In a rare flexing of its disciplinary powers, the Federal Energy Regulatory Commission last week suspended for one year the authority of Enron subsidiary Transwestern Pipeline Co. to negotiate rates based on basis differentials and ordered shipper refunds for excess charges, which at times reached 100 times the maximum regulated rate during the California energy crisis in 2000-2001. The Commission also issued a draft notice of inquiry (NOI) into all negotiated-rate transportation deals that are tied to basis differentials.

In its NOI, FERC posed a slate of questions to industry about the future direction of negotiated-rate policies and practices. “The Commission is undertaking a review of the recourse rate as a viable alternative and safeguard against the exercise of market power of interstate gas pipelines, as well as the entire spectrum of issues related to its negotiated-rate program,” the notice said [PL02-6]. The emergence of negotiated-rate deals tied to price-index differentials, in particular, “[has] raised serious concerns regarding the breadth and direction of the Commission’s negotiated-rate program.”

Chairman Pat Wood said he feared Transwestern’s practice of tying transportation rates to spot gas prices at different points was “putting the pipelines back in the business we worked so hard to get them out of — that is, of having a vested interest in the commodity market.” This type of negotiated rate “[puts] them back in the saddle very directly, in a relatively covert way.” Wood and other commissioners said they would be examining practices of other pipelines in this regard.

He noted that he was “disappointed in the behavior [of Transwestern] here very much,” and added that it “undermines the relatively good compliance” record of the natural gas pipeline industry overall.

The Commission’s decision and Wood’s remarks were not unexpected. Earlier this month, Wood signaled his concern about index-based negotiated rate transactions in a statement, which accompanied an order addressing a negotiated-rate agreement between PG&E Gas Transmission, Northwest Corp. and Enserco Energy Inc. “I have come to believe that [these transactions]…may not be good public policy,” he said.

FERC’s action on Transwestern reversed in part an initial decision of Administrative Law Judge Jacob Leventhal in October 2001, which cleared the Enron pipeline of charges that it exercised market power in negotiated-rate contracts with two shippers on its system — Sempra Energy Trading and Richardson Products Co. For starters, the Commission disagreed with Leventhal’s finding that there was “insufficient evidence” to show either of the companies received advance notice of the availability of capacity on Transwestern’s system — a violation of the Natural Gas Act and Commission regulations.

Based on a phone conversation between Transwestern and Richardson on Jan. 30, 2001, FERC “finds a clear and conscious effort by Transwestern to seek out and negotiate a transportation agreement under which it would share profits based on natural gas spot market differentials,” the order said [RP97-288-009]. The Commission said Transwestern contacted Richardson about operational capacity prior to posting it on its bulletin, and notified Sempra Energy about the capacity by telephone on the same day it was posted.

Speaking at FERC’s regular open meeting, staff said Transwestern had charged Sempra Energy and Richardson Products a negotiated transportation rate of up to $40/Dth in February 2001, far in excess of the pipeline’s regulated recourse rate of 38 cents/Dth. On Feb. 14 and 16 of that year, Transwestern received $143,282 and $137,381 for daily service under the Richardson contract, and $231,817 on Feb. 14 under the Sempra Energy contract, the FERC order said. With a recourse rate, Transwestern would have gotten less than $3,800 per day under each contract, it noted. In return, Sempra Energy and Richardson would have received different — or below premium — services under the recourse rate, the order suggested. Both shippers apparently willingly entered into the prohibitively expensive contracts to assure priority service.

Upon viewing the shipper agreements, FERC found that Transwestern violated its tariff by selling interruptible transportation as firm service, and ran afoul of the agency’s negotiated-rate policy by negotiating terms and conditions of service. “The effect of the negotiated terms in the Sempra and Richardson contracts was to give these services priority over all interruptible services provided by Transwestern,” the order noted. Staff said it was reviewing Transwestern’s other contracts to see if there were more violations.

The pipeline must refund profits above the regulated rate to firm and interruptible shippers on its system. FERC did not specify the amount of the refunds. In addition, Transwestern was ordered to revise its tariff and web site to clarify posting and capacity-allocation procedures.

“Transwestern received windfall profits through preferential treatment to customers receiving special or advance notice, and violated its tariff and Commission regulations and policy, by providing an interruptible service under its firm service rate schedule. Transwestern, therefore, must return those profits (i.e. any revenues collected above the maximum recourse rate) plus interest to all of the firm transmission shippers on its system at the time,” the order said.

“The shippers involved in the instant deals will not be the only shippers to receive shares of the returned amounts, as they were apparently satisfied with their deals [with Transwestern]. Other shippers did not receive the notice given Sempra and Richardson, and therefore were at a disadvantage in their ability to acquire the capacity.”

FERC has ordered Transwestern to return the above-maximum rate revenues to the firm shippers within 30 days, and to file a report with the Commission identifying the amount of revenues refunded to each shippers.

Under its suspension, Transwestern is prohibited from entering into “negotiated rate agreements containing rates based on index-to-index differentials in natural gas spot market prices” for an entire year.

In the NOI, the Commission asked industry whether negotiated-rate deals based on price differentials should be barred in the future, or whether limits or restraints should be placed on them. It also is seeking comments on whether the recourse rate option effectively mitigates the market power of interstate pipelines.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.