[Federal Register Volume 70, Number 113 (Tuesday, June 14, 2005)]
[Proposed Rules]
[Pages 34421-34430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11660]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM05-2-000]


Order Reaffirming Discount Policy and Terminating Rulemaking 
Proceeding

June 7, 2005.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Order Reaffirming Discount Policy and Terminating Rulemaking 
Proceeding.

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SUMMARY: On November 22, 2004, the Federal Energy Regulatory Commission 
(Commission) issued a Notice of Inquiry (NOI) seeking comments on its 
policy regarding selective discounting by natural gas pipeline 
companies. The Commission has determined that it will take no further 
action in this proceeding and, therefore, it terminated Docket No. 
RM05-2-000.

DATES: The termination of this docket is made on June 14, 2005.

FOR FURTHER INFORMATION CONTACT: Ingrid Olson, Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426; (202) 502-8406. [email protected]

SUPPLEMENTARY INFORMATION:
    Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.

Policy for Selective Discounting by Natural Gas Pipelines

Issued May 31, 2005
    1. On November 22, 2004, the Commission issued a Notice of Inquiry 
(NOI) seeking comments on its policy regarding selective discounting by 
natural gas pipeline companies.\1\ The Commission asked parties to 
submit comments and respond to specific inquiries regarding whether the 
Commission's practice of permitting pipelines to adjust their 
ratemaking throughput downward in rate cases to reflect discounts given 
by pipelines for competitive reasons is appropriate when the discount 
is given to meet competition from another natural gas pipeline. The 
Commission also sought comments on the impact of its policy on captive 
customers and on what changes to the policy could be considered to 
minimize any impact on captive customers. Comments and responses to the 
inquiries were filed by 40 parties.
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    \1\ 109 FERC ] 61,202 (2004).
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    2. As discussed below, after reviewing the comments, the Commission 
finds that its current policy on selective discounting is an integral 
and essential part of the Commission's policies furthering the goal of 
developing a competitive national natural gas transportation market. 
The Commission further finds that the selective discounting policy 
provides for safeguards to protect captive customers. If there are 
circumstances on a particular pipeline that may warrant special 
consideration or additional protections for captive customers, those 
issues can be considered in individual cases. This order is in the 
public interest because it promotes a competitive natural gas market 
and also protects the interests of captive customers.

Background

    3. In the NOI, the Commission detailed the background and 
development of the selective discount policy. As explained in the NOI, 
in providing for open access transportation in Order No. 436, the 
Commission adopted regulations permitting pipelines to engage in 
selective discounting based on the varying demand elasticities of the 
pipeline's customers.\2\ Under these regulations, the pipeline is 
permitted to discount, on a nondiscriminatory basis, in order to meet 
competition. For example, if a fuel-switchable shipper were able to 
obtain an alternate fuel at a cost less than the cost of gas including 
the transportation rate, the Commission's policy permits the pipeline 
to discount its rate to compete with the alternate fuel, and thus 
obtain additional throughput that otherwise would be lost to the 
pipeline. In Order No. 436, the Commission explained that these 
selective discounts would benefit all customers, including customers 
that did not receive the discounts, because the discounts would allow 
the pipeline to maximize throughput and thus spread its fixed costs 
across more units of service. The Commission further found that 
selective discounting would protect captive customers from rate 
increases that would otherwise ultimately occur if pipelines lost 
volumes through the inability to respond to competition.
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    \2\ See Regulations of Natural Gas Pipelines After Partial 
Wellhead Decontrol, FERC Stats. & Regs., Regulations Preambles 
(1982-1985) ] 30,665 at 31,543-45 (1985).
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    4. Further, in the 1989 Rate Design Policy Statement,\3\ the 
Commission held that if a pipeline grants a discount in order to meet 
competition, the pipeline is not required in its next rate case to 
design its rates based on the assumption that the discounted volumes 
would flow at the maximum rate, but may reduce the discounted volumes 
so that the pipeline will be able to recover its cost of service. The 
Commission explained that if a pipeline must assume that the previously 
discounted service will be priced at the maximum rate when it files a 
new rate case, there may be a disincentive to pipelines discounting 
their services in the future to capture marginal firm and interruptible 
business. In order to obtain a discount adjustment in a rate case, the 
pipeline has the ultimate burden of showing that its discounts were 
required to meet competition. The policy of permitting discount 
adjustments is consistent with the discussion of the court in 
Associated Gas Distributors v. FERC (AGD I) \4\ suggesting that 
discount adjustments should be permitted.
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    \3\ Interstate Natural Gas Pipeline Rate Design, 47 FERC ] 
61,295, reh'g granted, 48 FERC ] 61,122 (1989).
    \4\ 824 F.2d 981, 1012 (D.C. Cir. 1987). As explained in the 
NOI, the court addressed an argument presented by some pipelines 
that the Commission's policy permitting pipelines to offer discounts 
to some customers, might lead to the pipelines under-recovering 
their costs. The court set forth a numerical example showing that 
the pipeline could under-recover its costs, if, in the next rate 
case after a pipeline obtained throughput by giving discounts, the 
Commission nevertheless designed the pipeline's rates based on the 
full amount of the discounted throughput, without any adjustment. 
However, the court found no reason to fear that the Commission would 
employ this ``dubious procedure,'' and accordingly rejected the 
pipelines' contention.
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    5. In Order No. 636, the Commission began to move away from the 
monopolistic selective discounting model to a competitive model,

[[Page 34422]]

particularly for the secondary market. The institution of capacity 
release created competition between shippers and the pipeline with 
respect to unused capacity. Thus, competition from capacity release 
requires pipelines to discount their interruptible and short-term firm 
capacity.
    6. Since AGD I and the Rate Design Policy Statement, the issue of 
``gas-on-gas'' competition, i.e., where the competition for the 
business is between pipelines as opposed to competition between gas and 
other fuels, has been raised in several Commission proceedings.\5\ In 
these proceedings, certain parties have questioned the Commission's 
rationale for permitting selective discounting, i.e., that it benefits 
captive customers by allowing fixed costs to be spread over more units 
of service. These parties have contended that, while this may be true 
where a discount is given to obtain a customer who would otherwise use 
an alternative fuel and not ship gas at all, it is not true where 
discounts are given to meet competition from other gas pipelines. In 
the latter situation, these parties have argued, gas-on-gas competition 
permits a customer who must use gas, but has access to more than one 
pipeline, to obtain a discount. But, if the two pipelines were 
prohibited from giving discounts when competing with one another, the 
customer would have to pay the maximum rate to one of the pipelines in 
order to obtain the gas it needs. This would reduce any discount 
adjustment and thus lower the rates paid by the captive customers.
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    \5\ The Illinois Municipal Gas Agency (IMGA) raised this issue 
in a petition for rulemaking in Docket No. RM97-7-000. In the NOI, 
the Commission stated that it would consider all comments on this 
issue in Docket No. RM05-2-000 and terminated the proceeding in 
Docket No. RM97-7-000. The Commission explained that the issues 
included in Docket No. RM05-2-000 include all the issues raised in 
the Docket No. RM97-7-000 proceeding. IMGA did not seek rehearing of 
the Commission's decision to terminate the Docket No. RM97-7-000 
proceeding and did not in its comments object to the procedural 
forum offered to it in Docket No. RM05-2-000.
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    7. In Southern Natural Gas Co.,\6\ the Commission rejected the 
argument made by one of Southern's customers that no discount 
adjustment should be permitted with respect to gas-on-gas competition. 
The Commission stated, ``in light of the dynamic nature of the natural 
gas market, the Commission believes any effort to prohibit interstate 
gas pipelines from discounting to meet gas-on-gas competition would 
inevitably result in a loss of throughput to the detriment of all their 
customers.'' \7\ The Commission explained that the pipeline faced 
competition from intrastate pipelines not subject to the Commission's 
jurisdiction, so that the Commission could not prohibit gas-on-gas 
competition altogether. The Commission also stated that discounts given 
to meet gas-on-gas competition are not readily distinguishable from 
discounts given to meet competition from alternative fuels. \8\
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    \6\ 67 FERC ] 61,155 (1994).
    \7\ Id. at 61,458.
    \8\ For a more detailed discussion of the background of the 
Commission's selective discount policy, see the NOI at P 2-10.
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    8. The NOI sought comments from the parties on the effect of the 
current policy on captive customers, whether the Commission should 
eliminate the discount adjustment for discounts to meet gas-on-gas 
competition, and whether the Commission should consider alternative 
policy choices to minimize any adverse effects on captive customers.

