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Williams Sees SFV Fix for Transportation

Williams Sees SFV Fix for Transportation

With overloads of turned-back capacity and a bottoming market for long-term pipeline transportation contracts, distributors have finally picked up some pipeline support for a "generic" departure from straight fixed variable (SFV) rates.

In comments submitted to FERC recently Williams acknowledged that loading all the fixed costs into the demand charge "increases the unavoidable costs of reserving capacity, contributing to customers' reluctance to contract for long-term transportation services, and thereby limiting the number of participants in the long-term market for transportation."

Williams said that in addition to supporting current policies allowing negotiated rates using other rate designs, it "is not opposed to a Commission-sponsored move away from SFV rate design as part of a generic policy applied simultaneously to all pipelines and if pipelines are provided the tools necessary to mitigate the increased risks posed by non-SFV rates." Thus did one of the leading pipeline companies acknowledge the market's undermining of the pipelines' religiously-held and oft-defended belief in their right to collect all fixed costs in the demand charge. That works only if customers sign up for firm service and agree to pay a demand charge.

The Customer Coalition, made up of distributors and utilities in the Northeast, was more aggressive in its campaign to break the back of the SFV policy, saying FERC should specify that 35% of a pipeline's fixed costs should be shifted to the usage or commodity portion of the rate. "SFV rate design rewards inefficiency and fails to adequately reward efficient pipelines...A change to a rate design that recovers more costs volumetrically would expose more costs to competition."

The customers pointed out that because they are able to make very little on capacity release, the high fixed costs in SFV rates makes holding long term capacity a much riskier proposition than holding short term capacity.

Responding the Federal Energy Regulatory Commission's request for ideas for the next round of fine-tuning the gas market, Williams also said the Commission "should immediately remove price caps on all short-term natural gas transportation transactions, including short-term pipeline services."

Regarding new and expansion projects "if a pipeline and its expansion shippers are willing to proceed on the basis of the arrangements that have been struck, then the Commission should approve such arrangements provided existing shippers are protected operationally and financially and all required environmental conditions are met."

Williams also repeated its support for negotiated terms and conditions and urged the Commission to re-examine the need for the 'shipper-must-have-title' policy.

The comments were filed in response the FERC's Notice of Proposed Rulemaking (RM98-10) and Notice of Inquiry (RM98-12). They follow on a public conference held by the Commission in September to discuss possible market changes (see NGI, Sept. 25).

Meanwhile, producers were concerned that FERC needs to pay attention to how its latest Order 637 rules are enforced before it starts thinking about next generation changes.

Particularly in the realm of penalties, Order 637 pipeline compliance filings "propose few substantive changes designed to meet the Commission's directives and provide meager justification, if any, for existing operational restrictions and penalties. Where pipelines do propose to modify their existing penalty structures, they generally propose new penalty mechanisms, increased penalty levels, or tighter tolerance levels," the producers said.

Having delivered that opening shot, producers honed in on calls, particularly from LDC members of the American Gas Association (AGA), for repeal of the "shipper must have title" policy, which requires shippers to own the gas they ship through the pipeline. Producers believe elimination of the title policy "would seriously undermine the ability of the Commission to ensure compliance with its open access and non-discrimination policies." The rule protects against illegal capacity brokering and ensures a competitive capacity release market, the producers said. The comments were filed as part of the ongoing discussion FERC initiated with a public conference last month (see Daily GPI, Sept. 20 & Oct. 24)

AGA argues that removing the rule would "work to increase liquidity in natural gas markets by taking away an impediment to transferring gas. For instance, the shipper must have title policy may prevent storage customers from providing imbalance services." AGA maintains that new Order 637 reporting requirements will replace the information lost by eliminating capacity release postings. The group would like to continue the dialogue to determine what information is necessary and when.

Producers and AGA likewise disagree as to whether the title policy interferes with state unbundling initiatives because it impedes LDCs' utilization of their capacity for the benefit of third parties. Producers point out the Commission has the ability to grant limited waivers of the shipper title policy to the extent necessary to facilitate state unbundling initiatives.

AGA also focused on the rash of new pipeline services and how they are impacting service to existing customers. "AGA sees that pipelines have already begun to provide new services, which employ assets historically used to provide critical operational attributes of LDCs' firm services, thereby incrementally degrading the reliability of existing firm services." The LDCs' "flexibility is being reduced as pipelines sell that flexibility under new service offerings and thereby enhance their revenue without recognizing any cost reallocations."

The group particularly noted the new flexible services being offered to generators. "This is a serious problem because it is this flexibility that translates into service reliability at the burnertip." Going forward, AGA pointed to testimony at FERC's conference last month on next generation rules by an Enron representative who suggested the unbundling of services such as options on future capacity, alternate rights (a/k/a flexible receipt and delivery points), hourly takes (a/k/a traditionally allowed flexible hourly overruns) and delivery pressures. "The services pipelines seek to unbundle for their values are part of the service attributes LDCs consider critical for continued reliable service to burnertip customers."

Ellen Beswick

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