FERC issued two draft orders Wednesday that grant pipelines the ability to offer discounted rates based on formulas that include the use of basis differentials, which are the difference between two gas price indexes for different locations on the pipeline grid.

The Commission originally rejected a similar rate proposal by Northern Natural Gas. However the U.S. Court of Appeals for the District of Columbia Circuit vacated the Commission’s order, holding among other things that the Commission had not adequately explained the difference between discounted and negotiated rate transactions.

These two new draft orders basically adopt Northern Natural’s definition for these type of discounted rates and grant Northern Natural and CenterPoint Energy Gas Transmission the right to amend their tariffs to incorporate the new rates.

The draft orders find that the fundamental distinction between discounted and negotiated rates is that discounted rates must remain within the range established by the pipeline’s maximum and minimum recourse rates and must reflect the same rate design as the recourse rates, FERC staff noted in a presentation. In contrast, negotiated rates are not subject to either of those restrictions.

The draft orders find the rate formulas that produce varying rates during the term of an agreement are permissible as discounted rates so long as the rate remains within the range established by the maximum and minimum rates set forth in the pipeline’s tariff. The orders also find that basis differentials may be used in discounted rate formulas.

Staff said the draft orders recognize that the Commission’s July 25 negotiated rate policy statement modified Commission policy to no longer permit the use of basis differentials in negotiated rates. Requests to reconsider that policy are currently pending. However, regardless of the approach the Commission ultimately takes with respect to the use of basis differentials in negotiated rates, the concerns about the use of basis differentials in negotiated rates that were set forth in the July 5 policy statement are not present in the context of discounted rates. Discounted rates, unlike negotiated rates, must be under pipelines’ maximum cost of service rates.

The proposed draft orders require that the pipelines revise their proposed tariff language in order to ensure that any formula-based discounts do use the same rate design as the pipeline recourse rates.

“I’m the one who I think had the biggest heartburn on the current Commission about basis differential pricing,” said Chairman Pat Wood. But he noted that because discounted rates are different from negotiated rates, any concerns about basis differential pricing giving the pipeline an incentive to withhold capacity in order to achieve higher revenues are alleviated.

“My continuing concerns about basis differential pricing, which are really at the heart of the concern I have about the pipelines getting back into the commodity business after this Commission worked so hard over the last 15 years to really force that divorce to happen, are really minimized here,” he said.

This type of pricing is a “useful tool in the financial hedging of prices for a commodity, and I think that we should do what we can to facilitate those transactions. If parties think that [discounted rates under this formula] do not provide sufficient flexibility to accomplish legitimate financial hedging opportunities for customers then I think we are open to hearing that. It’s my hope that [these orders] are enough.”

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