CHAPTER 3 STATE REGULATION OF TRANSPORTATION
| Jurisdiction | United States |
(Sep 1991)
STATE REGULATION OF TRANSPORTATION
Hinkle, Cox, Eaton, Coffield & Hensley
Albuquerque, New Mexico
Table of Contents
Page
I. Introduction
II. Intrastate Open Access Policy
A. Comprehensive Regulation v. Case-By-Case Policy
B. Scope of Regulation
C. Common Open Access Terms and Conditions
1. Scope of Service
2. Rates
3. Contract Term
4. Standby/Return to Sales Service
5. Curtailment/Interruption
6. Capacity
7. Restriction on Marketing By a Utility
8. Other Provisions
D. Conclusion
III. Bypass of the Local Distribution Company
A. The Motivation for and Possible Effect of Bypass
B. Bypass Using Private Intrastate Pipeline From the Wellhead or Other Intrastate Pipeline
1. Determining the Definition of "Public Utility"
2. Effect of Exclusive Certification
C. Bypass Using an "Intrastate" Pipeline From An Interstate Pipeline
D. State Responses to Bypass
E. Conclusion
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I. INTRODUCTION.
Transportation services represent an unbundling of the traditional roles of the pipeline. The person who contracts with the pipeline only "purchases" transportation services from the pipeline. The purchaser may be an end user, a gas producer, a gas marketer, a private pipeline, or a public utility.
The Federal Energy Regulatory Commission embraced this unbundling in the early 1980's with blanket certifications.1 Since then, interstate pipelines have shifted their emphasis from sales gas throughput to transportation gas throughput.2
Faced with an increasingly competitive market, many state utility commissions have developed policies or promulgated regulations addressing the demand for transportation services. These policies are primarily aimed at the operations of the local distribution companies (LDC's), but may also govern non-utility intrastate pipelines. LDC's have traditionally served as the retailer, delivering gas at the burner tip by way of an intrastate pipeline. However, bypass of the LDC's has become an important factor in the gas market.
This paper first examines the various elements of intrastate open access policies of several Western and Southwestern states. Second, issues affecting bypass of an LDC are discussed.
II. INTRASTATE OPEN ACCESS POLICY.
A. Comprehensive Regulation v. Case-By-Case Policy.
Treatment of intrastate transportation may either be through set generic policy, or decided on a case-by-case basis. The generic policy statement has the advantage of consistent and equal treatment. Additionally, once the commission has acted,
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end-users and producers are free to contract, confident that common carriage will be available. States which have promulgated a general policy statement or set of regulations include California, New Mexico, Colorado, and Oregon.
Other commissions decide transportation issues case-by-case. Of course, this approach may require the commission to continuously review proposals before it and do extensive work on each submitted tariff before approval of transportation contracts. Yet, often, the fact-specific, tailored ruling can be beneficial insofar as commission policy is developed in relation to specific facts, and sufficient flexibility remains to allow policy to change in response to a changing environment. Among the states deciding transportation issues on a case by case basis are Idaho, Montana, Oklahoma, Utah, Texas, and Wyoming.
Whichever approach is espoused, however, principles and trends in commission ideology can be identified.
B. Scope of Regulation.
The jurisdiction of a state commission to regulate transportation services and contracts generally extends only to "public utilities." Primarily these are the LDC's who hold their services out for the general public and serve the ultimate end-users. However, some commissions exercise jurisdiction over all intrastate pipelines, including LDC's. (State commission jurisdiction is discussed in more detail at pp. 3-17 of this paper.)
For example, Colorado regulations pertain to both LDC's and intrastate wholesale pipelines, utility or not.3 New Mexico extends it's transportation rules to "any person subject to the Commission's jurisdiction."4 However, there are private pipelines not subject to commission jurisdiction. Oregon claims that its policy statement applies to any "utility."5 In Oklahoma, non-utility intrastate pipelines are not regulated and
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those pipelines are only subject to pipeline safety requirements. LDC's and transportation by their affiliates are regulated.6
Texas municipalities have original jurisdiction over intra-municipality transportation agreements, with the Texas Railroad Commission having appellate jurisdiction and original jurisdiction over other intrastate pipelines.7 Section 502 (b) of the Texas Gas Act virtually deregulates transportation if the parties involved agree. Only if the pipeline is outside an incorporated area or if there is a complaint about a municipality action will the Railroad Commission take jurisdiction.
