Shippers are protesting a compliance filing of Kern River Gas Transmission that would force shippers within the same class whose contracts are expiring to unanimously agree to renew for the same term, or face costlier rates.
Kern River has said it “would impose a default of a 10-year contract term (with the associated higher rate) upon all shippers within a class in the event unanimous agreement is not reached among these shippers despite their divergent business interests,” BP Energy Co., a shipper on Kern River, told the Federal Energy Regulatory Commission [RP11-2356].
This is contrary to the FERC-issued Opinion 486-E, which requires that eligible shippers be “offered the option of entering into 10- or 15-year contracts for service during Period Two,” BP Energy said.
Opinion 486-E was issued in July and addressed the step-down rates to which Kern River’s firm shippers would be entitled when their current contracts expire. In a 1990 order, approving the Kern River pipeline, the Commission authorized the pipeline to charge separate levelized rates for three different periods: the 15-year term of the firm shippers’ initial contracts (Period One); the period from the expiration of those contracts to the end of Kern River’s depreciable life (Period 2); and the period thereafter (Period Three). Period Two rates are expected to take effect on Oct. 1.
“Opinion 486-E does not authorize Kern River to force agreement within each shipper class, much less mandate agreement at the shorter contract duration [10-year term] and higher rate offered,” BP Energy said.
The Rolled-In Customer Group, which includes a broad-based coalition of Kern River shippers taking service under the 15-year rolled-in rate schedule, also expressed opposition to the Kern River proposal. “Opinion 486-E refers in several different places to the right of the individual shipper to opt for its own contract term,” said the group, whose members include Anadarko E&P Co. LP, Chevron USA Inc., Occidental Energy Marketing Inc., Shell Energy North America (US), Southwest Gas Corp. and WPX Energy Marketing LLC.
“Both 10- and 15-year commitments are considered long term in today’s business environment, and shippers should be permitted to contract for either term on the basis of their own commercial risk perceptions and practices, just as they have been permitted to do on Kern River in the past under Period One rates. They should not be forced to modify their contract term to reach consensus with their competitors. Kern River has administered different contract terms for different shipper classes historically, and there is no basis for discontinuing this practice in the future for Period Two rates,” the coalition said.
Forcing shippers to commit to a contract term with higher rates would have significant economic consequences, BP Energy noted. “If shippers have predicated commodity sales arrangements or economic analyses underpinning their Period Two capacity commitments based upon the lower 15-year contract rates, which they are subsequently forced to abandon, their plans will be up-ended and they will be seriously disadvantaged.
“Any binding downstream contracts would be turned on their heads if shippers are forced in the end to modify their contract terms based upon either group consensus or if they are otherwise compelled to sign 10-year terms in the event of disagreement within a shipper class,” BP Energy said.
The Period Two rates proposed for 10-year contract shippers on Kern River’s original system (prior to expansions) are “excessive,” it noted. “The rates proposed consistently require the Original System 10-year shippers to pay higher rates than the Original System 15-year shippers for Period Two contracts of the same duration.”
Original System 10-Year shippers taking 10-year contracts would initially pay a reservation unit rate of $0.2560, compared to the Original System 15-Year shippers taking 10-year contracts reservation unit rate of $0.2182.
“The Period Two rates proposed by Kern River do not fairly reflect the fact that both the Original System 10-Year and 15-Year shippers are to pay 30% of plant during Period Two, as determined in Kern River’s original certificate order and the ET [extended term] settlement order…Because the agreement to pay 30% of plan in Period Two was part of the original risk-sharing agreement entered into by both the Original System 10-Year and 15-Year shippers, both shipper classes should pay the same Period Two rates if both agree to take Period Two service for an equal duration,” BP Energy said.
It called on FERC to direct Kern River to set the same Period Two rates for Original System 10-Year shippers and 15-Year shippers that take service for the same duration.
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