FERC Clarifies Treatment of Pipeline’s Discount-Type Adjustments for Negotiated Rates

By Joel L. Greene

In an order on rehearing issued March 15, 2012 in Texas Gas Transmission, LLC, 138 FERC ¶ 61,175, the Federal Energy Regulatory Commission (“FERC”) took the opportunity to reiterate, and in light of overly broad precedent, clarify the conditions a pipeline must satisfy in order to obtain a discount-type adjustment for negotiated rate transactions in a Natural Gas Act section 4 rate case. Recognizing that its policy on this issue has evolved over the fifteen years since the negotiated rate program was established in the Alternative Rate Policy Statement[1], the Commission reiterated its intent that “customers electing the recourse rates will be no worse off as a result of the use of negotiated rates.” But because the Commission’s statements in individual cases concerning how to accomplish that goal have varied, the following clarifications were provided in this order:

  • There is no per se prohibition of discount adjustments for negotiated rates;
  • Such an adjustment might be permitted if the pipeline has a tariff provision protecting recourse rate shippers from inappropriate cost shifting;
  • The pipeline will have the burden to show that its proposed discount adjustment takes into account any above-maximum rate revenues, and that it has included an appropriate corresponding reduction in its proposed discount adjustment;
  • If a pipeline has tariff language permitting it to seek a discount-type adjustment for negotiated rate transactions, parties may raise the issue whether costs should be allocated to the negotiated rate transactions based on the full revenues received in those transactions during the test period; and
  • Discount-type adjustments in fuel tracking mechanisms are not permitted, as pipelines are required to be at risk for discounts given between rate cases.

In response to the argument that by giving pipelines the choice of whether to implement a tariff provision permitting a discount adjustment for negotiated rates, the Commission is opening the door for abuse (since the pipeline will either add or delete the provision depending on whether it will work to its advantage in the next rate case), the Commission stated that it may consider allegations of such abuse in individual cases, such as where a pipeline with such a provision proposes to delete it.

Key FERC orders referenced:
  1. Columbia Gulf Transmission Co., 133 FERC ¶ 61,078 (2010)
  2. Wyoming Interstate Co., Ltd., 117 FERC ¶ 61,150 (2006) (WIC II)
  3. Southern Natural Gas Co., 94 FERC ¶ 61,063 (2001); Southern Natural Gas Co., 95 FERC ¶ 61,038, order on reh’g, 95 FERC ¶ 61,364 (2001)
  4. Enbridge Pipelines (KPC), 103 FERC ¶ 61,305 (2003)
  5. El Paso Natural Gas Co., 114 FERC ¶ 61,305 (2006)
  6. Nornew Energy Supply, Inc., 116 FERC ¶ 61,192 (2006)
  7. Tennessee Gas Pipeline Co., 135 FERC ¶ 61,208 (2011)

[1] Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61,076, order granting clarification, 74 FERC ¶ 61,194, reh’g denied, 75 FERC ¶ 61,024 (1996) (“Alternative Rate Policy Statement”).

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