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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
  • pipelines] may "properly" be deferred to another day and another proceeding for ultimate resolution.[Fn.12]
  • Withholding Any Opinion. The D.C. Circuit Court in 1995 ruled that the court has not specifically addressed the "legality of gas-on-gas discounts."[Fn.13]
  • Emphasizing the open question. The court in 1996 defined standard model FERC selective discounting to include that 1995 ruling that the legality of gas-on-gas discounts has not been specifically addressed (on review of Order No. 636 unbundling of sales and transportation services).[Fn.14]

Even general rate design principles leave the gas-on-gas problem open to challenge. Correcting the problem would be required under the anti-discrimination discounting objectives of the FERC's 1989 Rate Design Policy Statement: (1) to maximize throughput, and (2) to "prevent subsidization of the discounts by the pipeline's nondiscounted rates."[Fn.15]

Disallowing ratemaking adjustments for gas-on-gas discounts actually promotes the second objective, by removing captive customer subsidies of discounts a pipeline gives to favored others. Moreover, the promotion occurs at no detriment to the first objective, because no units of service are lost to the pipeline grid by disallowing the practice.

In unbundling sales from transportation in 1992, the FERC took care to declare the Rate Design Policy Statement "still will be applicable to ... the discounting of rates."[Fn.16] Correction of the gas-on-gas, prejudicial rate methodology problem also would improve allocative and productivity efficiency under the Policy Statement, as encouraged by the Final Rule.[Fn.17]

The Remedy: Measures Less Severe on Captive Customers

The FERC's rule in Part 284 (Title 18 of the Code of Federal Regulations) requires that discounts, including gas-on-gas discounts, be provided without "undue discrimination or preference of any kind."[Fn.18] The Natural Gas Act "fairly bristles" with concern for undue discrimination that those regulations were issued to prevent.[Fn.19] Section 4 (b)(2) of the Act proscribes illegal discrimination as taking place between "classes of service."[Fn.20] Disallowing such prejudicial ratemaking also would be appropriate under the FERC's long-standing doctrine stating that the only legal rate is the FERC-filed rate.[Fn.21]

Rather than await a court challenge, the FERC could well accommodate some of the gains[Fn.22] it seeks in its discounting policy through means less severe on captive customers. The FERC should correct the discrimination inherent in its current model for rate discounting by these two measures:

No undercutting the reservation charge. Gas-on-gas discounting of reservation charges below the filed maximum reservation charges of a competing, FERC-regulated pipeline should not be allowed. Nor should adjustments for any permissible gas-on-gas discounting of the reservation charge be allowed in the design of rates. Pipelines could discount down to another pipeline's maximum reservation charge, but without standard model rate design privilege of recouping those discounts from other customers.

No discounting the usage charge. Gas-on-gas discounting of usage charges in firm rates also should not be allowed. Nor should any discounting of interruptible rates below usage charges of a competing, FERC-regulated pipeline, or any discounting of interruptible rates to compete with capacity released by a firm service customer of a FERC-regulated pipeline, be allowed. Pipelines could discount down to another pipeline's filed firm or interruptible usage charge, but, again, without rate design privilege.