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Gas Transport Rates: A Puzzling Prospect

Why does FERC want to limit pipeline discounts?

Fortnightly Magazine - April 2005

of the commission's very own Office of Administrative Litigation (OAL). In no uncertain terms, Froelich's office argues that the time may have come and gone for FERC's discounting policy:

"Given the rapidly escalating price of gas, there are sound economic reasons to question whether pipeline discounting should be encouraged at all."

Echoing arguments from some municipal utilities, who might be "captive" to a single pipeline, the OAL suggests that large local distribution companies (LDCs) attached to more than one pipeline have been able to play off one pipeline against another in search of deep discounts. By allowing an adjustment in the design of the pipeline's rates for such discounts, the commission, says Froelich's office, is in effect "causing the captive maximum rate customers to subsidize the discount."

The analysis from FERC staff recalls the spirit of the 1970s, when policy-makers took it as their sworn duty to discourage consumption and promote conservation of resources as a response to escalating prices:

"In an era when conservation is key … the threshold question that needs to be addressed is whether the commission, through its discounting policies, should still be encouraging marginal uses of gas when it is the demand for gas that has increased and caused prices to skyrocket." (See, Comments of the Office of Administrative Litigation, Notice of Inquiry on Policy for Selective Discounting by Natural Gas Pipelines, FERC Docket No. RM05-2, filed Feb. 9, 2005. )

Froelich's office argued that pipeline rate discounts shield customers from true price signals. The OAL even suggested that the commission should require any pipeline offering gas-on-gas discounts to submit a new rate case at least every five years. Such pronouncements have left FERC Commissioner Nora Mead Brownell just a little bit flummoxed. As early as last November, she had declared that the entire inquiry seemed to her as a classic "search for a problem."

Yet this debate did not arise in a vacuum. Grumblings were heard as early as 1997, when the Illinois Municipal Gas Agency (IMGA) had asked FERC to open a rulemaking proceeding to consider the effect of discounting on captive customers of interstate gas pipelines.

IMGA had filed on behalf of LDCs or other customers who took service from one pipeline and who lacked opportunity to choose to take service from a competing pipe. IMGA alleged that discount could harm these captive customers, since they could be left marooned on an under-subscribed and under-funded system-vulnerable to a "death spiral" if too many non-captives jumped ship to competing pipelines to take advantage of discounts. IMGA had asked FERC to develop a rule of general applicability that pipelines cannot have their cake and eat it too. That is, when pipelines offer a discount for the purpose of retaining a customer in the face of competition from a second pipeline (known as "gas-on-gas" competition), they should not be allowed to claim a rate-making adjustment in a subsequent rate case to hold themselves harmless. (Current policy presumes that gas-on-gas discounts are justified, as long as the beneficiary is not an affiliate of the discounting pipeline.)

IMGP took