ALJ Favors Zones Rates for Sempra on Kern River

In a decision siding with Sempra Energy, FERC Administrative Law Judge (ALJ) Herbert Grossman last week found that postage-stamp rates on Kern River Gas Transmission are "unjust and unreasonable." Instead, he ruled in favor of a distance-sensitive zonal rate design, which was proposed by Sempra.

The initial decision adopting zonal rates, which was issued last Tuesday, applies only to Sempra, but Grossman indicated that the rate design should be considered in Kern River's future rate cases.

The dispute over Kern River's rate design stemmed from a 1999 settlement in which the pipeline agreed to reduce its maximum rate and establish a three-year moratorium on future rate increases. Sempra was the only party to contest the settlement, and subsequently was severed from it so it could litigate the issue of rate design.

Sempra argued that while postage-stamp rates, which don't reflect mileage, may have been an appropriate rate design when all of the gas that Kern River picked up in Wyoming supply basins was delivered directly to the California market (no deliveries were made along the way), this was no longer the case today [RP99-274-003]. It was estimated that about 20% of the gas transported on Kern River is now delivered to markets upstream of California - Utah and Nevada.

"Consequently, we cannot blindly continue the initial rate design, even if it had been approved by the Commission, in that there has been a substantial change in operations that should be considered in determining whether the postage stamp rate is still appropriate. Nor should we consider ourselves bound to the postage-stamp rate by the commitments made at the inception of the pipeline," Grossman said.

Kern River contends that zonal rates would allow upstream customers (Utah, Nevada) to "piggyback," or take advantage of, the "large-scale economies" of the 900-mile pipeline system that it credits to the California customers.

"Far from negating the benefits to the downstream customers of the economies of scale, as Kern River alleges, the net effect of having the upstream customers pay for their costs of capacity, even on a zonal basis, would added to these benefits," Grossman noted.

He further said that since "the large diameter downstream [portion of the] pipe does not benefit the upstream customers at all...they should not have to pay for it" through postage-stamp rates, "except to the extent that they are effectively using it or rendering it unusable."

Sempra's zonal rate proposal, which Grossman adopted, would separate Kern River's system into three zones based - Zone 3 extends from the Goodspring Compressor Station near the Nevada-California border to the terminus of Kern River's system; Zone 2 extends from the Filmore Compressor Station to the Goodspring station; and Zone 3 extends from where Kern River orginates to the Filmore station. The proposed rates are: Zone 1, $0.1434, Zone 2, $0.4577, and Zone 3, $0.6800.

Susan Parker

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