In a rare move that eliminates huge legal costs, Kern River GasTransmission has submitted to FERC a negotiated settlementagreement on its rate design prior to the start of a general ratecase (RP99-274). The agreement has the approval of all of itsshippers. Kern’s general rate case was scheduled to begin thismonth.

It’s very unusual for a pipeline to volunteer to cut its ratesprior 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 greateremphasis on alternative dispute resolution procedures. And itcertainly saved a lot of litigation costs and time during a periodin which higher rates potentially would have been in effect,” sheadded. “From everyone’s perspective, I think it was a verybeneficial procedure.”

Shippers started to sign on to the deal when Kern began offeringa systemwide firm rate discount of 2 cents/Mcf to 67 cents/Mcf inJanuary to all long-term firm and seasonal firm customers whosigned a letter of intent to support the agreement. The settlementcalls for the discounted 67-cent firm rate to continue as Kern’snew rates following FERC’s decision on the settlement.

Another major attraction is Kern’s departure from straight-fixedvariable rate design, including the shifting of about 6 cents (outof 67 cents) to the commodity portion of its firm rates from thedemand portion. About $14.7 million, or 8.5% of its annualsettlement cost of service, is being reclassified to the commodityportion of its rates. The change places more risk of cost recoveryon the pipeline company.

In addition, Kern River has signed a revenue-sharing agreementwith its shippers that would reward both shareholders andratepayers equally if the pipeline brought in more than $177.3million in revenues annually. The figure is quite a bit higher thanrevenues collected in prior years, but it takes into account thelikelihood Kern revenues will increase in the future.

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

According to the settlement, Kern River also must not file for arate increase for the three years following the effective date ofthe settlement and must file a general rate case in five years. Thepipeline is requesting an effective date of May 1. Edwards said thesettlement is expected to move through FERC uncontested.

Rocco Canonica

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.