A coalition of pipeline customers has asked the Federal EnergyRegulatory Commission to take steps to reform the existingratemaking process, which it contends indulges interstate gaspipelines at the expense of their customers.

Although rate reform was addressed in the notice of proposedrulemaking (NOPR) on short-term transportation and notice ofinquiry (NOI), it was somewhat glossed over because of the “numberand complexity” of other issues that also were included in theinitiatives, the Pipeline Transportation Customer Coalition said insupplemental comments to the gas initiatives [RM98-10, RM98-12].

As a result, it has called on the Commission to give “seriousconsideration” to the issue of rate reform through either aseparate NOPR, additional comments in the existing short-term NOPRand NOI initiatives, or further technical conferences.

Specifically, the coalition is looking to FERC to review theentire ratemaking process, which it alleges is being “adeptly’gamed’ by pipelines.” Interstate pipelines “can play theratemaking game regarding test period requirements, timing offilings, rate of return analysis, and capital structure in a mannerto lower risk and achieve unjustified earnings.” It believes areview should encompass FERC policies on pipeline rate discounting,rate of return and refund practices.

The group of pipeline customers said “many of the problems” canbe traced back to the elimination of periodic rate reviews forpipelines in Order 636. But the coalition isn’t advocating a returnto the pre-636 rate review practices for pipelines, said a sourcewho represented one of the coalition members, but asked to remainanonymous.

“What it’s doing is it [the coalition] is basically asking FERCto recognize that there are problems” with the ratemaking process,she noted. “First, it lacks any method for rate refreshment; andtwo, a lot of the particulars that are used in designing ratestoday have problems in and of themselves that can be easily gamedby pipelines.”

Although some coalition members might support a return toperiodic rate reviews, the group’s comments “do not offer asolution” to the ratemaking problems. “It’s asking more foracknowledgment that there is a problem, and to create a forum foraddressing those problems,” the source said. “It’s trying to getFERC to take that first step…I believe the entire industry -including the pipelines and the Commission – can sit down togetherand work this thing out.”

The coalition members include the Natural Gas SupplyAssociation, the Independent Petroleum Institute of America, theAmerican Public Gas Association, the Ohio Consumers Counsel, theDomestic Petroleum Council and the Texas Independent Producers andRoyalty Owners Association.

Jerald V. Halvorsen, president of the Interstate Natural GasAssociation of America (INGAA), fired off a quick response to the”exceedingly late” comments of the coalition. “First it is a myththat pipeline’s rates are not ‘fresh.’ We looked at 25 pipelinesand found that each pipeline has filed at least one rate case orsettlement since complying with Order 636,” he said in a letter tothe Commission yesterday.

With respect to FERC’s rate-of-return policies, he reminded thecoalition that producers’ prices have risen more than 50% thisfall, while pipeline rates have remained unchanged. “The rise inproducer prices affects…small customers more adversely thanpipeline transportation rates, which are only 16% of the deliveredgas price.”

As for discounting, pipelines are guilty of the practice ascharged. “But let’s be clear: The pipeline loses the differencebetween the discount and the cost-of-service rate. The discountedcustomers gain because they get cheaper transportation, while othercustomers gain because the discounted volumes and revenues areincluded when rates are set in the next rate case,” Halvorsen said.

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