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to a year to act on a request for

certification. Consequently, this time

frame will be recognized in any

schedule that the Director of OEP may

set.

9. With respect to the revisions to

NGA section 15, we expect to request

public comments on rules of general

applicability on how best to coordinate

and schedule agencies’ efforts in

processing requests for federal

authorizations. In the meantime, the

Commission expects the Director of OEP

to exercise the authority delegated

herein on a flexible, case-by-case basis,

to section 3 and 7 proposals filed prior

to the effective date of a final rule,

including proposals filed prior to the

enactment of EPAct 2005. The Director

of OEP need not intervene to establish

deadlines for federal authorizations in

every pending proceeding. For example,

the Director of OEP may find it serves

no purpose to establish deadlines in

proceedings that are relatively close to

completion. Agencies or parties to a

proceeding that object to decisions of

the Director of OEP under the authority

delegated herein may request

Commission review of the Director’s

actions.

The Commission orders:

The Commission delegates to the

Director of OEP the authority provided

by EPAct 2005 to establish a schedule

for all federal authorizations necessary

for NGA section 3 and 7 proposals.

By the Commission.

Magalie R. Salas,

Secretary.

[FR Doc. 05–23139 Filed 11–22–05; 8:45 am]

BILLING CODE 6717–01–P

DEPARTMENT OF ENERGY

Federal Energy Regulatory

Commission

[Docket No. RM05–2–001]

Policy for Selective Discounting by

Natural Gas Pipelines; Order Denying

Rehearing

November 17, 2005.

Before Commissioners: Joseph T. Kelliher,

Chairman; Nora Mead Brownell, and

Suedeen G. Kelly.

1. On May 31, 2005, the Commission

issued an order (May 31 Order)1 in this

proceeding reaffirming the

Commission’s current policy on

selective discounting. Timely requests

for rehearing of that order were filed by

the Illinois Municipal Gas Agency

(IMGA) and, jointly by Northern

1 111 FERC ¶ 61,309 (2005).

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Municipal Distributor Group and the

Midwest Region Gas Agency (Northern

Municipals). For the reasons discussed

below, the requests for rehearing are

denied.

Background

2. The prior orders in this proceeding

set forth the background and

development of the Commission’s

selective discounting policy.2 Generally,

as explained in those orders, the

Commission’s regulations permit

pipelines to discount their rates, 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

regulations permit the pipeline to

discount its rates to compete with the

alternate fuel, and thus obtain

throughput that would otherwise be lost

to the pipeline. As the Commission has

explained, these discounts benefit all

customers, including customers that do

not receive the discounts, because the

discounts allow the pipeline to

maximize throughput and thus spread

fixed costs across more units of service.

Further, as the Commission has

explained, selective discounting

protects captive customers from rate

increases that would otherwise occur if

pipelines lost volumes through the

inability to respond to competition. The

Commission’s regulations permitting

selective discounting were upheld by

the court in Associated Gas Distributors

v. FERC (AGD I).3

3. The prior orders also explained the

rationale behind the Commission’s

policy of allowing a discount

adjustment and stated that the adoption

of the discount adjustment resulted

from the court’s discussion in AGD I. In

AGD I, the court addressed arguments

raised by pipelines that the selective

discounting regulations 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.4 However, the

court found no reason to fear that the

Commission would employ this

2 109 FERC ¶ 61,202 at P 2–10; 111 FERC ¶ 61,309

at P3–8.

3 824 F.2d 981, 1010–12 (D.C. Cir. 1987).

4 Id. at 1012.

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‘‘dubious procedure,’’ 5 and accordingly

rejected the pipelines’’ contention.

4. In response to the court’s concern,

the Commission, in the 1989 Rate

Design Policy Statement,6 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.

5. Since AGD I and the Rate Design

Policy Statement, the issue of ‘‘gas-ongas’’ 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.7 In these proceedings,

certain parties have questioned the

Commission’s rationale for permitting

discount adjustments, 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

5 Id.

6 Interstate Natural Gas Pipeline Rate Design, 47

FERC ¶ 61,295, reh’g granted, 48 FERC ¶ 61,122

(1989).

7 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 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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adjustment and thus lower the rates

paid by the captive customers.

6. On November 22, 2004, the

Commission issued a Notice of Inquiry

(NOI) seeking comments on its policy

regarding selective discounting by

natural gas pipelines.8 The Commission

asked parties to submit comments and

respond to specific questions 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.

Comments were filed by 40 parties.

7. On May 31, 2005, after reviewing

the comments, the Commission issued

an order 9 reaffirming the Commission’s

current selective discounting policy.

The Commission 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

decided not to modify its 16-year old

policy to prohibit pipelines from

seeking adjustments to their rate design

volumes to account for discounts given

to meet gas-on-gas competition.

8. The May 31 Order stated that

interstate pipelines face three types of

so-called gas-on-gas competition: (1)

Competition from other interstate

pipelines subject to the Commission’s

NGA jurisdiction, (2) competition from

capacity releases by the pipeline’s own

firm customers, and (3) competition

from intrastate pipelines not subject to

the Commission’s jurisdiction. The May

31 Order recognized that a significant

portion of pipeline discounts are given

to meet competition from other

interstate pipelines. Some commenters

contended that customers receiving

such discounts are not fuel switchable

and thus would take the same amount

of gas even if required to pay the

maximum rate of whichever pipeline

they choose to use. The Commission

rejected this contention, finding that

discounts to non-fuel switchable

customers can increase throughput and

thus benefit captive customers. The

Commission pointed to at least five

examples of why this is so.

9. First, the Commission stated that

industrial and other business customers

of pipelines typically face considerable

competition in their own markets and

must keep their costs down in order to

8 109 FERC ¶ 61,202 (2004).

9 111 FERC ¶ 61,309 (2005).

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prosper. Lower energy costs achieved

through obtaining discounted pipeline

capacity can help them do more

business than they otherwise would,

thereby increasing their demand for gas.

10. Second, discounts may reduce the

incentive for existing non-fuel

switchable customers to install the

necessary equipment to become fuel

switchable. 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.

11. Third, the Commission stated that

an LDC’s need for interstate pipeline

capacity depends upon the demand of

their customers for gas, and that

demand is elastic, since some of their

customers are fuel switchable. They also

have non-fuel switchable industrial or

business customers whose gas usage

may vary depending upon cost.

12. Fourth, pipeline discounts may

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.

13. Finally, the Commission pointed

out that 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, since their choice to

contract for interruptible service shows

that they do not require guaranteed

access to natural gas.

14. The Commission thus found 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. The Commission also

found that, apart from the issue of the

extent to which such discounts increase

overall throughput on interstate

pipelines, discounts arising from

competition between interstate

pipelines provide other substantial

public benefits, which would be lost if

the Commission sought to discourage

such discounting. The Commission

pointed out that, as a result of increased

competition in the gas commodity and

transportation markets, there are now

market prices for the gas commodity in

the production area and for delivered

gas in downstream markets. The

difference between these prices (referred

to as the ‘‘basis differential’’) shows the

market value of transportation service

between those two points.

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70803

15. The May 31 Order found that

discounting pipeline capacity to the

market value indicated by the basis

differentials provides a number of

benefits. First, such discounting helps

minimize the distorting effect of

transportation costs on producer

decisions concerning exploration and

production. Second, if several interstate

pipelines serve the same downstream

market, discounting can help minimize

short-term price spikes in response to

increases in demand by making the

higher cost pipeline more willing to

discount down to the basis differential

in order to bring more supplies to the

downstream market. Third, discounting

enables interstate pipelines with higher

cost structures to compete with lower

cost pipelines. Fourth, discounting

helps facilitate discretionary shipments

of gas into storage during off-peak

periods. Finally, selective discounting

helps pipelines more accurately assess

when new construction is needed.

16. In addition, the May 31 Order

found that a discount adjustment for

discounts given in competition with

capacity release promotes the

Commission’s goal of creating a robust

competitive secondary market, and that

discouraging pipelines from competing

in this market would defeat the purpose

of capacity release and eliminate the

competition that capacity release has

created. The Commission also pointed

out that capacity release provides

substantial benefits to captive

customers. Similarly, the Commission

determined in the May 31 Order that

there was no reason to create an

exemption from the selective

discounting policy for expansion

capacity. However, the Commission

stated that under the Commission’s

current policy as set forth in the

Certification of New Interstate Natural

Gas Pipeline Facilities (Certificate

Pricing Policy Statement),10 unless the

new construction benefits current

customers, the services must be

incrementally priced and the

Commission would not approve a

discount adjustment that would shift

costs to current customers.

17. IMGA and Northern Municipals

seek rehearing of the May 31 Order.

Generally, these parties argue that the

May 31 Order is not based on

substantial or factual evidence, that the

selective discount policy does not

benefit captive customers, that the

Commission has not properly assigned

the burden of proving that discounts

were given to meet competition, and

10 88 FERC ¶ 61,227 (1999), order on clarification,

90 FERC ¶ 61,128 (2000), order on further

clarification, 92 FERC ¶ 61,094 (2000).

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Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices

that the Commission did not address

certain arguments of the parties that

oppose the policy. The issues raised in

the requests for rehearing are discussed

below.

Discussion

A. Procedural Matters

18. The NOI invited interested

persons to submit comments and other

information on the matters raised by the

NOI within 60 days. The NOI did not

provide for reply comments. Forty

parties submitted comments in response

to the NOI. Only one party, IMGA, filed

reply comments. In the May 31 Order,

the Commission found that in these

circumstances, it would not consider

IMGA’s reply. On rehearing, IMGA

argues that it was error for the

Commission to reject their reply

comments.

19. The Commission has broad

discretion to establish the procedures to

be used in carrying out its

responsibilities.11 In this case, the

Commission sought comments and

responses to specific questions from

interested parties, but did not authorize

the filing of replies to the comments.

Because reply comments were not

authorized and IMGA was the only

party to file reply comments, the

Commission reasonably determined that

it would not be appropriate or fair to the

other parties in the proceeding to

consider IMGA’s reply comments. This

was not error and was clearly within the

Commission’s discretion. In any event,

IMGA’s request for rehearing sets forth

the arguments that IMGA made in its

reply comments and those arguments

are addressed in this order.

B. Substantial Evidence in Support of

the Policy

20. Throughout their requests for

rehearing, both IMGA and Northern

Municipals argue that the Commission’s

decision is not supported by substantial

evidence because it is not based on facts

and empirical data, but is based on

theory and speculation. Northern

Municipals assert that the Commission

has not provided any hard data or

factual support for its conclusion that

the selective discounting policy will

increase overall throughput and benefit

captive customers. Instead, Northern

Municipals state, the Commission

posited a number of examples that

might lead to increased throughput.

However, they argue, the Commission

11 E.g., Mobile Oil Exploration & Producing

Southeast, Inc. v. United Distrib. Cos., 498 U.S. 211,

230 (1991); Vermont Yankee Nuclear Power Corp.

v. Natural Resources Defense Council, Inc., 435 U.S.

519, 524–25, 543 (1978).

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failed to quantify any increase in

throughput, failed to analyze whether

the increase would be in the form of an

overall increase to the national grid or

simply an increase to one pipeline and

a decrease to another, and failed to

analyze whether the benefits of such an

increase to captive and other customers

would be outweighed by the costs of

subsidizing the discounts. Similarly,

IMGA argues that the May 31 Order

merely adopts the comments of the

supporters of the policy and that those

comments were based on allegation and

speculation, rather than substantial

evidence.

21. Northern Municipals assert that

the Commission should engage in a

cost/benefit analysis of the policy and

should review all orders issued on the

merits for base rate cases for a period of

time to determine how often discount

adjustments were allowed and whether

pipelines routinely file for such

adjustments. If discounts are routinely

allowed, Northern Municipals argue,

that is an indication that the pipeline

considers the recovery of discounts an

entitlement, and this undermines the

validity of the Commission’s premise

that pipelines will always seek the

highest rate for their service.

22. While the Commission will

address below Northern Municipals’

and IMGA’s arguments regarding the

basis for each of the Commission’s

challenged findings, some general

comments about the type of evidence

considered in this proceeding are

appropriate at the outset. Rehearing

applicants ask the Commission to

change a policy of 16 years and

establish a blanket rule that prohibits

pipelines from seeking a discount

adjustment in a rate case for discounts

given to meet gas-on-gas competition.

While the permission given by the

Commission to pipelines to discount

their rates between a minimum and

maximum rate was promulgated in

Order No. 436 and adopted as a

regulation,12 the adjustment in

throughput to recognize discounting is

not a rule, but is a policy that was

adopted by the Commission in the Rate

Design Policy Statement.13 Therefore, in

individual rate cases, the parties are free

to develop a record based on the

specific circumstances on the pipeline

to determine whether the discounts

given were beneficial to captive

customers. The pipeline has the burden

of proof under section 4 of the NGA in

a rate case to show that its proposal is

12 18 CFR 284.10 (2005).

13 Interstate Natural Gas Pipeline Rate Design, 47

FERC ¶ 61,295, reh’g granted, 48 FERC ¶ 61,122

(1989).

