Northern Natural’s innovative volumetric rate proposal, whichcould provide customers with a method of better managing weatherrisk, is headed to a technical conference and further FERC andindustry scrutiny.

The Federal Energy Regulatory Commission last week accepted andsuspended for the full five months the tariff sheets related to theproposed optional volumetric firm throughput service (Docket No.RP00-264) subject to refund and the outcome of the technicalconference (see NGI, May 15).

The service would allow customers to only pay for the servicethey use and share the risk of weather-related volatility with thepipeline. The proposed service would be available to existing andnew customers that contract for long-term firm service on NorthernNatural, and would have the same terms and conditions as thepipeline’s existing firm rate schedules.

The VFT service would offer customers “a new flexible billingoption for the pricing of firm service, i.e., a ‘pay-as-you-go’approach,” according to Northern Natural. Also, it would permitcustomers to “fix the per-unit cost of transportation servicepurchased from Northern and insulate themselves and their customersfrom weather-driven cost volatility.” Northern believes the VFTservice would be a vast improvement over the current two-part firmbilling structure, where a shipper pays for firm service whether ituses the service or not.

Some intervenors lauded Northern’s goal of giving shippers ahedge against weather risk an said the pipeline should be commendedfor it innovation and efforts to design new rates and servicesdesired by existing and potential customers. A number ofintervenors, however, still wanted a technical conference becauseof some serious flaws in the proposal. Protesters argued that theproposal was contrary to FERC policy and regulations mandating theuse of straight fixed-variable rate design. Others said thatNorthern’s proposed load factor calculation needed to be filedbecause it could slant the economic benefits to Northern if basedon the last three warmer than normal winters.

FERC said the proposal “presents many difficulties, such as howto effectively allocate capacity and whether there is unduediscrimination and cross-subsidization present in a volumetricrate. These issues need further development and exploration priorto implementation.”

FERC also said the filing did not comply with its regulationsbecause Northern did not discuss the impact on existing customers,provide the basis for the rate schedule, the workpapers thatdevelop the proposed load factor calculations nor any cost andrevenue reconciliation.

“Northern’s proposal also institutes a seasonality in its ratesthat Northern has not explained,” FERC said. “The proposal is notconsistent with Order No. 637 in that (1) the tariff sheets werenot filed as pro forma sheets and (2) it applies peak/off peakrates to long term, contracts but does not propose a revenuecrediting mechanism, a cost and revenue study in fifteen months,nor a full section 4 proceeding.” As a result a technicalconference is necessary, FERC said.

Rocco Canonica

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