Policy for Selective Discounting by Natural Gas Pipelines; Order Denying Rehearing, 70802-70819 [05-23140]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 70, Number 225 (Wednesday, November 23, 2005)]
[Notices]
[Pages 70802-70819]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-23140]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM05-2-001]


Policy for Selective Discounting by Natural Gas Pipelines; Order 
Denying Rehearing

November 17, 2005.

    Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly.

    1. On May 31, 2005, the Commission issued an order (May 31 
Order)\1\ in this proceeding reaffirming the Commission's current 
policy on selective discounting. Timely requests for rehearing of that 
order were filed by the Illinois Municipal Gas Agency (IMGA) and, 
jointly by Northern Municipal Distributor Group and the Midwest Region 
Gas Agency (Northern Municipals). For the reasons discussed below, the 
requests for rehearing are denied.
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    \1\ 111 FERC ] 61,309 (2005).
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Background

    2. The prior orders in this proceeding set forth the background and 
development of the Commission's selective discounting policy.\2\ 
Generally, as explained in those orders, the Commission's regulations 
permit pipelines to discount their rates, on a nondiscriminatory basis, 
in order to meet competition. For example, if a fuel-switchable shipper 
were able to obtain an alternate fuel at a cost less than the cost of 
gas including the transportation rate, the Commission's regulations 
permit the pipeline to discount its rates to compete with the alternate 
fuel, and thus obtain throughput that would otherwise be lost to the 
pipeline. As the Commission has explained, these discounts benefit all 
customers, including customers that do not receive the discounts, 
because the discounts allow the pipeline to maximize throughput and 
thus spread fixed costs across more units of service. Further, as the 
Commission has explained, selective discounting protects captive 
customers from rate increases that would otherwise occur if pipelines 
lost volumes through the inability to respond to competition. The 
Commission's regulations permitting selective discounting were upheld 
by the court in Associated Gas Distributors v. FERC (AGD I).\3\
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    \2\ 109 FERC ] 61,202 at P 2-10; 111 FERC ] 61,309 at P3-8.
    \3\ 824 F.2d 981, 1010-12 (D.C. Cir. 1987).
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    3. The prior orders also explained the rationale behind the 
Commission's policy of allowing a discount adjustment and stated that 
the adoption of the discount adjustment resulted from the court's 
discussion in AGD I. In AGD I, the court addressed arguments raised by 
pipelines that the selective discounting regulations might lead to the 
pipelines under-recovering their costs. The court set forth a numerical 
example showing that the pipeline could under-recover its costs, if, in 
the next rate case after a pipeline obtained throughput by giving 
discounts, the Commission nevertheless designed the pipeline's rates 
based on the full amount of the discounted throughput, without any 
adjustment.\4\ However, the court found no reason to fear that the 
Commission would employ this ``dubious procedure,'' \5\ and accordingly 
rejected the pipelines'' contention.
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    \4\ Id. at 1012.
    \5\ Id.
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    4. In response to the court's concern, the Commission, in the 1989 
Rate Design Policy Statement,\6\ held that if a pipeline grants a 
discount in order to meet competition, the pipeline is not required in 
its next rate case to design its rates based on the assumption that the 
discounted volumes would flow at the maximum rate, but may reduce the 
discounted volumes so that the pipeline will be able to recover its 
cost of service. The Commission explained that if a pipeline must 
assume that the previously discounted service will be priced at the 
maximum rate when it files a new rate case, there may be a disincentive 
to pipelines discounting their services in the future to capture 
marginal firm and interruptible business.
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    \6\ Interstate Natural Gas Pipeline Rate Design, 47 FERC ] 
61,295, reh'g granted, 48 FERC ] 61,122 (1989).
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    5. Since AGD I and the Rate Design Policy Statement, the issue of 
``gas-on-gas'' competition, i.e., where the competition for the 
business is between pipelines as opposed to competition between gas and 
other fuels, has been raised in several Commission proceedings.\7\ In 
these proceedings, certain parties have questioned the Commission's 
rationale for permitting discount adjustments, i.e., that it benefits 
captive customers by allowing fixed costs to be spread over more units 
of service. These parties have contended that, while this may be true 
where a discount is given to obtain a customer who would otherwise use 
an alternative fuel and not ship gas at all, it is not true where 
discounts are given to meet competition from other gas pipelines. In 
the latter situation, these parties have argued, gas-on-gas competition 
permits a customer who must use gas, but has access to more than one 
pipeline, to obtain a discount. But, if the two pipelines were 
prohibited from giving discounts when competing with one another, the 
customer would have to pay the maximum rate to one of the pipelines in 
order to obtain the gas it needs. This would reduce any discount

[[Page 70803]]

