Major gas producers and liquefied natural gas (LNG) importers/marketers have assailed Southern Natural Gas Co.’s bid for a rate increase of approximately $35 million.

Southern Natural Gas, which filed a Section 4 general rate proposal in late August, cited increased operation and maintenance (O&M) costs, a higher depreciation expense and a proposed increase in its rate of return on equity to 13.5% in requesting an aggregate hike in its transportation rates of 10%.

All parties asked the Federal Energy Regulatory Commission to set Southern’s rate case for hearing, and to suspend the pipeline’s proposed tariff sheets for the maximum statutory period, to be effective March 1, 2005.

“Southern Natural’s proposed overall cost of service reflects a substantial increase [$118 million], has not been justified and should be thoroughly examined at a hearing. Much of this increase is attributable to the return, depreciation and O&M cost increases sought by Southern Natural. The return on equity requested by Southern Natural is higher than equity returns the Commission has approved for other pipelines,” said Shell NA LNG LLC [RP04-523].

Shell also protested Southern Natural’s proposal to roll in the costs associated with several large expansion projects, which it said incurred “large overruns.” It asked FERC to set the issue for hearing, saying “it is clear that Southern Natural has not demonstrated in its filing that none of its existing customers would be subsidizing one or more of the incremental projects.”

Among other things, a group of four major producers complained that Southern Natural’s proposed imbalance cash-out mechanism violated Commission policy because “it would penalize imbalances that have little or no impact on system reliability, and [would] unreasonably eliminate a penalty-free imbalance tolerance zone.” The producers include BP America Production, Chevron U.S.A Inc., Exxon Mobil Corp., and Shell Oil.

“Under Southern’s high/low mechanism, a shipper is required to pay more than the average price when it owes gas, and receives less than the average price when it is owed gas. This would apply to an imbalance of even 1 Dth,” they said. The pipeline’s proposal is “more punitive than necessary to control system imbalances.”

The most glaring omission by Southern, an El Paso pipeline subsidiary, is the recommissioning of El Paso’s Elba Island LNG facility in Georgia, noted BG LNG Services LLC.

“Perhaps the most significant change in circumstances since Southern’s last rate case is the recommissioning of the LNG terminal at Elba Island and the reinstitution of LNG deliveries into the eastern end of the Southern system…In a number of important regards, Southern’s filing fails to properly account for this development. These failures have implications not only for the Southern system, but more broadly for the Commission’s policy,” BG LNG said.

“Rate structures and ratemaking practices that were developed without regard to LNG imports must be re-examined in order to determine if Commission rate-setting practices have the effect of deterring LNG imports. This proceeding represents one of the first opportunities the Commission has had to consider pipeline ratemaking in light of its new emphasis on LNG imports.”

In late 2003, El Paso Merchant Energy (EPME) released all of its capacity at the Elba Island terminal to BG LNG on a short-term basis, and BG LNG stepped into the role of LNG purchaser at the plant. In January 2004, EPME permanently assigned to BG LNG and affiliates its long-term purchase agreements with two LNG suppliers from Trinidad.

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