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FERC: "High-Low" Gas Pricing Prevents Gaming

Fortnightly Magazine - May 15 1996

The Federal Energy Regulatory Commission (FERC) has approved Texas Eastern Transmission Corp.'s (TET) proposed revisions of its monthly imbalance cash-out mechanism (Docket No. RP96-142-000).

TET had asserted in February that its monthly imbalance mechanism enabled shippers to game the cash-out mechanism during the recent rapid and large price fluctuations in the spot gas market. Therefore, TET proposed changing its cash-out mechanism to include "high-low" pricing - i.e., basing the cash price on the lowest index spot price in the month for a shipper that leaves gas on the system, and the highest price for shippers that take gas from the system. For imbalances over a certain level, the monthly cash-out mechanism imposed tiered penalties on shippers.

In a February 16, 1996, letter order, the FERC found TET's proposal reasonable. But shippers argued that operation flow orders (OFOs) are sufficient to address the operational problems caused by shipper imbalances. The FERC disagreed, stating that a pipeline's transportation tariff's balancing provisions should not be a source of gas-price profit for shippers. It further noted that OFOs are not intended to correct tariff imbalance shortcomings.

While it believes in uniformity of tariff provisions, the FERC currently has no general standards for cash-out tariff mechanisms. The FERC initially required more uniformity in TET's cash-out mechanism, but experience supports the proposed change for individual pipelines.

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