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FERC: Selective Discounting 'Integral, Essential' for Gas-On-Gas Pipeline Competition

May 30, 2005
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FERC last Wednesday voted to retain its existing policy on selective discounting for natural gas interstate pipelines, allowing them to offer discounts to customers to compete effectively with other gas pipelines.

The Commission's current policy on selective discounting is an "integral and essential part of its policies furthering the goal of developing a competitive transportation market," according to the agency's decision, which was approved by three commissioners and partially dissented on by a fourth [RM05-2].

The Federal Energy Regulatory Commission, in its ruling, concluded that "any effort to discourage pipelines from offering discounts to meet gas-on-gas competition would do more harm than good." Moreover, it noted that the current policy "contains safeguards that protect captive customers," and allows for additional protections, if needed, to be considered for captive customers in individual rate cases.

Chairman Pat Wood expressed some concern about the impact of FERC's discount policy on captive customers. "I do remain concerned as a general matter...that the discount that is given by the pipe to win the customer is going to be paid for by the captive customers on the pipe that loses." But "that's a theoretical concern," he said. "We haven't seen pipelines go into [a] death spiral over this issue."

The order further said that the Commission "takes seriously" reports of noncompliance with the agency's posting and reporting requirements for discount transactions, and will refer allegations of noncompliance to the Office of Market Oversight and Investigations.

FERC's selective discounting policy permits interstate pipelines to adjust their ratemaking throughput downward in rate cases to reflect discounts given by pipes for competitive reasons to meet competition with other pipelines. In November 2004, the Commission issued a notice of inquiry (NOI) asking for industry comments on whether it should change its policy on selective discounting, particularly with respect to discounts that are given to enhance competition between gas pipelines.

In comments filed at the agency, the overwhelming majority of the gas industry -- interstate pipelines, local distribution companies (LDC), independent and major gas producers, and large industrial customers -- urged FERC to keep its discount policy intact.

In a related decision in March of this year, FERC reinstated its policy of permitting interstate pipelines to limit selective shipper discounts to the primary receipt and delivery points specified in a shipper's contract [RP00-463-0067]. The agency decision came nearly a year after the U.S. Court of Appeals for the District of Columbia Circuit vacated a 2002 ruling in which FERC ordered Williston Basin Interstate Pipeline to permit a shipper with a discounted rate to retain its discount when using secondary points or segmenting its capacity, if a similarly situated shipper is receiving a discount at those points (see NGI, March 7).

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