adjustment and thus lower the rates paid by the captive customers.
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    \7\ IMGA raised this issue in a petition for rulemaking in 
Docket No. RM97-7-000. In the NOI, the Commission stated that it 
would consider all comments on this issue in Docket No. RM05-2-000 
and terminated the proceeding in Docket No. RM97-7-000. The 
Commission explained that the issues included in Docket No. RM05-2-
000 include all the issues raised in the Docket No. RM97-7-000 
proceeding. IMGA did not seek rehearing of the Commission's decision 
to terminate Docket No. RM97-7-000 proceeding and did not in its 
comments object to the procedural forum offered to it in Docket No. 
RM05-2-000.
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    6. On November 22, 2004, the Commission issued a Notice of Inquiry 
(NOI) seeking comments on its policy regarding selective discounting by 
natural gas pipelines.\8\ The Commission asked parties to submit 
comments and respond to specific questions regarding whether the 
Commission's practice of permitting pipelines to adjust their 
ratemaking throughput downward in rate cases to reflect discounts given 
by pipelines for competitive reasons is appropriate when the discount 
is given to meet competition from another natural gas pipeline. The 
Commission also sought comments on the impact of its policy on captive 
customers. Comments were filed by 40 parties.
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    \8\ 109 FERC ] 61,202 (2004).
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    7. On May 31, 2005, after reviewing the comments, the Commission 
issued an order \9\ reaffirming the Commission's current selective 
discounting policy. The Commission concluded that, in today's dynamic 
natural gas market, any effort to discourage pipelines from offering 
discounts to meet gas-on-gas competition would do more harm than good. 
Accordingly, the Commission decided not to modify its 16-year old 
policy to prohibit pipelines from seeking adjustments to their rate 
design volumes to account for discounts given to meet gas-on-gas 
competition.
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    \9\ 111 FERC ] 61,309 (2005).
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    8. The May 31 Order stated that interstate pipelines face three 
types of so-called gas-on-gas competition: (1) Competition from other 
interstate pipelines subject to the Commission's NGA jurisdiction, (2) 
competition from capacity releases by the pipeline's own firm 
customers, and (3) competition from intrastate pipelines not subject to 
the Commission's jurisdiction. The May 31 Order recognized that a 
significant portion of pipeline discounts are given to meet competition 
from other interstate pipelines. Some commenters contended that 
customers receiving such discounts are not fuel switchable and thus 
would take the same amount of gas even if required to pay the maximum 
rate of whichever pipeline they choose to use. The Commission rejected 
this contention, finding that discounts to non-fuel switchable 
customers can increase throughput and thus benefit captive customers. 
The Commission pointed to at least five examples of why this is so.
    9. First, the Commission stated that industrial and other business 
customers of pipelines typically face considerable competition in their 
own markets and must keep their costs down in order to prosper. Lower 
energy costs achieved through obtaining discounted pipeline capacity 
can help them do more business than they otherwise would, thereby 
increasing their demand for gas.
    10. Second, discounts may reduce the incentive for existing non-
fuel switchable customers to install the necessary equipment to become 
fuel switchable. In addition, potential new customers, such as 
companies considering the construction of gas-fired electric 
generators, may be more likely to build such generators if they obtain 
discounted capacity on the pipeline.
    11. Third, the Commission stated that an LDC's need for interstate 
pipeline capacity depends upon the demand of their customers for gas, 
and that demand is elastic, since some of their customers are fuel 
switchable. They also have non-fuel switchable industrial or business 
customers whose gas usage may vary depending upon cost.
    12. Fourth, pipeline discounts may enable natural gas producers to 
keep marginal wells in operation for a longer period and affect their 
decisions on whether to explore and drill for gas in certain areas with 
high production costs.
    13. Finally, the Commission pointed out that on many pipeline 
systems, the bulk of the pipelines' discounts are given to obtain 
interruptible shippers. All interruptible shippers may reasonably be 
considered as demand elastic, regardless of whether they are fuel 
switchable, since their choice to contract for interruptible service 
shows that they do not require guaranteed access to natural gas.
    14. The Commission thus found no basis to conclude that overall 
interstate pipeline throughput would remain at the same level, if the 
Commission discouraged interstate pipelines from giving discounts in 
competition with one another. The Commission also found that, apart 
from the issue of the extent to which such discounts increase overall 
throughput on interstate pipelines, discounts arising from competition 
between interstate pipelines provide other substantial public benefits, 
which would be lost if the Commission sought to discourage such 
discounting. The Commission pointed out that, as a result of increased 
competition in the gas commodity and transportation markets, there are 
now market prices for the gas commodity in the production area and for 
delivered gas in downstream markets. The difference between these 
prices (referred to as the ``basis differential'') shows the market 
value of transportation service between those two points.
    15. The May 31 Order found that discounting pipeline capacity to 
the market value indicated by the basis differentials provides a number 
of benefits. First, such discounting helps minimize the distorting 
effect of transportation costs on producer decisions concerning 
exploration and production. Second, if several interstate pipelines 
serve the same downstream market, discounting can help minimize short-
term price spikes in response to increases in demand by making the 
higher cost pipeline more willing to discount down to the basis 
differential in order to bring more supplies to the downstream market. 
Third, discounting enables interstate pipelines with higher cost 
structures to compete with lower cost pipelines. Fourth, discounting 
helps facilitate discretionary shipments of gas into storage during 
off-peak periods. Finally, selective discounting helps pipelines more 
accurately assess when new construction is needed.
    16. In addition, the May 31 Order found that a discount adjustment 
for discounts given in competition with capacity release promotes the 
Commission's goal of creating a robust competitive secondary market, 
and that discouraging pipelines from competing in this market would 
defeat the purpose of capacity release and eliminate the competition 
that capacity release has created. The Commission also pointed out that 
capacity release provides substantial benefits to captive customers. 
Similarly, the Commission determined in the May 31 Order that there was 
no reason to create an exemption from the selective discounting policy 
for expansion capacity. However, the Commission stated that under the 
Commission's current policy as set forth in the Certification of New 
Interstate Natural Gas Pipeline Facilities (Certificate Pricing Policy 
Statement),\10\ unless the new construction benefits current customers, 
the services must be incrementally priced and the Commission would not 
approve a discount adjustment that would shift costs to current 
customers.
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    \10\ 88 FERC ] 61,227 (1999), order on clarification, 90 FERC ] 
61,128 (2000), order on further clarification, 92 FERC ] 61,094 
(2000).
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    17. IMGA and Northern Municipals seek rehearing of the May 31 
Order. Generally, these parties argue that the May 31 Order is not 
based on substantial or factual evidence, that the selective discount 
policy does not benefit captive customers, that the Commission has not 
properly assigned the burden of proving that discounts were given to 
meet competition, and

[[Page 70804]]

that the Commission did not address certain arguments of the parties 
that oppose the policy. The issues raised in the requests for rehearing 
are discussed below.

