A coalition of pipeline customers has called on the FederalEnergy Regulatory Commission to place greater focus on reformingthe existing ratemaking process, which it contends indulgesinterstate gas pipelines at the expense of their customers. Thepipelines wasted little time in delivering a counterpunch lastMonday.

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, said the Pipeline Transportation Customer Coalition insupplemental comments to the gas rulemakings [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 of producers, municipals and retailcustomers is looking to FERC to review the entire ratemakingprocess, which it alleges is being “adeptly ‘gamed’ by pipelines.”Interstate pipelines “can play the ratemaking game regarding testperiod requirements, timing of filings, rate of return analysis,and capital structure in a manner to lower risk and achieveunjustified earnings.” It believes a review should encompass FERCpolicies on pipeline rate discounting, rate of return and refundpractices.

The Pennsylvania Office of Consumer Advocate came out in fullsupport of the coalition’s effort. It believes the focus of anyrate review should be on the “inadequate refund mechanism,” whichit said permits interstate pipelines to over-earn reasonable levelsof return at the expense of their customers.

The coalition believes “many of the problems” with theratemaking process can be traced back to the elimination ofperiodic rate reviews for pipelines in Order 636. But it isn’tadvocating a return to the pre-636 rate review practices forpipelines, said a representative of one of the coalition members,who requested anonymity.

“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.”

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, which he said”provide such an inaccurate view of the industry that they merit avigorous reply and ‘reality check'” by regulated pipelines. “Firstit is a myth that pipelines rates are not ‘fresh.’ We looked at 25pipelines and found that each pipeline has filed at least one ratecase or settlement since complying with Order 636,” he wrote in aNov. 15 letter to FERC Chairman James Hoecker.

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, Halvorsen agreed that pipelines “regularlyand sometimes deeply discount” their rates to remain competitive.”But let’s be clear: The pipeline loses the difference between thediscount and the cost-of-service rate. The discounted customersgain because they get cheaper transportation, while other customersgain because the discounted volumes and revenues are included whenrates are set in the next rate case,” he said.

Although some coalition members might support a return toperiodic rate reviews, the group’s comments “do not offer asolution” to the ratemaking problems, the coalition representativenoted. “It’s asking more for acknowledgment that there is aproblem, and to create a forum for addressing those problems. It’strying to get FERC to take that first step…..I believe the entireindustry — including the pipelines and the Commission — cansit down together and work this thing out.”

Coalition members include the Natural Gas Supply Association,the Independent Petroleum Institute of America, the American PublicGas Association, the Ohio Consumers Counsel, the Domestic PetroleumCouncil and the Texas Independent Producers and Royalty OwnersAssociation.

Susan Parker

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