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just and reasonable. If there are

circumstances on a particular pipeline

that may warrant special considerations

or disallowance of a full discount

adjustment, those issues may be

addressed in individual proceedings.14

Parties in a rate proceeding may address

not only the issue of whether a discount

was given to meet competition, but also

issues concerning whether the discount

was a result of destructive competition

and whether something less than a full

discount adjustment may be appropriate

in the circumstances.

23. The November 22 NOI gave all

participants in the natural gas industry

an opportunity to provide comments on

whether gas-on-gas discounts help

increase overall throughput on interstate

pipelines and asked specific questions

concerning whether customers receiving

such discounts could increase their

throughput. The Commission did this to

develop a record upon which to base its

decision whether to change the selective

discounting policy. Forty parties filed

comments. The Commission

appropriately relies on the record

developed and the comments of

experienced industry participants.

Because the Commission provided all

interested parties with an opportunity to

present evidence, it need not now

undertake a separate and independent

analysis.

24. Further, the Commission need not

undertake such an analysis for the

purposes of determining whether, as

Northern Municipals allege, the

Commission’s rationale for the policy is

undermined because discount

adjustments are ‘‘routinely’’ granted and

pipelines therefore consider them an

entitlement. The Commission does not

routinely grant pipelines a discount

adjustment, but grants such an

adjustment only to the extent that the

discount was required to meet

competition. The Commission has

denied pipelines the adjustment where

the pipeline has failed to meet its

burden of showing that the discount

was required to meet competition. For

example, in Panhandle Eastern Pipe

Line Co,15 Williams Natural Gas Co,16

and Trunkline Gas Co.,17 the

Commission held that the pipeline had

not met its burden to show that its

discounts to its affiliates were required

by competition. In addition, in Iroquois

Gas Transmission System 18 and

14 See, e.g., Natural Gas Pipeline Company of

America, 73 FERC ¶ 61,050 at 61,128–29 (1995),

and El Paso Natural Gas Co., 72 FERC ¶ 61,083 at

61,441 (1995).

15 74 FERC at ¶ 61,109 at 61,401–02 (1996).

16 77 FERC at ¶ 61,277 at 62,206–07 (1996).

17 90 FERC at ¶ 61,017 at 61,096 (2000).

18 84 FERC at ¶ 61,086 at 61,476–78 (1998).

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Trunkline Gas Co.,19 the Commission

disallowed a discount adjustment with

respect to discounts given to nonaffiliates. In both cases, the discounts

were given to long-term, firm customers.

The Commission found that the parties

opposing the discount adjustment had

raised enough questions about the

circumstances in which those long-term

discounts were given to shift the burden

back to the pipeline to justify the

discount. The Commission then found

that, when a pipeline gives a long-term

discount, the Commission would expect

that the pipeline would make a

thorough analysis whether competition

required such a long-term discount, and

in both these cases the pipeline had

failed to present any evidence of such

an analysis. A discount adjustment is

not an entitlement and the pipelines

would be ill-advised to consider it so.

25. Moreover, the Commission need

not conduct such a fact-specific analysis

in order to meet the requirement that its

decision be supported by substantial

evidence. In AGD I, the court explained

that promulgation of generic rate criteria

involves the determination of policy

goals and the selection of the means to

achieve them, and that courts do not

insist on empirical data for every

proposition on which the selection

depends.20 The court cited Wisconsin

Gas Co. v. FERC,21 where certain parties

had objected to the Commission’s

curtailment of the minimum bill

because it allegedly would result in

shifting costs to captive customers. In

response to these arguments, the

Commission stated that the increased

incentive to compete vigorously in the

market would eventually lead to lower

prices for all consumers. The court

noted that the Wisconsin Gas court

accepted this response without record

evidence ‘‘presumably because it

viewed the prediction as at least likely

enough to be within the Commission’s

authority.’’ 22 The court further stated

‘‘agencies do not need to conduct

experiments in order to rely on the

prediction that an unsupported stone

will fall; nor need they do so for

predictions that competition will

normally lead to lower prices.’’ 23

26. Similarly in INGAA v. FERC,24 the

Commission narrowed the right of first

refusal (ROFR) to eliminate the ROFR

for discounted contracts. In justifying

this change, the Commission stated that

if a customer is truly captive, it is likely

19 90 FERC at ¶ 61,017 at 61,092–95 (2000).

20 824 F.2d at 1008.

21 770 F.2d 1144 (D.C. Cir. 1985).

22 824 F.2d at 1008.

23 Id. at 1008–09.

24 285 F.3d 18 at 55 (D.C. Cir. 2002).

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17:33 Nov 22, 2005

Jkt 208001

that its contract will be at the maximum

rate. Parties challenged this finding as

not being based on substantial evidence,

but rather on the agency’s own

supposition and presented hypothetical

examples to the contrary. The court

upheld the Commission and stated that

while the Commission had cited no

studies or data, its conclusion seemed

largely true by definition and that it was

a ‘‘fair inference’’ that customers paying

less than the maximum rate for service

had other choices in the market. The

court further found that the hypothetical

counter examples given by the

petitioners failed to undermine the

Commission’s conclusion that generally,

discounts are given in order to obtain

and retain load that the pipeline could

not transport at the maximum rate

because of competition.

27. In AGD I, the court cited to

economic treatises in reaching its

decision,25 and courts rely on economic

theory in their decisions. For example,

the decisions in Williston Basin v.

FERC,26 Iroquois Gas Transmission

System v. FERC,27 and Arco Alaska, Inc.

v. FERC,28 rely on economic theory in

reaching their conclusions. Therefore,

the Commission rejects the arguments of

Northern Municipals and IMGA that the

May 31 Order is not based on

substantial evidence because it relies on

economic theory rather than empirical

data. To the extent that the

Commission’s orders on the selective

discounting policy rely on economic

theory, that is entirely proper, and

economic theory may be the basis for

the Commission’s decision.

C. Legal Basis for Upholding the Policy

28. In the May 31 Order, the

Commission discussed its

responsibilities under the NGA and

cited to Order No. 636:

The Commission’s responsibility under the

NGA is to protect the consumers of natural

25 Id. at 1010 (citing 2 A. Kahn, The Economics

of Regulation: Principles and Institutions (1987)),

1011n.12 (citing E. Gellhorn & R. Pierce, Regulated

Industries 185–89 (1987)), and n.13 (citing, inter

alia, Tye & Leonard, On the Problems of Applying

Ramsey Pricing to the Railroad Industry with

Uncertain Demand Elasticities, 17A Transportation

Research 439 (1983)).

26 358 F.3d 45, 49–50 (D.C. Cir. 2004) (citing

Alfred E. Kahn, The Economics of Regulation:

Principles and Institutions 132–33 (1988)).

27 172 F.3d 84, 89 (D.C. Cir. 1999) (‘‘We note that

classic analysis of non-cost-based discounting by

carriers has turned on differences in the price

elasticity of demand for the carried product. It

pursues the goal of an optimal trade-off between the

desirability of maximizing output and the necessity

of the utility’s recovering all its costs.’’).

28 89 F.3d 878, 883 (D.C. Cir. 1996) (Explaining

the now ‘‘inverse-elasticity rule, Ramsey Pricing

allocates joint costs in inverse proportion to the

demand elasticities of different customers to yield

the most efficient use of a pipeline.).

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70805

gas from the exercise of monopoly power by

the pipelines 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.29

The Commission then concluded that,

in light of existing conditions in the

natural gas market, 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.

29. On rehearing, IMGA argues that

the Commission did not apply the

proper legal criteria in reaching its

conclusion. IMGA argues that the

selective discount policy is unlawful

unless it can be shown that it produces

a net benefit to captive customers 30 and

that the burden of proof is on the

supporters of the policy to produce

substantial evidence to show that the

discount adjustment benefits captive

customers. It argues that the

Commission’s cite to Tejas was taken

out of context and that it is a

‘‘perversion of the ruling in Tejas Power

Corp. to employ it to support a

conclusion that it is okay to exploit

captive customers where that

exploitation could arguably increase gas

supply because it produces higher

prices.’’ IMGA states that regardless of

whether higher gas prices is a lawful

objective, it is not lawful if the

mechanism produces a violation of the

prohibition against undue

discrimination of sections 4 and 5 of the

NGA. Further, IMGA argues, it is of no

benefit to captive shippers that the

discount adjustment reduces their

transportation costs if it also increases

their gas supply costs, and that in

Maryland People’s Counsel v. FERC, 31

the court concluded that it was

unlawful for the Commission to focus

only on the benefits of lower

transportation costs and ignore the

potential offsetting impact of higher gas

prices.

30. The Commission has correctly

stated its responsibilities under the

29 Order No. 636 at 30,392.

30 IMGA cites the Order No. 637 NOPR,

Transcontinental Gas Pipe Line Corp. v. FERC, 998

F.2d 1313, 1318, 1321 (D.C. Cir. 1993); Columbia

Gas Transmission Corp. v. FERC, 848 F.2d 250,

251–254 (D.C. Cir. 1988); Maryland People’s

Counsel v. FERC, 761 F.2d 768, 770–771 (D.C. Cir.

1985).

31 IMGA cites 761 F.2d 768, 770–71 (D.C. Cir.

1988).

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NGA. The citation to Order No. 636 and

Tejas merely state, as do numerous

other Commission and court

decisions,32 that the Commission’s

responsibility under the NGA is to

ensure customers access to natural gas

at reasonable prices, and that in carrying

out its mission, the Commission must

balance a number of competing

interests. In Order No. 636, the

Commission cited to the Natural Gas

Wellhead Decontrol Act of 1989

(Decontrol Act),33 enacted by Congress

in order to create more abundant natural

gas supplies at lower prices by creating

competition among efficient

producers.34 The House Committee

Report urged the Commission to ‘‘retain

and improve’’ the competitive structure

in natural gas markets in order to

maximize the benefits of wellhead price

decontrol.35 The Decontrol Act did not,

however, alter the Commission’s

consumer protection mandate.

31. Thus, the Commission must, in all

of its decisions, balance a number of

interests, and that is what it has done

here. The Commission recognizes its

obligation to protect captive customers

and it has met that obligation here.

However, the Commission also has

broad responsibilities to develop

policies of general applicability. The

Commission has analyzed the concerns

of IMGA and Northern Municipals in

the context of the overall benefits to the

national pipeline system provided by

the selective discount policy. The

Commission has concluded that the

selective discount policy, including

allowing a discount adjustment for gason-gas competition, generally benefits

all customers including customers who

do not receive the discount.

32. We find IMGA’s view of the

Commission’s responsibilities too

narrow. Under IMGA’s view, if there

could be circumstances where a

discount does not benefit captive

customers then the policy must be

abandoned. While the Commission has

concluded that the selective discounting

policy generally benefits all customers,

it has also recognized that there may be

circumstances on some pipelines where

captive customers may require

additional protections. It is not

necessary, however, for the Commission

32 E.g., FPC v. Hope Natural Gas Co., 320 U.S.

591, 603 (1943); Atlantic Refining Co. v. Public

Service Commission of New York, 360 U.S. 378,

388, 389, 392 (1959) (fundamental purpose of NGA

is to assure the public of a reliable supply of gas

at reasonable prices).

33 103 Stat. 157 (1989).

34 Order No. 636, Regulations Preambles ¶ 30,939

at p. 30,397 (1992), citing H.R. Report No. 29, 101st

Cong., 1st Sess., at p. 2 (1989).

35 H.R. Report No. 29, supra, at p.2.

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to eliminate entirely the discount

adjustment for gas-on-gas competition

in order to address those limited

situations. The cases cited by IMGA are

not to the contrary.

33. As the Commission explained in

the May 31 Order, it is possible to adopt

measures to protect small publicly

owned municipal gas companies in

circumstances where the policy works

an undue hardship on them and at the

same time retain the competitive

benefits of the policy for the majority of

shippers. This is the proper balancing of

interests in this proceeding and the

Commission applied the appropriate

legal standards in balancing these

interests. The Commission’s decision

here meets both goals of promoting a

competitive natural gas market and

protecting captive customers. This is the

type of balancing decision that the

courts have recognized is within the

Commission’s discretion in developing

its policies in a competitive

marketplace.36

34. IMGA’s characterization of the

Commission’s decision as concluding

that it is ‘‘okay’’ to exploit captive

customers where that exploitation could

increase gas supply by producing higher

prices is not an accurate

characterization of the Commission’s

decision. As stated above, it is the

Commission’s responsibility to ensure

that consumers have access to natural

gas at reasonable prices, not to promote

policies that increase prices, and there

is no basis for concluding that the

discount policy increases the delivered

price of natural gas to consumers.

Further, it is clearly established that

selective discounting based on different

demand elasticities does not constitute

undue discrimination under the NGA.37

D. There Is Substantial Evidence To

Support the Commission’s Conclusion

That Discouraging Discounts Would Do

More Harm Than Good

35. IMGA and Northern Municipals

argue that the Commission’s decision

that discouraging gas-on-gas discounting

by disallowing any adjustment to rate

design volumes to account for such

discounts would do more harm than

good is not based on substantial

evidence. They raise a number of issues

which, they allege, the Commission

either failed to address or did not

adequately address in the May 31 Order.