The Comments in Response to the NOI

    9. The Commission received comments from 40 parties in response to 
the NOI. Comments in support of the Commission's current discount 
policies were filed by BP America Production Company and BP America 
Energy Company (BP America), Cinergy Services, Inc. (Cinergy), 
Discovery Gas Transmission (Discovery Gas), Dominion Resources 
Services, Inc. (Dominion), El Paso Corporation's Pipeline Group (El 
Paso), Enbridge Inc. and Enbridge Energy Partners (Enbridge), Florida 
Power & Light (Florida Power), Gas Transmission Northwest Corporation 
(Northwest), Gulf South Pipeline Co., L.P. (Gulf South), Iowa Utilities 
Board, Independent Petroleum Association of America (IPAA), Interstate 
Natural Gas Association of America (INGAA), Louisville Gas & Electric 
Company (Louisville Gas), Memphis Light, Gas and Water Division 
(Memphis Light), Michigan Consolidated Gas Company (Mich Con), 
MidAmerican Energy Co. (MidAmerican), Natural Gas Pipeline Co. of 
America (Natural), Natural Gas Supply Association (NGSA), Northern 
Natural Gas Co. (Northern), Texas Gas Transmission, LLC (Texas Gas), 
Nicor Gas, Process Gas Consumers Group and American Forest and Paper 
Products (Process Gas), Reliant Energy Services, Inc.(Reliant), Sempra 
Global Enterprises (Sempra), Southern California Gas Company and San 
Diego Gas & Electric Co. (SoCalGas and San Diego), Transcontinental Gas 
Pipeline Corp. (Transco), Williston Basin Interstate Pipeline Co. 
(Williston).
    10. Generally, the parties supporting the current policy state that 
the policy has worked well, is central to the Commission's 
procompetitive policies, and sends appropriate price signals to the 
market. They argue that a discount adjustment for gas-on-gas 
competition is essential to competition in the secondary market. 
Further, they assert that there are safeguards that adequately protect 
captive customers.
    11. In addition, several parties generally support the Commission's 
policy, but seek modifications of certain aspects of the policy. These 
parties are Calpine Corporation (Calpine), CenterPoint Energy Resources 
Corp. (CenterPoint), Memphis Light, Gas, and Water (Memphis Light), 
Missouri Public Service Commission (MoPSC), National Fuel Gas 
Distribution Corporation and Niagara Mohawk Power Corporation (National 
Fuel), and Northwest Industrial Gas Users (Northwest Industrials). The 
parties seek modification of the current policy with regard to the 
burden of proof on pipelines seeking a discount adjustment, discounts 
that result from competition with capacity release, discounts on 
expansion capacity, the need for pipelines to make periodic section 4 
filings, and the adequacy of the information posted concerning the 
discounts.
    12. On the other hand, comments opposing the Commission's policy 
were filed by the American Public Gas Association (APGA), Arizona 
Electric Power Cooperative, Inc. (Arizona Electric), Illinois Municipal 
Gas Agency (IMGA),\9\ Northern Municipal Distributor Group and the 
Midwest Region Gas Task Force Association (Northern Municipals), 
National Association of State Utility Consumer Advocates (NASUCA), and 
the Commission's Office of Administrative Litigation (OAL).
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    \9\ IMGA also filed a responding affidavit. The NOI did not 
provide for reply comments and no other party filed a reply. In 
these circumstances, the Commission will not consider IMGA's 
response.
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    13. Generally, the parties opposing the policy state that the 
Commission's rationale in support of the discount policy is flawed 
because it does not recognize that one pipeline's gain through 
discounting is another pipeline's loss and the policy does not provide 
net benefits to captive customers. Further, they assert that even if a 
discount produces an increase in throughput, that discount also 
contributes to increased wellhead prices. They assert that the current 
policy cannot be sustained unless the Commission finds substantial 
evidence that captive shippers on the competing pipelines obtain a net 
benefit from the

[[Page 34423]]

throughput adjustment. The issues raised by the parties are discussed 
below.

Discussion

    14. After considering the comments filed in response to the NOI, 
the Commission has determined not to modify its current policies 
concerning selective discounting. Therefore, the Commission will 
continue to allow a pipeline to seek a reduction in the volumes used to 
design its maximum rates, if it obtained those volumes by offering 
discounts to meet competition, regardless of the source of that 
competition. As the Commission stated in Order No. 636:

    The Commission's responsibility under the NGA is to protect the 
consumers of natural gas from the exercise of monopoly power by the 
pipeline in order to ensure consumers ``access to an adequate supply 
of gas at a reasonable price.'' [Tejas Power Corp. v. FERC, 908 F.2d 
998, 1003 (D.C. Cir. 1990).] This mission must be undertaken by 
balancing the interests of the investors in the pipeline, to be 
compensated for the risks they have assumed, and the interests of 
consumers, and in light of current economic, regulatory, and market 
realities.\10\
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    \10\ Order No. 636 at 30,392.

    In light of existing conditions in the natural gas market, the 
Commission concludes that its existing policies concerning selective 
discounting are more consistent with the goal of ensuring adequate 
supplies at a reasonable price, than any of the alternatives proposed 
in the comments in response to the NOI.