Discussion

A. Procedural Matters

    18. The NOI invited interested persons to submit comments and other 
information on the matters raised by the NOI within 60 days. The NOI 
did not provide for reply comments. Forty parties submitted comments in 
response to the NOI. Only one party, IMGA, filed reply comments. In the 
May 31 Order, the Commission found that in these circumstances, it 
would not consider IMGA's reply. On rehearing, IMGA argues that it was 
error for the Commission to reject their reply comments.
    19. The Commission has broad discretion to establish the procedures 
to be used in carrying out its responsibilities.\11\ In this case, the 
Commission sought comments and responses to specific questions from 
interested parties, but did not authorize the filing of replies to the 
comments. Because reply comments were not authorized and IMGA was the 
only party to file reply comments, the Commission reasonably determined 
that it would not be appropriate or fair to the other parties in the 
proceeding to consider IMGA's reply comments. This was not error and 
was clearly within the Commission's discretion. In any event, IMGA's 
request for rehearing sets forth the arguments that IMGA made in its 
reply comments and those arguments are addressed in this order.
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    \11\ E.g., Mobile Oil Exploration & Producing Southeast, Inc. v. 
United Distrib. Cos., 498 U.S. 211, 230 (1991); Vermont Yankee 
Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 
U.S. 519, 524-25, 543 (1978).
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B. Substantial Evidence in Support of the Policy

    20. Throughout their requests for rehearing, both IMGA and Northern 
Municipals argue that the Commission's decision is not supported by 
substantial evidence because it is not based on facts and empirical 
data, but is based on theory and speculation. Northern Municipals 
assert that the Commission has not provided any hard data or factual 
support for its conclusion that the selective discounting policy will 
increase overall throughput and benefit captive customers. Instead, 
Northern Municipals state, the Commission posited a number of examples 
that might lead to increased throughput. However, they argue, the 
Commission failed to quantify any increase in throughput, failed to 
analyze whether the increase would be in the form of an overall 
increase to the national grid or simply an increase to one pipeline and 
a decrease to another, and failed to analyze whether the benefits of 
such an increase to captive and other customers would be outweighed by 
the costs of subsidizing the discounts. Similarly, IMGA argues that the 
May 31 Order merely adopts the comments of the supporters of the policy 
and that those comments were based on allegation and speculation, 
rather than substantial evidence.
    21. Northern Municipals assert that the Commission should engage in 
a cost/benefit analysis of the policy and should review all orders 
issued on the merits for base rate cases for a period of time to 
determine how often discount adjustments were allowed and whether 
pipelines routinely file for such adjustments. If discounts are 
routinely allowed, Northern Municipals argue, that is an indication 
that the pipeline considers the recovery of discounts an entitlement, 
and this undermines the validity of the Commission's premise that 
pipelines will always seek the highest rate for their service.
    22. While the Commission will address below Northern Municipals' 
and IMGA's arguments regarding the basis for each of the Commission's 
challenged findings, some general comments about the type of evidence 
considered in this proceeding are appropriate at the outset. Rehearing 
applicants ask the Commission to change a policy of 16 years and 
establish a blanket rule that prohibits pipelines from seeking a 
discount adjustment in a rate case for discounts given to meet gas-on-
gas competition. While the permission given by the Commission to 
pipelines to discount their rates between a minimum and maximum rate 
was promulgated in Order No. 436 and adopted as a regulation,\12\ the 
adjustment in throughput to recognize discounting is not a rule, but is 
a policy that was adopted by the Commission in the Rate Design Policy 
Statement.\13\ Therefore, in individual rate cases, the parties are 
free to develop a record based on the specific circumstances on the 
pipeline to determine whether the discounts given were beneficial to 
captive customers. The pipeline has the burden of proof under section 4 
of the NGA in a rate case to show that its proposal is just and 
reasonable. If there are circumstances on a particular pipeline that 
may warrant special considerations or disallowance of a full discount 
adjustment, those issues may be addressed in individual 
proceedings.\14\ Parties in a rate proceeding may address not only the 
issue of whether a discount was given to meet competition, but also 
issues concerning whether the discount was a result of destructive 
competition and whether something less than a full discount adjustment 
may be appropriate in the circumstances.
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    \12\ 18 CFR 284.10 (2005).
    \13\ Interstate Natural Gas Pipeline Rate Design, 47 FERC ] 
61,295, reh'g granted, 48 FERC ] 61,122 (1989).
    \14\ See, e.g., Natural Gas Pipeline Company of America, 73 FERC 
] 61,050 at 61,128-29 (1995), and El Paso Natural Gas Co., 72 FERC ] 
61,083 at 61,441 (1995).
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    23. The November 22 NOI gave all participants in the natural gas 
industry an opportunity to provide comments on whether gas-on-gas 
discounts help increase overall throughput on interstate pipelines and 
asked specific questions concerning whether customers receiving such 
discounts could increase their throughput. The Commission did this to 
develop a record upon which to base its decision whether to change the 
selective discounting policy. Forty parties filed comments. The 
Commission appropriately relies on the record developed and the 
comments of experienced industry participants. Because the Commission 
provided all interested parties with an opportunity to present 
evidence, it need not now undertake a separate and independent 
analysis.
    24. Further, the Commission need not undertake such an analysis for 
the purposes of determining whether, as Northern Municipals allege, the 
Commission's rationale for the policy is undermined because discount 
adjustments are ``routinely'' granted and pipelines therefore consider 
them an entitlement. The Commission does not routinely grant pipelines 
a discount adjustment, but grants such an adjustment only to the extent 
that the discount was required to meet competition. The Commission has 
denied pipelines the adjustment where the pipeline has failed to meet 
its burden of showing that the discount was required to meet 
competition. For example, in Panhandle Eastern Pipe Line Co,\15\ 
Williams Natural Gas Co,\16\ and Trunkline Gas Co.,\17\ the Commission 
held that the pipeline had not met its burden to show that its 
discounts to its affiliates were required by competition. In addition, 
in Iroquois Gas Transmission System \18\ and

[[Page 70805]]