As the May 31 Order stated, there are

three different categories of gas-on-gas

competition. One category is

36 See, e.g., Midcoast Interstate Transmission, Inc.

v. FERC, 198 F.3d 960, 970 (D.C. Cir. 2000).

37 E.g., AGD I at 1011; United Distribution

Companies v. FERC, 88 F.3d 1105, 1142 (D.C. Cir.

1996).

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competition from other interstate

pipelines subject to the Commission’s

jurisdiction. The second category is

competition from capacity releases by

the pipeline’s own firm customers. The

third category is competition from

interstate pipelines that are not subject

to the Commission’s jurisdiction. The

May 31 Order gave different reasons for

allowing discount adjustments for each

of these categories of gas-on-gas

discounts. Accordingly, in addressing

the rehearing requests, we will continue

to discuss these categories of gas-on-gas

competition separately.

1. Competition From Other Interstate

Pipelines

36. IMGA and Northern Municipals

contend that the Commission erred in

not adopting their proposals to adopt a

rule prohibiting adjustments to rate

design volumes for discounts a pipeline

gives in competition with another

interstate pipeline. They attack both of

the primary bases of the Commission’s

decision: (1) that gas-on-gas discounts

do play a role in increasing throughput

on interstate pipelines and (2) such

discounts provide substantial other

public benefits which would be lost if

the Commission sought to discourage

such discounting.

37. Before addressing the specific

arguments of the two rehearing

applicants in support of their position,

several general comments are in order.

First, the Commission has never

codified its policy concerning discount

adjustments in any definitive rule or

regulation. Rather, the Commission has

developed its discount adjustment

policy first through the 1989 Rate

Design Policy Statement and

subsequently in individual rate cases.

Under that policy, the pipeline may

propose as part of a section 4 rate filing

to adjust its rate design volumes to

account for any discounts it gave during

the test period, including discounts

given in competition with other

pipelines. By proceeding on this basis,

the Commission must find, based on the

record developed in each rate case, that

the pipeline has met its section 4

burden to show that any approved

discount adjustment to rate design

volumes is just and reasonable.38 In

addition, as the Commission stated in

the May 31 Order 39 and discusses

further below, the Commission will

consider the impact of any discount

adjustment on captive customers in

specific proceedings. The Commission’s

termination of the instant rulemaking

38 Pacific Gas & Electric Co. v. FPC, 506 F.2d 33,

48 (D.C. Cir. 1974).

39 111 FERC ¶ 61,309 at P 57.

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proceeding is a decision to continue to

address the discount adjustment issue

in the same case-by-case manner. Thus,

the May 31 Order should not be

interpreted as establishing any

definitive rule that pipelines will in all

instances be permitted a full discount

adjustment for discounts given in

competition with another pipeline.

Rather, the Commission simply

determined in the May 31 Order to

reject the rehearing applicants’ proposal

to establish a definitive rule prohibiting

pipelines from proposing in section 4

rate cases discount adjustments with

respect to discounts given in

competition with other pipelines.

38. Second, the Commission’s

approach to this issue appropriately

balances several factors. Given the

increasingly competitive nature of both

the gas commodity and pipeline

capacity markets, the Commission

believes there are undeniable public

benefits to giving pipelines flexibility to

discount their rates consistent with the

market value of their capacity, including

in the context of competition with other

interstate pipelines. At the same time,

the Commission must take into account

the effect of such discounting on truly

captive customers. While the

Commission believes that in most

instances such discounts either help

keep the rates of the captive customers

lower than they otherwise would be or

are at least neutral in effect, the

Commission recognizes that there may

be some situations where gas-on-gas

discounting could shift costs to the

captive customers. However, the

Commission believes that such

situations are sufficiently isolated that

they are best dealt with on a case-bycase basis, rather than by establishing a

generic rule discouraging interstate

pipelines from giving discounts in

competition with one another.

39. The Commission now turns to a

discussion of the public benefits of

competition between interstate

pipelines. The May 31 Order found that

pipeline discounts in competition with

one another 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,

and that discouraging such discounting

would lead to harmful distortions in

both the commodity and capacity

markets. On rehearing, IMGA and

Northern Municipals argue that there is

no substantial evidence in the record to

support this conclusion. The

Commission disagrees.

40. As the Commission found in both

Order No. 637 and the May 31 Order,

and as many of the comments in this

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proceeding reiterate,40 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

supplies. As a result, buyers can reach

supplies in a number of different

producing regions and sellers can reach

a number of different downstream

markets.

41. 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.’’ 41 These basis

differentials vary on a daily and

seasonal basis as market conditions

change and are largely determined by

the gas-on-gas competition that occurs

at the market centers.42

42. Under the Commission’s original

cost method of determining just and

reasonable rates, the maximum just and

reasonable rate in a pipeline’s tariff

reflects embedded costs and

depreciation. As a result, the pipeline’s

maximum tariff rate need not reflect the

market value of its capacity on any

given day or season of the year.

Moreover, the maximum rates of

competing pipelines may substantially

differ from one another. Allowing each

pipeline to discount its capacity to the

market value indicated by the basis

differentials taking into account the

40 Id. at P 31.

41 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).

42 Gulf South comments at 17.

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time period over which the discount

will be in effect 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

and during the time periods when it is

needed.

43. The May 31 Order gave a number

of examples of the public benefits

provided by enabling pipelines to

discount their rates to the market value.

First, such discounting helps minimize

the distorting effect of transportation

costs on producer decisions concerning

exploration and production. Second,

discounting enables interstate pipelines

with higher cost structures to compete

with lower cost pipelines. Third, if

several interstate pipelines serve the

same downstream market, discounting

can help minimize short-term price

spikes in response to increases in

demand by making the higher cost

pipeline more willing to discount down

to the basis differential in order to bring

more supplies to the downstream

market. Fourth, discounting helps

facilitate discretionary shipments of gas

into storage during off-peak periods.

Finally, selective discounting helps

pipelines more accurately assess when

new construction is needed.

44. IMGA and Northern Municipals

contest each of the public benefits found

by the Commission. However, a large

majority of the commenters in this

proceeding affirmed that discounts

given by competing pipelines based on

the market value of their capacity do

produce significant public benefits.

IMGA and Northern Municipals do not

seriously contest the finding that basis

differentials between two points show

the current market value of the

transportation capacity between those

two points. Rather, they suggest, in

essence, that by discouraging pipelines

from discounting maximum rates that

exceed the basis differentials, the

Commission could force whatever

reductions in the delivered price of gas

the market requires to be made with

respect to the commodity component,

rather than the transportation

component of the delivered price. For

example, IMGA states that, without

discounts, wellhead prices may fall

somewhat. However, the Commission

believes that any effort to insulate one

component of a price from market forces

would cause harmful distortions and

ultimately fail.

45. IMGA and Northern Municipals

contend that, in today’s market, with its

higher natural gas commodity prices,

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there is no need to be concerned that

unavailability of discounts to the basis

differentials could lower producer net

backs. They argue that, if no discount is

granted, the producer will either adjust

its price to clear this market, or will

choose to flow its gas to some other

market where a consumer is willing to

pay more, a correct result in a

competitive market. Also, Northern

Municipals suggest that, given the

deregulation of wellhead prices, the

Commission should no longer be

concerned with the effect of interstate

transportation rates on producers.

46. However, as already discussed,

when Congress deregulated wellhead

prices in 1989, it directed that the

Commission exercise its remaining NGA

jurisdiction over transportation in

manner that would improve the

competitive structure of the natural gas

market. In response to that directive, the

Commission has consistently taken into

account the effect of its rate policies on

natural gas production, most

significantly when it adopted the

straight fixed variable (SFV) rate design

for firm transportation rates in Order

No. 636. The purpose of that policy was

to minimize the distorting effect of

transportation costs on producer

decisions concerning exploration and

production. As the Commission stated

in the May 31 Order, the various

interstate pipelines competing in the

same downstream markets generally

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. Given the

differences between pipeline maximum

rates based on their differing historical

costs and given the fact that market

value of transportation between two

points is at times less than the pipeline

maximum rates, any effort by the

Commission to insulate pipelines from

market forces would be inconsistent

with the Congress’s directive that the

Commission seek to improve the

competitive structure of the natural gas

market. 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.43 As a result, gas

reserves from supply areas served by

lower cost pipelines would have a builtin cost advantage over gas reserves

served by higher cost pipelines.

47. IMGA and Northern Municipals

also contend that the Commission’s

43 Reliant Energy at 11; Gulf South at 30.

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statement that discounts help interstate

pipelines with higher cost structures to

compete with lower cost pipelines,

enabling the capacity for both pipelines

to be utilized in the most efficient

manner possible, provides no support

for the selective discounting policy.

However, it is clear that in such a

situation the pipeline with the higher

maximum rate may need to discount to

compete with the pipeline with the

lower maximum rate to the extent the

pipeline with the lower maximum rate

has available capacity. Discouraging the

pipeline with the higher maximum rate

from discounting in that situation

would only harm that pipeline’s captive

customers, since it would lose

throughput over which it could

otherwise spread its fixed costs. IMGA

and Northern Municipals suggest that

such discounts would provide no

overall public benefit, since they would

not increase overall throughput on both

interstate pipelines. Rather such

discounts would only serve to switch

throughput from one pipeline to the

other. However, the Commission finds

there is a clear public benefit to

maximizing the ability of higher cost

pipelines to compete with lower cost

pipelines. Otherwise, the higher cost

pipeline will tend always to lose

throughput over which to spread its

fixed costs, thus exacerbating the

difference in rates between the two

pipelines making it more and more

difficult for the higher cost pipeline to

compete and leading the captive

customers of the higher cost pipeline to

bearing an inequitably high

transportation cost vis-á-vis the captive

customers of the lower cost pipeline.44

48. Indeed, discounting has become

an integral part of today’s dynamic

natural gas market.45 The U.S. natural

gas pipeline grid has become

increasingly interconnected since the

transition to unbundled, open access

transportation service pursuant to Order

Nos. 436, 636, and 637, with pipeline

companies making substantial

investments in constructing new

pipeline facilities. In response to a 2005

INGAA survey, 36 pipelines reported

that they had spent $19.6 billion for

interstate pipeline infrastructure

between 1993 and 2004, and during the

1990s interregional natural gas pipeline

44 See Michigan Consolidated Gas Co. comments

at 4–5, describing the adverse effect on

TransCanada Pipeline and its customers due to its

inability to discount in competition with the United

States pipelines; Transco comments at 9–10.

45 INGAA comments at 7–10; Duke comments at

18–22; Transco comments at 5–8, 27–28; Process

Gas comments at 3–4; Gulf South comments at 10,

11, 17–19; Dominion Resources comments at 3–5;

NGSA comments at 8–10.

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capacity grew by 27 percent.46 As a

result, most major markets are now

served by multiple interstate pipelines.

For example, customers in the Chicago

metropolitan area are served by eleven

interstate pipelines, giving them access

to natural gas supplies in Western

Canada, the Rocky Mountains, New

Mexico, Oklahoma, Michigan,

Louisiana, the Gulf coast, and Texas.47

In this environment, gas-on-gas

competition and alternate fuel

competition are interchangeable.

Discounts given by competing pipelines

also serve to increase the market share

of natural gas versus alternate fuels.48

49. In their rehearing requests, IMGA

and Northern Municipals contend that,

whatever public benefits may arise from

discounts given by one interstate

pipeline to meet competition from

another interstate pipeline, captive

customers should not have to bear the

cost of those discounts through a

discount adjustment to rate design

volumes. They contend that the

Commission erred when it found that

such discounts benefit captive

customers, since the customers

receiving such discounts are demand

elastic and therefore those discounts

help increase overall throughput on

interstate pipelines.

50. In their rehearing requests, IMGA

and Northern Municipals do not

seriously contest the Commission’s

finding that such discounts will

increase the demand of the customers

receiving them in at least some of the

ways found by the Commission. For

example, the Commission stated that

industrial and other business customers

of pipelines 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 industrial and other

business customers of pipelines, who

typically face considerable competition

in their own markets, do more business

than they otherwise would, thereby

increasing their demand for gas. Also,

such discounts may reduce the

incentive for existing non-fuel

switchable customers to install the

necessary equipment to become fuel

switchable. 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.

51. However, the thrust of IMGA and

Northern Municipals’ argument is that

46 INGAA comments at 9.

47 Kinder Morgan comments at 10.

48 Kinder Morgan comments at 7, 18.

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the Commission has not shown that

such increased demand will translate

into increased overall throughput or

revenues on interstate pipelines. IMGA

contends that a study presented by

INGAA in its comments shows that the

demand elasticity in the natural gas

transportation market is very limited,

with the result that, for every 10 percent

decrease in the price of transportation,

demand for transportation increases by

only about 1.2 percent.49 IMGA

contends that, as a result, any additional

revenues generated by a pipeline

decreasing its rates through discounts in

competition with another pipeline will

not offset the effects of the rate

decreases.50 IMGA also argues that even

if a discounted rate given to customers

with access to more than one pipeline

would cause them to increase their

consumption of natural gas, the

increased price that the discount

adjustment would charge to captive

shippers would cause them to decrease

their consumption by a similar amount.

