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Gas Transport Rates: A Puzzling Prospect

Why does FERC want to limit pipeline discounts?

Fortnightly Magazine - April 2005

pains in its petition to distinguish this gas-on-gas discounting from discounting to compete against intrastate pipelines, or against alternate fuels. For example, a pipeline customer or second-tier retail end users might turn for their needs to an alternate fuel, such as no. 6 fuel oil for an industrial boiler. IMGA argued, however, that where gas-on-gas competition was concerned, discounting was simply a zero-sum game conferring no benefits on the consuming public, as gains in throughput on one pipe were matched by losses on another.

Nevertheless, as Brownell has pointed out, FERC rejected this very argument (no rate case adjustment for gas-on-gas discounts) over a decade ago, in the case of Southern Natural Gas, Docket No. RP92-134, May 5, 1994, 67 FERC ¶61,155. )

Why is that ruling not still applicable?

Ain't Broke, Don't Fix It

The prevailing industry sentiment appears to support FERC's current discounting policy, and by a wide margin. Pipelines, LDCs (some, not all) and at least one state public utility commission (PUC) have all joined in a chorus of, "ain't broke, don't fix it."

Assuming, however, that the NOI might still attract support from FERC, it might be worthwhile to pinpoint some of the elements that might define a new policy:

  • Corporate Affiliation. Any new rule would likely target discounts offered to pipeline affiliates before attempting to curtail discounting to independent customers, which now is presumed to be beneficial.
  • Contract Term. The shorter the term of service, the more likely that discounts have tended to be seen as appropriate.
  • Interfuel/Intrastate Competition. Some discredit gas-on-gas discounting as a pointless zero-sum game (IMGA, FERC's OAL, etc.), but even these naysayers tend to look more approvingly at discounts offered to meet competition from intrastate pipelines or alternate fuels.
  • Pipe Expansions. Discounting to attract shippers on brand-new pipes, or to retain shippers after costly expansions on existing pipes (compression, looping, etc.) attracts even more critics than standard gas-on-gas discounting. Expansion creates additional fixed costs, making it more difficult to argue that discounts help captive customers by preserving throughput. And discounting suggests that an expansion perhaps was not economically viable or necessary in the first place.
  • Capacity Release. The question seems less settled on whether discounting to meet competition from capacity release by shippers should be included in the gas-on-gas category.
  • Price Elasticity. Those who argue that the recent price spikes for the gas commodity should warrant a second look at FERC's discounting policy tend to focus on the behavior of shippers who receive discounts. They see danger in discounting to price-elastic shippers (that only exacerbates gas shortages and drives prices even higher). Yet price-elasticity also guarantees that discounts maintain or boost throughput, which, after all, is a key element of the case in favor of discounting.
  • Rate Case Interval. FERC's OAL notes that several interstate pipelines have not had their rates reviewed by FERC in "well over ten years." To correct that, OAL and some others suggest that FERC should force any discounting pipeline to "refresh" its rates through an NGA sec. 4 rate case filed every five years. Yet the irony remains