Trunkline Gas Co.,\19\ the Commission disallowed a discount adjustment 
with respect to discounts given to non-affiliates. In both cases, the 
discounts were given to long-term, firm customers. The Commission found 
that the parties opposing the discount adjustment had raised enough 
questions about the circumstances in which those long-term discounts 
were given to shift the burden back to the pipeline to justify the 
discount. The Commission then found that, when a pipeline gives a long-
term discount, the Commission would expect that the pipeline would make 
a thorough analysis whether competition required such a long-term 
discount, and in both these cases the pipeline had failed to present 
any evidence of such an analysis. A discount adjustment is not an 
entitlement and the pipelines would be ill-advised to consider it so.
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    \15\ 74 FERC at ] 61,109 at 61,401-02 (1996).
    \16\ 77 FERC at ] 61,277 at 62,206-07 (1996).
    \17\ 90 FERC at ] 61,017 at 61,096 (2000).
    \18\ 84 FERC at ] 61,086 at 61,476-78 (1998).
    \19\ 90 FERC at ] 61,017 at 61,092-95 (2000).
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    25. Moreover, the Commission need not conduct such a fact-specific 
analysis in order to meet the requirement that its decision be 
supported by substantial evidence. In AGD I, the court explained that 
promulgation of generic rate criteria involves the determination of 
policy goals and the selection of the means to achieve them, and that 
courts do not insist on empirical data for every proposition on which 
the selection depends.\20\ The court cited Wisconsin Gas Co. v. 
FERC,\21\ where certain parties had objected to the Commission's 
curtailment of the minimum bill because it allegedly would result in 
shifting costs to captive customers. In response to these arguments, 
the Commission stated that the increased incentive to compete 
vigorously in the market would eventually lead to lower prices for all 
consumers. The court noted that the Wisconsin Gas court accepted this 
response without record evidence ``presumably because it viewed the 
prediction as at least likely enough to be within the Commission's 
authority.'' \22\ The court further stated ``agencies do not need to 
conduct experiments in order to rely on the prediction that an 
unsupported stone will fall; nor need they do so for predictions that 
competition will normally lead to lower prices.'' \23\
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    \20\ 824 F.2d at 1008.
    \21\ 770 F.2d 1144 (D.C. Cir. 1985).
    \22\ 824 F.2d at 1008.
    \23\ Id. at 1008-09.
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    26. Similarly in INGAA v. FERC,\24\ the Commission narrowed the 
right of first refusal (ROFR) to eliminate the ROFR for discounted 
contracts. In justifying this change, the Commission stated that if a 
customer is truly captive, it is likely that its contract will be at 
the maximum rate. Parties challenged this finding as not being based on 
substantial evidence, but rather on the agency's own supposition and 
presented hypothetical examples to the contrary. The court upheld the 
Commission and stated that while the Commission had cited no studies or 
data, its conclusion seemed largely true by definition and that it was 
a ``fair inference'' that customers paying less than the maximum rate 
for service had other choices in the market. The court further found 
that the hypothetical counter examples given by the petitioners failed 
to undermine the Commission's conclusion that generally, discounts are 
given in order to obtain and retain load that the pipeline could not 
transport at the maximum rate because of competition.
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    \24\ 285 F.3d 18 at 55 (D.C. Cir. 2002).
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    27. In AGD I, the court cited to economic treatises in reaching its 
decision,\25\ and courts rely on economic theory in their decisions. 
For example, the decisions in Williston Basin v. FERC,\26\ Iroquois Gas 
Transmission System v. FERC,\27\ and Arco Alaska, Inc. v. FERC,\28\ 
rely on economic theory in reaching their conclusions. Therefore, the 
Commission rejects the arguments of Northern Municipals and IMGA that 
the May 31 Order is not based on substantial evidence because it relies 
on economic theory rather than empirical data. To the extent that the 
Commission's orders on the selective discounting policy rely on 
economic theory, that is entirely proper, and economic theory may be 
the basis for the Commission's decision.
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    \25\ Id. at 1010 (citing 2 A. Kahn, The Economics of Regulation: 
Principles and Institutions (1987)), 1011n.12 (citing E. Gellhorn & 
R. Pierce, Regulated Industries 185-89 (1987)), and n.13 (citing, 
inter alia, Tye & Leonard, On the Problems of Applying Ramsey 
Pricing to the Railroad Industry with Uncertain Demand Elasticities, 
17A Transportation Research 439 (1983)).
    \26\ 358 F.3d 45, 49-50 (D.C. Cir. 2004) (citing Alfred E. Kahn, 
The Economics of Regulation: Principles and Institutions 132-33 
(1988)).
    \27\ 172 F.3d 84, 89 (D.C. Cir. 1999) (``We note that classic 
analysis of non-cost-based discounting by carriers has turned on 
differences in the price elasticity of demand for the carried 
product. It pursues the goal of an optimal trade-off between the 
desirability of maximizing output and the necessity of the utility's 
recovering all its costs.'').
    \28\ 89 F.3d 878, 883 (D.C. Cir. 1996) (Explaining the now 
``inverse-elasticity rule, Ramsey Pricing allocates joint costs in 
inverse proportion to the demand elasticities of different customers 
to yield the most efficient use of a pipeline.).
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C. Legal Basis for Upholding the Policy

    28. In the May 31 Order, the Commission discussed its 
responsibilities under the NGA and cited to Order No. 636:

    The Commission's responsibility under the NGA is to protect the 
consumers of natural gas from the exercise of monopoly power by the 
pipelines in order to ensure consumers ``access to an adequate 
supply of gas at a reasonable price.'' [Tejas Power Corp. v. FERC, 
908 F.2d 998, 1003 (D.C. Cir. 1990).] This mission must be 
undertaken by balancing the interests of the investors in the 
pipeline, to be compensated for the risks they have assumed, and the 
interests of consumers, and in light of current economic, 
regulatory, and market realities.\29\
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    \29\ Order No. 636 at 30,392.