Most state commissions, however, assert jurisdiction over virtually every intrastate transporter of gas.
C. Common Open Access Terms and Conditions.
1. Scope of Service.
Commissions may chose to regulate the scope of service that the transporter will provide. Transportation service may be voluntary or mandatory.8 A particular circumstance may have to exist or condition met before transportation service is available. Also, the transporter may provide service on an interruptible or firm basis, or offer a choice to the user.9
Oregon requires that those distributors offering interruptible transportation services also offer firm
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transportation service.10 The firm service customer is essentially allowed to purchase priority over the interruptible customer. The Oregon Commission expressed its belief that firm service was necessary to make transportation an option on equal footing for large end-users and, thus, to prevent bypass.11
The New Mexico Rules and the Colorado Rules require that a utility transport customer-owned natural gas upon request, subject to terms to be filed with the Commission by the local utility.12 The utility may provide either firm or interruptible service, or both.
The Public Service Commission of Utah has approved a tariff filed by Mountain Fuel Supply Company offering interruptible service to persons transporting volumes of at least 100 decatherms per day.13
Another scheme was used in Idaho by Washington Water Power Company, which submitted a tariff to provide transportation services, but also limited the use of the service. Gas delivered to the transportation customer cannot be resold by the person contracting for transportation services with Washington Water Power Company.14
The scope of service in California is defined by a "core" / "noncore" dichotomy.15 Core customer are residential or other small end-user without alternate fuel capacity. Noncore customers are larger end-users. Traditionally, transportation services had only been available to noncore customers. Recently, as California ordered its utilities to eliminate their noncore
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portfolios, this structure changed.16 Utilities were to begin a "core subscription" service, whereby gas and transportation would be offered as a package to certain noncore customers.17
Additionally, California has promulgated an elaborate system of five Service Levels (SL's) that must be made available by utilities.18 SL 1 is reserved for "core" customers, with SL's 2-5 available for "non-core" customer transportation. Utilities must offer both firm service and three levels of interruptible service.
2. Rates.
Of course, a basic regulated provision is the price that may be charged for the transportation service. There are three basic approaches to price determination. In a simple margin approach, the commodity part of the usual sales rate is taken out to give a transportation rate. Another method, the gross margin method, requires that the transportation user make a contribution to fixed costs and cover the variable cost of transportation service. Finally, under the variable cost method, only the cost of the transportation is recovered, not the pipeline's fixed costs. This methodology has the overall effect of transferring the fixed cost burden to sales customers. One other option which many commissions seem to utilize is simply the requirement that the rates, as submitted, be reasonable.
Oregon resolved the pricing problem by approving a formula which allocates some overhead cost to the transportation customer: The commodity rate is subtracted from the sales rate, which is based on Long Run Incremental Costs.19 And, consistent with its policy to give a sales discount to customers with alternative fuel capacity, the Oregon Commission approved a similar "oil incentive" discount for transportation customers.20 Rates for interruptible customers with alternative fuel capacities are based on the market price of oil, but with only the smallest margin necessary to permit gas to be a competitive option.
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Under the Colorado Rules, LDC's and other intrastate pipelines must file with the Commission proposed transportation rates or rate methodology.21 This "maximum rate" must be based on fully allocated cost methods and allow a return on allocated rate base equal to the last rate authorized by the commission.22 If price flexibility is desired, minimum rates must be filed.23
In New Mexico, transportation rates must be just and reasonable.24 Utilities must file with the Commission their proposed maximum rates.25 To negotiate rates lower than the filed rate, the utility files the agreed upon rate, which must be above the variable cost of transportation service.26 If a rate is negotiated with an end-user, that rate must be available to all transportation customers or suppliers selling...
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