals, and has agreed to assemble a task force to study whether market-based rates are appropriate.

The second part of the rate case sets procedures for FERC to resolve several thorny issues: whether the at-risk conditions that currently apply to several of ANR’s facilities should be removed; what type of costs should be classified as non-mileage and therefore be included in ANR’s mainline access charge; and how the refund floor should be determined.

The third component was a proposal for a new Rate Schedule FTS-3 that would govern short-term firm transportation deals with terms less than one year. This proposal was not included in the original filing, so parties were able to protest FTS-3 without officially opposing the rate settlement.

The Commission approved most of the ALJ’s original decision, and the uncontested portion of the settlement, which means that the settlement rates, which became effective last Nov. 1, will remain in effect.

Short-Term Service on Hold

FERC did not approve, however, the FTS-3 proposal, which would have allowed ANR to provide short-term firm service to the extent that it had available uncommitted firm primary point capacity. The monthly FTS-3 reservation access charge would have been $10.624/Dth (with a daily access rate of $10.01/Dth), both of which were significantly higher than the monthly reservation access rate for FTS-1 shippers of $2.75/Dth.

The pipeline argued that in years past most customers were distributors who entered into long-term contracts. Now sophisticated marketers buy firm transportation on a short-term basis at prices that don’t reflect the allocated cost of annual service. ANR thinks these market players take advantage of the system by demanding firm capacity in the few months of the year when it is constrained, but purchase released or interruptible capacity the rest of the year at lower competitive prices. This causes a shortfall in the pipeline’s fixed cost recovery and shifts costs to the pipelines’ traditional long-term customers. While ANR didn’t propose the FTS-3 rate in time for the hearing, it argued that the record showed that short-term shippers weren’t paying their fair share of annual costs.

FERC rejected the FTS-3 rates because the acceptance or modification of ANR’s proposal would be premature. “The Commission has not previously accepted a pipeline proposal to implement a higher maximum rate for short-term firm transactions than for long-term firm transactions,” it said. The Commission’s proposed rulemaking on secondary market transactions should address the issue of short-term rates, regulators added.

At-Risk Conditions

The Commission imposed at-risk conditions on four certificated construction projects: the Northeast Project, Blue Lake Storage, Battle Creek Lateral and the Winchester Lateral. ANR had wanted to include $73.5 million attributable to these four projects in the rate case. In addition, ANR argued that the at-risk conditions be removed permanently. The ALJ decided that the costs of three of the facilities (all but Blue Lake) should be included in the rate base, but kept the at-risk condition for all but the Winchester Lateral.

The general rule is that the at-risk condition should be applied unless the pipeline has commitments for 100% of the new capacity under 10-year contracts, or revenues would recover the costs of the facilities on a long-term basis. The Commission staff determined that the projects didn’t meet the test. Blue Lake Storage, for example, was 63% subscribed for 10 years and 70% for eight years. Part of the problem is that some contracts exceed 10 years and others fall far short.

Finally, ANR classified about $295 million, or 60% of mainline costs, as access costs, and about $117 million, or 40%, as mileage-related costs. Commission staff and several intervenors argued that ANR had placed too many costs into the access (or demand) side of the equation. The ALJ agreed to switch some costs, but didn’t go far enough to suit some parties.

Sarah McKinley

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