IMGA states that this is because the

difference between captive customers

and discounted shippers is not the

elasticity of their demand, but whether

there are alternative pipelines from

which they can purchase.

52. Similarly, Northern Municipals

state that the Commission makes

conclusory statements that overall

throughput on the national grid will

increase as a result of discounting, but

provides no studies or evidence to back

this up. Similarly, Northern Municipals

argue that unless the reduction in fixed

costs to captive and other customers is

greater than the discounts they are

forced to absorb, the increase in

throughput does nothing to protect the

interests of captive customers and, they

allege, there is no solid evidence to

support the conclusion that any increase

in throughput will result in a net

decrease in rates to consumers.

Northern Municipals states that the May

31 Order provides no support for the

presumption that increased throughput

results in more spreading of fixed costs,

thus benefiting consumers that are not

entitled to discounts by providing them

with lower overall rates. They state that

the only thing the order proves is that

if a rate is discounted heavily enough,

it may attract some additional volumes.

49 IMGA cites pages 14–15 of an affidavit by

Bruce B. Henning attached to INGAA’s comments.

50 IMGA illustrates its contention with the

following example: It assumes a pipeline with

revenues of $250.00 based on charging $.50 per Mcf

for throughput of 500 Mcf. If the pipeline reduced

its rate by 10 percent to $.45 per Mcf in order to

increase its throughput by 1.2 percent to 506 Mcf,

it would then generate revenues of $227.70, about

9 percent less than its revenues without the rate

reduction.

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But, they argue, if the discount the

ratepayers must absorb is greater than

the offsetting reduction in the portion of

the fixed costs that those ratepayers

must bear, there is no justification for

the discount.

53. The Commission recognizes that

the discounts a pipeline gives in

competition with another interstate

pipeline may or may not increase the

overall revenue collected by interstate

pipelines. As discussed below, the

revenue effects of particular gas-on-gas

discounts given by a pipeline depend on

the circumstances in which the pipeline

gave the discount. However, the

Commission’s experience has been that

such discounts generally do not cause

significant cost shifts to captive

customers. Therefore, the Commission

reaffirms its conclusion that discounts

given by competing pipelines provide

sufficient public benefits that we will

not modify our policy to adopt a blanket

prohibition on adjustments to rate

design volumes to reflect such

discounts. As we stated in the May 31

Order, if there are circumstances on a

particular pipeline that warrant

additional protections for captive

customers, including a limitation on the

discount adjustment to rate design

volumes, those issues can be considered

in individual rate cases.

54. IMGA and Northern Municipals

assume that, where two pipelines

compete with one another they will

engage in a destructive bidding war,

with the result that all customers with

access to the two pipelines will receive

heavily discounted rates for all their

service without regard to their elasticity

of demand. However, this assumes that

in such a situation the customers with

access to the two pipelines will have all

the bargaining power, and the two

pipelines will have none. This is

unlikely to be the case. If the total

capacity of the two pipelines is not

greatly in excess of the demand for

transportation service in the markets

served by the two pipelines,

competition between the customers for

the pipelines’ capacity should give the

pipelines some ability to minimize any

discounts and target the discounts they

do give to the customers whose demand

will increase with a lower rate so as to

fill the pipeline.

55. Moreover, pipelines have an

incentive not to discount too deeply,

because they recognize that, to the

extent they do file a rate case to attempt

to raise rates to their remaining

customers, the demand of those

customers could go down. Also, those

customers would then have more of an

incentive to seek alternatives of their

own, for example through participating

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70809

in the expansion of another pipeline.

The affidavit of Bruce Henning,

submitted by INGAA and relied on by

IMGA, pointed out that long-run

elasticities of demand are always higher

than short-term demand elasticities,

usually two to three times.51 That is

because in the long-run consumers can

make capital investments to increase

price responsiveness, including

investments to increase their efficiency,

and their alternative fuel capacity. In

addition, the pipelines should recognize

that the Commission has stated that it

may not permit a full discount

adjustment in situations where that

would lead to an inequitable result.52

56. There is nothing in the record

developed in response to the NOI to

suggest that the Commission’s general

policy of permitting pipelines to

propose discount adjustments for gason-gas competition has led to a

widespread cost shift to captive

customers. The NOI asked the

commenters for specific examples of

rate cases where the discount

adjustment has impacted captive

customers. No party was able to point to

any rate case where discounts due to

gas-on-gas competition actually caused

a substantial cost shift to captive

customers. In response, IMGA referred

to discounts in Docket No. RP95–326,

Natural Gas Pipeline Co. of America,

where, IMGA asserts, discounts

produced adjustments in throughput

that resulted in rates so high that

Natural chose not to increase their tariff

rates as much as could have been

justified. IMGA also referred to

Southern Natural Gas Co.,53 where it

had submitted testimony concerning

discounts given by Southern during the

period May 1992 through April 1993.

Northern Municipals referred to the

discount given to CenterPoint on

Northern.

57. These specific Commission

proceedings cited by the parties seeking

rehearing do not support a finding that

gas-on gas discount adjustments have

caused a significant cost shift to captive

customers, requiring a drastic policy

change seeking to discourage such

discounts. Instead, they support the

conclusion that individual rate cases

provide the appropriate forum for

determining the extent to which a

discount adjustment for this type of

discount is just and reasonable in the

circumstances of the particular case. As

IMGA points out, in the Natural

51 Henning Affidavit at 15.

52 See Natural Gas Pipeline Company of America,

73 FERC ¶ 61,050 at 61,128–29 (1995), and El Paso

Natural Gas Co., 72 FERC ¶ 61,083 at 61,441 (1995).

53 65 FERC ¶ 61,348 (1993).

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decision, the circumstances resulted in

the pipeline not implementing the full

discount adjustment. Indeed, in its

rehearing request,54 IMGA recognizes

that Natural, and a second pipeline

which faces substantial gas-on-gas

competition, Gulf South Pipeline

Company, have been able to engage in

effective and efficient competition. As a

result, they have not had to shift large

amounts of costs to captive customers

through discount adjustments. IMGA

also recognizes that one factor in the

ability of these pipelines to successfully

compete has been the Commission’s

1996 policy of permitting pipelines to

negotiate rates using a different rate

design from their recourse rates.55

58. In the Southern decision cited by

IMGA, the parties reached a settlement.

Moreover, in the May 31 Order the

Commission found that the testimony

presented in that case concerning

discounting practices of one interstate

pipeline over ten years ago are not

probative of the prevalence of gas-on-gas

discounting by all interstate pipelines

today,56 and IMGA does not contest that

finding in its rehearing request. As

discussed more fully below, the issue of

whether Northern should receive a full

discount adjustment in connection with

the CenterPoint discount has not been

decided and parties will have an

opportunity to address all the relevant

facts concerning this discount in

Northern’s next rate case.

59. Thus, appropriate actions have

been taken in individual rate cases to

resolve this issue. In the individual rate

cases, parties can investigate the

specific facts surrounding the discount

to determine whether a full discount

adjustment is warranted and whether

any special circumstances require

additional protections for captive

customers. This approach retains the

competitive benefits of discounting and

at the same time allows the Commission

to take action to mitigate the impact of

a discount adjustment if the

circumstances require.

60. Thus, the Commission finds that

the responses to the NOI produced no

evidence to support IMGA’s allegation

in its brief to the D.C. Circuit on the

appeal of Order No. 637 that the

discount adjustment for gas-on-gas

competition has burdened captive

customers by a cost ‘‘tilt of billions of

dollars of costs.’’ 57 As a result, the

Commission concludes that a

54 IMGA rehearing at 20.

55 Alternatives to Traditional Cost-of-Service

Ratemaking, 74 FERC ¶ 61,076 (1996).

56 111 FERC ¶ 61,309 at P 20.

57 INGAA v. FERC, 285 F.3d 18, 58 (D.C. Cir.

2002).

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continuation of its current general

policy permitting pipelines to seek

discount adjustments for gas-on-gas

discounts in individual section 4 rate

cases, with the ability to consider limits

on a case-by-case basis, strikes the best

balance between enabling the industry

to obtain the benefits of such

discounting discussed above, while

minimizing the potential ill effects.

Thus, the Commission rejects the

request of IMGA and Northern

Municipals that it establish a blanket

rule prohibiting pipelines from

proposing such a discount adjustment

in a section 4 rate case.

61. In its rehearing request, Northern

Municipals contends that, even if the

Commission does not prohibit discount

adjustments for discounts given in

competition with another pipeline, the

Commission should require pipelines to

demonstrate in their initial rate filing

that such discounts actually increased

throughput sufficiently that the

proposed rates are lower than they

would have been had no discount been

granted. Under current Commission

policy, the Commission gives shippers a

full opportunity to litigate all issues

concerning the justness and

reasonableness of any proposed

discount adjustment. While the

Commission does not require pipelines

in their initial rate filing to include

evidence justifying why competition

required each and every test period

discount underlying the pipeline’s

proposed discount adjustment, the

customers have the ability through

discovery in the rate case to inquire into

why the pipeline provided each such

discount. In their rehearing requests,

IMGA and the Northern Municipals

seek to portray the Commission’s

presumption that discounts given to

non-affiliates were required by

competition as an insuperable obstacle

to contesting the need for any such

discounts. However, as the Commission

clarifies elsewhere in this order that is

not a correct interpretation of our

policy. To the extent a pipeline is

unable during the discovery process to

explain what competitive alternatives

the recipient of any particular discount

had or otherwise give a satisfactory

explanation of why the discount was

required, that fact by itself would be

sufficient to rebut the presumption that

competition required the discount.

62. Moreover, as indicated by the

Commission’s orders in Natural 58 and

El Paso,59 even where a pipeline is able

to show that particular discounts were

required to meet competition from

58 73 FERC ¶ 61,050 (1995).

59 72 FERC ¶ 61,083 (1995).

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another pipeline, parties may argue that

the competition between the two

pipelines led to such deep discounts

that a full discount adjustment would

lead to an inequitable cost shift to the

captive customers. As the Commission

stated in the May 31 Order, the

Commission continues to be mindful of

its obligations to captive customers and

will consider the impact of any discount

adjustment on those customers in

specific proceedings. In this regard, the

Commission notes that Northern

Municipals in its rehearing request has

contended that certain discounts

Northern has recently provided to two

large LDCs will lead to an improper cost

shift in Northern’s next rate case.

However, as the Commission has stated

in its orders concerning those

discounted rate transactions, if Northern

proposes in its next rate case a discount

adjustment based on those discounted

rate transactions, the parties may litigate

all issues concerning the justness and

reasonableness of any such discount

adjustment.

63. Finally, Northern Municipals refer

to an example provided in the initial

comments of the Commission’s Office of

Administrative Litigation (OAL) and

assert that the Commission did not

adequately refute the conclusion drawn

from this example that overall

throughput is not increased when a

selective discount is given to meet gason-gas competition. We will restate that

example here:

Assume that an LDC is attached to three

pipelines, Pipelines A, B, and C, each with

their own contracts to transport 20,000

MMbtu/day. If the LDC’s contract with

Pipeline A is set to expire at the end of Year

1, the LDC will negotiate with all three

pipelines to obtain the best price for the

desired capacity. If Pipeline B offers the best

discounted price, Pipeline A will have lost

the contract. If the loss of volumes is

sufficient Pipeline A will file a rate case, and

receive an increase in rates, based on the

reduced throughput of the lost LDC contract.

All captive customers of Pipeline A will pay

higher maximum rates.

Meanwhile, Pipeline B will have increased

its throughput by 20,000 MMbtu/day. All

other things being equal, since Pipeline B’s

volumes now exceed those upon which its

rates were designed by 20,000 MMbtu/day,

the additional volumes will simply increase

Pipeline B’s earned rate of return until such

time as the pipeline files a rate case.

If, during of Year 2, the LDC’s original

contract with Pipeline B (a maximum rate

contract for a different 20,000 MMbtu/day)

expires, the pipelines again can bid for the

capacity and offer discounts. If Pipeline C

wins the contract, Pipeline B’s overall

throughput will decrease back down to the

level it was at before it acquired the volumes

from Pipeline A. Now, however, Pipeline B

may have to file for a rate increase because,

even though it is selling the same volumes

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upon which its rates were designed, 20,000

MMbtu/day of those volumes (i.e., the

volumes it took from Pipeline A which it still

has) now move at a discounted rate. As a

result, Pipeline B will show a revenue

shortfall, and it will be given a discount

adjustment for the discounted rate it is

receiving from the LDC for the capacity it

acquired that originally was under contract

with Pipeline A.

If, during Year 3, Pipeline C’s original

contract with the LDC expires, the pipelines

again can bid for the capacity and offer

discounts. If Pipeline C wins the contract

again, but at a steep discount, it may have to

file for a rate increase as its revenues may be

short of its costs even though it has increased

its throughput volumes.

