The New York Public Service Commission (PSC) has asked FERC toinitiate a proposed rulemaking for the purpose of opening up aninquiry into the appropriate rate design for interstate natural gaspipelines.

The current straight-fixed variable (SFV) rate design, whichallows pipelines to recover all of their fixed costs in thereservation component, isn’t working as the gas industry movestowards greater competition and shorter term contracts, the NewYork PSC said.It believes the time is ripe for the Commission toconsider a rate design that would enable pipelines to recover aportion of their fixed costs in the usage component.

“The movement of fixed costs to pipeline usage rates willencourage pipelines to compete for increased throughput on aday-to-day basis,” state regulators noted, adding it is a”necessary step” to ensure that FERC regulation keeps up with thetrend towards short-term transactions. Such a rate design “alsowill discourage pipelines from inflating their equity ratios,” andwill encourage retail access, the New York commission said.

It dismissed arguments that a departure from SFV rate design,which was established as part of Order 636, could serve to distortproducer wellhead prices. If anything, the state commissioncontends a non-SFV rate design would have a number of benefits: itcould make turned-back pipeline capacity more marketable byreducing reservation charges; encourage the entrance of newsuppliers into the retail markets; and reduce the need fordiscounting and mitigate rate disparities between captive andnon-captive customers.

Moreover, state regulators believe a shift from SFV rate designwould put recourse, or standard, rates on a more even scale withnegotiated rates. FERC’s present policy permits pipelines tonegotiate rates that diverge from SFV, but it requires recourserates to be calculated using the SFV rate design. “New York isconcerned that if the market is demanding a move away from SFV, butnot all customers have the leverage to obtain the pipeline’s[negotiated] agreement, the recourse rate has lost its validityunless it too moves away from SFV.”

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