CHAPTER 5 CONTRACTING FOR TRANSPORTATION SPECIAL EMPHASIS ON GENERATOR LOADS
| Jurisdiction | United States |
(2001)
CONTRACTING FOR TRANSPORTATION SPECIAL EMPHASIS ON GENERATOR LOADS
El Paso Pipeline Group
Houston, Texas
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I. THE PIPELINE CONTRACTING PROCESS—DISCUSSION
A. Tariff—Standard Service Agreement—Individual Service Agreement
1. Interaction Between the Tariff and the Contract
Every interstate pipeline is required to maintain a detailed FERC tariff, specifying the terms and conditions of service, the rates to be charged, and containing a "standard contract" for each service it offers. Every shipper service agreement starts with that standard contract. Then, the individual service agreement will list the term of the agreement, the receipt and delivery points involved, the maximum delivery quantity (MDQ) of the agreement, and the rates to be charged. The rates may simply be a reference to the tariff, or they may be stated discounts from those rates. Because any firm shipper has a right to move to secondary receipt and delivery points, the agreement may also describe the rates to be charged for service to or from various points other than the primary points listed in the contract. Thus, the tariff is the starting point for each agreement, and the tariff may only be changed if FERC approves the change.
2. Ban on Negotiated Terms of Service
FERC policy prohibits the negotiation of terms and conditions of service other than those specified in the tariff (this varies from its policy on negotiated rates, as described below). Thus, issues such as hourly flexibility, secondary-point availability, gas quality, etc., may not be individually negotiated to levels not available to everyone under the tariff.
3. Negotiated Rate Contracts
FERC policy does allow rates to be negotiated to levels other than the ranges of rates stated in the tariff. For this to happen, the pipeline must (a) have a tariff section, approved by the FERC, specifically authorizing negotiated rates, (b) make "recourse-rate" service a freely available alternative at the time the agreement is signed, and (c) file the negotiated-rate agreement at the FERC, prior to commencement of service. "Recourse rates" are the tariff, FERC-approved, cost-based rates traditionally charged by pipelines. Thus, a shipper agreeing to a negotiated rate has the option, at the time the contract is signed, of choosing service at the tariff rate. If the shipper is willing to pay the full, maximum tariff rate, the pipeline cannot deny service.
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4. Precedent Agreements and Side Letters
Many major transportation agreements, especially when they involve new capacity, start with a precedent agreement, an "agreement to agree." In addition, a practice for a long time in the industry was to execute "side letters," agreements that modified or interpreted the actual service agreement, to the satisfaction of both parties. Today, such agreements must be in conformance with the standard agreement in the tariff, or they must be filed with the FERC for its review.
5. Material Deviations—FERC Actions/Shipper Options
If a service agreement, precedent agreement, or side agreement includes "material deviations" from the standard contract contained in the tariff, it must be filed. FERC must approve it before service can commence. Recent rulings at the FERC have interpreted this requirement very strictly (significantly lowering the materiality threshold), and the likelihood that a contract containing material deviations will be rejected is very high now. The shipper whose agreement with the pipeline has been rejected can still take service at under a standard contract, but the delay caused by FERC review and the negotiation of a new standard contract may be costly. Additionally, if the original agreement is rejected, it is possible for another party to capture the subject capacity, through a request at tariff rates. Thus, any shipper negotiating a non-standard agreement with a pipeline should try to provide for the eventuality of FERC rejection, by specifying what happens in that event.
B. Types of Pipeline Service
1. Basic Firm Transportation and Storage
Firm transportation is the bread and butter of interstate pipelines. Firm storage service, unbundled from transportation, is also a very important business. Both types of service are characterized by "reservation charges" for the reservation of the capacity, which are paid monthly whether or not the capacity is used. Then, there is a smaller variable charge ("quantity charge" for transportation and "injection/withdrawal" charge for storage), that is paid based on the gas that actually goes through the meter. Firm transportation is reserved according to an MDQ and specified primary receipt and delivery points. It has the flexibility to move either receipt or delivery to other, secondary, points, at a priority of service above interruptible but below shippers who hold primary capacity at those points. Firm storage is reserved based on maximum deliverability and space in the field. Usually, there is a fixed relationship between the two capacities (e.g., the space, or working-gas capacity, might be 50 times the deliverability, meaning all the gas could be withdrawn in 50 days).