A. Discount Adjustments Associated With Gas-on-Gas Competition

    15. APGA, IMGA, NASUCA, Northern Municipals, Arizona Electric 
Cooperative, and OAL assert that the Commission should revise its 
discount policy so as to eliminate any adjustment to rate design 
volumes for discounts given to meet competition from other transporters 
of natural gas (which we will refer to as gas-on-gas competition). They 
point out that the Commission's rationale for permitting selective 
discounts is that discounts benefit all customers, including captive 
customers that did not receive the discounts, because the discounts 
allow the pipeline to maximize throughput and thus spread its fixed 
costs across more units of service. A discount adjustment is permitted 
in the pipeline's next rate case in order to avoid discouraging such 
beneficial discounts. These parties contend that, while this rationale 
may justify permitting an adjustment to rate design volumes for 
discounts given to obtain a customer who would otherwise use an 
alternative fuel and not ship gas at all, it is not true where 
discounts are given to meet competition from other gas transporters.
    16. In the latter situation, these parties argue, gas-on-gas 
competition permits a customer who must use gas, but has access to more 
than one pipeline, to obtain a discount. These parties assert that such 
a discount does not produce an overall increase in pipeline throughput; 
it simply shifts throughput from one pipeline to another. As a result, 
they argue, discounts given to meet gas-on-gas competition provide no 
net benefit to captive customers as a class. In fact, captive customers 
would be better off if competing pipelines were discouraged from 
offering discounts in competition with one another, since then the 
throughput at issue would flow on one of the pipelines at the maximum 
rate rather than at a discounted rate. They conclude that such 
discounts should not be encouraged through the availability of a 
discount adjustment in the pipeline's next rate case. Rather, to the 
extent a pipeline may wish to give a discount in such circumstances, 
the pipeline and its shareholders should be required to absorb the cost 
of the discount.
    17. The remaining commenters generally support continuing to allow 
an adjustment to rate design volumes for discounts given to meet gas-
on-gas competition, although some commenters suggest other changes in 
Commission policy concerning discounts.
    18. After reviewing all the comments, the Commission has concluded 
that, in today's dynamic natural gas market, any effort to discourage 
pipelines from offering discounts to meet gas-on-gas competition would 
do more harm than good. Accordingly, the Commission will not modify its 
policy to prohibit pipelines from seeking adjustments to their rate 
design volumes to account for discounts given to meet gas-on-gas 
competition. However, in individual rate cases, parties remain free to 
contend that, in the circumstances of the particular case, a full 
discount adjustment may be inequitable.\11\
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    \11\ See, e.g., Natural Gas Pipeline Company of America, 73 FERC 
] 61,050 at 61,128-29 (1995); El Paso Natural Gas Co., 72 FERC ] 
61,083 at 61,441 (1995).
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    19. Before explaining our reasons for reaching this conclusion, we 
first observe that pipelines face at least three separate categories of 
so-called gas-on-gas competition. One category is competition from 
other interstate pipelines subject to the Commission's NGA 
jurisdiction. The second category is competition from capacity releases 
by the pipeline's own firm customers. The third category is competition 
from intrastate pipelines not subject to the Commission's jurisdiction. 
The commenters opposing discount adjustments for gas-on-gas competition 
focus on the first two types of gas-on-gas competition. They generally 
recognize that the Commission has no ability to discourage intrastate 
pipelines outside the Commission's jurisdiction from offering discounts 
in competition with interstate pipelines and therefore interstate 
pipeline discounts to avoid loss of throughput to non-jurisdictional 
intrastate pipelines do benefit captive customers of the interstate 
pipelines. Therefore, our discussion below addresses only the first two 
types of gas-on-gas competition. Because the contentions of the parties 
and our reasons for allowing discount adjustments for discounts to meet 
competition from other interstate pipelines and discounts to meet 
competition from capacity release are different, we discuss the two 
separately below.
1. Competition From Other Interstate Pipelines
    20. In the NOI, the Commission asked several questions concerning 
the extent to which interstate pipelines give discounts to meet 
competition from other interstate pipelines, including asking IMGA to 
explain the basis for its previous statements that over 75 percent of 
discounts are for this purpose. None of the commenters have provided 
responses that would enable the Commission to estimate with any 
precision what percentage of pipeline discounts are currently being 
given to meet competition from other interstate pipelines. For example, 
IMGA has clarified in its comments that its over 75 percent estimate is 
based solely on the testimony of its witness in Southern Natural Gas 
Company's section 4 rate case in Docket No. RP92-134-000. That 
testimony only analyzed the discounts given by Southern during the 
period May 1992 through April 1993.\12\ Clearly, the discounting 
practices of one interstate pipeline over ten years ago are not 
probative as to the prevalence of gas-on-gas discounting by all 
interstate pipelines today.
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    \12\ Affidavit of Baker Clay at 16, attached to IMGA's comments.
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    21. Nevertheless, all commenters, whether they oppose or support 
allowing rate design volume adjustments for discounts to meet gas-on-
gas competition from other interstate

[[Page 34424]]

pipelines, appear to agree that such discounts are, in INGAA's words, 
``widespread.'' \13\ Thus, the Commission recognizes that such 
discounts make up a significant portion of pipeline discounts. It also 
appears that such discounts are more pervasive in some regions than 
others. For example, INGAA states that such discounts are pervasive in 
the production areas of East Texas, South Louisiana, and South Texas, 
as well as in the Midwest and the Western regions.
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    \13\ INGAA comments at 17. INGAA states gas-on-gas discounting 
is widespread, ``particularly when one takes into consideration'' 
competition from capacity release and non-jurisdictional pipelines. 
However, the Commission does not understand INGAA to dispute that a 
significant portion of pipeline discounts are given to meet 
competition from other interstate pipelines.
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    22. APGA, IMGA, NASUCA, Northern Municipals, Arizona Electric 
Cooperative, and OAL all contend that pipeline discounts given to meet 
competition from other interstate pipelines do not increase overall 
interstate pipeline throughput and therefore do not benefit captive 
customers. These commenters assert that the customers who obtain such 
discounts are larger LDCs, industrials, or electric generators who may 
have access to more than one interstate pipeline but who are not fuel 
switchable. These commenters thus assert that such customers would take 
the same amount of gas even if required to pay the maximum rate of 
whichever pipeline they choose to use. Based on that premise, these 
commenters assert that discounts resulting from competition between 
interstate pipelines serve only to reduce the revenue contribution of 
the customers receiving the discounts, thereby forcing captive 
customers without access to more than one pipeline to bear additional 
costs. In short, these commenters make the same contention the DC 
Circuit described in AGD I,\14\ when it stated, ``It has long been 
contended * * * that rate differentials based exclusively on 
competition between transporters with similar cost functions may end up 
forcing captive customers to bear disproportionate shares of fixed 
costs without any offsetting gain in efficiency.''
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    \14\ 824 F.2d at 1011-2.
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    23. However, the court followed the description of this contention 
with the statement, ``The contention is not self evidently true: if the 
demand of buyers with access to competing carriers is at all price 
elastic, the price reductions they enjoy will raise their demand close 
to competitive levels.'' \15\ Based on the comments filed by the 
supporters of the Commission's current policy, the Commission finds 
that the demand of shippers with access to more then one interstate 
pipeline is sufficiently price elastic that discouraging discounts by 
competing interstate pipelines would do more harm than good.
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    \15\ Id. at 1012.
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    24. It does not follow from the fact that a potential pipeline 
customer currently lacks the ability to use alternative fuels that its 
demand for gas is totally inelastic. Supporters of the current policy 
offer many examples of why this is so. Industrial and other business 
customers of pipelines, who account for over half of U.S. end-use gas 
consumption,\16\ typically face considerable competition in their own 
markets and must keep their costs down in order to prosper. Lower 
energy costs achieved through obtaining discounted pipeline capacity 
can help them increase operations at their plants or at least minimize 
the possibility that such customers will outsource their production to 
other areas where their product can be produced at lower cost or simply 
close their plants due to an inability to compete.\17\ For example 
Process Gas Consumers \18\ stated, ``A plant may be able to increase 
output based on access to a competitive natural gas source on a 
competing pipeline but only if a transportation discount is given. In 
that case, a discount based on gas-on-gas competition will actually 
increase throughput instead of simply shifting throughput from one 
pipeline to another.'' Similarly, as BP America \19\ states, 
``Requiring generators to pay maximum rates might result in marginal 
generation costs exceeding the market price of power, forcing the 
generator to shut down.''
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    \16\ As cited by BPAmerica at 12 Fn. 8, the Energy Information 
Administration (EIA) reports that non-human needs consumers account 
for about 60 percent of end-use consumption.
    \17\ Williston at 21-22; INGAA at 11 and the accompanying 
Henning Affidavit at 15; Natural at 19.
    \18\ Id. at 4.
    \19\ Id. at 12.
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    25. Discounts may also reduce the incentive for existing non-fuel 
switchable customers to install the necessary equipment to become fuel 
switchable.\20\ In addition, potential new customers, such as companies 
considering the construction of gas-fired electric generators, may be 
more likely to build such generators if they obtain discounted capacity 
on the pipeline.\21\ In all these situations a discount may cause the 
customer to contract for a greater amount of capacity on whichever 
pipeline they choose than they would have if the pipeline had not 
offered them a discount.
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    \20\ Nicor at 5; INGAA, the accompanying Henning Affidavit at 
18, Natural, Economic Analysis at 15.
    \21\ Reliant Energy Services, Inc. at 6; Gulf South at 28, 
INGAA, the accompanying Henning Affidavit at 18; Natural, Economic 
Analysis at 15.
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    26. Commenters opposing discount adjustments for gas-on-gas 
competition also complain that larger LDCs may use their access to more 
than one pipeline to obtain discounts for capacity that, absent the 
willingness of the pipelines to offer discounts in competition with one 
another, the LDC would contract for at the maximum rate. LDCs in the 
business of distributing gas obviously do not have the option of 
switching to an alternative fuel. However, that does not mean that they 
would necessarily contract for the same amount of interstate pipeline 
capacity regardless of the price of that capacity. An LDC's need for 
interstate pipeline capacity depends upon the demand of the LDC's 
customers for gas, and that demand is elastic. LDCs typically have 
customers who are fuel switchable. They also have non-fuel switchable 
industrial or business customers whose gas usage may vary depending 
upon cost for the same reasons as the similar customers directly served 
by the pipelines discussed above. Moreover, LDCs may have the option of 
building more facilities of their own as a substitute for some of their 
interstate capacity.\22\ Thus, a discount may cause such an LDC to 
contract for more firm capacity than it would have, if it had been 
unable to obtain discounted capacity on any pipeline.
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    \22\ Nicor at 8. (``In a number of instances, Nicor Gas had 
found it more economical to use discounted capacity rather than to 
construct additional facilities.'').
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    27. Pipeline discounts may also enable natural gas producers to 
keep marginal wells in operation for a longer period and affect their 
decisions on whether to explore and drill for gas in certain areas with 
high production costs. For example, the Natural Gas Supply Association 
\23\ stated, ``If forced to pay maximum tariff rates to move gas out of 
certain production areas, particularly offshore, or for marginal wells, 
in some circumstances this could impact development or even lead to 
premature abandonment of existing gas wells.'' Also, many producers 
sell gas under net-back arrangements, under which the price they 
receive for sale of the gas commodity is the market price for delivered 
gas in the consuming area minus the cost of transportation.\24\ Thus, a 
higher cost of transportation translates into a lower price for the gas

