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Court Zaps Transco's Dogged Determination to Win FTW Rates

Acting on the case for a third time, a federal appeals court in Washington, DC, last Tuesday upheld FERC's 2003 decision rejecting Transcontinental Gas Pipe Line Corp.'s bid to charge shippers firm-to-wellhead (FTW) transportation rates similar to those enjoyed by its competitors.

ExxonMobil Corp. and other producers challenged the Federal Energy Regulatory Commission orders, which rejected Transco's two-part FTW rate proposal on the grounds that it would force local distribution companies to pay for service that was not included in their transportation contracts with Transco [court case No. 04-1226].

The U.S. Court of Appeals for the District of Columbia Circuit denied the producers' petition for review of the FERC orders, saying "we hold FERC did not act arbitrarily and capriciously in its previous orders."

The three-judge panel called the proceeding involving Transco's FTW rates "convoluted," noting that it was "perhaps an understandable result of multiple remands" by the court. The appellate court first remanded the issue, which was addressed in a 1995 order, to the Commission for reconsideration in early 2001, but the agency upheld its original decision in June 2001. Before the court could act on the first order, FERC had rejected yet another attempt by Transco to win FTW rates in 1999.

In January 2003, the court granted a petition by ExxonMobil and other producers challenging FERC's 2001 remand decision. It admonished the Commission for failing to clearly reconcile its two FTW decisions -- in 1995 and 1999. "The Commission may be able to reconcile the 1995 and 1999 decisions, but its efforts so far have only added to the confusion," the judges said at the time, adding that this was a "serious glitch."

FTW service had its roots in FERC's 1992 gas restructuring directive, Order 636. Most interstate pipelines responded to the order by offering their converting sales customers the rights to firm transportation from producers' gathering facilities downstream to delivery points specified in the customers' contracts. This is what is known as firm-to-the-wellhead service.

Transco chose not to adopt FTW service at the time it unbundled its gas sales and transportation service, while the majority of its competitors did. But the pipeline changed its mind soon afterward, and has been fighting for more than 10 years to win FTW rates.

At the crux of the case is who should pay the fixed costs of Transco's supply laterals: 1) the producers and marketers who contract for service on supply laterals and currently pay all of the fixed costs ($50 million per year); or 2) Transco's firm transportation customers (distributors) who converted from bundled sales to transportation on the pipeline's mainline.

The producers and marketers, who transport gas on Transco's supply laterals, favor a switch to a two-part FTW rate structure because it would lighten their fixed-cost burden. Transco advocates the rate shift because it believes this would encourage more producers to attach their supplies to its system. But the pipeline's distributor customers are opposed to being charged FTW rates on supply laterals.

Payment of the $50 million in fixed costs "has motivated [this case over] the past dozen years of litigation," the court said. "Much of the rest of the debate over the meaning and applicability of the terms 'primary' and 'secondary' obscures the real substance of the dispute," it noted.

"Requiring FT-conversion shippers [distributors] to pay an increased reservation charge for access to the laterals is equivalent to forcing them to accept service in an additional zone, for which they would have to pay a new reservation charge. Regardless of the labels placed on the proposed change, the substantive effect of the FTW plan would be to require FT-conversion shippers to take on a new service" that they never contracted for, the court said.

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