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Gas Customers Pay the Price

Fortnightly Magazine - April 15 1995

the pipeline charges qualify for special rate treatment.

The same argument arose the last time the FERC created a special class of costs to be billed by the pipelines to their LDC customers. Most PUCs found these "take-or-pay" costs eligible for gas cost recovery, as the Illinois Commerce Commission pointed out in deciding to allow recovery of the transition costs billed to Illinois LDCs. The commission found that the FERC chose to restructure the industry in a series of steps. The first step, Orders 436 and 500, eliminated part but not all of the pipelines' merchant function. The initial costs of restructuring contracts for gas supply were called take-or-pay costs because of the nature of pipeline contracts with natural gas producers. The next, and perhaps last step, was Order 636, which eliminated the remaining pipeline merchant obligations. Illinois regulators could find no "valid policy or legal rationale to treat the recovery of GSR costs in a different manner than take-or-pay costs." Re FERC Order 636 Transition Costs, 155 PUR4th 331 (Ill.C.C.1994).

In other cases customers have argued that only Account 191 costs truly qualify as gas costs. LDC payments for other types of transition costs would not result in additional capacity or gas for the utility, and therefore do not qualify as gas costs. Cost-recovery opponents further argue that GSR costs are directly associated with implementation of Order 636 rather than with gas transactions. In rejecting this line of argument, the Indiana Utility Regulatory Commission (URC) reasoned that, prior to Order 636, sales volumes purchased by LDCs included in one price individual components for gas commodity, transportation, facilities, and storage costs. The URC concluded that all four types of transition costs fell under the statutory definition of "other expenses relating to gas costs" eligible for adjustment clause treatment. Re City of Indianapolis, 158 PUR4th (em , Cause No. 37399-GCA41, Jan. 18, 1995 (Ind.U.R.C.).

The take-or-pay analogy also applies to LDC use of the "filed-rate" doctrine to thwart calls for an "equitable sharing" of the transition costs between ratepayers and utility shareholders. LDCs contend that, under the Supremacy Clause of the U.S. Constitution, this doctrine preempts PUCs from challenging the reasonableness of FERC-approved rates charged by a pipeline. In other words, a PUC must allow costs in rates unless it finds that an LDC imprudently incurred a certain level of transition charges. In addition, LDCs note that the courts had found PUCs preempted from performing a prudence review with respect to direct billed take-or-pay costs because there was no way for the LDCs to avoid paying such costs. See General Motors Corp. v. Illinois Commerce Commission, 143 Ill.2d 407 (Ill.C.C.1992).

Interruptible Customers Held Liable

The issue of whether LDCs should be required to spread transition charges among all ratepayers, including interruptible transportation customers, has caused the most trouble for state regulators (see box insert). In Tennessee, state regulators found that LDCs were collecting fees using a wide variety of recovery and class allocation methods. The Tennessee Public Service Commission (PSC) noted that the FERC had not spelled out how the pipelines should pass