The Federal Energy Regulatory Commission should continue to allow interstate gas pipelines to offer their customers customized negotiated rates as an alternative to maximum recourse rates, both shippers and pipelines said Monday. But they were divided on the issue of whether the Commission ought to make some nips and tucks to its negotiated-rate program.

The Natural Gas Supply Association (NGSA), which represents the nation’s major gas producers, called on FERC to take a number of steps to safeguard pipeline shippers and instill confidence in negotiated-rate transactions:

Vector Pipeline LP doesn’t believe the Commission needs to make any changes to its negotiated-rate program, but it noted that allegations of abuses by pipelines should be vigorously investigated. “Vector’s view is that the Commission should not modify the basic parameters of its negotiated-rate program. In most cases, the program seems to be working without problem; certainly that has been the case with Vector, to the benefit of both the pipeline and its shippers,” it told FERC [PL02-6].

The Interstate Natural Gas Association of America (INGAA), which represents pipes, echoed this sentiment, noting that FERC’s negotiated-rate policy was “carefully crafted” to provide both flexibility and “adequate protection” against unduly discriminatory conduct by pipelines.

“Where there are allegations of abuse, such as where a pipeline insists on the use of a negotiated rate to the exclusion of any recourse bid or if the parties do not follow the tariff requirements for capacity allocation, these instances should be investigated and, if proven, remedied in an appropriate manner,” Vector told the Commission.

If FERC should decide to make changes to its negotiated-rate program, the changes should affect only future transactions, Vector said. “Currently effective negotiated-rate transactions, which are not protested by shippers or under investigation by the Commission, should remain in effect as agreed to by the parties without interference…by the Commission.”

In a notice of inquiry (NOI) issued in July, FERC asked the energy industry to comment on the future direction of its negotiated-rate policies and practices. The Commission opened the NOI proceeding at the same time it took disciplinary action against Enron subsidiary Transwestern Pipeline for charging excessive negotiated rates during the California energy crisis in 2000-2001. The Commission noted the pipeline’s rates at times reached 100 times the maximum regulated rate during that period.

The Commission suspended for one year Transwestern’s authority to negotiate rates based on basis differentials and ordered the pipeline to pay shipper refunds for the extremely high rates.

The case involving Transwestern was “more about instances of flawed pipeline procedures than problems inherent in the negotiated-rate program,” countered Peoples Gas Light and Coke Co. of Chicago, IL. “Peoples’ experience with negotiated rates is that the existence of negotiated rates has not been a vehicle for market power abuse.”

The utility said it remains a firm believer in FERC’s negotiated-rate program, and does not believe any changes are warranted. Peoples and others acknowledge that entering into negotiated rates is a gamble — the rates may benefit customers at times, while at other times they may tilt in favor of pipelines — but they said it’s a gamble they’re willing to take.

“A shipper that enters into an agreement that is or has the possibility of being for more than the maximum rate does so voluntarily and, presumably, has a commercially sound reason for doing so. Peoples doubts that a shipper would enter into a contract with a stated rate in excess of the maximum rate, as it would be economically irrational to do so,” it said. But it does make economic sense for a shipper to enter into a contract with a pipeline where the rate can fluctuate — sometimes above the maximum rate, and other times below the maximum rate.

Peoples objected to proposal that would require pipes to submit (30 days prior to contracts taking effect) their negotiated-rate agreements to FERC for review. “A thirty-day prior filing requirement would reduce the benefits of the negotiated-rate program..A major benefit of negotiated rates is the ability to craft a contract rate that is responsive to market conditions. Particularly for shorter term contracts, finalizing the rate agreement shortly before its effective date enhances the degree to which the parties are assured that the contract is in tune with market conditions.”

Both Peoples and Vector contend the resource rate option effectively mitigates pipeline market power. Peoples also believes the Commission should continue to permit pipelines to offer index-based negotiated deals based on price differentials. “The price differential between receipt and delivery points is a commonly accepted proxy for the value of transportation between those points. Negotiating a rate based on this differential is a reasonable way to set the price for transportation. Of course, that price could exceed the maximum tariff rate, but it could also fall below [the] tariff rate.”

Vector said it owes its very existence to negotiated rates. “Absent the negotiated-rate option, there would be no Vector pipeline.” When it held its open season for the Chicago-to-Dawn, ON, pipeline, it said “all the bidders for capacity (both affiliates and non-affiliates) chose the negotiated-rate option, and the actual service agreements entered [into] with shippers were for negotiated rates.”

The Vector system “certainly has no objection to selling its services at the maximum recourse rate and welcomes the opportunity to do so, but the market in which Vector operates simply does not favor that approach,” it told FERC. “In fact, contrary to the notion that pipelines are or might be using their market power to constrain shippers to enter into negotiated-rate deals, Vector’s experience is that shippers decline to use the recourse rate and instead ‘prefer,’ and in many case ‘insist,’ that Vector configures the rate components to meet the shipper’s particular needs and concerns.”

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