[[Page 34425]]

commodity, which may render some production activities uneconomic.\25\ 
Therefore, once again a discount in this situation could lead to 
increased throughput.
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    \23\ NGSA at 8. See also INGAA at 111-12, Henning Affidavit at 
18, 22.
    \24\ IPAA at 4.
    \25\ Williston at 26 (``Pipeline revenues industry wide could 
fall significantly as some producers, particularly those with 
already low operating margins, shut their wells rather than 
transport gas to market at maximum rate.''); INGAA, Henning 
Affidavit at 22.
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    28. Finally, on many pipeline systems, the bulk of the pipelines' 
discounts are given to obtain interruptible shippers. All interruptible 
shippers may reasonably be considered as demand elastic, regardless of 
whether they are fuel switchable. Their very choice to contract for 
interruptible service shows that they do not require guaranteed access 
to natural gas.\26\ Otherwise, they would have purchased firm 
interstate pipeline capacity. Thus, absence of a discount could cause 
such a shipper to take less service or discontinue service altogether, 
since the shipper has already indicated it does not require service.
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    \26\ Williston at 22.
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    29. The Commission thus finds no basis to conclude that overall 
interstate pipeline throughput would remain at the same level, if the 
Commission discouraged interstate pipelines from giving discounts in 
competition with one another. Rather, it seems clear that such 
discounts do play a role in increasing throughput on interstate 
pipelines. The Commission thus rejects the fundamental premise of the 
commenters seeking to have the Commission disallow any discount 
adjustment in Natural Gas Act (NGA) section 4 rate cases for discounts 
given in competition with another interstate pipeline.
    30. Apart from the issue of the extent to which such discounts 
increase overall throughput on interstate pipelines, the Commission 
finds that discounts arising from competition between interstate 
pipelines provide other substantial public benefits, which would be 
lost if the Commission sought to discourage such discounting. Such 
discounting leads to more efficient use of the interstate pipeline 
grid, by enabling pipelines to adjust the price of their capacity to 
match its market value. Any effort to discourage interstate pipelines 
from offering discounts when necessary to reduce their rates to the 
market value of their capacity would lead to harmful distortions in 
both the commodity and capacity markets.
    31. As the Commission found in Order No. 637, the deregulation of 
wellhead natural gas prices, together with the requirement that 
interstate pipelines offer unbundled open access transportation 
service, has increased competition and efficiency in both the gas 
commodity market and the transportation market. Market centers have 
developed both upstream in the production area and downstream in the 
market area. Such market centers enhance competition by giving buyers 
and sellers a greater number of alternative pipelines from which to 
choose in order to obtain and deliver gas suppliers. As a result, 
buyers can reach supplies in a number of different producing regions 
and sellers can reach a number of different downstream markets.
    32. The development of spot markets in downstream areas means there 
is now a market price for delivered gas in those markets. That price 
reflects not only the cost of the gas commodity but also the value of 
transportation service from the production area to the downstream 
market. The difference between the downstream delivered gas price and 
the market price at upstream market centers in the production area 
(referred to as the ``basis differential'') shows the market value of 
transportation service between those two points. As a result, ``gas 
commodity markets now determine the economic value of pipeline 
transportation services in many parts of the country. Thus, even as 
FERC has sought to isolate pipeline services from commodity sales, it 
is within the commodity markets that one can see revealed the true 
price for gas transportation.'' \27\ These basis differentials may vary 
on a daily and seasonal basis.
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    \27\ Order No. 637 at 31,274 (quoting M. Barcella, How Commodity 
Markets Drive Gas Pipeline Values, Public Utilities Fortnightly, 
February 1, 1998 at 24-25).
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    33. Discounting pipeline capacity to the market value indicated by 
the basis differentials provides greater efficiency in the production 
and distribution of gas across the pipeline grid, promoting optimal 
decisions concerning exploration for and production of the gas 
commodity and transportation of gas supplies to locations where it is 
needed the most. First, such discounting helps minimize the distorting 
effect of transportation costs on producer decisions concerning 
exploration and production. The various interstate pipelines competing 
in the same downstream markets may bring gas from different supply 
basins. For example, different interstate pipelines serving California 
are attached to supply basins in the Texas, Oklahoma, Gulf Coast area; 
the Rocky Mountain area, and Canada. Without discounts by the higher 
cost pipelines, producers in supply basins served by higher cost 
pipelines would generally face the burden of any price reductions 
necessary to meet the market price for delivered gas in the downstream 
areas.\28\ As a result, gas reserves from supply areas served by lower 
cost pipelines would have a built-in cost advantage over gas reserves 
served by higher cost pipelines. Thus, lack of discounting could cause 
production of reserves served by higher cost pipelines to be delayed or 
reduced, even though those reserves might have similar or greater 
potential. This is inconsistent with the goal of ensuring consumers 
access to an adequate supply of gas at reasonable costs.
---------------------------------------------------------------------------

    \28\ Reliant Energy at 11; Gulf South at 30.
---------------------------------------------------------------------------

    34. Second, if several interstate pipelines serve the same 
downstream market, discounting can help minimize short-term price 
spikes in response to increases in demand. In a situation where the 
maximum rate of the higher cost pipeline is greater than the basis 
differential between its supply area and the market area in question, 
then absent a discount adjustment, that pipeline may not be willing to 
transport additional supplies at a discount until the basis 
differential rises to its maximum rate. Thus, discouraging discounting 
by the higher cost pipeline could delay the supply increases in the 
downstream market necessary to moderate the price spike.\29\
---------------------------------------------------------------------------

    \29\ Duke Energy at 19.
---------------------------------------------------------------------------

    35. Third, discounting also enables interstate pipelines with 
higher cost structures to compete with lower cost pipelines for 
customers, enabling the capacity of both pipelines to be utilized in 
the most efficient manner possible.\30\ In the absence of such 
discounts, existing customers of the higher cost pipeline with access 
to the lower cost pipeline would likely switch to the lower cost 
pipeline to the extent it has available capacity. Similarly, new 
customers would contract first with the lower cost pipeline.\31\ Fewer 
customers contributing to the fixed costs of the higher cost pipeline 
would lead to higher rates on that pipeline, to the detriment of its 
captive customers.\32\ Moreover, the demand for service on the lower 
cost pipeline combined with increasing rates on the higher cost 
pipeline could trigger an expansion of the lower cost pipeline despite 
the existence of unused capacity on the higher cost pipeline, as long 
as the expansion could be priced at less than the higher cost 
pipeline's maximum

[[Page 34426]]

rate. However, if the higher cost pipeline could discount, then an 
expansion would be unnecessary, and thereby lead to a more efficient 
result.
---------------------------------------------------------------------------

    \30\ Sempra at 6; Nicor at 6; Gulf South at 34.
    \31\ Duke Energy at 27-28.
    \32\ Reliant Energy at 9.
---------------------------------------------------------------------------