64. Northern Municipals state that

three conclusions can be drawn from

this hypothetical: First, the LDC did not

change the total amount of gas it

transported and consumed. Second, two

of the three pipelines were able to

increase their earned rates of return for

a period of time due to the excess

volumes captured from the pipeline

holding the original contract. Third,

maximum rates to captive customers left

on the LDC’s original pipeline

experienced an increase in rates due to

the LDC’s defection, and eventually,

captive customers on the other pipelines

also experienced an increase. Northern

Municipals state that all this occurred

with no increase in net throughput.

Thus, they conclude, the final result is

that the LDC and its customers enjoy

lower rates, but the captive maximum

rate and other customers pay higher

rates with no corresponding benefits

and, thus, subsidize the discount to the

LDC.

65. There are several problems with

this overly simple example, which was

clearly developed to prove the result

that it assumes. In the first place, the

example assumes that both Pipeline B

and Pipeline C have 20,000 MMBtu/day

of unsubscribed capacity that is

available for sale to the LDC. The

example does not, however, explain

how those units of unsubscribed

capacity were accounted for in Pipeline

B and C revenue requirement or the cost

impact of the unsubscribed capacity on

the current customers. If those costs are

not being collected by Pipeline B and C,

its customers will be better off if the

pipeline sells its unsubscribed capacity

at a discount, rather than if it files a rate

case to recover the costs of the

unsubscribed capacity from its current

customers. The discounts will protect

the captive customers from absorbing

the full costs of the unsubscribed

capacity. The example also assumes that

if Pipeline A loses 20,000 MMBtu/d, it

will file a rate case and the Commission

will allow it to shift all the costs of its

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unsubscribed capacity to its captive

shippers. Neither of these of scenarios

may occur. Pipeline A would likely try

to resell this capacity and, if Pipeline A

did file a rate case, the Commission

might not allow the recovery of all of

the costs of the unsubscribed capacity

from the captive customers. In any

event, Northern Municipals does not

cite any case or real-life example where

anything like this occurred.

66. As discussed above, the

Commission understands that there may

be circumstances where gas-on-gas

competition could result in discounts

and no increase in throughput.

However, this example cited by

Northern Municipals provides no basis

for making any changes in the

Commission’s current policy.

2. Competition From Capacity Release

67. In the May 31 Order, the

Commission found that there was no

basis for creating an exemption from the

selective discounting policy for

discounts that result from competition

from capacity release. The Commission

explained that its goal in creating the

capacity release market in Order No.

636 was to create a robust competitive

secondary market for capacity, and

stated that the capacity release program,

together with the Commission’s policies

on segmentation and flexible point

rights has been successful in achieving

this goal. The Commission stated that 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. The Commission

also explained that capacity release

benefits captive customers by allowing

them to compete with pipelines for their

unused capacity, and this provides them

with an opportunity to offset a portion

of their transportation costs. The

Commission stated that it is not

unreasonable to require shippers to

compete with the pipeline for the sale

of released capacity. In addition, the

Commission stated that releasing

customers have some competitive

advantages over the pipelines in the

capacity release market. Thus, the

Commission explained that flexible

point rights and the ability to segment

capacity enhance their ability to

compete in the secondary market, and

that shippers have an additional

advantage in the secondary market

because the capacity that is being

released by the shippers is firm

capacity, while the pipeline may be

limited to selling service on an

interruptible basis because it has

already sold the capacity to the

releasing shipper on a firm basis.

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Northern Municipals and IMGA seek

rehearing of the Commission’s ruling on

this issue.

68. Northern Municipals state that

capacity release is based on a

fundamentally different concept than

the selective discounting policy. They

assert that the capacity release program

is intended to enable firm customers of

pipelines to sell any excess firm

capacity and thereby recoup some of the

costs associated with holding that firm

entitlement. Order No. 637 was also

intended to benefit captive customers,

Northern Municipals argue, by reducing

their revenue responsibility through a

combination of increased capacity

release revenues, revenue credits,

reduced discount adjustments, and

lower long-term rates on pipelines

instituting peak/off peak or term

differentiated rates. On the other hand,

Northern Municipals state, the selective

discount policy is premised on the

belief that discounting increases

throughput on the overall national grid

to the benefit of captive customers.

Northern Municipals argue that

allowing pipelines to use selective

discounting to compete with their own

firm capacity holders is at odds with the

general goals of the capacity release

program, as well as the goals of Order

No. 637.

69. Northern Municipals are correct

that the selective discount policy and

the capacity release programs are based

on fundamentally different concepts.

The Commission discussed the

differences in the development of these

policies in the NOI in this proceeding 60

as well as in its order in Williston Basin

Interstate Pipeline Co.61 As the

Commission explained, the selective

discount policy was adopted as part of

Order No. 436 and is based on a

monopolistic model, while the capacity

release program was adopted in Order

No. 636, where the Commission began

to move away from the monopolistic

selective discount model to a more

competitive model, especially for the

secondary market. In Order No. 636, the

Commission adopted significant

changes to the structure of the services

provided by natural gas pipelines in

order to foster greater competition in the

natural gas markets.

70. One of these changes was the

adoption of the capacity release

program. As Northern Municipals state,

one of the purposes of the capacity

release program was to enable

customers to sell their unused capacity

in the secondary market and thus

mitigate the shift to the SFV rate design.

60 See NOI at P 2–6.

61 107 FERC ¶ 61,229 at P 3–9 (2004).

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However, this was not the only or the

primary purpose of the capacity release

program. As the Commission explained

in Order No. 636–A, the capacity release

mechanism is intended to create a

robust secondary market where the

pipeline’s direct sale of its capacity

must compete with its firm shippers’

offers to release their capacity. The

Commission stated that this competition

would help ensure that customers pay

only the competitive price for the

available capacity.62 In upholding the

capacity release program in UDC v.

FERC,63 the court recognized that

capacity release is intended to develop

an active secondary market with holders

of unutilized firm capacity rights

reselling those rights in competition

with capacity offered directly by the

pipeline.

71. The issue therefore is how best to

accommodate the policies behind

selective discounting and capacity

release. The Commission believes that

the May 31 Order strikes the appropriate

balance. Northern Municipals and

IMGA would have the Commission

focus only on the goal of allowing

captive customers to recoup some of

their transportation costs. But, the

capacity release program, as upheld by

the court in UDC v. FERC, was also

intended to create a robust competitive

secondary market. It was not the intent

of the Commission to allow customers

to release capacity without competition

between the customers and the

pipelines, and it was entirely reasonable

for the Commission to require customers

to compete with the pipelines in these

circumstances. The Commission always

intended that customers would be

required to compete with pipelines for

the sale of this capacity and to protect

customers from this competition would

negate an equally important part of the

capacity release policy.

72. The Commission must adopt

policies of general application that

promote the Commission’s goals in the

national gas market. Competition in the

secondary market benefits all users of

the system. Reduction of incentives for

pipelines to offer discounts would

reduce competition. The public interest

is best served when the Commission’s

policies promote competition and

market efficiency to the maximum

practical extent. The Commission’s

policies on capacity release and

pipeline discount adjustments act

together to maximize competition and

economic efficiency, resulting in lower

delivered energy prices for consumers

62 See Order No. 636–A, FERC Stats. & Regs. at

30,553 and 30,556.

63 88 F.3d 1105, 1149 (D. C. Cir. 1996).

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Jkt 208001

in aggregate. Denying pipelines a

discount adjustment for capacity sold

below the maximum rate in competition

its customers would inhibit the

competitive market that capacity release

has created.

73. Further, Northern Municipals

argue that the Commission has not

demonstrated how the goal of increasing

throughput on the national grid and,

thus, spreading fixed costs over more

units of service, is furthered by allowing

discount adjustments for capacity sold

by an interstate pipeline in competition

with released capacity. In these

circumstances, Northern Municipals

argue, the pipeline is merely competing

to resell the same capacity that has

already been sold to the releasing

shipper as firm capacity. Northern

Municipals state that the fixed costs

associated with this capacity have

already been paid, and, therefore the

charge paid for this capacity will not

add to the recovery of fixed costs.

Further, Northern Municipals argue, the

impact on throughput will be the same

whether the pipeline sells this capacity

or the releasing shipper sells this

capacity.

74. Northern Municipals’ argument

misunderstands how increased

throughput on the pipeline impacts the

reservation charges of firm customers.

Increased capacity sold by the pipeline,

in competition with capacity release or

otherwise, will not impact the current

reservation charges paid by firm

customers, but will reduce those charges

in the next rate case. In a rate case, rates

are determined by dividing the revenue

requirement by the units of throughput.

The higher the throughput, the lower

the rates and, thus, if the pipeline’s

throughput during the rate case test

period is increased due to discounting

the reservation charges in the next rate

case will be lower than they would have

been without the increased throughput.

If firm shippers release capacity in

competition with the pipeline and a

replacement shipper buys the capacity

from the shipper instead of the pipeline,

then there will be no increase in the

pipeline’s throughput from that

transaction to reduce rates in the next

proceeding. But, the releasing shipper

has instead received an immediate and

direct benefit by making the sale of

capacity and thereby recovered some of

its reservation charges. When the

Commission implemented Order No.

636, it recognized that competition from

capacity release would reduce the

amount of interruptible transportation

service the pipelines would be able to

sell. Therefore, in the Order No. 636

restructuring proceedings of individual

pipelines, the Commission permitted

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the pipelines to reduce their allocation

of costs to interruptible service.

However, the Commission determined

then, and reaffirms now, that enabling

firm shippers to release their capacity

when they are not using it and

immediately recover some of their

reservation charges provides a greater

benefit that more than offsets the cost of

any reduced allocation of fixed costs to

interruptible service.

75. In addition, Northern Municipals

dispute the Commission’s conclusion

that the releasing shipper has a

competitive advantage over the pipeline

and states that circumstances on

Northern give it some advantages over

the releasing shipper. First, Northern

Municipals state, Northern offers a daily

firm service which may be more

attractive to shippers than released

capacity. Further, Northern Municipals

assert, Northern has a competitive

advantage over releasing shippers in

terms of price because during the

summer months there is excess capacity

on Northern and the price for this

capacity is very low. In addition,

Northern Municipals assert, Northern

may enter into contracts that exempt

shippers from surcharges, giving

Northern a price advantage over a

releasing firm shipper that is subject to

these charges. Northern Municipals

state that Northern can undercut the

releasing shipper by this amount

without absorbing any costs, and then

turn around and propose a selective

discount adjustment that raises the rates

of the shipper against whom Northern

was competing to sell the capacity.

Northern Municipals state that these

advantages are not the result of a

competitive market, but are instead the

result of Northern’s ability to use its

monopoly power to manipulate rates in

a manner that maximizes its revenues,

contrary to the fundamental notion that

interstate pipelines should not be

permitted to use their market power to

the detriment of their customers.64

76. Nothing in Northern Municipals’

argument negates the fact that Order No.

637’s policies on segmentation and

flexible point rights enhance a shipper’s

ability to compete in the secondary

market. Moreover, since the shippers

have contracted for guaranteed firm

service for the entire term of their

contracts, they can release guaranteed

firm service for whatever term they do

not require the service themselves. This

does give them the ability to sell a high

quality service in the secondary market,

rather than the short-term daily firm

service described by Northern

64 Northern Municipals cites UMDG v. FERC, 88

F.3d 1105, 1127 (D.C.Cir. 1996).

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Municipals. It may be that Northern has

some advantages as well, but this has

not hampered competition in the

secondary market. The Commission’s

policies have led to an active and

competitive secondary market for the

sale of capacity.

77. Northern Municipals and IMGA

argue that a discount adjustment for

discounts given in competition with

capacity release amounts to a subsidy

and that therefore captive and other firm

shippers are required to subsidize the

very discounts that kept them from

selling their excess capacity. IMGA

argues that the Commission’s citation to

AGD I 65 as justification for the discount

adjustment is inapposite because the

Commission’s current discount policy

with the discount adjustment was not

before the court and thus any statement

regarding the discount adjustment was

dicta.66 Moreover, IMGA asserts, AGD I

also made clear that the ‘‘opportunity to

recover costs does not guarantee that

those costs are recoverable in the face of

competition.’’ 67 Thus, IMGA states, if

captive customers’ rates are increased to

offset the loss the pipeline would

otherwise incur in discounting in

competition with capacity release, those

discounts are subsidized, and, unless

there is evidence that captive customers

benefit from the subsidy, it is unlawful.

78. Contrary to the suggestion of

IMGA and Northern Municipals the

discount adjustment is not a subsidy.

Pipelines are not, as IMGA and

Northern Municipals suggest,

reimbursed for the discount by the

captive customers through the discount

adjustment and the discount adjustment

should not raise the rates of captive

shippers. As explained above, in a rate

case, the rates going forward are

determined by dividing the pipeline’s

projected costs by its projected future

throughput on the volumes transported

during the rate case test period. If some

of the test period volumes were

transported at a discount, the discount

adjustment recognizes that these

volumes were transported at less than

the maximum rate. Therefore the units

of throughput for ratemaking purposes

are reduced to reflect the discounting.

