BP Amoco is starting a quiet, behind-the-scenes campaign aimedat bringing pipeline rate-setting out of the realm of the archaic,making it current and market-responsive by building in annualre-calculations to adjust return on equity.

“We’re interested in developing a consensus. We’ve put aproposal out there that we think is a start in the right direction.It may not be the ultimate solution, but we hope others willcontribute,” said Bill Benham, vice president of regulatory affairsfor natural gas. Benham and BP Amoco’s Jeff Holligan have beenmeeting with representatives of other industry segments to promotethe idea. The producer’s proposal is for rate adjustments based onannual assessments of costs and volumes provided in Form 2 filingsby pipelines at the Federal Energy Regulatory Commission.

“The current rate-making scheme is one-sided. Pipelines areprotected on the downside, but there’s no customer protection onthe upside. It’s not balanced. There is no incentive for pipelinesto cut rates,” Benham said. As a result pipeline profits have beenincreasing at the same time throughput volumes have gone down.

BP Amoco’s plan would compare annual revenues with the previousyear and apply 50% of the difference either as a surcharge or acredit on the next year’s rates. For instance, if operating costsare cut by $10 million from the previous year, the pretax return onthe most recent year is increased by $5 million and a new return onequity is calculated. Conversely, if costs on a per unit basis goup the pipeline would be penalized with a lower return on equity.The idea is to reward the pipeline for cutting customer costs.

Under current regulations pipelines no longer are required tofile regular rate cases and “they have the opportunity to game thesystem using test period results,” Benham said. I’m not blaming thepipelines, I would do the same in their place. The system nowfavors the pipelines. FERC needs to make it beneficial for otherparts of the industry also.”

“We’re hoping this initiative can gain momentum,” Benham said.He noted that pipeline customers, producers, end users and LDCs,need to be unified and persistent in seeking changes in rateregulations. “Pipelines have a tremendous advantage in that theirsenior management is attuned to FERC,” he said pointing to thepipeline association’s new office location two blocks from theCommission. CEOs for some producers and end users “don’t even knowwhat FERC does. We have to build up sufficient political weight tobe noticed.” He also advised there is “growing evidence the courtsare not happy with a regulatory scheme that is just good for thepipelines and not for the rest of the industry.”

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