    The Commission then concluded that, in light of existing conditions 
in the natural gas market, its existing policies concerning selective 
discounting are more consistent with the goal of ensuring adequate 
supplies at a reasonable price, than any of the alternatives proposed 
in the comments in response to the NOI.
    29. On rehearing, IMGA argues that the Commission did not apply the 
proper legal criteria in reaching its conclusion. IMGA argues that the 
selective discount policy is unlawful unless it can be shown that it 
produces a net benefit to captive customers \30\ and that the burden of 
proof is on the supporters of the policy to produce substantial 
evidence to show that the discount adjustment benefits captive 
customers. It argues that the Commission's cite to Tejas was taken out 
of context and that it is a ``perversion of the ruling in Tejas Power 
Corp. to employ it to support a conclusion that it is okay to exploit 
captive customers where that exploitation could arguably increase gas 
supply because it produces higher prices.'' IMGA states that regardless 
of whether higher gas prices is a lawful objective, it is not lawful if 
the mechanism produces a violation of the prohibition against undue 
discrimination of sections 4 and 5 of the NGA. Further, IMGA argues, it 
is of no benefit to captive shippers that the discount adjustment 
reduces their transportation costs if it also increases their gas 
supply costs, and that in Maryland People's Counsel v. FERC, \31\ the 
court concluded that it was unlawful for the Commission to focus only 
on the benefits of lower transportation costs and ignore the potential 
offsetting impact of higher gas prices.
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    \30\ IMGA cites the Order No. 637 NOPR, Transcontinental Gas 
Pipe Line Corp. v. FERC, 998 F.2d 1313, 1318, 1321 (D.C. Cir. 1993); 
Columbia Gas Transmission Corp. v. FERC, 848 F.2d 250, 251-254 (D.C. 
Cir. 1988); Maryland People's Counsel v. FERC, 761 F.2d 768, 770-771 
(D.C. Cir. 1985).
    \31\ IMGA cites 761 F.2d 768, 770-71 (D.C. Cir. 1988).
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    30. The Commission has correctly stated its responsibilities under 
the

[[Page 70806]]

NGA. The citation to Order No. 636 and Tejas merely state, as do 
numerous other Commission and court decisions,\32\ that the 
Commission's responsibility under the NGA is to ensure customers access 
to natural gas at reasonable prices, and that in carrying out its 
mission, the Commission must balance a number of competing interests. 
In Order No. 636, the Commission cited to the Natural Gas Wellhead 
Decontrol Act of 1989 (Decontrol Act),\33\ enacted by Congress in order 
to create more abundant natural gas supplies at lower prices by 
creating competition among efficient producers.\34\ The House Committee 
Report urged the Commission to ``retain and improve'' the competitive 
structure in natural gas markets in order to maximize the benefits of 
wellhead price decontrol.\35\ The Decontrol Act did not, however, alter 
the Commission's consumer protection mandate.
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    \32\ E.g., FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 
(1943); Atlantic Refining Co. v. Public Service Commission of New 
York, 360 U.S. 378, 388, 389, 392 (1959) (fundamental purpose of NGA 
is to assure the public of a reliable supply of gas at reasonable 
prices).
    \33\ 103 Stat. 157 (1989).
    \34\ Order No. 636, Regulations Preambles ] 30,939 at p. 30,397 
(1992), citing H.R. Report No. 29, 101st Cong., 1st Sess., at p. 2 
(1989).
    \35\ H.R. Report No. 29, supra, at p.2.
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    31. Thus, the Commission must, in all of its decisions, balance a 
number of interests, and that is what it has done here. The Commission 
recognizes its obligation to protect captive customers and it has met 
that obligation here. However, the Commission also has broad 
responsibilities to develop policies of general applicability. The 
Commission has analyzed the concerns of IMGA and Northern Municipals in 
the context of the overall benefits to the national pipeline system 
provided by the selective discount policy. The Commission has concluded 
that the selective discount policy, including allowing a discount 
adjustment for gas-on-gas competition, generally benefits all customers 
including customers who do not receive the discount.
    32. We find IMGA's view of the Commission's responsibilities too 
narrow. Under IMGA's view, if there could be circumstances where a 
discount does not benefit captive customers then the policy must be 
abandoned. While the Commission has concluded that the selective 
discounting policy generally benefits all customers, it has also 
recognized that there may be circumstances on some pipelines where 
captive customers may require additional protections. It is not 
necessary, however, for the Commission to eliminate entirely the 
discount adjustment for gas-on-gas competition in order to address 
those limited situations. The cases cited by IMGA are not to the 
contrary.
    33. As the Commission explained in the May 31 Order, it is possible 
to adopt measures to protect small publicly owned municipal gas 
companies in circumstances where the policy works an undue hardship on 
them and at the same time retain the competitive benefits of the policy 
for the majority of shippers. This is the proper balancing of interests 
in this proceeding and the Commission applied the appropriate legal 
standards in balancing these interests. The Commission's decision here 
meets both goals of promoting a competitive natural gas market and 
protecting captive customers. This is the type of balancing decision 
that the courts have recognized is within the Commission's discretion 
in developing its policies in a competitive marketplace.\36\
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    \36\ See, e.g., Midcoast Interstate Transmission, Inc. v. FERC, 
198 F.3d 960, 970 (D.C. Cir. 2000).
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    34. IMGA's characterization of the Commission's decision as 
concluding that it is ``okay'' to exploit captive customers where that 
exploitation could increase gas supply by producing higher prices is 
not an accurate characterization of the Commission's decision. As 
stated above, it is the Commission's responsibility to ensure that 
consumers have access to natural gas at reasonable prices, not to 
promote policies that increase prices, and there is no basis for 
concluding that the discount policy increases the delivered price of 
natural gas to consumers. Further, it is clearly established that 
selective discounting based on different demand elasticities does not 
constitute undue discrimination under the NGA.\37\
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    \37\ E.g., AGD I at 1011; United Distribution Companies v. FERC, 
88 F.3d 1105, 1142 (D.C. Cir. 1996).
---------------------------------------------------------------------------

D. There Is Substantial Evidence To Support the Commission's Conclusion 
That Discouraging Discounts Would Do More Harm Than Good

