The Rolled In Versus Incremental Pricing Debate Continues Split Decision by DC Circuit Upholds FERC

03.07.2008

DC Circuit Court FERC Decision -- March 7, 2008

On March 7, 2008, the U.S. Court of Appeals for the D.C. Circuit issued a decision finding that the Federal Energy Regulatory Commission properly applied a policy statement on the rate treatment for new natural gas pipeline facilities constructed by Transcontinental Gas Pipe Line Corporation. FERC had required incremental pricing for the compression costs needed to operate the new facilities. That is, customers who signed up for the capacity created by the new facilities were required to pay 100 percent of the operating costs, as opposed to rolling in some or all of those costs into Transco's existing rates, which would spread the impact, but which would cause customers with no need for the expansion to pay more. The incremental shippers had already paid for the capital costs of the expansion. The court largely deferred to FERC's expertise even where it found some of FERC's reasoning to be "relatively unilluminating." The decision was by Circuit Judges Tatel, Brown, and Kavanaugh, with a partial dissent by Judge Brown.

This case upholds an interpretation of incremental rates that could have serious implications for shippers and pipelines evaluating potential new natural gas pipeline facilities and the ultimate rates shippers on those facilities will be required to pay. This decision may not be the end of this story however. Judge Brown's partial dissent argued that FERC had not met its Natural Gas Act Section 5 burden to show that the rates FERC imposed on the new shippers were just and reasonable. Under Section 5 FERC must show both the existing rate is unjust and unreasonable and determine the just and reasonable rate to replace it. Among other things, Judge Brown noted that based on the record it was possible that FERC's ruling could lead to unlawful reverse discrimination against the new shippers--a possibility that FERC had not adequately addressed. Transco may now seek rehearing or rehearing en banc of the decision, or may appeal to the Supreme Court.

 

US District Court DC Circuit Court Decision: Transco v. FERC March 2008