In response to the decision of the United States Court of Appeals for the D.C. Circuit in Williston Interstate Pipeline Co. v. FERC, 358 F.3d 45 (2004), the Commission asked interested persons for their views as to whether it should (1) adhere to the policy on pipeline discounting announced in Colorado Interstate Gas Co., 95 FERC ¶ 61,321 (2001) and Granite State Transmission Co., 96 FERC ¶ 61,273 (2001) (the “CIG/Granite State” policy); (2) return to its previous policy as set out in El Paso Natural Gas Co., 62 FERC ¶ 61,311 (1993); or adopt an alternative. Order on Remand, 107 FERC at 61,989 (¶ 18). INGAA urges the Commission to return to the policy stated in El Paso.
As the Commission stated in El Paso, “the rule is that the contract between a pipeline and a shipper governs discounts.” 62 FERC at 62,990. A pipeline may contractually limit a discount to the shipper’s primary point, and require the shipper or a replacement shipper to pay the maximum tariff rate for service to a secondary point. Id. (Of course, should circumstances warrant, nothing prevents the pipeline from also discounting the secondary point to obtain the shipper’s business there. Id.) El Paso is consistent with long-standing Commission policy that pipelines may, but are not required, to offer discounts from maximum rates. See, e.g., Order No. 637, Regulation of Short–Term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Transportation Services, FERC Stats. & Regs. [Reg. Preambles 1996–2000] (CCH) ¶ 31,091 at 31,634 (2000).
In CIG, the Commission announced a rule that a shipper is presumptively entitled to retain a primary point discount when it or a replacement shipper uses a secondary point that the pipeline has discounted for another shipper, subject to the pipeline’s rebuttal on grounds the shippers are not similarly situated. See 95 FERC at 62,120-21. The Commission made this decision outside the rulemaking context, and without any factual evidence indicating that pipelines were declining to offer otherwise warranted discounts at secondary points. In Granite State, the Commission added the requirement that the pipeline respond to the secondary point discount request within two hours. 96 FERC at 62,037. The Commission enforced the CIG/Granite State rule in subsequent Order No. 637 compliance proceedings (including those leading to the Williston case). See, e.g., Gulf South Pipeline Co., 104 FERC ¶ 61,160 at 61,570-74 (2003).
INGAA has no quarrel with the proposition underlying the CIG/Granite State policy that similarly situated shippers should receive the same discount. INGAA urges, however, that the Commission return to the contractual freedom of the El Paso policy for two principal reasons. First, in adopting the CIG/Granite State rule, the Commission has effectively required pipelines to alter contractual terms governing secondary point discounting that were sanctioned by the El Paso policy, without carrying its statutory burden of proof under Section 5 of the Natural Gas Act (“NGA”) to show that the existing policy is no longer lawful and the prescribed new one is lawful. See, e.g., Western Resources, Inc. v. FERC, 9 F.3d 1568, 1580 (D.C. Cir. 1993). The Williston Court held that the Commission failed to justify, either with evidence or reasoned economic analysis, requiring Williston to adopt the CIG/Granite State policy, 358 F.3d at 48-50, and the Commission has not presented evidence or analysis elsewhere to demonstrate that the El Paso policy has resulted in undue discrimination in the secondary point scenario.
Moreover, the fact that the pipeline may rebut the presumption of unlawfulness under the policy – i.e., that a shipper receiving a discount at a specific primary point is similarly situated with other shippers receiving discounts at other points – does not save the CIG/Granite State rule because the presumption is not based on any evidence and is not rational in today’s rapidly changing market for natural gas and its transportation. The effect of the presumption is to shift unlawfully to pipelines the burdens the Commission is required to shoulder under NGA § 5. The Williston Court did not reach the claim that the Commission’s CIG/Granite State presumption unlawfully switched the NGA § 5 burden, see 358 F.3d at 50, but it nevertheless hangs over this entire proceeding.
Second, discounts provided out of competitive necessity potentially reduce captive customer rates (through increased throughput and contribution to the pipeline’s fixed costs) and therefore are sanctioned in the regulatory context. See, e.g., Interstate Natural Gas Pipeline Rate Design, 47 FERC ¶ 61,295 at 62,053 (1989)(Rate Design Policy Statement); Williston, 358 F.3d at 50 (and authorities cited there). There is every reason to believe that pipelines already have the proper incentive, without the coercive CIG/Granite State presumption, to permit the kind of discounting contemplated by the Commission’s CIG/Granite State policy — i.e., discounting for shippers that are “similarly situated” with respect to competitive circumstances. See Order on Remand, 107 FERC at 61,989 (¶ 19(A)). As the Commission stated recently, under its discount policy, “the relevant inquiry is whether the pipeline would lose the business without a discount due to competitive alternatives.” Transcontinental Gas Pipe Line Corp., 107 FERC ¶ 61,058 at 61,190 (2004)(Transco). Simply because the El Paso policy permits the pipeline to limit discounting rights at secondary points contractually, there is no reason to assume that the pipeline will later deny the discount if it is necessary to attract the throughput to that point.
On the other hand, the CIG/Granite State policy, if affirmed, is likely to skew pipeline decisions in a way that actually thwarts efficient discounting. It does this in a number of ways. It encourages confusion in the proper focus of the discount decision by suggesting that because a previous competitive situation warranted a discount at a secondary point, a later shipper should normally be entitled to the same discount. But the only proper focus is the present: there should be a current competitive reason to grant a shipper a discount based on pipeline utilization and economic factors, inter alia, at the time of the transaction. Moreover, the policy will discourage otherwise efficient discounting up front, or promote improvident discounting later on out of concern that the litigation costs of defending a correct “not-similarly-situated” judgment call will be more than the revenues foregone in granting a discount that is not justified by competition. To the extent competitively warranted discounts are discouraged, or non-competitive discounts granted, captive shippers are injured. See, e.g., Transco, 107 FERC at 61,190 (¶ 17). The Commission’s suggestion (Order on Remand, 107 FERC at 61,989 (19(A)) that these disincentives to efficient discounting and predictable adverse consequences of the CIG/Granite State policy are avoided by restricting its application to shippers with competitive alternatives, see id., ignores practical realities facing the pipeline in responding to the discount request in the prescribed two-hour period.
Finally, the alternative suggested by the Commission – limiting the duration of the releasing shipper’s secondary discounting rights to one month or less to permit competition with the pipeline’s sale of interruptible and short term capacity – suffers the same legal and economic defects as CIG/Granite State.In short, the CIG/Granite State policy is a solution for an as yet unsubstantiated problem. It potentially does more harm than good through regulatory overkill. The Commission should return to the permissive El Paso policy until there is evidence of undue discrimination in the secondary point discount scenario.