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Gas-on-Gas Discounting: Still a Zero-Sum Game

The Policy: Blind Faith in Supply-Side Subsidy
Fortnightly Magazine - April 15 2000

revenues for pipelines, will benefit the captive customers paying maximum cost-of-service rates. According to this rationale, the increased service reduces, in the pipeline's next rate case, costs that otherwise would be recovered through rates paid by those captive customers.[Fn.8] Nowhere does the Final Rule recognize that pipelines actually reduce the level of throughput reflected in the ratemaking process to force non-favored customers to subsidize discounts.

Moreover, it overlooks an obvious problem: Discounting only furthers what is essentially a zero-sum game.

Gas-on-gas competition often takes the form of a pipeline's competing with another interstate pipeline for a customer. Favored customers with access to both pipelines - but not those customers captive to only one pipeline - get the discounts. Another typical form of gas-on-gas competition occurs among the users of a pipeline's own rate schedules for transportation service, including capacity release. When firm contracts expire, pipelines grant demand charge discounts to compete with their own interruptible transportation rates, which also often are discounted.

A pipeline's rates increase in step with its discounting to meet such gas-on-gas competition from other interstate pipelines or with itself.[Fn.9] Gas-on-gas discounting amounts to substantial dollars across the grid.[Fn.10] Furthermore, gas-on-gas, pipeline-on-pipeline, discounting (and related ratemaking throughput adjustment) by definition impacts more than one pipeline's customers. Yet after the deals are struck, not one additional dekatherm moves across the FERC-regulated pipeline grid.

Discounting to meet gas-on-gas competition fails to spread fixed-cost recovery over more units of service. Markets a pipeline wins in gas-on-gas competition with another pipeline, or among the pipeline's own rate schedules, merely displace units of service otherwise delivered by that other pipeline, or under another rate schedule. No real increase in economic output occurs.

The Rebuttal: A Case Ripe for Judicial Review

Not all discounts are bad; nor do they all discriminate. Some discounts aim to meet competition from alternate fuels or from pipelines not regulated by the FERC. These discounts may well increase units of service across the interstate grid, to the benefit of non-favored customers as well as customers getting discounts, which the gas-on-gas discount does not do. The question for this discussion, however, is whether the appellate courts recognize this distinction between load-building and zero-sum discounts and, if so, how might they rule on the FERC's current policy?

In the 1980s, in a slightly different context involving pipeline discounts of gas , not transportation, the U.S. Court of Appeals for the D.C. Circuit had occasion to test the FERC's policy to see if such discounts made a contribution to fixed costs that otherwise would not be made at all. When the court found that equitable justification to be "missing," it said "no" to the policy in question.[Fn.11]

In fact, on at least three separate occasions since then, the D.C. Circuit Court has insisted that the issue of pipelines adjusting their rates to offset discounts to meet gas-on-gas competition has not even been addressed, let alone analyzed or approved:

  • Deferring the Issue. In 1987 the court explained that issues of rate differentials based exclusively on competition between transporters with similar cost functions [i.e., interstate