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Gas Transport Rates: A Puzzling Prospect

Why does FERC want to limit pipeline discounts?

Fortnightly Magazine - April 2005
  • that it is only after the conclusion of a rate case-with its artificially adjusted throughput and reallocation of costs-that captive customers face risks from discounting.

According to the groups of municipal gas distribution utilities operating in the northern Midwest region, a prime example of the evils of gas-on-gas discounting can be seen in a case now pending at FERC in Docket No. RP05-181. The utility groups say that case shows that Northern Natural has offered discounts to CenterPoint Energy (Minnesota Gas) that approach 50 percent of Northern Natural's current maximum reservation rates. Moreover, the proposed rates would remain in effect for at least 12 years (through 2019), without any showing from Northern Natural, according to the municipal utility groups, that net throughput would be increased.

Yet, the Gulf South System, located in the Gulf Coast production area, says that it currently discounts over 90 percent of transportation service, and defends the practice as essential, owing to the plethora of competitors it faces.

As Gulf South explains, its system can boast direct connections to some 100 operational industrial plants and 19 power plants. But 41 of the 100 industrial plants can connect with at least one other pipeline, and 23 can connect to three or more competing pipes. Fifteen of the 19 gen plants can access at least one other pipeline, while nine can access three or more competitors. Fourteen of the 19 gen plants claim the capacity to use alternate fuels.

In such an environment, Gulf South has little choice but to offer discounts, as its maximum rate to serve an industrial customer in Louisiana runs about $0.14 per million Btu (MMBtu), while many competing intrastate pipes in Lousiana will typically charge about $0.05 to serve the same customer. And, as Gulf South notes, those intrastate rates will typically include reimbursement for fuel (costs incurred in pumping and compression).

A different but essentially similar case prevails in the northern Midwest, where the convergence of many systems also raises the level pipeline of competition. Consider, for example the system run by Natural Gas Pipeline Co. of America (NGPA), owned by Kinder/Morgan.

As NGPA notes, its delivery area is centered on Chicago, meaning that all of its larger LDC customers can take service from multiple pipelines or even other LDCs. For deliveries to NGPA's Chicago-area customers, competition comes from as many as 10 different large-diameter interstate pipelines: ANR, Northern Natural, Trunkline, Northern Border, Panhandle Eastern, Midwestern Gas Transmission, Alliance, Vector, Horizon, and Guardian. Thus, peak-day market demand in the Chicago area runs about 11 billion cubic feet per day (Bcf/d), says NGPA, while delivery capability from all sources can reach about 19 Bcf/d on an early season peak day.

According to NGPA, this surplus capacity virtually demands discounting against capacity release, and effectively kills any notion that a local customer could call itself "captive."

Thus, NGPA argues that truly captive customers represent only about 1 percent of its customer base, in terms of total contract requirements for firm transportation service. And if that wasn't enough NGPA says that it already favors such captive customers