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Profit Without Costs

An analysis of participant funding in natural gas and electricity markets.
Fortnightly Magazine - August 2004

from which they receive little visible increase in service. 5

There are two basic and potentially divergent methods of allocating new asset costs to be reflected in a utility's rate structure. The first recognizes that a gas pipeline of this sort is not just a collection of discrete pieces and parts, but an integrated system serving all of its customers. Applying this approach the cost of the various assets of the system are collected or "rolled in" to arrive at the cost of the entire system which is then pro-rated among all of the customers. ... 3

... At some point the facility becomes so identified with its function as part of the local distributor's gas plant that it may be unfair to charge its costs to all of the customers of the utility. This is particularly so where the extent and cost of such segregated facilities vary greatly among the customers. In such a situation the costs of these facilities are commonly charged as an "incremental" cost added in to the particular customer's rate base. 4

The basic test has always involved a weighing of costs and benefits. However, in the past, the Commission took a broader view regarding the value of system expansion to existing customers than we have in recent cases. This is, in part, because the increased costs to existing customers resulting from rolled-in pricing were generally relatively small compared to the obvious systemwide benefits in the form of increased capacity, reliability, and flexibility. However, more recently, the Commission's focus on the value of the benefits of expansion to systemwide customers has intensified as costs have risen considerably in relation to the benefits. 16

A number of commenters submit that the existing presumption in favor of rolled-in rates for pipeline expansions sends the wrong price signals with regard to pricing new construction. They urge the Commission to adopt policies such as incremental pricing for pipeline projects or placing pipelines at risk for recovery of the costs of construction. They submit that such a policy would reveal the true value of existing capacity and properly allocate costs and risks. 29

An effective certificate policy should further the goals and objectives of the Commission's natural gas regulatory policies. In particular, it should be designed to foster competitive markets, protect captive consumers, and avoid unnecessary environmental and community impacts while serving increasing demands for natural gas. It should also provide appropriate incentives for the optimal level of construction and efficient customer choices." 30

As the industry becomes more competitive the Commission needs to adapt its policies to ensure that they provide the correct regulatory incentives to achieve the Commission's goals and objectives. All of the Commission's natural gas policy goals and objectives are affected by its pricing policy, but directly affected are the goals of fostering competitive markets, protecting captive customers, and providing incentives for the optimal level of construction and efficient customer choice. The current pricing policy focuses primarily on the interests of the expanding pipelines and its existing and new shippers, giving little weight to the interests of competing