FERC Stands by Its Policy Permitting Natural Gas Transportation Discounts

FERC recently reaffirmed its policy permitting competitive discounting of natural gas transportation charges, upholding the practice against charges that competitive discounting shifts costs unfairly to captive customers of the discounting pipeline.  According to FERC, allowing pipelines to adjust throughput to reflect increased sales at discounts remains an important tool for maximizing system usage of interstate pipelines, benefiting all users.

FERC's current policy is to allow pipelines to discount transportation charges on a nondiscriminatory basis, to meet competition from all other forms of transportation.  Before late 2004, FERC allowed discounting only for the purpose of meeting competition from capacity release or from intrastate pipelines.  FERC opted to allow discount adjustments for any of these competitive reasons.   But following an inquiry in late 2004, the agency stated that discounting to meet competition from all alternative transportation options lowered costs to all users by spreading pipeline costs over an increasing number of units of throughput.  

The Illinois Municipal Gas Agency, together with the Northern Municipal Distributor Group and the Midwest Region Gas Agency had asked FERC to reconsider its discounting policy.  They argued that the discounting does not benefit the captive customers of the discounting pipeline, and generally they claimed that low elasticity of demand for natural gas transportation prevented discounts from materially increasing demand and throughput.  As a consequence, the complainants charged that discounting often shifts more costs to captive customers than it saves all customers generally from increased throughput.

Not so, countered FERC.  The evidence is that discounting more than offsets any shift in fixed costs on most systems.  FERC qualified, however, that if presented with circumstances on an individual pipeline that warrant additional protections for captive customers, such protections could be considered in individual rate cases.  In a noteworthy partial dissent, Commissioner Suedeen Kelly argued that pipelines should be required to post on their websites the reasons for providing a discount to a particular shipper.  [Policy for Selective Discounting by Natural Gas Pipelines, 113 FERC ¶ 61,173 (2005)]