A rate hike proposal of Northern Natural Gas that has thepotential to cause a showdown at FERC over key policy issues got acool reception last week from Midwest municipals and smalldistributors on Northern’s system.

Both the Northern Municipal Distributors Group (NMDG) and theMidwest Region Gas Task Force Association (MRGTF) issued a stern”no” to the proposal in which Northern Natural seeks authority toassess market-based rates for short-term firm and interruptibletransportation and capacity release in its field area. In effect,it wants the FERC-ordered price caps lifted. The pipeline alsoseeks permission to negotiate “limited” terms and conditions ofservice-an issue that has been off limits at the Commission. Itfurther has asked for the go-ahead to implement its “skyline” ratestructure, which would provide shippers with the flexibility topurchase capacity on a monthly, or seasonal, basis.

The so-called skyline proposal would “straight-jacket shippers,”the municipals and distributors said in their protest [RP98-203].”It is fundamentally flawed because it assumes that a shipper willbe able to precisely establish and select its monthly firmrequirements for at least five years into the future. As Northernwell knows, firm shippers with high-priority loads have a difficultenough time establishing loads for the next day during the winterperiod, much less for the next five years,” they said.

The municipals/distributors noted Northern Natural made asimilar proposal in its last rate case, and shipper opposition thenwas “virtually unanimous.” The latest filing includes a “fewmodifications,” but they are “not sufficient to overcome theserious deficiencies,” which they claim include “less flexibilityand higher rates for maximum rate firm shippers.”

An analysis of Northern Natural’s proposed skyline ratestructure on an NMDG/MRGTF shipper revealed an increase of 12% inthe annual reservation charge. But when broken down, the annualreservation charge for market-area services, which make up morethan 80% of the shipper’s bill, showed a “whopping” 27% increase,while the annual reservation charge for field-area service, whichmakes up less than 20% of the bill, dropped by a like amount, themunicipals and distributors estimated.

“It is clear that, under the skyline rate proposal, costs arebeing shifted from the field area to the market area. Moreover, itappears that those costs are being shifted to the market-areawinter service, rather than the market-area summer service.Northern has not provided any justification for this costshifting.” The municipals/distributors also took issue with thepipeline’s proposal to reduce the overall tolerance level to 2%from 5%, and to eliminate altogether the small-customer tolerancelevel.

As for lifting the price cap on short-term firm and IT transportand capacity release, they urged the Commission to give “carefulscrutiny” to this proposal before implementing it to ensure thatNorthern Natural lacks market power and that allshippers-regardless of size-have viable alternatives. They objectedto the pipeline’s proposal for market-based rates for firm and ITstorage services. “…[W]hile alternatives to Northern’s storageare beginning to emerge even for small customers, the market is notyet sufficiently competitive for all shippers to justifymarket-based services.”

The municipals/distributors also said they opposed allowingNorthern Natural to negotiate terms and conditions of service,including hourly takes; options to acquire firm capacity;non-performance clauses; shipper “opt-out” clauses; flexibleright-of-first-refusal terms; and other terms that are “lesser”than what the tariff currently provides. “Clearly, these proposalswould, if accepted, undermine the value of ‘recourse’ services nowand in the future.”

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