In what some predicted would be a “watershed” decision, FERClast week scrapped a proposal in which Viking Gas Transmissionsought authority to incrementally price existing transportationcapacity as it opened up on its system without filing a full-scalerate case. The Commission did not generically address the issue inthe order, leaving open the door for similar proposals by otherpipelines.

In a 5-0 vote, the Commission said it “may be appropriate” forpipelines, which have different vintages of capacity andincremental rates, “to use a form of rolling-up that increases therates for the older vintages and decreases the rates for newercapacity,” but it noted Viking “appears” to be precluded from doingthis by a rate settlement that was approved last May. Under thatsettlement, “Viking agreed with its customers to a gradualrolling-in of the costs of Viking’s expansion facilities with aspecific schedule,” and it agreed to rates that are to remain ineffect until the pipeline files its next general rate case, theFERC order said [RP00-35]. As a result, it “appears” Viking’sincremental pricing proposal can only be implemented by filing ageneral rate case under Section 4.

Moreover, FERC said the proposed rate adjustments along with theaccompanying revenue-credit mechanism appeared to be “inconsistent”with Viking’s stated objective for its proposal, which was to sendaccurate price signals to the market.

“I think the order…said it ‘appeared’ the settlement”prohibited Viking from making such a proposal outside the realm ofa rate case, remarked Viking President Gregory H. Palmer, whoemphasized the word “appeared.” But “I don’t believe that wastrue.” He contends the settlement permits Viking’s incrementalpricing proposal as long as it’s done in the context of a limitedSection 4 rate filing, which it was.

“I’m definitely confused right now as to what the policy is” atFERC on incremental pricing, he told NGI. Asked if Viking intendedto seek rehearing, Palmer said “we’re trying to sort through it[the order] to see what our options are. Certainly we’re lookingfor clear guidance on what the policy is.” On the upside, he noted”I’m sure some of the shippers are happy” with the Commission’sdecision. “I guess the one thing we want most is happy shippers.”

Viking proposed to incrementally price capacity that would openup on its system through capacity turnback, permanent capacityrelease, contract renewal or right-of-first-refusal at a levelwarranted by the market. The price for such capacity would becapped at the FT-D rate, Viking’s highest. The pipeline fetched anFT-D rate of 45 cents/Mcf for firm service from the Canadian borderto Marshfield, WI, on its latest expansion.

Viking currently has four different levels of firm rates on itssystem, and offered the proposal in an attempt to achieve some formof uniformity in firm rates, as well as in its rates forinterruptible, capacity release and authorized overruntransportation (AOT) services. The pipeline proposed to refund 90%of the excess revenues to shippers paying the higher incrementalrates for the firm, IT and AOT services. With temporary releases,the releasing shippers would keep whatever additional revenues theyreaped. Viking argued its proposal was justified under theCommission’s new policy statement on pipeline construction andunder FERC precedent.

In a concurring opinion, Commissioner Linda Breathitt said shehad “grave concerns” about Viking’s proposal, not only because itwould be “inequitable” for existing shippers, but because “thiscase could serve as precedent for other similar filings.”

She said Viking “misread the language” in the policy statementand in a PG&E Gas Transmission, Northwest case on this issue.Viking “is grafting the capacity-release policy stated in PG&Eonto all of its shippers and lifting a sentence from the policystatement as support for its proposal. Even the limited language inthe policy statement that Viking uses to [justify] its proposalimplies that there are instances where the type of roll-up Vikingproposes may not be warranted.”

The result of these “contortions of policy” is a proposal thatwould provide Viking with market-based rate authority, Breathittsaid. It would allow Viking to charge existing shippers on itsoriginal system, which was built in the 1960s, four times more forthe same capacity when their firm contracts come up for renewal.

“My concern would be less if Viking’s proposal only affectedpermanent capacity release replacement shippers or futureshippers,” she noted. But the proposal’s “inclusion of all existingservices, both firm and interruptible, raises serious concerns.”

Breathitt said that only a “full Section four proceeding, withits rate safeguards, can identify the implications of this proposalon present and future customers,” which she believes will be”wide-reaching.”

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