    35. IMGA and Northern Municipals argue that the Commission's 
decision that discouraging gas-on-gas discounting by disallowing any 
adjustment to rate design volumes to account for such discounts would 
do more harm than good is not based on substantial evidence. They raise 
a number of issues which, they allege, the Commission either failed to 
address or did not adequately address in the May 31 Order. As the May 
31 Order stated, there are three different categories of gas-on-gas 
competition. One category is competition from other interstate 
pipelines subject to the Commission's jurisdiction. The second category 
is competition from capacity releases by the pipeline's own firm 
customers. The third category is competition from interstate pipelines 
that are not subject to the Commission's jurisdiction. The May 31 Order 
gave different reasons for allowing discount adjustments for each of 
these categories of gas-on-gas discounts. Accordingly, in addressing 
the rehearing requests, we will continue to discuss these categories of 
gas-on-gas competition separately.
1. Competition From Other Interstate Pipelines
    36. IMGA and Northern Municipals contend that the Commission erred 
in not adopting their proposals to adopt a rule prohibiting adjustments 
to rate design volumes for discounts a pipeline gives in competition 
with another interstate pipeline. They attack both of the primary bases 
of the Commission's decision: (1) that gas-on-gas discounts do play a 
role in increasing throughput on interstate pipelines and (2) such 
discounts provide substantial other public benefits which would be lost 
if the Commission sought to discourage such discounting.
    37. Before addressing the specific arguments of the two rehearing 
applicants in support of their position, several general comments are 
in order. First, the Commission has never codified its policy 
concerning discount adjustments in any definitive rule or regulation. 
Rather, the Commission has developed its discount adjustment policy 
first through the 1989 Rate Design Policy Statement and subsequently in 
individual rate cases. Under that policy, the pipeline may propose as 
part of a section 4 rate filing to adjust its rate design volumes to 
account for any discounts it gave during the test period, including 
discounts given in competition with other pipelines. By proceeding on 
this basis, the Commission must find, based on the record developed in 
each rate case, that the pipeline has met its section 4 burden to show 
that any approved discount adjustment to rate design volumes is just 
and reasonable.\38\ In addition, as the Commission stated in the May 31 
Order \39\ and discusses further below, the Commission will consider 
the impact of any discount adjustment on captive customers in specific 
proceedings. The Commission's termination of the instant rulemaking

[[Page 70807]]

proceeding is a decision to continue to address the discount adjustment 
issue in the same case-by-case manner. Thus, the May 31 Order should 
not be interpreted as establishing any definitive rule that pipelines 
will in all instances be permitted a full discount adjustment for 
discounts given in competition with another pipeline. Rather, the 
Commission simply determined in the May 31 Order to reject the 
rehearing applicants' proposal to establish a definitive rule 
prohibiting pipelines from proposing in section 4 rate cases discount 
adjustments with respect to discounts given in competition with other 
pipelines.
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    \38\ Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 48 (D.C. 
Cir. 1974).
    \39\ 111 FERC ] 61,309 at P 57.
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    38. Second, the Commission's approach to this issue appropriately 
balances several factors. Given the increasingly competitive nature of 
both the gas commodity and pipeline capacity markets, the Commission 
believes there are undeniable public benefits to giving pipelines 
flexibility to discount their rates consistent with the market value of 
their capacity, including in the context of competition with other 
interstate pipelines. At the same time, the Commission must take into 
account the effect of such discounting on truly captive customers. 
While the Commission believes that in most instances such discounts 
either help keep the rates of the captive customers lower than they 
otherwise would be or are at least neutral in effect, the Commission 
recognizes that there may be some situations where gas-on-gas 
discounting could shift costs to the captive customers. However, the 
Commission believes that such situations are sufficiently isolated that 
they are best dealt with on a case-by-case basis, rather than by 
establishing a generic rule discouraging interstate pipelines from 
giving discounts in competition with one another.
    39. The Commission now turns to a discussion of the public benefits 
of competition between interstate pipelines. The May 31 Order found 
that pipeline discounts in competition with one another leads to more 
efficient use of the interstate pipeline grid by enabling pipelines to 
adjust the price of their capacity to match its market value, and that 
discouraging such discounting would lead to harmful distortions in both 
the commodity and capacity markets. On rehearing, IMGA and Northern 
Municipals argue that there is no substantial evidence in the record to 
support this conclusion. The Commission disagrees.
    40. As the Commission found in both Order No. 637 and the May 31 
Order, and as many of the comments in this proceeding reiterate,\40\ 
the deregulation of wellhead natural gas prices, together with the 
requirement that interstate pipelines offer unbundled open access 
transportation service, has increased competition and efficiency in 
both the gas commodity market and the transportation market. Market 
centers have developed both upstream in the production area and 
downstream in the market area. Such market centers enhance competition 
by giving buyers and sellers a greater number of alternative pipelines 
from which to choose in order to obtain and deliver gas supplies. As a 
result, buyers can reach supplies in a number of different producing 
regions and sellers can reach a number of different downstream markets.
---------------------------------------------------------------------------

