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Kern, Shippers Settle Rate Case Before it Begins

Kern, Shippers Settle Rate Case Before it Begins

In a rare move that eliminates huge legal costs, Kern River Gas Transmission has submitted to FERC a negotiated settlement agreement on its rate design prior to the start of a general rate case (RP99-274). The agreement has the approval of all of its shippers. Kern's general rate case was scheduled to begin this month.

The settlement calls for a departure from straight-fixed variable rate design, including the shifting of about 6 cents (out of 67 cents) to the commodity portion of Kern's firm rates from the demand portion. About $14.7 million, or 8.5% of its annual settlement cost of service, is being reclassified to the commodity portion of its rates. The change places more risk of cost recovery on the pipeline company. In addition, Kern River has signed a revenue-sharing agreement with its shippers that would reward both shareholders and ratepayers equally if the pipeline brought in more than $177.3 million in revenues annually. The figure is quite a bit higher than revenues collected in prior years, but it takes into account the likelihood Kern revenues will increase in the future.

"I'm not sure the last time you saw a rate case settled before it ever got filed. That's what we've done here," said Steven Snarr, vice president and general counsel for Kern River. "It's unique in that all of our firm shippers are supporting it as well as many of the interruptible and replacement shippers as we could round up and get votes from," he said. "They seemed to coalesce around the shift of some costs; it's not a significant amount, but some costs are shifted to commodity away from SFV."

Shippers also apparently were lured into settling by the systemwide firm rate discount of 2 cents/Mcf to 67 cents/Mcf that Kern offered in January to all long-term firm and seasonal firm customers who signed a letter of intent to support the agreement. The discount will continue as Kern's new rates following FERC's decision on the settlement.

"This is consistent with the efforts at FERC to place greater emphasis on alternative dispute resolution procedures., and it saved a lot of litigation costs and time during a period in which higher rates potentially would have been in effect," said Katherine Edwards, a Washington, D.C. attorney who represented several shippers in the negotiations. "From everyone's perspective, I think it was a very beneficial procedure."

According to the settlement, Kern River also must not file for a rate increase for the three years following the effective date of the settlement and must file a general rate case in five years. The pipeline is requesting an effective date of May 1.

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