    36. Fourth, discounting helps facilitate discretionary shipments of 
gas into storage during off-peak periods. Some marketers and others may 
only move gas into storage when existing seasonal prices and/or 
tradeable basis differentials allow them to hedge their financial 
risks. If pipelines are discouraged from discounting the price of their 
capacity to the seasonal basis differential, some customers may find it 
too risky to put gas into storage.\33\ This may then lead to higher 
peak period gas costs, when the supply of gas in storage is lower than 
it otherwise would have been.
---------------------------------------------------------------------------

    \33\ BP America at 13.
---------------------------------------------------------------------------

    37. Finally, selective discounting helps pipelines more accurately 
assess when new construction is needed. When the basis differential 
between two points equals or exceeds the applicable maximum tariff 
rates for prolonged periods of time, that fact indicates a need for 
more capacity between those points. In contrast, basis differentials 
below maximum rates indicate additional capacity between the relevant 
points is not needed. Discouraging discounting would distort these 
price signals, since a high basis differential could simply be the 
result of the lack of discounting as opposed to an indication of a 
capacity constraint.\34\ Moreover, it is only efficient to construct 
new pipeline facilities when the stand-alone cost of the new facilities 
is less than the incremental cost of serving the same customer using 
the facilities of an existing pipeline. However, if the existing 
pipeline is discouraged from discounting, the construction of new 
pipeline facilities could occur in selected locations where the stand-
alone cost of the new pipeline is less than the embedded cost rate of 
an existing higher cost pipeline. Thus, discouraging existing pipelines 
from offering discounts in such situations could distort investment 
decisions.\35\
---------------------------------------------------------------------------

    \34\ Gulf South at 18-19.
    \35\ Kinder Morgan, Declaration of David Sibley and Michael 
Doane at 16. Nicor at 4. Enbridge at 8.
---------------------------------------------------------------------------

2. Competition From Capacity Release
    38. APGA, National Fuel, NASUCA, Northern Municipals, and OAL 
oppose inclusion of a discount adjustment in pipeline rates for 
discounts that result from competition with the pipeline's own 
customers who are participating in capacity release. These parties 
argue that when pipelines receive a discount adjustment for discounts 
given in competition with capacity releases made by the pipeline's 
captive customers, the pipeline has a competitive advantage over the 
releasing shippers because the cost of the discount is subsidized by 
those same releasing shippers. They argue that to the extent the 
pipeline is able to sell this capacity by offering a discount, the 
releasing shipper is harmed by not being able to capture revenues from 
the release. NASUCA argues that if the shipper who is competing with 
the pipeline through attempts to release capacity is an LDC, retail 
consumers are doubly burdened, first, by the loss of the release 
revenues to offset high cost or stranded capacity and, second, in the 
payment of the subsidy for the discount given by the pipeline.
    39. The goal of the Commission in creating the capacity release 
market in Order No. 636 was to create a robust secondary market for 
capacity where the pipeline's direct sale of its capacity must compete 
with its firm shipper's offers to release their capacity. Capacity 
release requires pipelines to discount, or suffer the loss of those 
sales.\36\ Capacity release has made it more difficult for pipelines to 
obtain additional throughput through selective discounting. As the 
Commission explained in Order No. 636, capacity release reduces the 
pipeline's sale of interruptible service because potential purchasers 
of interruptible service would have the option of purchasing released 
firm capacity.
---------------------------------------------------------------------------

    \36\ See Order No. 636-A, FERC Stats. & Regs ] 30,950 at 30,562; 
Order No. 636-B, 61 FERC ] 61,272 at 61,999.
---------------------------------------------------------------------------

    40. Further, as the court recognized in INGAA v. FERC,\37\ the 
establishment in Order No. 636 of segmentation and flexible point 
rights was intended to enhance the value of firm capacity and promote 
competition in the secondary market between shippers releasing their 
capacity and pipelines, as well as between releasing shippers 
themselves. In Order No. 637, the Commission took additional actions to 
enhance flexibility and competition in the secondary market by 
requiring pipelines to permit a shipper to segment its capacity either 
for its own use or for the purpose of capacity release. This enhances 
shippers' ability to compete in the capacity release market by giving 
them the right to segment capacity and sell their capacity in separate 
packages.
---------------------------------------------------------------------------

    \37\ 285 F.3d 18, 36 (D.C. Cir. 2002).
---------------------------------------------------------------------------

    41. The capacity release program together with the Commission's 
policies on segmentation, and flexible point rights, has been 
successful in creating a robust secondary market where pipelines must 
compete on price. To prevent pipelines from competing effectively in 
this market would defeat the purpose of capacity release and eliminate 
the competition that capacity release has created. Competition between 
the pipeline and its shippers will be stifled if the pipeline's ability 
to offer service at a price below the maximum rate is hampered by lack 
of a discount adjustment. Diminished competition in the secondary 
market will tend to raise prices to the detriment of all shippers.
    42. Capacity release provides benefits to captive customers by 
allowing them to compete with the pipeline for the sale of their unused 
capacity. To the extent they are able to sell their unused capacity in 
the capacity release market at a discount, they will be able to offset 
a portion of their transportation costs. It is not unreasonable to 
require them to compete with the pipeline for the sale of this 
capacity, and the Commission has provided shippers with flexible point 
rights and the ability to segment their capacity to enhance their 
ability to compete in the secondary market. The releasing shipper has 
an additional competitive advantage over the pipeline because the 
capacity that is being released by the shipper is firm capacity, while 
the pipeline may be limited to offering interruptible service because 
it has already sold the capacity to the releasing shipper on a firm 
basis. Therefore, the service being released by the shipper has a 
higher value. Moreover, any discount adjustment received by the 
pipeline is not a subsidy, but simply gives the pipeline an opportunity 
to recover its costs, consistent with the court's admonition in AGD I 
\38\ and is subject to review in the rate case.
---------------------------------------------------------------------------

    \38\ 824 F.2d 981, 1012 (D.C. Cir. 1987). In AGD I, the court 
addressed an argument presented by some pipelines that the 
Commission's selective discount policy might lead to the pipelines 
under-recovering their costs. The court set forth a numerical 
example showing that the pipeline could under-recover its costs, if, 
in the next rate case after a pipeline obtained throughput by giving 
discounts, the Commission nevertheless designed the pipeline's rates 
based on the full amount of the discounted throughput, without any 
adjustment. However, the court found no reason to fear that the 
Commission would employ this ``dubious procedure,'' and accordingly 
rejected the pipelines' contention.
---------------------------------------------------------------------------

3. The Discount Adjustment and Expansion Capacity
    43. IMGA, NASUCA, Northern Municipals, and OAL argue that the 
Commission should modify its policy and disallow discount adjustments 
for discounts given on expansion capacity. These parties argue that 
permitting such

[[Page 34427]]

a discount artificially reduces the true price of the new capacity, 
interferes with the workings of the market, and artificially influences 
the economic decisions made by those parties participating in the 
project. Further, they argue, there is no justification for requiring 
captive customers to subsidize new construction.
    44. Moreover, these parties argue that permitting a discount 
adjustment for discounts on expansions is at odds with the Commission's 
policy concerning new projects which requires that they be 
incrementally priced where existing customers receive no benefits from 
the expansion project.\39\ NASUCA states that the Commission adopted 
its pricing policy for expansion projects to send accurate price 
signals to market participants as to the cost of new capacity, and that 
discount adjustments would distort those price signals and essentially 
result in rolled-in rates if the difference between the discount and 
the actual cost of expansion projects were recovered in rates from pre-
expansion, non-discounted shippers. IMGA states that in order for a 
pipeline to construct new facilities, there should be a market demand 
for those facilities and if a pipeline must discount expansion capacity 
in order to compete, the expansion is probably not necessary.
---------------------------------------------------------------------------

    \39\ They cite Certification of New Interstate Natural Gas 
Pipeline Facilities, 88 FERC ] 61,277 (1999), order on 
clarification, 90 FERC ] 61,128 (2000), order on further 
clarification, 92 FERC ] 61,094 (2000) (Certificate Pricing Policy 
Statement).
---------------------------------------------------------------------------

