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Shipper Balks at ANR Cost of Service Hike But Would Like Fewer Pipeline Zones

On Tuesday FERC granted a hearing for an ANR Pipeline Co. rate case reflecting "a substantial increase" in the pipeline's cost of service. The Commission also will consider a "preferred case," proposed by ANR, which would cut its rate structure from seven to four zones. Judging by filings in the docket so far, there will be plenty to talk about.

ANR's last Natural Gas Act (NGA) Section 4 rate case was filed in November 1993 and marked the pipeline's restructuring of operations after Federal Energy Regulatory Commission open access Order 636. Under ANR's current proposal before the Commission, cost of service is pegged at nearly $925 million, up from the nearly $573 million established in the pipeline's last Commission-approved rates.

The docket has drawn dozens of intervenors -- producers, marketers and regulatory agencies among them -- as well as a number of protests, too. Behind the higher costs are the upending of the natural gas grid by the emergence of numerous unconventional supply basins as well as the aging infrastructure of the ANR system.

"In the nearly 20 years since the RP94-43 Settlement [of Oct. 17, 1997], the natural gas marketplace has undergone a series of transformative changes that have significantly affected where ANR's natural gas supply is sourced and have also resulted in the development of non-traditional market areas," the TransCanada Corp. pipeline told the Commission in its January rate filing [RP 16-440].

Impacts to the ANR system include significant flow changes; increased competition in its northern area markets; low transportation values on the Southwest Mainline; shuffling of the customer portfolio and pipeline services used by customers; declining use of long-term storage services; "transportation by others" arrangements becoming no longer viable; and a need to modernize the system, the pipeline told FERC.

"Of particular significance to this filing, ANR has had to make significant capital expenditures over the last two years to address aging infrastructure, obsolete equipment, engine and compressor reliability, automation upgrades, and line pipe integrity to ensure overall system reliability and compliance with safety regulations as it accommodates increased and changing flows," ANR said.

Lawyers for Rice Energy Marketing LLC (REM) read all that and then some; then they filed 16 pages of protest and comment. The first bone to be picked was what the cost of service hike would do to shipper rates.

"This 61% ($351 million) cost of service increase, as proposed by this rate filing, is to result in an average 92% increase in [ANR's] firm service rates and a 2% reduction in its storage rates," REM said. "Although a 92% increase is a breathtakingly large amount, far larger than proposed rate increases in other Commission pipeline rate filings, these percentages actually understate the massive shift in cost responsibility proposed by ANR because these percentages are presented on a 'revenue-based, weighted-average basis.'"

The hit to FTS-1 and other firm shipper rates would be so great because of "inappropriate cost allocation and rate design maneuvers proposed by ANR..." REM said. REM agreed that ANR storage services have become devalued but said "that fact does not justify ANR's attempt here to shift these stranded storage costs to its FTS-1 shippers."

The marketing company also protested the pipeline's proposal to roll in the costs of a series of incremental expansions, saying that allowing this would subject non-expansion shippers to subsidization of expansion costs.

REM also took issue with proposed tariff provisions it said would allow the pipeline to "effectively ignore" FERC negotiated rate policy and longstanding cost-based rate policies. ANR's proposal would allow it "to automatically ratchet up its maximum recourse rates whenever any shipper, perhaps purchasing a single dekatherm of service, agrees to purchase capacity at a negotiated rate higher than the current maximum recourse rate," REM said.

But perhaps the biggest criticism by REM is the assertion that for the last 20 years or so, ANR has been falling behind on general plant and maintenance capital (GPMC) spending, letting the years roll by without a rate case and too little in the way of pipeline maintenance.

ANR is proposing to include in base rates GPMC "test period" expenditures of about $494 million, REM said. "As a threshold matter, ANR's GPMC proposal needs to be evaluated in light of management's decision to refrain from filing a rate case for over 20 years."

"It appears that ANR may have deferred maintenance expenses for years. If ANR had not deferred such maintenance and not avoided taking advantage of its right to make occasional NGA Section 4 filings, it could have obtained Commission-approved adjustments to expense levels and rate base designed to allow pipelines such as ANR to maintain, modernize and replacing aging equipment on a prudent, ongoing basis."

REM claimed that ANR skimped on maintenance "to provide cash to its parent," TransCanada, which bought the pipeline in 2007 (see Daily GPI, Feb. 23, 2007).

The "preferred case" proposed by ANR would see the number of zones on its system cut from seven to four in order to reflect changing flows.

The zone boundaries that would be eliminated are the boundary between the SW Area and Southwest Southern Segment (ML-5), the boundary between the Southwest Central Segment (ML-6) and the Northern Area (ML-7), and the boundary between the Southeast Southern Segment (ML-2) and Southeast Central Segment (ML-3). The new zones would consist of: Supply Zone West (the former SW Area and ML-5); Supply Zone East (the former ML-2 and ML-3); Market Zone North (the former ML-6 and ML-7); and Market Zone South (the former SE Area), ANR said.

"...[T]he existing seven-zone structure reasonably reflected the historical flow of natural gas across the long lines of the ANR system," the pipeline said. "Traditionally, gas supply was typically sourced from Gulf Coast and Midcontinent supply areas, transported primarily in a unidirectional fashion from south to north, and delivered to ANR's primary market area in the Northern Area.

"...[G]as supplies accessing the ANR system have diversified beyond the traditional Gulf of Mexico and Midcontinent supply regions...Gas is now supplied to the ANR system from a variety of different sources that did not exist at the time ANR filed its last rate case. These sources include shale gas that can enter ANR's system on the southern end of its SE Mainline, Marcellus/Utica shale gas that can enter ANR's system in the middle and on the northern end of its SE Mainline, Rockies supplies that can enter ANR's system near the midpoints of ANR's SW and SE Mainlines, and increased Canadian supplies that can enter ANR's system in ANR's Northern Area.

"In addition, ANR's SE Area, traditionally a supply area, has now become a net market area on ANR's system, second only to the Northern Area that was the original market ANR's mainlines were constructed to serve. ANR's Southeast Mainline System Reversal Project was undertaken to enable producers to reach this market area."

Creation of a four-zone system would allow ANR to separate its system into supply and market zones. "ANR's proposal creates two distinct header systems, or zones, along components of the traditional SE and SW Mainlines that will allow supplies within those zones to compete on equal footing to serve adjoining markets," the pipeline said. "The creation of larger, header-type zones will allow supplies that access these larger zones to compete on the basis of production costs, without regard to transportation rate barriers that are unrelated to the cost of production and that give supplies closer to a market a competitive advantage."

REM said in its comments that it would take the consolidation of zones one step further, creating only three zones instead of four. "...[T]he SE Area should be included within Supply Zone East, just as ANR proposes to include the SW Area within Supply Zone West," REM said. "This would result in three rate zones, not four."

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