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FERC's GulfTerra Orders: Chnages in the Pipeline

A new FERC decision veers away from congressional intent not to burden intrastate pipelines with interstate policies.
Fortnightly Magazine - May 2004

within the state's borders and delivering gas produced in-state to end users or local distribution companies for in-state consumption. 8 GulfTerra already had NGPA rates for interruptible service when, in late 1999, over intervenor opposition, 9 it proposed two-part NGPA rates for firm transportation service.

With its June 11, 2002, and Feb. 25, 2004, orders on reasonably comparable interstate ratemaking for GulfTerra's NGPA firm rates, FERC in part applies its NGA rate policies to NGPA intrastate pipeline interstate ratemaking and in part does not. Over one commissioner's dissent, and in keeping with past practice, FERC also directs GulfTerra to file, within three years of the order on rehearing, to justify its existing rates or to establish new maximum rates, so that FERC can obtain information to determine whether GulfTerra's intrastate pipeline rates remain fair and equitable for interstate transportation purposes. 10

Interstate Regulation Unexercised

FERC accepts GulfTerra's two-part rate for firm service as a typical rate design used for decades in the gas industry. Also, FERC does not require GulfTerra to follow policies made to protect firm shippers when interstate pipelines were required to provide open access to their transportation capacity, including interstate pipeline capacity release, any electronic bulletin board (EBB), flexible receipt and delivery points, and seasonal maximum daily quantities.

Explaining that it never has required intrastate pipelines to introduce to their systems all the features of interstate pipeline open access service, FERC points to its Order Nos. 636, et al., specific exemption of intrastates 11 from the open access policy requirements (including capacity release, EBBs, and point flexibility) for interstates. FERC's apparent GulfTerra purpose, consistent with the NGPA, is that if FERC refrains from unduly burdening intrastate pipelines, the intrastate pipelines will provide interstate transportation services on the grid, thereby developing that transportation network as Congress intended. In that way also, FERC believes duplication of facilities between interstate and intrastate pipelines will be lessened or avoided.

Finding no harm to any party or to its goal to foster a national pipeline grid, FERC also approves GulfTerra's assignment of only 50 percent of its fixed costs to the reservation charge. That allocation plainly deviates from the straight fixed-variable rate design FERC requires for interstate pipelines by which all, not just half, of fixed costs are assigned to the reservation charge. From the perspective of NGPA intrastate pipeline rate planning to avoid FERC regulation if possible, those are the non-intrusive parts of the GulfTerra orders.

The Good, the Bad, and the Ugly

FERC decides the following precedent-making cost-of-service matters, among others, in the GulfTerra orders:

  • Circumstances not unusual enough to support proposed equity return. FERC reduces GulfTerra's requested 14 percent equity return to 13.01 percent, which FERC finds to be the median among four interstate pipelines GulfTerra had included in a larger proxy group. Rejecting GulfTerra's proposed, larger proxy group of 15 regulated gas and electric energy companies, FERC instead uses a proxy group consisting solely of four companies operating gas pipelines that are publicly traded, engaged largely in gas transmission, and that own FERC-regulated interstate gas pipelines. Unconvinced GulfTerra has above-average