79. To the extent that a discount

adjustment for discounts given to

interruptible customers in competition

with firm customer capacity release

results in a higher allocation of costs to

65 A GD I at 1012.

66 IMGA states that the D.C. Circuit made this

clear in Mississippi Valley Gas Co. v. FERC, 68 F.3d

503, 506–07 (D.C. Cir. 1995); Transcontinental Gas

Pipe Line Corp. v. FERC, 998 F.2d 1313, 1318, 1321

(D.C. Cir. 1993); Columbia Gas Transmission Corp.

v. FERC, 848 F2d 250, 251–254 (D.C. Cir. 1988).

67 IMGA cites AGD I at 1001.

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Jkt 208001

firm services, as opposed to

interruptible services, that allocation

appropriately recognizes that firm

service with the right to release capacity

in competition with the pipeline and

the right to segment and use flexible

point rights is a higher quality service

with substantial rights.

80. Further, while it is true that the

discount adjustment was not before the

court in AGD I, the court clearly

indicated its concern that the absence of

a discount adjustment would be a

‘‘dubious’’ practice that could result in

denying the pipelines and opportunity

to recover their costs. It was not error for

the Commission to respond to the

court’s concern in further developing its

discount policy.

81. Of course, if there were no

discount adjustment and all of the

discounted volumes were included in

the test period throughput as though

they had been transported at the

maximum rate, the rate derived using

those volumes would be lower than the

rates that would be derived using the

discount adjustment. But, if the

Commission required pipelines to

include the full amount of all volumes

transported at a discount, then, as the

court pointed out in AGD I, the pipeline

would be in jeopardy of not having an

opportunity to recover its cost of

service. This would discourage

discounting. In these circumstances, it

is likely that the pipeline would not

have transported the volumes at the

discounted rate and the throughput in

the next rate case would be lower than

if the volumes had been transported at

a discount.

82. Further, IMGA argues that

discounting in competition with

capacity release does not benefit captive

customers and therefore the policy

cannot be continued. First, IMGA states,

small captive customers on one-part rate

schedules are not permitted to release

capacity and, second, even if a captive

customer benefits from capacity release,

that does not mean that it benefits from

discounting in competition with

capacity release.

83. Again, IMGA’s focus is too

narrow. The Commission recognizes its

obligation to protect captive customers

from the monopoly power of the

pipelines, but the Commission has other

obligations as well and must balance a

number of interests in developing its

policies. Captive customers might be

better off if they were able to sell their

capacity in the capacity release market

without competition from the pipelines,

but this would defeat the Commission’s

purpose in adopting the capacity release

program to develop a robust competitive

secondary market for capacity. It is not

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70813

unreasonable for the Commission to

require firm shippers to compete with

pipelines for the sale of capacity in the

secondary market.

84. As the Commission explained in

Order No. 636–B,68 because customers

paying a one-part 69 rate do not pay a

reservation charge to reserve capacity,

they cannot release that capacity.

However, the Commission also stated

that the pipeline should develop

procedures that would enable customers

served under one-part rate schedule to

convert to a two-part rate schedule if

they choose to convert in order to

release capacity. Presumably, IMGA’s

one-part rate shippers could convert to

a two-part rate schedule if they choose

to take advantage of the benefits of

capacity release. The one-part

volumetric rate with an imputed load

factor paid by small customers is a

subsidized rate that provides them with

a lower rate than they would pay if they

paid the rate applicable to larger

shippers. The choice is for the small

shipper to decide if it prefers the

benefits of its lower one-part rate to the

benefits of capacity release.

3. Competition From Intrastate Pipelines

85. In the May 31 Order, the

Commission stated that competition

from intrastate pipelines is not subject

to the Commission’s jurisdiction and the

Commission therefore has no ability to

discourage intrastate pipelines from

offering discounts in competition with

interstate pipelines. Therefore, the

Commission stated that interstate

pipeline discounts to avoid loss of

throughput to non-jurisdictional

intrastate pipelines do benefit captive

customers of the interstate pipelines.

The Commission stated that the

commenters opposing the discount

adjustment seemed to recognize this and

therefore focused their comments on

competition from interstate pipelines

and capacity release.

86. On rehearing, Northern

Municipals argue that the Commission

has provided no support for its

statement that customers benefit from

discounts given to avoid loss of

throughput to intrastate pipelines.

Northern Municipals assert that the

analysis of whether a discount given to

meet competition from an intrastate

pipeline is no different from the

68 Order No. 636–B, 61 FERC ¶ 61,272 at 61,998

(1992).

69 As the Commission explained in the May 31

Order, small captive customers pay one-part

volumetric rates on many pipelines. Small shippers

paying these one-part 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.

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analysis that should apply to a discount

given to meet competition from an

interstate pipeline, i.e., does the

discount that shippers are being asked

to bear outweigh any benefits from

retaining the load in question. Northern

Municipals assert that competition from

an intrastate pipeline will almost always

involve competition from another

interstate pipeline and that they believe

that the majority of intrastate pipelines

are not built to allow a shipper to

directly access a production area, but

instead are built to provide access to

another interstate pipeline. Thus, they

argue, the analysis is not different than

if a shipper went directly to the

competing interstate pipeline.

87. Northern Municipals give as an

example the discount given by Northern

to CenterPoint. Northern Municipals

state that the discount granted to

CenterPoint was for capacity that

CenterPoint already had under contract

and therefore no increase in throughput

would result from the CenterPoint deal

either on Northern or on the interstate

grid. Northern Municipals state that the

competition in this case was from an

intrastate pipeline and that

CenterPoint’s competitive alternative

was to build or have built an intrastate

pipeline to access another interstate

pipeline, not to access directly the

production area. Northern Municipals

further state that while the Commission

has assured Northern Municipals that it

can attack this discount in a future rate

case, the Commission’s statement that

discounts given to meet competition

from intrastate pipelines do benefit

captive customers of the interstate

pipeline prejudges that issue.

88. Parties did not generally argue in

their initial comments that discounts to

meet competition from intrastate

pipelines would not increase

throughput on the national

transportation grid, as they did with

regard to discounts given to meet

competition from other interstate

pipelines. Therefore, the May 31 Order

did not focus on this issue. The

Commission lacks jurisdiction over

intrastate pipelines and thus cannot

discourage them from discounting

through its ratemaking policies.

Therefore, interstate pipelines must be

allowed to compete with intrastate

pipelines or throughput will be lost to

the intrastate pipelines to the detriment

of the interstate customers.

89. If an interstate pipeline gives a

shipper a discount in order to keep that

shipper on the system, the discount

benefits the captive customers of the

pipeline by retaining that throughput. If

instead the volumes left the system to be

transported on an intrastate pipeline,

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the overall volume on the interstate

system would be lower as a result. If the

volumes were retained on the interstate

pipeline rather than moving via an

intrastate pipeline to another interstate

pipeline, the issues would be similar to

those discussed above with regard to

competition between interstate

pipelines. As the Commission has

concluded above, competition between

interstate pipelines can increase

throughput on the interstate grid and

can produce additional benefits to users

of the system. Thus, the Commission

has concluded that in either case a

discount to gain or retain throughput

may be appropriate if the pipeline is

able to show that the discount was

necessary to meet competition.

90. In any event, the issue of whether

the discount given to CenterPoint

should receive a discount adjustment

under the Commission’s policy can be

addressed in the rate case where

Northern seeks a discount adjustment.

Northern Municipals raised issues

concerning the CenterPoint discount

when Northern filed its service

agreement with CenterPoint for the

Commission to approve various material

deviations in the service agreement. As

the Commission’s March 23, 2005 70 and

June 8, 2005 71 Orders in that

proceeding made clear, the Commission

has made no determination as to

whether Northern will be able to obtain

a discount adjustment in its next rate

case for the discount given to

CenterPoint, and neither does anything

in this order prejudge that issue.

Similarly, as the Commission explained

in the November 1, 2005 Order in

Northern Natural Gas Co.,72 the issue of

whether Northern will be permitted to

adjust its rate design volumes in its next

rate case to reflect discounts given to

another Northern customer

(Metropolitan Utilities District) will be

decided in that next rate case. The issue

of whether any other equitable relief

would be appropriate in the

circumstances of these discounts can

also be addressed in the next rate case.

91. Thus, as a general rule, a discount

granted by an interstate pipeline to meet

competition from an intrastate pipeline

will result in greater throughput on the

interstate system than without such a

discount to the benefit of all customers.

If there are special circumstances that

the Commission should consider, it can

do so in an individual rate case.

70 Northern Natural Gas Co., 110 FERC ¶ 61,321

at P 32 (2005).

71 Northern Natural Gas Co., 111 FERC ¶ 61,379

at P 8 (2005).

72 113 FERC ¶ 61,119 (2005).

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E. The Discount Adjustment for

Discounts Given on Expansion Capacity

92. In the May 31 Order, the

Commission found there was no reason

to create an exemption from the

selective discounting policy for

expansion projects. The Commission

explained 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. The Commission stated that, as

a result of recent expansions, there are

fewer captive customers,73 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. However, the Commission also

clarified that in receiving approval for

the expansion project, the pipeline must

meet the criteria set forth in the

Certificate Pricing Policy Statement,74

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.

IMGA and Northern Municipals seek

rehearing of this ruling.

93. On rehearing Northern Municipals

argue that the Commission failed to

address the issue of how new

construction can be a true competitive

alternative if, in the absence of

discounting, it is a higher priced

alternative. Northern Municipals state

that in a competitive market, the correct

result is that the construction will not

be undertaken because there is lowerpriced capacity already available.

Northern Municipals state that a

competitive market is not one in which

one alternative is artificially priced

lower than its cost by forcing other

shippers, not interested in the

construction, to subsidize that

construction so that it can compete with

other, lower-priced service.

94. Northern Municipals state that

there is no evidentiary support for the

Commission’s statement that as a result

of expansions, there are fewer captive

73 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.

74 88 FERC ¶ 61,277 (1999), order on clarification,

90 FERC ¶ 61,128 (2000), order on further

clarification, 92 FERC ¶ 61,094 (2000).

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customers. But, they argue, even if this

were true, there is still no justification

for asking existing customers of a

pipeline to subsidize a discount

adjustment for a construction project for

capacity that is not competitively

priced.

95. Northern Municipals and IMGA

argue that discount adjustments are

contrary to the Commission’s policy on

expansion capacity because they distort

accurate price signals. They quote the

Certificate Pricing Policy Statement that

rolled in pricing sends the wrong price

signals by masking the costs of the

expansion, and asserts that discounting

has the same effect. Northern

Municipals acknowledge the

Commission’s statement in the May 31

Order that it would not approve a

discount adjustment in circumstances

that would shift costs to customers that

did not benefit from the expansion, but

argues that the Commission then

contradicts itself by stating that

allowing an adjustment for discounts in

a rate case does not amount to rolledin pricing. Northern Municipals argue

that if the rates are required to be

incrementally priced under the

Commission’s existing policy, then an

adjustment in a base rate case for

discounts does constitute recovery of

costs from existing shippers that do not

benefit from the expansion.

96. In addressing the issue of the

application of the selective discounting

policy to new pipelines, there is a

distinction between an entirely new

pipeline and an expansion of an existing

pipeline. An entirely new pipeline

should have the same policies applied

to it with regard to discounting as an

existing pipeline. Discount adjustments

only affect the allocation of the costs of

the pipeline that gave the discount

among its own customers. Thus, the

ability of a new pipeline to seek a

discount adjustment in designing its

own rates will not adversely affect

customers of other pipelines. Shippers

who are original customers on the new

pipeline can negotiate risk-sharing

arrangements with that pipeline before

deciding to participate in the project.

These original shippers are not captive

customers in the same sense as captive

customers on existing pipelines and,

since they are not currently receiving

service under the new pipeline, they

clearly have other options. A newly

constructed pipeline could be fully

booked with firm transportation, but

could obtain additional throughput

through the sale of interruptible service

at a discounted rate. In those

circumstances, the pipeline should

receive a discount adjustment, and there

is no reason to create an exemption from

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the Commission’s selective discounting

policy for newly constructed pipelines.

97. The expansion of existing pipeline

capacity is, however, a different

situation. In the Certificate Pricing

Policy Statement,75 the Commission

stated that in evaluating proposals for

certificating new construction, the

threshold question applicable to

existing pipelines is whether the project

can proceed without subsidies from

their existing customers. This policy

statement changed the Commission’s

previous policy of giving a presumption

for rolled-in treatment for pipeline

expansions. The Commission found that

rolled-in treatment sends the wrong

price signals by masking the true cost of

capacity expansions to the shippers

seeking the additional capacity. The

Commission stated that the requirement

that pipeline expansions should not be

subsidized by existing customers is

necessary for a finding of market need

for the project. This generally means

that expansions will be priced

incrementally so that expansion

shippers will have to pay the full cost

of the project without subsidy from the

existing customer through rolled-in

pricing.

