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Viking Pricing Proposal --- A 'Watershed' Event or Bust

November 15, 1999
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Viking Pricing Proposal --- A 'Watershed' Event or Bust

Based on its own interpretation of FERC's new policy on capacity pricing, Viking Gas Transmission is seeking authority to charge higher incremental rates for historically lower-priced capacity as it becomes available on its system without filing a new rate case. Some believe Viking's proposal - the first of its kind - may prove to be a "watershed" event for the Commission's still-evolving policies on the pricing of interstate pipeline capacity.

Even shippers that aren't customers of Viking Gas are worried about the "precedental effect" of this case. A group of Florida Cities, which hold firm capacity on the incrementally priced Florida Gas Transmission (FGT) system, have intervened because they believe FERC's ruling on the Viking proposal could ultimately affect FGT and other pipelines.

Dynegy echoed the concerns of many when it called the Viking pricing proposal a "transparent attempt" to over-recover the pipeline's cost-of-service until its next rate case in late 2001 without undergoing any rate scrutiny. Dynegy, the Florida Cities and other Viking customers urged FERC to reject the proposal outright, or at least require it to meet the "just and reasonable" burden of Section 4 rate cases. Some customers called for FERC to suspend it for the maximum five months --- which Viking anticipates the Commission will do --- and hold a technical conference.

Specifically, Viking Gas wants to be able to incrementally price capacity that opens up on its system through capacity turnback, permanent capacity release, contract renewal or right-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/Mcf for firm service from the Canadian border to Marshfield, WI, on its most 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 45 cents. The aim is to achieve some uniformity in firm rates, as well as those for interruptible, capacity release and authorized overrun transportation (AOT) services. But Viking President Greg Palmer doesn't expect to achieve rate equality quickly. "We've got contracts that go anywhere from 30 days up to 14 years, so it's going to take a period of time."

Given the disparity in contract expirations, Dynegy said it was particularly concerned that some Viking shippers, whose contracts aren't due to expire for years, will have an "unreasonable competitive advantage" over other shippers "because their rates [will be] capped at a much lower rate that is more representative of Viking's cost basis."

If the proposal is approved, shippers served by Viking's original system, which was built in the 1960s, could wind up paying four times more for the same capacity when their firm contracts come up for renewal. And shippers served by two other expansions (FT-B and FT-C) that were constructed in the late 1990s could see their firm rates double or more. But Viking won't "hoard all [of] the windfall," as one shipper noted. The pipeline proposes to refund 90% of the excess revenues to the shippers paying the higher incremental rates for firm, IT and AOT services. With temporary releases, the releasing shippers would keep whatever additional revenues 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 45 cents. But if I'm out selling today, I probably can't get that same 45 cents. Maybe I can get 20 cents or something like that. It just depends on what the market's willing to pay. But it's not going to be the [full] FT-D rate."

If Viking were to charge the full 45-cent rate, the pipeline's existing shippers already have indicated they will take their business elsewhere, he told NGI. "We've had quite a few conversations with the shippers on this. And they've told me in no uncertain terms that they're not going to pay 45 cents." Palmer expected a "number of protests" to Viking's proposal to be filed at FERC. "They've told me that they've got to look out for their customers. Their preference would be to keep the capacity at the grandfathered rate as long as they can."

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

Palmer said incremental pricing of "available" system capacity is allowed under the policy on new pipeline construction, which FERC approved in September. "Our reading is...that when contracts are renewed or extended that's the point in time when you roll up that cost along with the incremental rates that you're charging on your system," he noted. "Our belief is that you need this type of policy to have equal treatment between customers. You can either do it this way or you can allow rolled-in rates during rate cases. But you shouldn't have a perpetual system where you charge your customers four different rates."

But Dynegy questioned whether the new policy provides Viking with such a mandate outside of a rate case. Specifically, the policy statement says "whether and to what extent costs can be shifted is an issue to be resolved in the incumbent pipeline's rate case..." In light of this, "it puzzles Dynegy why Viking would think it appropriate to impose costs relating to an individual expansion on all customers without heeding the Commission's mandate to first file an NGA Section 4 rate case."

Florida Cities said the policy statement "invites incrementally-priced pipelines [such as Viking] to consider using the higher incremental rate as the standard for right-of-first-refusal purposes on expiration of lower-priced contracts." But it believes Viking has gone far beyond what is permitted by the policy statement.

In addition to providing rate uniformity, Viking Gas believes its proposal "will provide better price signals to the market," and "will encourage longer term contracts." But Dynegy is concerned it would eliminate "rate certainty" for power generators and give pipeline marketing affiliates, which would hold lower-priced capacity, a decided advantage over their competitors.

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

Susan Parker

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