70802 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

1 111 FERC ¶ 61,309 (2005). 

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. 

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. 

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 

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 

‘‘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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70803 

8 109 FERC ¶ 61,202 (2004). 

9 111 FERC ¶ 61,309 (2005). 

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

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

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

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 

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. 

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 

70804 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

11E.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). 

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). 

14See, 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). 

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70805 

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). 

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.). 

29Order 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). 

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 

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 

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 

70806 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

32E.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). 

34Order 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). 

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

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

v. FERC, 198 F.3d 960, 970 (D.C. Cir. 2000). 37E.g., AGD I at 1011; United Distribution 

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

1996). 

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

48 (D.C. Cir. 1974). 

39 111 FERC ¶ 61,309 at P 57. 

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70807 

40 Id. at P 31. 41Order 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. 

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 

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 

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, 

70808 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

43Reliant Energy at 11; Gulf South at 30. 

44See 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. 

46 INGAA comments at 9. 

47 Kinder Morgan comments at 10. 

48 Kinder Morgan comments at 7, 18. 

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 

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-a ́-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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70809 

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. 

51Henning Affidavit at 15. 

52See 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). 

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. 

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 

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 

70810 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

54 IMGA rehearing at 20. 

55Alternatives 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). 

58 73 FERC ¶ 61,050 (1995). 

59 72 FERC ¶ 61,083 (1995). 

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70811 

60See NOI at P 2–6. 

61 107 FERC ¶ 61,229 at P 3–9 (2004). 

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 

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. 

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. 

70812 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

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

30,553 and 30,556. 

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

64Northern Municipals cites UMDG v. FERC, 88 

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

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70813 

65A 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. 

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

(1992). 

69As 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. 

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 

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 

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 

70814 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

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

at P 32 (2005). 

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

at P 8 (2005). 

72 113 FERC ¶ 61,119 (2005). 

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). 

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, 

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. 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70815 

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

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

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

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 

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 

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 

70816 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

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

¶ 61,379 at P 18 (2005). 

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

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

highest possible rate). 

78See, 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). 

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70817 

79Community 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. 

80Moreover, 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. 

81See Comments of Natural Gas Pipeline 

Company of America at 14–15. 

82As stated above, in response to a 2005 INGAA 

survey, 36 pipelines reported that they had spent 

Continued 

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 

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

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 

70818 Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 

$19.6 billion for interstate pipeline infrastructure 

between 1993 and 2004, and during the 1990s 

interregional natural gas pipeline capacity grew by 

27 percent. 

83New 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). 

84Under 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. 

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 

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 

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 

Federal Register / Vol. 70, No. 225 / Wednesday, November 23, 2005 / Notices 70819 

85 824 F.2d at 1009. 

86Some of the proposals also appear to be beyond 

the scope of the Commission’s authority to 

implement. 

1Policy for Selective Discounting By Natural Gas 

Pipelines, 111 FERC§ 61,309 (2005). 

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 

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: 

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