98. Thus, in most cases, expansion

capacity is incrementally priced. The

Commission clarifies that in these

circumstances, there will be no discount

adjustment for service on the expansion

that affects the rates of the current

shippers, since rates for that service will

be designed incrementally.

99. However, the pricing policy did

not eliminate the possibility that some

or all of a project’s costs could be

included in determining existing

shipper’s rates. The Commission stated

that rolled-in treatment would be

appropriate when rolled-in rates lead to

a rate decrease for the pre-expansion

customers, for example because initial

costly expansion results in cheap

expansibility. In addition, rolled-in rates

might be appropriate if the new

facilities are necessary to improve

service for existing customers. In

circumstances where the rates for

expansion capacity are rolled-in, a

discount adjustment can be appropriate.

F. Burden of Proof

100. In the May 31 Order, the

Commission explained that under its

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. The

75 88 FERC ¶ 61,277 (1999), order on clarification,

90 FERC ¶ 61,128 (2000), order on further

clarification, 92 FERC ¶ 61,094 (2000).

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Commission further explained that it

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 nonaffiliated shippers, the Commission

stated, 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, the Commission stated, once

the pipeline has explained generally

that it gives discounts to non-affiliates

to meet competition, parties opposing

the discount adjustment have the

burden to raise a reasonable question

concerning whether competition

required the discounts given in

particular non-affiliate transactions.

Once the party opposing the discount

adjustment raises a reasonable question

about the circumstances of the discount,

then the burden shifts back to the

pipeline to show that the questioned

discounts were in fact required by

competition.

101. The May 31 Order found that this

allocation of the burden of proof is

based on accurate assumptions and

produces a just and reasonable result.

The Commission stated that 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. IMGA and

Northern Municipals seek rehearing of

this ruling.

102. Northern Municipals assert that

the burden of proof is heavily tilted in

favor of the pipeline because the burden

is on the opposing party, who was not

privy to the original negotiations, to

discover all of the details relevant to the

discounts at issue, while the pipeline,

who knows the most about the

transaction, need do nothing at the

outset to prove that the discount was

necessary. Further, Northern Municipals

assert, the rate case in which the

discount adjustment is at issue often

occurs well after the discount is made

and thus, the opposing party’s attempts

to prove that the discounts were not

necessary are invariably met with

charges that they are using ‘twentytwenty’ hindsight to challenge the

discounts. Northern Municipals state

that an additional problem with the

burden of proof is that in rate cases,

pipelines argue that they have the right

to file the last round of testimony,

giving the pipeline the final opportunity

to present its real justification for the

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discount, and there will be no

opportunity for the shippers to rebut

this testimony.

103. Northern Municipals argue that

pipelines should be required to

demonstrate, through the filing of

substantial evidence in their initial

cases, that the benefits to captive

customers that they and the

Commission assume exist, actually do

exist. Thus, Northern Municipals state,

pipelines would have to compare the

base rates that would have existed had

the discounts not been granted to the

base rates that would have existed if the

discounts had been granted and a

discount adjustment included in the

computation of base rates. They argue

that this proposal would not discourage

discounts, as the Commission has

suggested, if the discount met the test of

providing some quantifiable benefit to

captive and other customers, but would

only discourage discounts that do not

comport with the Commission’s stated

rationale for its selective discount

policy.

104. Northern Municipals overstate

the burden placed upon parties

challenging a discount adjustment.

Contrary to the assertions of Northern

Municipals, the burden placed upon the

opponents of the discount adjustment is

not an unduly heavy burden. All the

challenger of a discount adjustment

must do, after the pipeline has

explained generally the basis for its

discounts, is produce some evidence

that raises a reasonable question

concerning whether the discount was

required to meet competition.76 Thus,

Northern Municipals’ concern that, in a

rate case, ‘‘the opposing party’s attempts

to prove that the discounts were not

necessary are invariably met with

charges that they are using ‘twentytwenty’ hindsight to challenge the

discounts’’ is unfounded. Contrary to

Northern Municipals assertion, the

opponent of the discount is not required

to prove that the discount was not given

to meet competition, but merely has to

raise a reasonable question as to the

validity of the discount and the pipeline

is required to show that it was made to

meet competition. Further, the relevant

inquiry is whether at the time the

discount was given it was necessary to

meet competition and this inquiry

would not be dismissed as hindsight.

105. It is not an undue burden to ask

the parties opposing the discount

adjustment to introduce some evidence

that raises a question about the need for

the discount. In a rate case where the

discount adjustment is challenged, all

76 See, e.g., Northern Natural Gas Co., 111 FERC

¶ 61,379 at P 18 (2005).

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parties have an opportunity to seek

discovery of all the facts surrounding

each discount. Thus, discovery will

provide the parties with the information

necessary to determine whether a

challenge to a discount adjustment is

appropriate and the ultimate burden of

proof on the issue will be on the

pipeline. In this regard, if a pipeline is

unable in response to a discovery

request to explain why competition

required a particular discount, the

Commission would regard that fact

alone to raise a sufficient question

concerning whether the discount was

required to meet competition to shift the

burden to the pipeline to justify the

discount. Thus, pipelines must keep

information relevant to each discount

because if they are unable to explain

and justify each discount, they will not

be able to meet their burden of proof.

Parties may also challenge in the rate

case the level of discounts given and the

pipeline must be able to substantiate

that the discount was not lower than

what was necessary to meet competition

and obtain the additional throughput.

Further, Northern Municipals’ concern

that shippers could be denied an

opportunity at a hearing to rebut the

pipelines case is unfounded and

Northern Municipals cite no case where

this has occurred. The pipeline must

present evidence showing that the

discount was required by competition

and the opponents of the discount have

an opportunity to challenge that

evidence.

106. Finally, Northern Municipals

argue that the Commission should

review its records and information

submitted by the pipelines to determine

whether pipelines are successful in

recovering discounts from their

remaining customers all or a majority of

the time. If so, Northern Municipals

argue, then the basis of the policy, i.e.,

that pipelines will always seek the

highest rate because it is in its own

economic interests to do so, must be

reexamined. Northern Municipals argue

that if pipelines are routinely permitted

to recover these discounts through rates,

then they do not need to seek the

highest possible rate and can agree to

virtually any discount from maximum

rates because their economic interests

are fully protected through their ability

to have their other customers subsidize

their discounts. Similarly, IMGA states

that the discount adjustment does not

motivate the pipeline to obtain the

highest rate possible for the service, but

instead motivates the pipeline to grant

the discount without knowing whether

it is necessary to meet competition

because the throughput adjustment

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insulates it from the risk of its own

imprudence.

107. The Commission does not

require the pipeline to initially present

detailed evidence to substantiate that

each discount was granted to meet

competition because it assumes that, in

the case of a discount to a non-affiliate,

the pipeline will always seek the

highest rate for its services because it is

in its own best economic interests to do

so. The Commission can make

assumptions about rational business

behavior and a pipeline, like any other

business, can be presumed to act in its

own economic best interests. Contrary

to the parties’ assertions here, the

discount adjustment does not negate

that assumption. There is no rational

reason for a pipeline company to sell

capacity at less that the highest rate it

can charge. It would not be a good

business practice for a pipeline to turn

down the opportunity to put money in

its pocket today through a higher rate in

order to take a chance that the

Commission will allow a discount

adjustment in a future rate case.77 There

is no guarantee that the Commission

will approve a discount adjustment and

the Commission has denied pipelines

this rate treatment when it has not been

shown that the discounts were required

by competition.78

108. Moreover, the discount

adjustment simply allows pipelines to

project future throughput based on the

volumes transported during the test

period for the rate case and recognizes

that some of these volumes may have

been transported at a discount in order

to meet competition. If the projection of

future volumes based on the test period

discounts is accurate, the pipeline will

recover its cost of service. However, if

competitive circumstances change, and

in the future the pipeline is required to

discount below the level of the

discounts during the test period, the

pipeline is at risk of undercollecting its

cost of service until its next rate case.

On the other hand, if the pipeline can

transport volumes at a rate higher than

the discounted rate during the test

period, it will retain that money until

the next rate case. Thus, the pipeline

always has an incentive to collect the

highest possible rate for its service and

it makes no business sense for a

pipeline to discount unnecessarily. It is

therefore reasonable for the Commission

to make this assumption in allocating

77 See, e.g., Columbia Gas Transmission Corp.,

848 F.2d 250, 251–54 (1985) (pipeline will seek the

highest possible rate).

78 See, e.g., Iroquois Gas Transmission System, 84

FERC ¶ 61,086 at 61,476–78 (1998), reh’g denied,

86 FERC ¶ 61,261 (1999); Trunkline Gas Co., 90

FERC ¶ 61,017 at 61,092–95 (2000).

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the burden of proof on this issue. As

explained above, parties opposing the

discount may address at the hearing, not

only the issue of whether a discount

was given to meet competition, but also

of whether something less than the full

discount is appropriate in the

circumstances. The requests for

rehearing are denied.

G. Protections for Captive Customers

109. In the May 31 Order, the

Commission stated that opposition to

the discount policy comes from a group

of publicly-owned municipal gas

companies that represent a small

percentage of throughput on the

national system, and that it is possible

to adopt measures to protect these

customers in individual cases where the

Commission’s policy works an undue

hardship on them and at the same time

retain the benefits of the policy for the

majority of shippers. Northern

Municipals and IMGA seek rehearing of

this ruling.

110. These parties assert that the

discount policy is opposed not only by

publicly-owned municipal gas

companies, but also that it is opposed at

least in part by OAL, Arizona Electric

Power Cooperative, Inc., the Missouri

Public Service Commission, Calpine

Corp., CenterPoint Energy Resources,

the Northwest Industrial Gas Users, and

seven members of Northern Municipals

that are small-investor-owned LDCs.79

Moreover, Northern Municipals argue,

the issues raised here do not turn on

whether those commenting represent a

large or a small percentage of

throughput. Instead, Northern

Municipals assert, the relevant inquiry

is whether the goals of the selective

discounting policy are adequately

supported by the facts and the law.

Northern Municipals argue, while it

may be true that the Commission can

take case-specific actions to protect

captive customers, this is not responsive

to the issue of whether the goals of the

selective discounting policy have been

adequately supported by the facts and

the law. Further, Northern Municipals

take issue with the Commission’s

statement that there are already

measures in place on pipelines that give

captive customers special rates that

provide them with protection. Northern

Municipals state that a selective

discounting policy that is premised on

the conclusion that it will lead to

increased throughput on the national

grid, and benefit captive customers and

79 Community Utility Company, Great Plains

Natural Gas Company, Northwest Natural Gas Co.,

Sheehan’s Gas Company, Inc., Midwest Natural

Gas, Inc., Superior Water Light & Power, and St.

Croix Valley Natural Gas, Wisconsin.

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Jkt 208001

others by spreading fixed costs cannot

be justified by simply stating that some

of the smallest customers on a pipeline

receive volumetric rates, particularly

where those rates are the result of

settlements.80

111. There are only two parties that

continue to oppose the discount policy,

IMGA and Northern Municipals. The

other parties mentioned by IMGA and

Northern Municipals have not sought

rehearing of the May 31 Order. In any

event, the Commission’s statement that

only a small group of customers oppose

the policy was not intended to suggest

that an otherwise unsupportable policy

would be appropriate because only a

few shippers object to it. Instead, the

statement was directed to a balancing of

competing interests in this case.

Because the discount policy is a

significant and necessary part of the

Commission’s pro-competitive policies

and because it provides benefits to

many shippers, it is appropriate for the

Commission to consider whether any

negative impacts of the policy can be

mitigated. If any negative impacts of the

selective discounting policy are

relatively few and isolated and can be

corrected, then abandoning the overall

benefits of the policy would not be

warranted.

112. IMGA objects to the statement in

the May 31 Order that one-part rates

protect small customers and are

subsidized by the larger customers.

IMGA asserts that there is no evidence

that all one-part rates are subsidized.

IMGA argues that the one-part rate does

not protect captive customers from

unlawful discrimination caused by

raising their rates to subsidize

discounted rates.

113. One-part rates are offered by

pipelines to small shippers to benefit

those shippers by charging them lower

rates than they otherwise would pay.

Generally, one-part volumetric rates are

based on an imputed load factor that

does not reflect the actual projected

volumes, but instead reflects a level

designed to allocate some of the costs to

larger customer services. For example,

Natural Gas Pipeline Co. of America

(Natural) explains that on its system the

group of small municipal customers that

do not have access to competitive

alternatives from other pipelines or

capacity release are served under Rate

Schedule FTS–G (G Customers).81

80 Moreover, Northern Municipals assert, while

45 of its members are eligible for volumetric rates,

all its members purchase service under Northern’s

two-part rate schedule, and therefore pay

reservation charges that are impacted by discount

adjustments.

81 See Comments of Natural Gas Pipeline

Company of America at 14–15.

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Natural states that these customers

account for 1 percent of the total

contract requirements on its system.

