The U.S. Court of Appeals for the District of Columbia last weekreversed and remanded a FERC order rejecting Transcontinental GasPipe Line Corp’s bid to levy two-part, “firm-to-the-wellhead” (FTW)rates on certain production-area customers served by the line.

At issue was whether Transco’s “conversion shippers,” which wereguaranteed “high priority” interruptible service (“essentially”firm) on the pipeline’s production laterals at one-part IT ratesunder a 1991 settlement, should pay a two-part firm rate for theservice — a reservation charge for the right to use the service,and a usage charge covering the costs of actual usage.

The “conversion customers” are firm sales customers in thedownstream areas served by Transco, who upon unbundling in theearly 1990s, were allowed to convert their “gas purchaseentitlements” into transportation service rights on Transco’slaterals, which connected their gathering systems to the pipeline’smain line.

Indicated Shippers, led by Exxon Corp., supported Transco’srequest for the FTW rates, but the Commission denied it in 1997 onthe grounds that such rates would represent an abrogation of thecontracts of the “conversion customers” under the 1991 settlement.Indicated Shippers, which also are producers in Transco’sproduction areas, petitioned the court to review the Commission’sdecision shortly thereafter.

“…[W]e are puzzled by the Commission’s insistence, in theopinions under review and its brief here, that Transco’s filing wasinherently an ‘abrogation’ of the contracts,” wrote Judge StephenF. Williams for the majority. Given that the conversion customers’contracts with Transco contained Memphis clauses, which permitpipes to secure rate changes through Section 4 filings, “where isthe ‘abrogation’?” the court asked.

Moreover, the court said it was hardpressed to understand FERC’s”resistance” to a two-part, straight-fixed-variable (SFV) rate,which was central to Order 636. It’s “especially odd in light of[the Commission’s] aggressiveness in shifting pipelines withtwo-part rates from MFV [modified fixed variable] to SFV,” itnoted. “The Commission’s opinions in this case do not explain whyOrder 636’s principles are not at play here on the side of theIndicated Shippers.”

In the end, “we find no reasoned decisionmaking to support theCommission’s rejection of Transco’s [Section 4] filings” for FTWrates, the court said. However, it pointed out that if FERC shouldjustify its decision on remand, the prospect for any kind of relieffor Indicated Shippers under Section 5 would be “remote.”

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