Transcontinental Gas Pipe Line’s proposal to revise the existingcash-out provisions of its tariff has come under heavy attack fromlarge shippers on its system.

The pipeline has proposed reducing its imbalance tolerance levelfrom 2.5% to 1.5%, and substituting “stricter pricing guidelines”for calculating payments in an attempt to prevent “gaming” on itssystem. Under the proposal, imbalances outside the 1.5% tolerancelevel would be subject to penalties [RP00-24].

Transco says the changes are needed to prevent system shippersfrom using its cash-out mechanism as an alternative market in whichthey can “buy” gas from the pipeline at below-market prices or can”sell” it to the pipeline at above-market prices, as well as toensure system reliability and safety.

While Transco has identified the issues correctly, shipperscontend the fixes it has proposed are far too drastic. The ProcessGas Consumers Group called the proposed reduction in Transco’simbalance tolerance level “draconian,” and not justifiedoperationally.Indicated Shippers said it was “unduly excessive.”

“Ignoring the views of and questions raised by its shippers,Transco continues its forced march toward an inflexible andshipper-unfriendly system. Apparently, Transco would rather rely onbroadly drawn proposals that create punitive cash-out situationsrather than using more precisely drawn cash-out mechanisms andother operational and system inventory tools to addressimbalances,” the group of industrial customers said.

Consolidated Edison of New York noted it was “particularlyconcerned” with Transco’s proposed cut in imbalance tolerancerange. It reminded FERC that as part of an earlier settlement, itand other customers had agreed to a reduction in Transco’stolerance band – from 5% to 2.5%.

“If, as Transco suggests, some shippers have been able tocalculate monthly cash-out prices before month’s end and use thatinformation to make profits on the cash-out mechanism, then theobvious solution is to adopt a cash-out mechanism that does notpermit customers to make that kind of calculation,” ConEd said. But”Transco has not shown why it also needs to reduce the imbalancetolerance range to such an unreasonably narrow band.”

For Indicated Shippers, “the proposals go far beyond what isnecessary to solve the problem identified, and impose punitivecash-out prices that are unnecessary…” Transco identified a”cumulative underrecovery” of $13 million as proof that itscash-out mechanism was malfunctioning

But the producer group said “the cause of the large cumulativeunderrecoveries is not the spot price indexes used for cash-out, orthe tolerance level, or even the imbalances themselves…… thecause is the difference between current spot prices and thehistorical cost of Transco’s system inventory gas that Transco’purchases’ to make up for negative imbalances,” Indicated Shipperssaid. Since “in recent years the embedded historical cost of systeminventory has usually been significantly higher than current marketprices, large paper underrecoveries have been generated when systeminventory gas was used as a source of gas to make up for systemimbalances.”

“Transco must either alter its accounting methodology so as toeliminate the use of non-market-sensitive system inventory pricesin current monthly cash-out calculations, or purchase gas in theopen market on a current basis when negative imbalances arise.”

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