    45. On the other hand, INGAA, Duke, El Paso, Reliant, Williston, BP 
America, CenterPoint, Louisville, MidAmerican, Nicor, SoCalGas and 
SDG&E, and Transco argue the selective discount policy should be 
applicable to expansions and that a prohibition against selective 
discounting would discourage pipeline expansions.
    46. The Commission finds no basis for creating an exemption from 
the selective discounting policy for expansion projects. As the 
Commission has moved from a regulatory model to a model based on 
greater competition, it has recognized that new construction is no 
longer undertaken solely for the purpose of serving new markets, but 
also to provide natural gas customers with competitive alternatives to 
existing service.\40\ Developing policies that encourage pipelines to 
actively compete with each other provides producers and end users with 
new market opportunities and provides customers with different supply 
options, which tends to reduce the delivered price of gas.
---------------------------------------------------------------------------

    \40\ Independence Pipeline Co., 89 FERC ] 61,283 at 61,843 
(2000).
---------------------------------------------------------------------------

    47. Eliminating the discount adjustment for new capacity could 
discourage pipeline expansion into areas to compete with existing 
service. For a pipeline to undertake an expansion into markets that are 
currently receiving interstate service, the new pipeline must have the 
flexibility to price the project to compete with the incumbent pipeline 
and still earn a reasonable return on that project. There would be no 
incentive for a pipeline to expand into an area served by another 
pipeline if it were required to charge a rate higher than the existing 
rates in the territory. Therefore, the new pipelines will need the 
flexibility to discount some aspect of its transportation rate.
    48. Moreover, as a result of recent expansions, there are fewer 
captive customers,\41\ and policies that encourage these expansions 
will provide more options to customers that are currently captive and 
thus enable them to benefit from the competitive markets. The 
Commission's policies should encourage pipelines to construct new 
capacity into captive markets, and the elimination of the discount 
adjustment for expansion capacity would not be consistent with that 
goal.
---------------------------------------------------------------------------

    \41\ INGAA states that since the implementation of the Order No. 
636, substantial new capacity has been built, leading to more gas-
on-gas competition and thus fewer captive customers. INGAA states 
that the 36 pipeline companies that responded to a 2005 INGAA survey 
reported that they spent $19.6 billion for interstate pipeline 
infrastructure between 1993 and 2004.
---------------------------------------------------------------------------

    49. In receiving approval for the expansion project, the pipeline 
must meet the criteria set forth in the Certificate Pricing Policy 
Statement,\42\ and if the expansion does not benefit current customers, 
the services must be incrementally priced. The Commission would not 
approve a discount adjustment in circumstances that would shift the 
costs of an expansion to existing customers that did not benefit from 
the expansion because this would be contrary to the Commission's 
policy.
---------------------------------------------------------------------------

    \42\ 88 FERC ]61,277 (1999), order on clarification, 90 FERC ] 
61,128 (2000), order on further clarification, 92 FERC ] 61,094 
(2000).
---------------------------------------------------------------------------

    50. Calpine states that the goal of discounting, to spread fixed 
costs over more customers and thereby lower costs to captive customers, 
is not necessarily met when discounts are provided on expansions. 
Calpine asserts that because discounts on expansion capacity involve 
the potential sharing of new fixed costs among new or existing 
shippers, these discounts also should bear a higher level of scrutiny 
before they are included in a discount adjustment.
    51. As explained above, the issue of whether rates on expansion 
capacity are incremental or rolled-in will be determined in accordance 
with the Certificate Pricing Policy Statement and allowing an 
adjustment in a rate case for the discounts does not make the rates 
rolled-in. There is no reason to change the burden of proof with regard 
to discounts on expansions. As with all other discounts, the ultimate 
burden of proof is on the pipeline to show that the discounts were 
granted to meet competition.
4. Protections for Captive Customers
    52. Opposition to the Commission's discount adjustment policy does 
not come from a wide range of interests, but from a group of publicly-
owed municipal gas companies that represents a small percentage of 
throughput on the national pipeline system. APGA implies that all 
captive customers are opposed to the selective discount policy.\43\ 
However, there are captive customers that do not oppose the 
Commission's selective discount policy. As the Commission explained in 
Order No. 637, if a customer is truly captive and has no alternatives 
for service it is likely that its contracts will be at the maximum 
rate.\44\ There are many shippers that pay the maximum rate, and it is 
only the small publicly-owned municipal gas companies that have 
objected to the selective discount policy. It is possible to adopt 
measures to protect these customers in circumstances where the 
Commission's policy works an undue hardship on them and at the same 
time retain the competitive benefits of the policy for the majority of 
shippers.
---------------------------------------------------------------------------

    \43\ APGA states that if captive customers benefited from the 
discounts, they would support them, but instead, captive customers 
are the staunchest critics of such discounts. APGA at 5-6.
    \44\ Order No. 637 at 217. In Order No. 637, the Commission 
concluded that captive customers paying the maximum rate need the 
protection of the right of first refusal, but that customers with 
alternatives that pay less than the maximum rate do not need this 
protection.
---------------------------------------------------------------------------

    53. The captive customers that oppose the Commission's selective 
discount policy argue that they are being harmed because it has 
resulted in increased rates for them. Northern Municipals gives as an 
example the circumstances on Northern Natural Gas Company (Northern) 
where Northern gave a large discount to an existing customer, 
Centerpoint, to prevent it from taking its business to a new intrastate 
pipeline. Northern Municipals states that these discounted rates will 
be in effect until 2019 and that Northern will attempt to

[[Page 34428]]

recover this discount from its captive shippers. Northern Municipals 
states that no significant additional volumes will flow as a result of 
the discount. Moreover, Northern Municipals states, under the present 
policy, Northern does not have the burden of proof to show that the 
discounts were either necessary or reasonable.
    54. Northern Municipals does not allege that any harm has occurred 
to them as yet, but anticipates that the harm will occur when Northern 
seeks a discount adjustment in its next rate case. This harm is 
therefore speculative. Further, Northern Municipals' statement that 
Northern has no obligation to show that the discounts were necessary or 
reasonable is not accurate. Northern has the ultimate burden of showing 
that this long-term discount was in fact necessary to meet 
competition.\45\ Further, the Commission has the obligation to assure 
that rates to all customers are just and reasonable and can consider 
mitigating measures where the rate impact on captive customers is 
inequitable. The circumstances described by Northern Municipals do not 
warrant the Commission's abandoning its selective discount policy that 
has provided substantial competitive benefits to a large number of 
shippers on the national grid.
---------------------------------------------------------------------------

    \45\ See the discussion on the burden of proof below.
---------------------------------------------------------------------------

    55. There are already rate measures in place on many pipelines that 
give small captive customers special rates that provide them 
protection. For example, Northern Natural states that on its system, 
small shippers pay volumetric rates. Other pipelines also offer special 
favorable rates to small captive shippers.\46\ Small shippers paying 
volumetric rates do not pay a reservation charge to reserve capacity 
and their rates are often developed using an imputed load factor that 
is higher than the customer's actual use of the system. Small customers 
therefore pay less for their service than they would if their rates 
were developed in the same manner as other shippers, and other shippers 
on the system subsidize the rates of the small shippers.
---------------------------------------------------------------------------

    \46\ For example, El Paso and Tennessee have special rates for 
small customers.
---------------------------------------------------------------------------

    56. Further, to the extent that the Commission's discount policy 
furthers competition, it should encourage other pipelines to compete 
for the business of these captive customers. As the national pipeline 
grid becomes more competitive, there will be fewer captive customers, 
and captive customers therefore will ultimately benefit from the 
Commission's policies that encourage competition.
    57. Moreover, the Commission has a responsibility to protect 
captive customers and can take action to protect these customers in 
case-specific situations. The Commission has always looked at the 
particular circumstances of each case and has adopted special 
protections for captive customers where circumstances warrant. For 
example, in Natural Gas Pipeline Company of America,\47\ the Commission 
stated that it was ``mindful of our obligation to protect the 
pipeline's captive customers, who have little or no alternative to 
obtaining service over Natural's facilities,'' and rejected the 
pipeline's proposal to recover the costs associated with unsubscribed 
capacity from its captive customers. The Commission explained that it 
would not allow a pipeline to shift costs to its captive customers 
without considering the adverse effects this would have on those 
customers.\48\ The Commission continues to be mindful of its obligation 
to captive customers and will consider the impact of any discount 
adjustment on those customers in specific proceedings.
---------------------------------------------------------------------------

