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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
  • assure that GulfTerra's transportation service is of equal quality for all gas supplies regardless of the gas supplier. 18
    However, in order not to burden GulfTerra or cause it to opt out of interstate transportation markets, FERC requires that GulfTerra refunctionalize its plant only before its next NGPA Section 311 rate filing, and not that it do so in this case. FERC continued to find that requirement not unduly burdensome on rehearing. 19 GulfTerra now is to use existing data to develop gathering rates based on a gathering cost of service, with a gathering rate base including allocated amounts for general plant, working capital, and accumulated deferred income tax. That FERC-initiated, separate gathering rate change has only prospective effect. Past refund period rates are to be calculated on GulfTerra's as-filed, bundled basis.
  • Mileage-based rates required. FERC rejects GulfTerra's postage stamp rate proposal, and instead applies interstate pipeline rate-design cost-causation principles (i.e., that rates reflect costs actually caused by customers paying the rates) and policy that rates reasonably should reflect any material variation in cost of providing service due to distance of haul. To design NGPA rates, FERC requires GulfTerra to turn to Texas regulation and use its previously effective, RRC-established methodology, which was based on mileage traversed (incorporating distance sensitivity) as well as line diameter. FERC concludes that GulfTerra's 6,200-mile extent suggests it is a long-line system where cost of service varies with distance. FERC also says, unless GulfTerra demonstrates otherwise, that the previous RRC intrastate service rate design creates a presumption for NGPA intrastate pipeline provision of interstate service that distance-sensitive rates are appropriate. On rehearing, FERC also confirmed, notwithstanding such cost updating and rate redesign, that fair and equitable ratemaking requires that GulfTerra's rates be capped at its originally filed, 1999 postage-stamp levels. 20
  • Affiliate discounts unjustified. FERC allows GulfTerra no downward rate-design throughput adjustment for affiliate discounts (while allowing such adjustment for non-affiliates), thereby decreasing the maximum rate and reducing GulfTerra's opportunity to collect its full cost of service. Applying longstanding interstate pipeline discounting policy rulings, 21 FERC finds GulfTerra did not justify the affiliate discounts it awarded on substantial affiliate throughput of about 55 percent of 1998 volumes.

Observing that all pipelines have problematic incentives to offer discounts to their affiliates not required by competition, FERC points to the much heavier pipeline rate applicant burden to justify discount levels for affiliates. GulfTerra needed to show why affiliate discounts were necessary, such as by identifying alternatives available to the affiliate or by showing that GulfTerra routinely was unable to collect its maximum rate on a particular segment (so that the affiliate only received the same discount as non-affiliates). FERC faults GulfTerra's failure to compare details of affiliate receipt and delivery points and non-affiliate receipt and delivery points (to support GulfTerra's statement that affiliates pay a higher average rate than non-affiliates). GulfTerra also failed, FERC asserts, to examine each contract's rate and relationship to basis differentials (to support GulfTerra's statement that basis differentials generally determine rates).

Balancing Goals

With the NGPA, Congress sought to encourage intrastate pipelines to provide interstate