The Federal Energy Regulatory Commission needs to “do a completeoverhaul of its cost of service ratemaking model,” according toproducer attorney Katherine Edwards, because the rates currently inplace on many pipelines no longer reflect the costs.

Edwards told a session at NGI’s GasMart/Power ’99 the fact thatOrder 636 removed the requirement that pipelines file new ratecases at least once every three years has robbed the Commission andpipeline customers of the means to review pipeline rates. Whilepipelines’ allowed rate of return is between 12% and 13%, theyactually are chalking up returns of 15% to 16% and in some cases asmuch as 20%. “If they are earning more than their allowed returns,the companies are earning profits that are not being captured in acost of service ratemaking model,” Edwards said. “The pipelineshave been able to cut costs, maximize throughput and never have tocome back for any type of accountability at FERC.” In some casespipelines have been able to cut their costs in half at the sametime their rates are going up through operation of an automaticinflation escalator. “Customers don’t see the benefit of these costcuts.”

“This is what is broken. This is what needs to be fixed.”

Edwards, a partner with Grammer, Kissel, Robbins, Skancke andEdwards in Washington, filed comments on behalf of Amoco on theFERC transportation proposals. She said the Commission should doaway with the base period/test period structure and set rates thatwould be adjusted yearly on an ongoing basis, reflecting costs forthat period of time and setting formulas for sharing cost savingsbetween customers and shareholders. This would create a viablerecourse rate. From there the pipelines could branch out withincentive rates and seasonal rates.

There is no need for FERC’s emphasis on long-term transportationcontracts. “When we’re talking about getting to a 30 Tcf market, itseems kind of crazy to me to be worried about providing incentivesfor long-term contracts. As the market has evolved it has gottenmore competitive with more short term month-to-month deals. That’snot a bad thing. And it’s not like the market for gas is going togo away.”

Dynegy’s Kathryn Patton agreed. “As a generation developer we’reout there risking our capital dollars building power plants withoutmarkets. Pipelines should be able to risk and construct pipe, andpossibly receive a higher rate of return. If they think they canmake money let them build it.”

Another important thing FERC can do is clean up its reportingrequirements and close the loopholes. This will ensureself-policing in the industry, Edwards said. She pointed out theNatural Gas Act requires contracts to be filed, but FERC has gottenaway from this requirement in recent years.

As to predicting what FERC will do now that it has receivedcomments on its transportation Notice of Proposed Rulemaking (NOPR)and Notice of Inquiry (NOI), she said it’s not clear whether theCommission will repackage ideas that have surfaced as a new NOPR orgo forward and issue a rule. But she believes “it’s unrealistic toexpect anything by the end of the year.”

Pipeline attorney Sharon McIlnay didn’t see the need “for widesweeping changes. Order 636 is working.” McIlnay is chief counsel,Northern Americas Development for CMS Energy Corp. which recentlybought Panhandle Eastern Pipe Line and Trunkline. The company’smain subsidiary is Consumers Power and McIlnay said their focus nowshould be getting “through the deregulation of electrics.” Shepointed out that pipelines need financing and have to be able toprove themselves to the financial world. CMS is supporting seasonalrates to get the market value from its pipeline capacity. McIlnayalso said pipelines have different characteristics – Panhandle is a60-year old line – and should be treated differently in theregulatory arena.

Ellen Beswick, Dallas

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.