    \47\ 73 FERC ] 61,050 at 61,128-29 (1995).
    \48\ See also El Paso Natural Gas Co., 72 FERC ] 61,083 at 
61,441 (1995).
---------------------------------------------------------------------------

B. Other Issues

    58. As discussed above, several parties generally support the 
selective discount policy, but suggested certain modifications to the 
policy. Specifically, these parties have suggested modifications to the 
policy with regard to the burden of proof, requirements for periodic 
rate filings, and informational postings. These proposed modifications 
are discussed below.
1. Burden of Proof
    59. Under the Commission's current policy, in order to obtain a 
discount adjustment in a rate case, the pipeline has the ultimate 
burden of showing that its discounts were required to meet competition. 
However, the Commission has distinguished between the burden of proof 
the pipeline must meet, depending upon whether a discount was given to 
a non-affiliate or an affiliate. In the case of discounts to non-
affiliated shippers, the Commission has stated that it is a reasonable 
presumption that a pipeline will always seek the highest possible rate 
from such shippers, since it is in the pipeline's own economic interest 
to do so. Therefore, once the pipeline has explained generally that it 
gives discounts to non-affiliates to meet competition, parties opposing 
the discount adjustment have the burden of producing evidence that 
discounts to non-affiliates were not justified by competition. To the 
extent those parties raise reasonable questions concerning whether 
competition required the discounts given in particular non-affiliate 
transactions, then the burden shifts back to the pipeline to show that 
the questioned discounts were in fact required by competition.
    60. APGA, Calpine, Centerpoint, Cinergy, NASUCA, Northwest 
Industrials, and MoPSC argue that the Commission should change this 
aspect of the policy and place a higher burden of proof on pipelines to 
justify discounts given to non-affiliates. These parties argue that the 
pipeline should bear a heavy burden of proof and should be required to 
provide sufficient and specific evidence that the discount was 
necessary to accomplish the transaction and that the transaction 
provided concrete benefits to captive customers by contributing to the 
recovery of fixed costs. APGA argues that the pipeline should be 
required to show that the discount is necessary to increase throughput 
in interstate commerce, not just on the discounting pipeline, and as a 
result, provides net benefits to captive shippers.
    61. The Commission finds that its current policy regarding the 
burden of proof is based on accurate assumptions and produces a just 
and reasonable result. As explained above, the pipeline always has the 
ultimate burden of proof on this issue. However, in the case of non-
affiliates, the Commission presumes that the pipeline will seek the 
highest price possible because it is in its best interest to do so. 
This is a reasonable presumption. A pipeline, like any other business, 
will act in its own best economic interest. As the Commission stated in 
Order No. 436, ``[u]nder economic theory, price discounting is a 
rational policy to pursue only when the pipeline perceives it is better 
to earn less than a full return on a service than to risk losing the 
service and failing to achieve the volumes on which its rates for the 
period in question were based.'' \49\ It is not the case, as NASUCA 
suggests, that if a discount adjustment is available, the pipeline 
offering the discount has no incentive to minimize the level of 
discount. It is always in the pipeline's best economic interest to 
obtain the

[[Page 34429]]

highest price possible from a non-affiliate for its services.
---------------------------------------------------------------------------

    \49\ Order No. 436, Regulation of Natural Gas Pipelines After 
Partial Wellhead Decontrol, FERC Stats. & Regs., Regs. Preambles 
1982-1985 ] 30,665 at 31,543 (1985).
---------------------------------------------------------------------------

    62. Moreover, a hearing in a rate case gives all the parties an 
opportunity to seek discovery regarding the purpose and level of any 
discount. Therefore, Commission Staff and other parties can use this 
opportunity to seek an explanation of each discount, and if the 
pipeline cannot support any discount, this issue can be raised at the 
hearing.
    63. In view of the reasonableness and accuracy of the presumption 
that pipelines will seek the highest rate from non-affiliated shippers, 
requiring the pipeline to substantiate the necessity for all 
unaffiliated discounts would be unduly burdensome and would discourage 
a pipeline from discounting. As discussed above, discounting furthers 
the Commission's goals of fostering a competitive natural gas market 
where prices reflect the market value of the capacity rather than the 
maximum regulated rate. It would be contrary to those goals for the 
Commission to adopt a policy that discourages discounting to meet 
competition. Similarly, where the discount results in additional 
throughput on the pipeline, this will necessarily provide additional 
revenue over which to spread the fixed costs and it is reasonable to 
assume that this benefits all the pipeline's customers.
    64. Calpine states that short-term discounts on existing capacity 
may benefit shippers, but that pipelines should bear a higher burden of 
proof with regard to long-term discounts. The Commission finds that 
there is no reason to change the burden of proof with regard to long-
term discount transactions.
    65. In Iroquois Gas Transmission System, L.P.,\50\ where the 
pipeline sought an adjustment for several long-term discounts, the 
Commission explained that in rebutting the presumption that non-
affiliate discounts are generally given to meet competition, the 
parties challenging the discount adjustment need not prove conclusively 
that the discount was not required to meet competition, but rather must 
merely introduce evidence to raise a reasonable question concerning 
whether in fact competition required the discount. Then, the burden is 
shifted back to the pipeline to introduce evidence to show that 
competition required it to grant those discounts.
---------------------------------------------------------------------------

    \50\ 84 FERC ] 61,086 at 61,477 (1998), reh'g denied, 86 FERC ] 
61,216 (1999) (Iroquois).
---------------------------------------------------------------------------

    66. In Iroquois, the Commission disallowed the adjustment for the 
long-term discounts.\51\ The Commission stated that while short-term 
and spot market data may justify a short-term discount, market 
conditions change over time and a long-term discount cannot be 
justified based solely on current market data. As the Commission 
explained, in the case of a long-term discount, the pipeline must 
present a thorough analysis of whether competition required such a 
long-term discount. The burden of proof is the same, but because of the 
nature of the transaction, the evidence required to meet that burden is 
different in the case of a long-term discount. The current policy 
therefore applies an appropriate burden of proof to both short-term and 
long-term discounts and the Commission finds that no change in the 
burden of proof is warranted.
---------------------------------------------------------------------------

    \51\ See also, Trunkline Gas Co., 90 FERC ] 61,017 at 61,092-95 
(2002) (denying a request for an adjustment for a discounted long-
term contract).
---------------------------------------------------------------------------

