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Pipeline Restructuring: Slicing a Shrinking Pie

Fortnightly Magazine - October 15 1997

benefits might include: 1) adding new demand, 2) replacing lost demand, 3) reducing customer costs, 4) economies of scale or 5) reducing the cost of future expansion. The FERC invokes a presumption before construction in favor of rolled-in pricing when benefits are realized and any rate increase to current customers totals 5 percent or less. %n11%n

The Indiana Utility Regulatory Commission opposes the FERC's policy on rolled-in pricing, which it describes as "legally subsidized competition." It believes that any project that increases system rates at all should not qualify for rolled-in pricing, unless the pipeline can show that benefits are proportional to costs and could not be obtained by an alternative strategy.

The URC cites the familiar concern that small, incremental capacity additions can qualify artificially under the 5-percent test. It adds:

Theoretically, the same pipe in the same location ought to have roughly the same benefits for all potential users in a seamless national pipeline system. (Ind. URC, p. 8.)

Not surprisingly, The Williams Cos. support current FERC policy (Williams, p. 29), while the United Distribution Companies opposes rolled-in pricing for pipeline facilities that bypass LDC transportation. %n12%n "[F]air, head-to-head competition between LDCs and pipelines is one matter, while competition ... underwritten by other pipeline customers, through rolled-in rates, is quite another." (UDC, p. 20.)

NEGOTIATED TERMS & CONDITIONS

(Impossible to police?)

FERC Order 636 stressed "comparability" of service. Today, five years later, nearly everyone agrees that gas pipelines need more flexibility in tailoring terms and conditions of service to specific customers. The comment, "One size no longer fits all," appears again and again.

Last year, the FERC inquired whether to allow pipelines to negotiate terms and conditions of service, just as it allows for rates, but said it was "not willing to permit the negotiation of individual shipper-customized terms of service at this time." %n13%n Questions remain. Would that policy place small-volume pipeline customers at a competitive disadvantage? Would it grant too much market power to pipelines in areas served by only a single long-haul pipe?

Many commenters call for negotiated terms and conditions. %n14%n One such pipeline, El Paso Energy Corp. %n15%n offers a unique angle. It sees no problem with market power as long as customers remain free to negotiate a lower rate for diminished service that hold little value for them in particular, or to pay a higher rate for enhanced service with a higher value for the individual customers. %n16%n

El Paso offers a slew of examples of diminished and enhanced services that it feels should be left open to negotiation:

• Diminished services: Customer relinquishes 1) some or all secondary receipt and delivery points, 2) capacity release rights, 3) right to segment released capacity (segments of contract path not separately marketable), 4) overrun rights (for customer with predictable daily needs), 5) intra-day nomination rights, or 6) force majeure protection (for customers with their own storage facilities or "swing supply" options).

• Enhanced services: Pipeline consents to 1) more flexibility in hourly takes, 2) redundant delivery points rather than prorating or allocating firm entitlements across all delivery points,