Natural explains that these small

customers have firm service, but pay

only volumetric rates. Therefore, they

have firm capacity reserved for them,

but pay for service only when they

actually use that capacity. Further,

Natural explains, the G rate is derived

from the corresponding large customer

rate at an assumed 50 percent load

factor, while the actual load factor of G

Customers is approximately 10 percent.

Natural states that under this rate

structure, the G Customers pay only

about 20 percent of what they would

pay for the corresponding level of firm

service under Rate Schedule FTS. In

these circumstances, the one-part rates

are subsidized because they do not

recover all of the costs of the service. In

any event, the Commission’s reference

to one-part rates was merely intended to

show an example of a way that

protections for small customers can be

considered in individual cases.

114. Northern Municipals state that

there is no evidence to support the

Commission’s statement that to the

extent the discount policy furthers

competition, it ‘‘should’’ encourage

other pipelines to compete for the

business of captive customers. Northern

Municipals state that pipelines

generally compete for the largest loads.

Further, Northern Municipals argue that

this portion of the order conflicts with

the Commission’s conclusion that

interstate pipelines should be able to

discount to compete with intrastate

pipelines. Northern Municipals state

that with regard to the CenterPoint

discount discussed above, the

competition that Northern was

attempting to meet was from a new

intrastate pipeline to be built. Northern

Municipals state that if the pipeline had

been built, it would have freed-up

capacity in Northern’s capacity

constrained market area perhaps

provided access to new or additional

supply sources and increased

competitive alternatives.

115. In the May 31 Order the

Commission stated that as the national

transportation grid becomes more

competitive, there will be fewer captive

customers. The Commission believes

that its policies promoting competition

do encourage pipelines to compete for

business, including the business of

captive customers, and since Order No.

636, substantial new capacity has been

built.82 In any event, as we have

82 As stated above, in response to a 2005 INGAA

survey, 36 pipelines reported that they had spent

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117. The May 31 Order found that

selective discounting does not provide a

basis for requiring pipelines to file

periodic rate cases. The Commission

explained that, unlike the circumstances

under the Commission’s Purchased Gas

Adjustment (PGA) clause regulations

there is no adjustment mechanism that

permits a pipeline to change its rates

and pass additional costs through to

customers between rate cases. The

Commission found that in these

circumstances, the procedures under

sections 4 and 5 of the NGA provide

sufficient protections to the pipeline’s

customers.

118. On rehearing, Northern

Municipals argue that if a pipeline

increases throughput through

discounting, any resulting benefits will

not accrue to captive customers until

the throughput on which rates are based

is adjusted in a rate case to reflect the

increase. Further, Northern Municipals

state that without a requirement for

periodic section 4 rate filings, pipelines

have the ability to manipulate the

timing of their filings to maximize

revenue. Northern Municipals also

assert that current system rates most

likely already include discount

adjustments and that, to the extent that

those adjustments were based on

discounts that no longer accurately

reflect the current level of discounting,

they may or may not achieve the

purposes of the selective discounting

policy.

119. Further, Northern Municipals

state complaint proceedings are not a

solution because they are time

consuming and expensive, the party

filing the complaint will not have access

to the information needed to file the

complaint in the first place, and relief

is prospective only. Northern

Municipals state that in their initial

comments, they asked the Commission

to ask Congress to amend section 5 of

the NGA to provide for refunds.

Northern Municipals state that the May

31 Order does not address these

shortcomings of section 5 and argues

that the Commission must fully address

these issues before concluding that

section 5 provides sufficient protection

to consumers.

120. Under section 4 of the NGA, the

Commission is required to ensure that

rate changes proposed by the pipeline

are just and reasonable, and under

section 5, if the Commission finds that

the existing rate is unjust or

unreasonable, it must establish the just

and reasonable rate for the future. This

is the statutory scheme under the NGA

and it gives the Commission sufficient

authority to ensure that pipeline rates

are just and reasonable. A requirement

that pipelines file periodic rate cases is

not part of the statutory scheme, and the

Commission’s authority to require such

filings is limited.83 As the Commission

stated in the May 31 Order, under this

statutory scheme, the decision to file a

rate case is always that of the pipeline

and it may choose to file a rate at a time

that it is advantageous for it to do so.

The ‘‘shortcomings’’ Northern

Municipals perceives in section 5 as a

remedy are part of the statutory scheme.

The fact that under section 5 the burden

of proof is on the complainant and that

relief is prospective only does not give

the Commission authority to order

periodic rate filings under section 4.

121. Northern Municipals argue that

periodic rate filings should be required

because there are similarities between

the discount policy and the PGA.

Northern Municipals state that the

fundamental premise behind the

periodic rate filing required under the

PGA regulations was that, in exchange

for the 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 the

gas cost increases were not offset by

decreases in other costs. Northern

Municipals state that, similarly, the

premise of selective discounting is that

captive customers will benefit from

subsidizing discounts because there will

be an increase in fixed costs spreading.

But, they argue, if the discounts are not

reviewed periodically, any alleged

benefits may not be realized. Northern

$19.6 billion for interstate pipeline infrastructure

between 1993 and 2004, and during the 1990s

interregional natural gas pipeline capacity grew by

27 percent.

83 New York State Public Service Commission v.

FERC, 866 F.2d 487 (D.C. Cir.1989) (requiring

periodic filings under NGA section 4 beyond the

Commission’s statutory authority).

explained above, issues concerning

Northern’s discount to CenterPoint can

be considered in Northern’s next rate

case.

116. IMGA further states that while

the Commission stated that it would

consider the impact of discount

adjustments in specific proceedings,

IMGA and other captive customers have

been paying higher rates than necessary

and lawful because of the Commission’s

discount policy for the past 16 years and

absent Commission action now, will

continue to pay those unlawful rates.

Contrary to this assertion, the current

rates being paid by IMGA are lawful

rates that have been found just and

reasonable under section 4 of the NGA.

H. Periodic Rate Cases

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17:33 Nov 22, 2005

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Municipals assert that this is no

different in principle from saying that

the pipeline under a PGA clause must

examine all costs at regular intervals to

assure that the gas cost increases were

not offset by decreases in other costs.

122. The Commission affirms its

conclusion that similarities between the

PGA mechanism and the discount

adjustment mechanism do not justify a

periodic rate filing requirement. Under

the PGA mechanism, pipelines were

able to pass projected changes in their

gas costs through to customers between

rate cases. Thus, the rates adjudicated

just and reasonable in a section 4 rate

case would change prior to the next rate

case to reflect increased gas costs. In

exchange for this ability to increase

their rates between rate cases, the

pipelines agreed to a reexamination of

all of their rates at three-year intervals.

This is not analogous to the discount

adjustment permitted in the pipeline’s

next rate case to reflect that not all testperiod throughput volumes were

transported at the maximum rate. There

is no mechanism under the selective

discount policy that permits shippers’

rates to change between rate cases. The

rates of other shippers on the system

remain at the level determined to be just

and reasonable in the pipeline’s last

section 4 rate case and are not affected

until the next rate case is filed. In these

circumstances a requirement that

pipelines file periodic rate cases is not

justified.

I. Informational Posting Requirements

123. In the May 31 Order, the

Commission concluded that its current

informational posting requirements

provide shippers with the price

transparency needed to make informed

decisions and to monitor transactions

for undue discrimination and

preference.84 Therefore, the

Commission stated that it would not

change its informational posting

requirements at this time. The

Commission further stated that it 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 and that, as part of the

Commission’s ongoing market

84 Under section 284.13(b), pipelines are required

to post on their Web site 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 Web site any offer of a

discount at the conclusion of negotiations

contemporaneous with the time the offer is

contractually binding.

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Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices

monitoring program, the Commission

will continue to conduct audits on its

own.

124. Northern Municipals argue that

the Commission erred in refusing to

amend its regulations to require

pipelines to post the reasons for each

selective discount granted and the

benefits of the discount to captive

customers. They state that if customers

want to oppose a discount, they must

know the reason for it. Northern

Municipals state that attempting to

analyze a pipeline’s reasons for granting

the discount in a later-filed rate case

raises additional issues, including

whether after-the-fact justification

should be permitted and whether it is

more difficult for the captive customers

to eliminate discount adjustments for

discounts that have already been

provided to favored customers.

125. As explained in the May 31

Order, under section 284.13(b) of the

Commission’s regulations, pipelines are

required to post on their Web site

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 Web site any offer of a discount at

the conclusion of negotiations

contemporaneous with the time the

offer is contractually binding. This

information provides shippers and the

Commission with the price transparency

needed to make informed decisions and

to monitor transactions for undue

discrimination and preference. As the

court stated in AGD I,85 ‘‘the reporting

system will enable the Commission to

monitor behavior and to act promptly

when it or another party detects

behavior arguably falling under the bans

of sections 4 and 5.’’

126. In determining whether a

discount adjustment is appropriate in a

rate case, the Commission determines

whether the discount was required by

competition at the time it was given.

Thus, the competitive circumstances at

the time of the discount are relevant and

an ‘‘after-the-fact’’ justification that does

not meet that standard would not

support a discount adjustment. Nor

would it be more difficult under this

standard to ‘‘eliminate discount

adjustments for discounts that have

already been provided to favored

customers.’’ Therefore, the request for

rehearing is denied. The Commission

85 824 F.2d at 1009.

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17:33 Nov 22, 2005

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will not change its informational

posting requirements at this time.

J. Proceeding To Investigate New Cost

Allocation Methodologies

127. Northern Municipals state that in

the NOI the Commission requested

comments on what alternative changes

in the Commission’s policy could be

considered to minimize any adverse

effects on captive customers. Northern

Municipals state that in response, it

requested that the Commission institute

proceedings to investigate a new cost

allocation methodology that would

more fairly allocate the costs of the

pipeline system in proportion to the

benefits a shipper derives from the

system. Northern Municipals state that

the Commission erred in not addressing

this issue and asks the Commission

address its alternative proposal on

rehearing.

128. Northern Municipals ask the

Commission to consider and investigate

a new approach to pipeline regulation

that would mandate structural

separation of the pipeline networks

from their parent corporations and

affiliates. Under Northern Municipals’

proposal, the pipeline network would

be independently financed, would have

its own board of directors, and would

have common carrier status. Further,

Northern Municipals state that the

Commission should utilize a cost

allocation methodology that assigns the

costs of the interstate pipeline network

to customers in direct proportion to the

benefits that they derive from the use of

the network. Northern Municipals also

ask the Commission to consider

implementing an independent system

operator (ISO) similar to that in the

electric industry.

129. In the NOI, the Commission

sought comments on what alternative

changes in the Commission’s discount

adjustment policy could be considered

to minimize any adverse effect on

captive customers. The issues raised by

Northern Municipals are beyond the

scope of this proceeding 86 and the

Commission will not address them here.

The Commission orders: The requests

for rehearing are denied.

By the Commission. Commissioner Kelly

dissenting in part with a separate statement

attached.

Magalie R. Salas,

Secretary.

Kelly, Commissioner, dissenting in part:

86 Some of the proposals also appear to be beyond

the scope of the Commission’s authority to

implement.

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70819

As I stated in the underlying order in this

proceeding,1 I would have supported a

requirement for pipelines to post on their

Web sites the reasons for providing a

selective discount to a particular shipper.

Therefore, I respectfully dissent in part on

this order.

Suedeen G. Kelly

[FR Doc. 05–23140 Filed 11–22–05; 8:45 am]

BILLING CODE 6717–01–P

ENVIRONMENTAL PROTECTION

AGENCY

[RCRA–2005–0011; FRL–8000–2]

Agency Information Collection

Activities; Submission to OMB for

Review and Approval; Comment

Request; Criteria for Classification of

Solid Waste Disposal Facilities and

Practices (Renewal), EPA ICR Number

1745.05, OMB Control Number 2050–

0154

AGENCY: Environmental Protection

Agency.

ACTION: Notice.

SUMMARY: In compliance with the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.), this document announces

that an Information Collection Request

(ICR) has been forwarded to the Office

of Management and Budget (OMB) for

review and approval. This is a request

to renew an existing approved

collection. This ICR is scheduled to

expire on November 30, 2005. Under

OMB regulations, the Agency may

continue to conduct or sponsor the

collection of information while this

submission is pending at OMB. This ICR

describes the nature of the information

collection and its estimated burden and

cost.

DATES: Additional comments may be

submitted on or before December 23,

2005.

ADDRESSES: Submit your comments,

referencing docket ID number RCRA–

2005–0011, to (1) EPA online using

EDOCKET (our preferred method), by email to rcra-docket@epa.gov, or by mail

to: EPA Docket Center, Environmental

Protection Agency, Mail Code 5303T,

1200 Pennsylvania Ave., NW.,

Washington, DC 20460, and (2) OMB at:

Office of Information and Regulatory

Affairs, Office of Management and

Budget (OMB), Attention: Desk Officer

for EPA, 725 17th Street, NW.,

Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT:

Craig Dufficy, Municipal and Industrial

Solid Waste Division of the Office of

1 Policy for Selective Discounting By Natural Gas

Pipelines, 111 FERC§ 61,309 (2005).

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