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Kern Offers to Cut Rates, Settles With Shippers Before Case Begins

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 month.

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 beneficial procedure."

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.

Rocco Canonica

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