Kern Offers to Cut Rates, Settles With Shippers Before Case 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
It's very unusual for a pipeline to volunteer to cut its rates
prior to litigation, noted Katherine Edwards, a Washington, D.C.
attorney who represented several shippers in the negotiations.
"This is consistent with the efforts at FERC to place greater
emphasis on alternative dispute resolution procedures. And it
certainly saved a lot of litigation costs and time during a period
in which higher rates potentially would have been in effect," she
added. "From everyone's perspective, I think it was a very
Shippers started to sign on to the deal when Kern began offering
a systemwide firm rate discount of 2 cents/Mcf to 67 cents/Mcf in
January to all long-term firm and seasonal firm customers who
signed a letter of intent to support the agreement. The settlement
calls for the discounted 67-cent firm rate to continue as Kern's
new rates following FERC's decision on the settlement.
Another major attraction is Kern's departure from straight-fixed
variable rate design, including the shifting of about 6 cents (out
of 67 cents) to the commodity portion of its 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."
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. Edwards said the
settlement is expected to move through FERC uncontested.
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