    \40\ Id. at P 31.
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    41. The development of spot markets in downstream areas means there 
is now a market price for delivered gas in those markets. That price 
reflects not only the cost of the gas commodity but also the value of 
transportation service from the production area to the downstream 
market. The difference between the downstream delivered gas price and 
the market price at upstream market centers in the production area 
(referred to as the ``basis differential'') shows the market value of 
transportation service between those two points. As a result, ``gas 
commodity markets now determine the economic value of pipeline 
transportation services in many parts of the country. Thus, even as 
FERC has sought to isolate pipeline services from commodity sales, it 
is within the commodity markets that one can see revealed the true 
price for gas transportation.'' \41\ These basis differentials vary on 
a daily and seasonal basis as market conditions change and are largely 
determined by the gas-on-gas competition that occurs at the market 
centers.\42\
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    \41\ Order No. 637 at 31,274 (quoting M. Barcella, How Commodity 
Markets Drive Gas Pipeline Values, Public Utilities Fortnightly, 
February 1, 1998 at 24-25).
    \42\ Gulf South comments at 17.
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    42. Under the Commission's original cost method of determining just 
and reasonable rates, the maximum just and reasonable rate in a 
pipeline's tariff reflects embedded costs and depreciation. As a 
result, the pipeline's maximum tariff rate need not reflect the market 
value of its capacity on any given day or season of the year. Moreover, 
the maximum rates of competing pipelines may substantially differ from 
one another. Allowing each pipeline to discount its capacity to the 
market value indicated by the basis differentials taking into account 
the time period over which the discount will be in effect provides 
greater efficiency in the production and distribution of gas across the 
pipeline grid, promoting optimal decisions concerning exploration for 
and production of the gas commodity and transportation of gas supplies 
to locations where it is needed the most and during the time periods 
when it is needed.
    43. The May 31 Order gave a number of examples of the public 
benefits provided by enabling pipelines to discount their rates to the 
market value. First, such discounting helps minimize the distorting 
effect of transportation costs on producer decisions concerning 
exploration and production. Second, discounting enables interstate 
pipelines with higher cost structures to compete with lower cost 
pipelines. Third, if several interstate pipelines serve the same 
downstream market, discounting can help minimize short-term price 
spikes in response to increases in demand by making the higher cost 
pipeline more willing to discount down to the basis differential in 
order to bring more supplies to the downstream market. Fourth, 
discounting helps facilitate discretionary shipments of gas into 
storage during off-peak periods. Finally, selective discounting helps 
pipelines more accurately assess when new construction is needed.
    44. IMGA and Northern Municipals contest each of the public 
benefits found by the Commission. However, a large majority of the 
commenters in this proceeding affirmed that discounts given by 
competing pipelines based on the market value of their capacity do 
produce significant public benefits. IMGA and Northern Municipals do 
not seriously contest the finding that basis differentials between two 
points show the current market value of the transportation capacity 
between those two points. Rather, they suggest, in essence, that by 
discouraging pipelines from discounting maximum rates that exceed the 
basis differentials, the Commission could force whatever reductions in 
the delivered price of gas the market requires to be made with respect 
to the commodity component, rather than the transportation component of 
the delivered price. For example, IMGA states that, without discounts, 
wellhead prices may fall somewhat. However, the Commission believes 
that any effort to insulate one component of a price from market forces 
would cause harmful distortions and ultimately fail.
    45. IMGA and Northern Municipals contend that, in today's market, 
with its higher natural gas commodity prices,

[[Page 70808]]

there is no need to be concerned that unavailability of discounts to 
the basis differentials could lower producer net backs. They argue 
that, if no discount is granted, the producer will either adjust its 
price to clear this market, or will choose to flow its gas to some 
other market where a consumer is willing to pay more, a correct result 
in a competitive market. Also, Northern Municipals suggest that, given 
the deregulation of wellhead prices, the Commission should no longer be 
concerned with the effect of interstate transportation rates on 
producers.
    46. However, as already discussed, when Congress deregulated 
wellhead prices in 1989, it directed that the Commission exercise its 
remaining NGA jurisdiction over transportation in manner that would 
improve the competitive structure of the natural gas market. In 
response to that directive, the Commission has consistently taken into 
account the effect of its rate policies on natural gas production, most 
significantly when it adopted the straight fixed variable (SFV) rate 
design for firm transportation rates in Order No. 636. The purpose of 
that policy was to minimize the distorting effect of transportation 
costs on producer decisions concerning exploration and production. As 
the Commission stated in the May 31 Order, the various interstate 
pipelines competing in the same downstream markets generally bring gas 
from different supply basins. For example, different interstate 
pipelines serving California are attached to supply basins in the 
Texas, Oklahoma, Gulf Coast area; the Rocky Mountain area, and Canada. 
Given the differences between pipeline maximum rates based on their 
differing historical costs and given the fact that market value of 
transportation between two points is at times less than the pipeline 
maximum rates, any effort by the Commission to insulate pipelines from 
market forces would be inconsistent with the Congress's directive that 
the Commission seek to improve the competitive structure of the natural 
gas market. Without discounts by the higher cost pipelines, producers 
in supply basins served by higher cost pipelines would generally face 
the burden of any price reductions necessary to meet the market price 
for delivered gas in the downstream areas.\43\ As a result, gas 
reserves from supply areas served by lower cost pipelines would have a 
built-in cost advantage over gas reserves served by higher cost 
pipelines.
---------------------------------------------------------------------------

    \43\ Reliant Energy at 11; Gulf South at 30.
---------------------------------------------------------------------------

    47. IMGA and Northern Municipals also contend that the Commission's 
statement that discounts help interstate pipelines with higher cost 
structures to compete with lower cost pipelines, enabling the capacity 
for both pipelines to be utilized in the most efficient manner 
possible, provides no support for the selective discounting policy. 
However, it is clear that in such a situation the pipeline with the 
higher maximum rate may need to discount to compete with the pipeline 
with the lower maximum rate to the extent the pipeline with the lower 
maximum rate has available capacity. Discouraging the pipeline with the 
higher maximum rate from discounting in that situation would only harm 
that pipeline's captive customers, since it would lose throughput over 
which it could otherwise spread its fixed costs. IMGA and Northern 
Municipals suggest that such discounts would provide no overall public 
benefit, since they would not increase overall throughput on both 
interstate pipelines. Rather such discounts would only serve to switch 
throughput from one pipeline to the other. However, the Commission 
finds there is a clear public benefit to maximizing the ability of 
higher cost pipelines to compete with lower cost pipelines. Otherwise, 
the higher cost pipeline will tend always to lose throughput over which 
to spread its fixed costs, thus exacerbating the difference in rates 
between the two pipelines making it more and more difficult for the 
higher cost pipeline to compete and leading the captive customers of 
the higher cost pipeline to bearing an inequitably high transportation 
cost vis-[aacute]-vis the captive customers of the lower cost 
pipeline.\44\
---------------------------------------------------------------------------

    \44\ See Michigan Consolidated Gas Co. comments at 4-5, 
describing the adverse effect on TransCanada Pipeline and its 
customers due to its inability to discount in competition with the 
United States pipelines; Transco comments at 9-10.
---------------------------------------------------------------------------

