Based on its own interpretation of FERC’s new policy on capacitypricing, Viking Gas Transmission is seeking authority to chargehigher incremental rates for historically lower-priced capacity asit becomes available on its system without filing a new rate case.Some believe Viking’s proposal – the first of its kind – may proveto be a “watershed” event for the Commission’s still-evolvingpolicies on the pricing of interstate pipeline capacity.

Even shippers that aren’t customers of Viking Gas are worriedabout the “precedental effect” of this case. A group of FloridaCities, which hold firm capacity on the incrementally pricedFlorida Gas Transmission (FGT) system, have intervened because theybelieve FERC’s ruling on the Viking proposal could ultimatelyaffect FGT and other pipelines.

Dynegy echoed the concerns of many when it called the Vikingpricing proposal a “transparent attempt” to over-recover thepipeline’s cost-of-service until its next rate case in late 2001without undergoing any rate scrutiny. Dynegy, the Florida Citiesand other Viking customers urged FERC to reject the proposaloutright, or at least require it to meet the “just and reasonable”burden of Section 4 rate cases. Some customers called for FERC tosuspend it for the maximum five months — which Viking anticipatesthe Commission will do — and hold a technical conference.

Specifically, Viking Gas wants to be able to incrementally pricecapacity that opens up on its system through capacity turnback,permanent capacity release, contract renewal orright-of-first-refusal (ROFR) at a level warranted by the market.The price for such capacity would be capped at the FT-D rate,Viking’s highest. The pipeline fetched an FT-D rate of 45 cents/Mcffor firm service from the Canadian border to Marshfield, WI, on itsmost recent expansion.

Currently, Viking has four different levels of firm rates,ranging from about 11.4 cents to 13 cents to 23.7 cents to 45cents. The aim is to achieve some uniformity in firm rates, as wellas those for interruptible, capacity release and authorized overruntransportation (AOT) services. But Viking President Greg Palmerdoesn’t expect to achieve rate equality quickly. “We’ve gotcontracts that go anywhere from 30 days up to 14 years, so it’sgoing to take a period of time.”

Given the disparity in contract expirations, Dynegy said it wasparticularly concerned that some Viking shippers, whose contractsaren’t due to expire for years, will have an “unreasonablecompetitive advantage” over other shippers “because their rates[will be] capped at a much lower rate that is more representativeof Viking’s cost basis.”

If the proposal is approved, shippers served by Viking’soriginal system, which was built in the 1960s, could wind up payingfour times more for the same capacity when their firm contractscome up for renewal. And shippers served by two other expansions(FT-B and FT-C) that were constructed in the late 1990s could seetheir firm rates double or more. But Viking won’t “hoard all [of]the windfall,” as one shipper noted. The pipeline proposes torefund 90% of the excess revenues to the shippers paying the higherincremental rates for firm, IT and AOT services. With temporaryreleases, the releasing shippers would keep whatever additionalrevenues they reap.

Although shippers will face higher rates for available capacity,Palmer said he doubted it would be the full FT-D rate of 45 cents.”The last capacity we sold from Emerson to Marshfield was at 45cents. But if I’m out selling today, I probably can’t get that same45 cents. Maybe I can get 20 cents or something like that. It justdepends on what the market’s willing to pay. But it’s not going tobe the [full] FT-D rate.”

If Viking were to charge the full 45-cent rate, the pipeline’sexisting shippers already have indicated they will take theirbusiness elsewhere, he told NGI. “We’ve had quite a fewconversations with the shippers on this. And they’ve told me in nouncertain terms that they’re not going to pay 45 cents.” Palmerexpected a “number of protests” to Viking’s proposal to be filed atFERC. “They’ve told me that they’ve got to look out for theircustomers. Their preference would be to keep the capacity at thegrandfathered rate as long as they can.”

Some shippers, however, have markets captive to the Vikingsystem, such as Northern States Power (Minnesota) and NorthernStates Power (Wisconsin).

Palmer said incremental pricing of “available” system capacityis allowed under the policy on new pipeline construction, whichFERC approved in September. “Our reading is…that when contractsare renewed or extended that’s the point in time when you roll upthat cost along with the incremental rates that you’re charging onyour system,” he noted. “Our belief is that you need this type ofpolicy to have equal treatment between customers. You can either doit this way or you can allow rolled-in rates during rate cases. Butyou shouldn’t have a perpetual system where you charge yourcustomers four different rates.”

But Dynegy questioned whether the new policy provides Vikingwith such a mandate outside of a rate case. Specifically, thepolicy statement says “whether and to what extent costs can beshifted is an issue to be resolved in the incumbent pipeline’s ratecase…” In light of this, “it puzzles Dynegy why Viking wouldthink it appropriate to impose costs relating to an individualexpansion on all customers without heeding the Commission’s mandateto first file an NGA Section 4 rate case.”

Florida Cities said the policy statement “invitesincrementally-priced pipelines [such as Viking] to consider usingthe higher incremental rate as the standard forright-of-first-refusal purposes on expiration of lower-pricedcontracts.” But it believes Viking has gone far beyond what ispermitted by the policy statement.

In addition to providing rate uniformity, Viking Gas believesits proposal “will provide better price signals to the market,” and”will encourage longer term contracts.” But Dynegy is concerned itwould eliminate “rate certainty” for power generators and givepipeline marketing affiliates, which would hold lower-pricedcapacity, a decided advantage over their competitors.

The Commission’s new pricing policy is of “special importance toViking and its shippers” given that contracts covering more thanone-half of the pipeline’s capacity are scheduled to expire duringthe upcoming year. Palmer estimated contracts for more than 250MMcf/d will terminate by Nov. 1, 2000. So far, shippersrepresenting about 120 MMcf/d of that capacity have elected toextend their contracts. Viking Gas said it is “by no means certain”it can subscribe all of the capacity that opens up on its system atthe higher rates. As a result, it has asked FERC for the authorityto discount the capacity to whatever the market will bear.

Susan Parker

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