[BETA] Fortnightly

A new Federal Energy Regulatory Commission (FERC) order in the restructuring proceeding for Natural Gas Pipeline Co. of America (NGP) suggests how the Commission will handle evolving issues in natural gas decontracting (Docket Nos. RP95-326-000).

NGP had asked to implement its compliance rates for new services in conjunction with a deferred-cost mechanism, allowing it to defer collection of revenue shortfall it allegedly would experience under those rates. The FERC recognized NGP's request as an effort to resolve a twofold problem on its system: First, NGP may be left with 600,000 MMBtu per day of unsubscribed capacity due to changes in contract levels and paths when its new contracts take effect on December 1. Second, to retain firm customers, NGP must offer many deep discounts on its firm reservation charge. As a result, a few customers end up paying the maximum rate.

The FERC denied the proposed rates, because they would cause a 50- to 60-percent rate hike for captive customers. Although a pipeline's customers should share a pipeline's costs in proportion to the capacity they use, the FERC ruled, the pipeline may not shift all costs of unsubscribed capacity onto them. The FERC rejected the deferred-cost mechanism, because although it would avoid rate shock, it could serve to only postpone, and perhaps exacerbate, NGP's problem. The FERC said it was reluctant to repeat the problems associated with deferred gas costs accumulated through purchased-gas adjustments (PGAs), and noted that NGP has an obligation to recoup some costs by marketing its turned-back capacity.

The FERC concluded that NGP should explore flexible rate designs to recover costs associated with unsubscribed capacity, and suggested a departure from the straight fixed variable (SFV) rate design. The FERC will consider allowing rate flexibility for capacity that customers have already elected. Another option is that NGP examine the economic life of its facilities to determine whether to reduce its depreciation rates or implement some form of levelized ratemaking.

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