2. Require Pipelines That Discount To File Periodic Rate Cases
    67. In the NOI, the Commission stated that pipelines are no longer 
required to file periodic rate cases and that many pipelines have not 
filed a rate case for a number of years. The Commission asked the 
parties to address the question of how the discount policy has affected 
captive customers in the absence of a section 4 rate case.
    68. Memphis Light, IMGA, NASUCA, NGSA, Northern Municipals, 
Northwest Industrials, and OAL argue that captive customers have been 
harmed by the absence of section 4 rate cases and that the Commission 
should reinstate the periodic rate filing requirement as a condition to 
pipelines providing discounted transportation service. These parties 
argue that without this requirement, pipelines can manipulate the 
timing of their rate filings to provide themselves with the greatest 
benefit. Thus, IMGA states that in the five or six years after the 
Commission established its discount policy, virtually all the pipelines 
sought and received substantial rate increases based primarily on the 
throughput adjustment, but also on the high interest rates and capital 
costs of the time. IMGA states that in recent years, interest rates and 
capital costs have decreased dramatically and it believes that but for 
the Commission's discount policy, there should have been and would have 
been rate proceedings producing rate reductions for most pipelines.
    69. Similarly, NASUCA states that the reason many pipelines have 
not filed rate cases in recent years is related to the status of their 
earnings. NASUCA states that the Natural Gas Supply Association 
annually computes the status of pipeline over-earnings and their 
studies show that at least 13 pipelines have earned significantly more 
than authorized in recent years. NASUCA states that because pipelines 
that are over-earning their authorized returns have not filed rate 
cases in recent years, consumers on those systems are not seeing the 
benefit of increased throughput over which the pipeline's fixed costs 
could be spread. NASUCA states that only by analyzing all elements of 
cost, throughput and discounts in a section 4 rate case would the 
Commission be able to determine that the net result of offsetting 
discount adjustments and increased throughput would be zero on 
consumers.
    70. Northwest Industrials states that because the pipelines retain 
all the benefits of discounted transportation between rate cases, the 
Commission should employ a revenue sharing mechanism to benefit 
customers as appropriate between rate cases.
    71. NASUCA and Northern Municipals state that while customers have 
the right under section 5 of the NGA to file over-earnings complaints 
against pipelines, the lack of information posted related to discounts 
and pipeline throughput, the insufficiency of FERC Form 2 to provide 
rate case data, the shift of the burden of proof, and the prospective 
nature of relief under section 5 combine to make it an inadequate 
remedy in these circumstances.
    72. On the other hand, Enbridge, INGAA, and Northwest assert that 
captive customers benefit from the absence of rate cases. INGAA states 
that for the last decade, pipeline rates have remained stable in 
nominal dollars and have gone down in real dollars. It asserts that 
timing of rate cases is now generally dictated by customer settlements 
or other economic or market forces. Further, INGAA states that rate 
cases create uncertainty, are expensive and time-consuming, and 
generally result in a rate increase, not a decrease. In addition, INGAA 
states, without the triennial review, pipelines have an incentive for 
cost containment and efficient operation to meet the risks associated 
with shorter contracts and price competition.
    73. Similarly, Northwest states that that the absence of section 4 
periodic rate cases has provided an additional safeguard for captive 
customers because the discount adjustment becomes relevant only when a 
pipeline seeks to adjust its rates. Northwest states that discounting 
encourages the pipeline to operate its system efficiently and

[[Page 34430]]

maximize its use of its system which results in the delay or 
elimination of the need for a rate case, resulting in long-term rate 
certainty for shippers.
    74. At the time the discount policy was originally adopted, 
pipeline rates were set every three years under the terms of the 
Purchased Gas Adjustment (PGA) clause in their tariff. Order No. 636 
eliminated the three year rate review and the PGA clause, and section 4 
rate cases have been filed much less frequently by the pipelines since. 
However, as explained below, the Commission has determined that 
selective discounting does not provide a basis for reinstating a 
requirement that pipelines file periodic rate cases.
    75. Under section 4 of the NGA, the decision to file a rate case is 
that of the pipeline. It has always been the option of the pipeline to 
file a rate case at a time when it is advantageous for it to do so. 
Therefore, IMGA's statement if it were not for the Commission's 
discount policy, there would have been rate proceedings producing rate 
reductions for most pipelines is not accurate. This issue is not 
whether pipelines can choose the timing of their rate case, but whether 
there is something about the discount adjustment policy that, like the 
PGA, justifies the requirement that pipelines file periodic rate cases. 
The Commission concludes that there is not.
    76. Under the Commission's PGA regulations, pipelines could recover 
projected changes in their cost of gas using periodic purchase gas 
adjustments instead of filing an entire section 4 rate case. In 
exchange for this ability to change only one cost element pipelines 
agreed to a reexamination of all their costs and rates at three year 
intervals to assure that gas cost increases were not offset by 
decreases in other costs. The PGA was a special rate adjustment 
mechanism by which pipelines could pass through certain costs to 
customers between rate cases.
    77. Under the selective discount policy, customer's rates are not 
affected until the pipeline files a rate case. There is no special rate 
adjustment mechanism that permits pipelines to change their rates and 
pass additional costs through to customers between rate cases. 
Therefore, we find no reason to impose a periodic rate review 
requirement on pipelines that engage in discounting. Selective 
discounting does not affect the rates of other customers on the system 
unless a rate case is filed. In these circumstances, the procedures 
provided for in sections 4 and 5 of the NGA provide sufficient 
protection to a pipeline's customers.
3. Informational Posting Requirements for Discount Transactions
    78. NASUCA recommends that the Commission amend its regulations to 
require pipelines to post the reasons for each selective discount 
granted. NASUCA states that the Commission should provide a check-off 
format of reasons, including gas-on-gas competition, adverse economic 
conditions that could cause a customer to go out of business, existing 
alternative fuel capability, planned alternative fuel capability, and 
other reasons. The pipeline should be required to check all the 
relevant reasons.
    79. Cinergy, on the other hand, states that the Commission's 
posting and reporting requirements provide the necessary transparency 
to the marketplace of discount transactions. However, Cinergy states 
that its review of the informational postings of some pipelines has 
revealed that much of the required information is missing. Cinergy asks 
the Commission to emphasize in this proceeding the importance of 
compliance with its posting and reporting requirements.
    80. Under section 284.13(b), pipelines are required to post on 
their website information concerning any discounted transactions, 
including the name of the shipper, the maximum rate, the rate actually 
charged, the volumes, receipt and delivery points, the duration of the 
contract, and information on any affiliation between the shipper and 
the pipeline. Further, section 358.5(d) of the regulations requires 
pipelines to post on their website any offer of a discount at the 
conclusion of negotiations contemporaneous with the time the offer is 
contractually binding. This information provides shippers with the 
price transparency needed to make informed decisions and to monitor 
transactions for undue discrimination and preference. The Commission 
will not change its informational posting requirements at this time. 
However, the Commission takes Cinergy's concerns seriously and will 
refer allegations of non-compliance with the Commission's posting and 
reporting requirements to the Office of Market Oversight and 
Investigation for a potential audit. Furthermore, as part of the 
Commission's ongoing market monitoring program, the Commission will 
continue to conduct audits on its own.
    The Commission orders:
    (A) The Commission's selective discount policy is reaffirmed.
    (B) This rulemaking proceeding is hereby terminated.

    By the Commission. Chairman Wood concurring in part with a 
separate statement attached. Commissioner Kelly dissenting in part 
with a separate statement attached.

Linda Mitry,
Deputy Secretary.

WOOD, Chairman, concurring in part:

    While I support today's decision to reaffirm the Commission's 
selective discounting policy, I believe that it would be more 
efficient, for future Commission auditing purposes, to require 
pipelines to specify the reason why a discount is given to a 
customer. In periodic audits, our staff auditors are called upon to 
determine whether a discount is given for legitimate business 
purposes. This is not only useful in designing rates in future gas 
pipeline rate cases, it also is necessary to comply with the 
Commission's regulations ensuring that pipeline transportation rate 
discounting not violate section 4(b) of the Natural Gas Act. Making 
this audit task more transparent at minimal cost is a good 
government step we ought to take.

Pat Wood, III,
Chairman.


KELLY, Commissioner, dissenting in part:

    As stated in this order, the Commission's current regulations 
require pipelines to post certain information on their Web site 
related to discounted transactions, including the name of the 
shipper, the maximum rate, the rate actually charged, the volumes, 
receipt and delivery points, the duration of the contract, and any 
affiliation between the shipper and the pipeline. In their comments 
filed in this proceeding, the National Association of State Utility 
Consumer Advocates (NASUCA) states that what is missing from this 
list of information is the reason for the discount. I would have 
supported NASUCA's recommendation to require pipelines to post a 
check-off list noting the reason that they provided a discount to a 
particular shipper. I think that requiring such information would 
not be unduly burdensome on the pipelines, would help shippers to 
determine whether they are similarly situated and thus eligible for 
a similar discount, and would help the Commission to ensure that 
selective discounting is not unduly discriminatory under sections 4 
and 5 of the Natural Gas Act. Therefore, I dissent in part from this 
order.

Suedeen G. Kelly.

[FR Doc. 05-11660 Filed 6-13-05; 8:45 am]
BILLING CODE 6717-01-P