Abandoning straight-fixed variable rate design (SFV) in favor ofone that would permit recovery of some pipeline fixed costs in theusage rate would resolve a lot of the competitive concerns raisedby FERC in its mega-notice of proposed rulemaking (NOPR) and noticeof inquiry (NOI), New York regulators and a coalition of utilitiessaid in separate, yet complementary filings last week.
The Customer Coalition, which is made up of mostly Northeastutilities, called on the Commission to implement a rate design thatwould place 35% of fixed costs in the usage rate, while the NewYork Public Service Commission (PSC) proposed putting a minimum of25% of fixed costs in usage rates [RM9810, RM98-12]. SFV ratedesign assigns all fixed charges to the reservation rate. The PSCsaid it would prefer to see a 50-50 split of fixed costs betweenreservation and usage rates, but conceded that it “may be tooabrupt a shift in one step.”
“Although a change in rate design does not provide all of theanswers, it is clearly a step in the right direction,” the CustomerCoalition told the Commission. Both the coalition and New Yorkregulators believe that a shift away from SFV towards a morevolume-oriented rate design would prove to be a panacea for manyof the gas industry’s ills, which were highlighted in the mega-NOPRand NOI. They have asked FERC to issue a separate NOPR addressingthe rate design issue.
The New York PSC and the utility coalition generally agreed,with few exceptions, that a change in rate design would: 1)eliminate, or possibly even reduce, the need for the controversialauction of short-term capacity; 2) remove the bias in favor ofshort-term capacity contracts; 3) enhance the viability of recourseservice; 4) limit the number of hastily-issued operational floworders (OFOs); 5) create a more balanced approach for certificatingnew facilities; 6) remove certain obstacles to state unbundlingefforts; and 7) limit the need for pipeline discounting.
A change to a more volumetric rate design, as proposed, wouldremove or lessen the motive for pipelines to withhold theircapacity from the market, which was the reason for theFERC-proposed auction, the coalition said. “If 35% of a pipeline’sfixed costs were at risk, the pipeline would have a strongincentive to keep its throughput as high as possible.” If anauction were to be implemented, the coalition believes a non-SFVrate still would play an essential role. “A chief concern with thecurrent proposal is the lack of a reserve price. If more costs wererecovered in the usage rate, that rate might provide an appropriatereserve price for the daily auction.”
As more and more pipelines move away from SFV rate design eitherthrough settlements or negotiated-rate deals, the Commission has an”obligation” to re-evaluate how its existing SFV rate design isaffecting recourse shippers, the coalition noted. It needs to”guard against a situation in which the only shippers who arepaying SFV rates are recourse shippers.” If the SFV rate regime isallowed to continue, New York regulators agreed it could lead to a”bifurcated” market – with some customers enjoying the benefits ofnegotiated rates and others being held captive to the higher SFVrates.
Moreover, both regulators and utilities insist SFV rate designencourages pipeline overbuilding, and that a volumetric-type ratedesign would limit this. “If the Commission changed to a ratedesign that recovered a substantial level of costs in the usagerate, pipelines would be required to more carefully evaluatewhether there is an adequate market for their project and thetiming of the project,” as well as the impact of such a project onaffiliated pipes that already serve the same markets, the coalitionnoted. On a related issue, the New York PSC contends a non-SFV ratealso would provide pipelines with greater incentive to marketunsubscribed capacity.
Additionally, a non-SFV rate may cause pipelines to think twicebefore issuing OFOs. “A change to a rate design that recovers asignificant level of the pipeline’s fixed costs in the usage ratewould provide pipelines with an increased incentive to keep theirsystems full. This, in turn, would lead pipelines to more carefullyconsider issuance of OFOs,” the utility coalition said.
Regulators and utilities further said a non-SFV rate designwould aid state unbundling efforts, where marketers have beenunwilling to assume LDC capacity because of the high demand chargesassociated with it. Instead, marketers are opting for interruptibleor short-term firm service from pipeline or capacityrelease/rebundled sales, leaving LDC capacity stranded. “Stateunbundling is hindered under this scenario because the potentialsavings the customer might realize are reduced or at least delayedby the need to pay for the stranded costs.”
When SFV rate design was adopted as part of Order 636 in theearly 1990s, the Commission recognized that it didn’t provide theproper incentives for pipelines to reduce costs. But it was a quidpro quo for getting the pipelines on board and FERC counted on thepipelines to file incentive ratemaking proposals to help in thatregard. It also believed higher capacity costs for shippers wouldbe offset through the capacity-release market. Since then, however,not one pipeline has filed to implement incentive rates, andshippers are recovering only a fraction of capacity costs in therelease market, the coalition said. “…[T]he time has come toreconsider continued use of SFV rate design on all pipelines.”
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