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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

At the end of the day, the Final Rule pays lip service to "reduced discount adjustments,"[Fn.23] but lifts not a finger to ease the gas-on-gas problem, let alone cure it. The FERC should assure that price differentials among transportation customers will benefit captive customers equitably by making a contribution to fixed costs that otherwise will not be made at all. Because no such assurance for gas-on-gas discounting exists, the FERC, or the courts on appeal, should take away the standard model rate design toy for playing that zero-sum game. There is no excuse for continuing to duck this matter.


1. Regulation of Short-Term Natural Gas Transportation Services, and Regulation of Interstate Natural Gas Transportation Services, Order No. 637 Final Rule, FERC Stat. & Reg. ¶31,091.

2. Adjusting ratemaking throughput is a mathematical step in the rate-setting process that takes the revenue requirement allocated to customers not receiving discounts and spreads it over a smaller throughput volume of gas, thus resulting in a higher unit rate for transportation.

3. Regulation of Interstate Natural Gas Transportation Services, Notice of Inquiry, FERC Stat. & Reg. ¶35,533 at 35,744.

4. Final Rule, supra, FERC Stat. & Reg. ¶31,091 at 31,267.

5. FERC analysis says, where it is clear the discount is solely at the pipeline's expense, selective discounts will not "ordinarily" be discriminatory; however, "[c]omplaints will be entertained as a means of determining whether a particular discount is pernicious." Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 436-A, FERC Stat. & Reg. ¶30,675, 31,679-80 (1985).

6. Koch Gateway Pipeline Co., 84 F.E.R.C. ¶61,143, 61,779-80 & n.57 (1998); Panhandle Eastern Pipe Line Co., 74 F.E.R.C. ¶61,109, 61,404 & n.117 (1996).

7. Final Rule, supra, FERC Stat. & Reg. ¶31,091 at 31,271.

8. Id. & n.82; see also at 31,274-75. However, nothing in the court decision, comments, or treatise cited in the Final Rule considers that not one more dekatherm flows in the grid because of gas-on-gas discounts. To the contrary, the cited treatise says price discrimination is justified by "making fuller use of existing capacity," which does not happen across the grid due to gas-on-gas discounting. 1 A. Kahn, The Economics of Regulation 133 (1970).

9. Mississippi Valley Gas Co. v. FERC, 68 F.3d 503 (D.C. Cir. 1995)(at 507: "[T]he agency has decided to allow selective discounting to meet gas-on-gas competition"); accord Williston Basin Interstate Pipeline Co., 85 F.E.R.C. ¶61,247, 62,028-30 (1998)(at 62,029: "[D]iscounts are also permitted to meet competition from alternate natural gas pipelines").

10. Southern Natural Gas Co., 67 F.E.R.C. ¶61,155, 61,457 (1994)(two-thirds of discounts assertedly for gas-on-gas competition).

11. Associated Gas Distributors v. FERC, 824 F.2d 981, 1010-11 (1987), cert. denied, 485 U.S. 1006 (1988).

12. Id. at 1011-12.

13. Mississippi Valley, supra, 68 F.3d at 507.

14. United Distribution Cos. v. FERC, 88 F.3d 1105, 1142 (D.C. Cir. 1996), cert. denied, 520 U.S. 1224 (1997).

15. Interstate Natural Gas Pipeline Rate Design, et al., 47 F.E.R.C. ¶61,295, 62,056-57, order on reh'g, 48 F.E.R.C. ¶61,122 (at 61,449: FERC has a "policy of avoiding cross-subsidizations").

16. Pipeline Service Obligations and Revisions