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Northern Volumetric Rates Subject to Detailed Review

Northern Volumetric Rates Subject to Detailed Review

Northern Natural's innovative volumetric rate proposal, which could provide customers with a method of better managing weather risk, is headed to a technical conference and further FERC and industry scrutiny.

The Federal Energy Regulatory Commission last week accepted and suspended for the full five months the tariff sheets related to the proposed optional volumetric firm throughput service (Docket No. RP00-264) subject to refund and the outcome of the technical conference (see NGI, May 15).

The service would allow customers to only pay for the service they use and share the risk of weather-related volatility with the pipeline. The proposed service would be available to existing and new customers that contract for long-term firm service on Northern Natural, and would have the same terms and conditions as the pipeline's existing firm rate schedules.

The VFT service would offer customers "a new flexible billing option for the pricing of firm service, i.e., a 'pay-as-you-go' approach," according to Northern Natural. Also, it would permit customers to "fix the per-unit cost of transportation service purchased from Northern and insulate themselves and their customers from weather-driven cost volatility." Northern believes the VFT service would be a vast improvement over the current two-part firm billing structure, where a shipper pays for firm service whether it uses the service or not.

Some intervenors lauded Northern's goal of giving shippers a hedge against weather risk an said the pipeline should be commended for it innovation and efforts to design new rates and services desired by existing and potential customers. A number of intervenors, however, still wanted a technical conference because of some serious flaws in the proposal. Protesters argued that the proposal was contrary to FERC policy and regulations mandating the use of straight fixed-variable rate design. Others said that Northern's proposed load factor calculation needed to be filed because it could slant the economic benefits to Northern if based on the last three warmer than normal winters.

FERC said the proposal "presents many difficulties, such as how to effectively allocate capacity and whether there is undue discrimination and cross-subsidization present in a volumetric rate. These issues need further development and exploration prior to implementation."

FERC also said the filing did not comply with its regulations because Northern did not discuss the impact on existing customers, provide the basis for the rate schedule, the workpapers that develop the proposed load factor calculations nor any cost and revenue reconciliation.

"Northern's proposal also institutes a seasonality in its rates that Northern has not explained," FERC said. "The proposal is not consistent with Order No. 637 in that (1) the tariff sheets were not filed as pro forma sheets and (2) it applies peak/off peak rates to long term, contracts but does not propose a revenue crediting mechanism, a cost and revenue study in fifteen months, nor a full section 4 proceeding." As a result a technical conference is necessary, FERC said.

Rocco Canonica

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