2. Interruptible Transportation and Storage
Interruptible transportation is space-available service on a pipeline, with no reservation of capacity and no fixed-charge commitment to the pipeline. Payment is at a "volumetric" rate, which charges only for gas that actually goes through the meter. Generally, this rate is a "100 percent load-factor" version of the firm rate, or the lowest effective unit cost a firm shipper could achieve by using his contract at full volume 100 percent of the time. Interruptible service will
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be bumped off the system if firm shippers need the capacity. Interruptible storage is similarly inferior to firm storage. An interruptible storage shipper is allowed to use empty space in a storage field, but is required to vacate that space if a firm storage customer needs it.
3. No-Notice Service
No-notice service is usually a bundled combination of firm transportation and storage, into a form that allows service to the customer with no delivery nominations. This was created to duplicate the flexibility in meeting LDCs' needs that characterized pipeline merchant service prior to restructuring. The customer nominates gas into the pipeline, but deliveries at the city gate are automatically equal to what the customer ends up needing—all mismatch between that quantity and what was nominated into the pipeline is accommodated with automatic injection into and withdrawal from storage. This is the pipeline's highest-premium service.
4. Park and Loan Service
Park and loan service allows shippers to use system storage to balance generally short-term imbalances between receipts and deliveries. The form it takes and the terms of service vary among pipelines, but it is a useful service for avoiding imbalance penalties or costs, and can allow shippers to play short-term commodity price fluctuations in the physical market. Pricing is generally a quantity charge for the amount of gas parked or loaned, times the number of days until it is liquidated.
5. Generation Service
Specific services including large hourly fluctuations are being proposed or put in place on various pipelines, to accommodate the needs of electric generators. Pricing of these services, as well as their relationship to other services, is discussed below, in the generation section.
C. Service on New Projects
1. Pricing of New-Project Transportation
Current FERC policy, since September of 1999, is that new projects will be priced "incrementally," unless their unit cost is lower than that of existing shippers. This means the shipper on the new project must pay a rate that fully recovers the cost of the expansion. The opposite treatment would be to roll-in the cost of the project—simply make it part of the pipeline's overall costs, and charge the shipper the pipeline's normal tariff rate. Prior to September 1999, FERC's policy was to allow roll-in as long as the project would not increase existing customers' rates by more than 5 percent. However, now the rule is that there will be no subsidization of the project by existing customers, unless there is very strong evidence that those existing customers receive substantial benefits from the project. Importantly, FERC policy is now to make this pricing decision in the certificate case wherein the project is authorized—prior to 1995, this determination was not made until a subsequent rate case, when the project was already built, and shippers were already committed. The new policy allows shippers to know the pricing rules before the project is built, and to cover themselves
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by contract against the possibility that the FERC will significantly change the pricing that underlay their original commitment.
2. Interaction of Section 7 and Section 4
Section 7 of the Natural Gas Act is FERC's authority to approve new projects. Section 4 is its ratemaking authority. The initial rates for a new project are actually approved in the authorization of the project (see pricing discussion, above). In subsequent rate cases, the pipeline can seek to increase these rates, and the shipper or the FERC can seek to decrease them. However, the overall structure of pricing (i.e. rolled-in or incremental) may only be revisited if there has been a significant change in facts and circumstances since the record was compiled in the certificate proceeding that originally authorized the project.
3. Role of Negotiated Rates
Uncertainty over the FERC's treatment of pricing and over the impact of future rate cases can be a very negative factor for both prospective shippers and the project sponsor. Thus, it is becoming increasingly common for new...
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