Shippers shot Southern Natural’s proposed rate increase full ofholes last week at FERC. Wholesale and retail marketers, municipaland investor-owned utilities, industrial gas users and gasproducers alike told FERC to deny Sonat’s request that theincreased rates be made effective Oct. 1. There was a unanimouscall for hearings and a suspension of the filing for the fullfive-month period subject to refund.

Southern proposes a cost of service increase of $82 million to$363 million because of pipeline expansions and an increase in rateof return. The company wants to increase is rate base by $433million because of pipeline and compressor replacements andrelocations, a new $29 million computer system and GISB compliance,and $272 million in expansion costs, including $103.5 million forits North Alabama expansion project which went 55% over budget.Southern also proposes an increase in its rate of return to 10.81%,predicated on a 13% return on equity, which is one percentage pointhigher than Sonat’s existing ROE and slightly higher than FERCtypically has allowed for other pipes.

One aspect of the rate increase that has caused a great deal ofalarm is the disproportionate rate impact on the different ratezones on Southern’s system. For example, there is a 10% increase inthe reservation rate in zone three and a 9% increase in zone two,but reservation rates would increase only slightly in theproduction area and actually would decrease in zone one, accordingto Atlanta Gas Light and Chattanooga Gas. A large group of Alabamaand Georgia municipal gas distributors, the investor-owned LDCs andothers have said the disproportionate impact is a clear indicationSonat is laying the heaviest burden on its captive customers.

“There is no justification for this mammoth cost shift; itsobvious purpose and dramatic effect are to shift costs to smallcaptive customers to allow Southern to charge lower rates tocustomers in competitive markets,” the Alabama and Georgia munistold FERC in their protest. The munis claim Southern is shiftingthe cost burden of its expansion projects onto small captivecustomers, which make up only 1% of its customer base, in responseto an “ominous downward spiral” in capacity contracting and heavyrate discounting. “This situation cries out for the Commission torequire Southern to transition away from [straight fixed-variable]rates so that the pipeline will recover substantial costs throughits commodity rates.”

According to AGL and Chattanooga, Southern’s rates already were”more than twice as high as Transco’s [comparable rates]…Southern can charge so much to Zone 3 customers because it faceslittle or no competition for the vast majority of loads in Zone 3.”

Protesters also would like a thorough review of the rolled-inrate impact of the North Alabama project given the unexpected $37million cost increase for the project. “The 55.4% cost overrunreflected in Southern’s filing is itself a significant change incircumstances that calls into question the entire economics of theproject,” said Alabama Gas Corp. Several protesters noted that in arecent KN Interstate ruling the Commission held that a 41% costoverrun in KNI’s Pony Express Project (from $159.2 million to$224.8 million) was a significant change in circumstances thatcaused KNI to lose the presumption in favor of rolled-in ratetreatment.

A significant omission in Southern’s rate calculations was theimpact of its proposed merger with El Paso, which is expected inthe fourth quarter. AGL and Chattanooga note that while Southernincluded in its rates the expansion costs for a project that isn’tyet in service, it did not include an estimate or the expectedimpact of cost savings from its proposed merger. Sonat and El Pasopreviously said the merger would result in $60 million in annualsavings. Shippers believe they should see some of those savings inthe form of lower rates.

“Based on El Paso’s acquisition of the pipeline business ofTenneco Inc., El Paso has a track record of achieving cost savingsby consolidating functions and laying off employees,” said AlabamaGas. In a footnote, Alabama Gas says it “should be noted that just12 days after the end of the test period of El Paso’s last ratecase, El Paso announced a massive restructuring of its workforcethat resulted in the elimination of 38% of its employees. The judgeassigned to the case concluded that the cost reductions had beenplanned during the test period and were known and measurable.”

Alabama Gas also noted that despite Sonat’s claims that itscurrent rates are not recovering its costs “a review of [FERC] Form2 data reveals that Southern generally has been over-recovering itscosts since the settlement rates went into effect for thepost-Order 636 restructuring period.”

Rocco Canonica

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.