    48. Indeed, discounting has become an integral part of today's 
dynamic natural gas market.\45\ The U.S. natural gas pipeline grid has 
become increasingly interconnected since the transition to unbundled, 
open access transportation service pursuant to Order Nos. 436, 636, and 
637, with pipeline companies making substantial investments in 
constructing new pipeline facilities. In response to a 2005 INGAA 
survey, 36 pipelines reported that they had spent $19.6 billion for 
interstate pipeline infrastructure between 1993 and 2004, and during 
the 1990s interregional natural gas pipeline capacity grew by 27 
percent.\46\ As a result, most major markets are now served by multiple 
interstate pipelines. For example, customers in the Chicago 
metropolitan area are served by eleven interstate pipelines, giving 
them access to natural gas supplies in Western Canada, the Rocky 
Mountains, New Mexico, Oklahoma, Michigan, Louisiana, the Gulf coast, 
and Texas.\47\ In this environment, gas-on-gas competition and 
alternate fuel competition are interchangeable. Discounts given by 
competing pipelines also serve to increase the market share of natural 
gas versus alternate fuels.\48\
---------------------------------------------------------------------------

    \45\ INGAA comments at 7-10; Duke comments at 18-22; Transco 
comments at 5-8, 27-28; Process Gas comments at 3-4; Gulf South 
comments at 10, 11, 17-19; Dominion Resources comments at 3-5; NGSA 
comments at 8-10.
    \46\ INGAA comments at 9.
    \47\ Kinder Morgan comments at 10.
    \48\ Kinder Morgan comments at 7, 18.
---------------------------------------------------------------------------

    49. In their rehearing requests, IMGA and Northern Municipals 
contend that, whatever public benefits may arise from discounts given 
by one interstate pipeline to meet competition from another interstate 
pipeline, captive customers should not have to bear the cost of those 
discounts through a discount adjustment to rate design volumes. They 
contend that the Commission erred when it found that such discounts 
benefit captive customers, since the customers receiving such discounts 
are demand elastic and therefore those discounts help increase overall 
throughput on interstate pipelines.
    50. In their rehearing requests, IMGA and Northern Municipals do 
not seriously contest the Commission's finding that such discounts will 
increase the demand of the customers receiving them in at least some of 
the ways found by the Commission. For example, the Commission stated 
that industrial and other business customers of pipelines typically 
face considerable competition in their own markets and must keep their 
costs down in order to prosper. Lower energy costs achieved through 
obtaining discounted pipeline capacity can help industrial and other 
business customers of pipelines, who typically face considerable 
competition in their own markets, do more business than they otherwise 
would, thereby increasing their demand for gas. Also, such discounts 
may reduce the incentive for existing non-fuel switchable customers to 
install the necessary equipment to become fuel switchable. In addition, 
potential new customers, such as companies considering the construction 
of gas-fired electric generators, may be more likely to build such 
generators if they obtain discounted capacity on the pipeline.
    51. However, the thrust of IMGA and Northern Municipals' argument 
is that

[[Page 70809]]

the Commission has not shown that such increased demand will translate 
into increased overall throughput or revenues on interstate pipelines. 
IMGA contends that a study presented by INGAA in its comments shows 
that the demand elasticity in the natural gas transportation market is 
very limited, with the result that, for every 10 percent decrease in 
the price of transportation, demand for transportation increases by 
only about 1.2 percent.\49\ IMGA contends that, as a result, any 
additional revenues generated by a pipeline decreasing its rates 
through discounts in competition with another pipeline will not offset 
the effects of the rate decreases.\50\ IMGA also argues that even if a 
discounted rate given to customers with access to more than one 
pipeline would cause them to increase their consumption of natural gas, 
the increased price that the discount adjustment would charge to 
captive shippers would cause them to decrease their consumption by a 
similar amount. IMGA states that this is because the difference between 
captive customers and discounted shippers is not the elasticity of 
their demand, but whether there are alternative pipelines from which 
they can purchase.
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    \49\ IMGA cites pages 14-15 of an affidavit by Bruce B. Henning 
attached to INGAA's comments.
    \50\ IMGA illustrates its contention with the following example: 
It assumes a pipeline with revenues of $250.00 based on charging 
$.50 per Mcf for throughput of 500 Mcf. If the pipeline reduced its 
rate by 10 percent to $.45 per Mcf in order to increase its 
throughput by 1.2 percent to 506 Mcf, it would then generate 
revenues of $227.70, about 9 percent less than its revenues without 
the rate reduction.
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    52. Similarly, Northern Municipals state that the Commission makes 
conclusory statements that overall throughput on the national grid will 
increase as a result of discounting, but provides no studies or 
evidence to back this up. Similarly, Northern Municipals argue that 
unless the reduction in fixed costs to captive and other customers is 
greater than the discounts they are forced to absorb, the increase in 
throughput does nothing to protect the interests of captive customers 
and, they allege, there is no solid evidence to support the conclusion 
that any increase in throughput will result in a net decrease in rates 
to consumers. Northern Municipals states that the May 31 Order provides 
no support for the presumption that increased throughput results in 
more spreading of fixed costs, thus benefiting consumers that are not 
entitled to discounts by providing them with lower overall rates. They 
state that the only thing the order proves is that if a rate is 
discounted heavily enough, it may attract some additional volumes. But, 
they argue, if the discount the ratepayers must absorb is greater than 
the offsetting reduction in the portion of the fixed costs that those 
ratepayers must bear, there is no justification for the discount.
    53. The Commission recognizes that the discounts a pipeline gives 
in competition with another interstate pipeline may or may not increase 
the overall revenue collected by interstate pipelines. As discussed 
below, the revenue effects of particular gas-on-gas discounts given by 
a pipeline depend on the circumstances in which the pipeline gave the 
discount. However, the Commission's experience has been that such 
discounts generally do not cause significant cost shifts to captive 
customers. Therefore, the Commission reaffirms its conclusion that 
discounts given by competing pipelines provide sufficient public 
benefits that we will not modify our policy to adopt a blanket 
prohibition on adjustments to rate design volumes to reflect such 
discounts. As we stated in the May 31 Order, if there are circumstances 
on a particular pipeline that warrant additional protections for 
captive customers, including a limitation on the discount adjustment to 
rate design volumes, those issues can be considered in individual rate 
cases.
    54. IMGA and Northern Municipals assume that, where two pipelines 
compete with one another they will engage in a destructive bidding war, 
with the result that all customers with access to the two pipelines 
will receive heavily discounted rates for all their service without 
regard to their elasticity of demand. However, this assumes that in 
such a situation the customers with access to the two pipelines will 
have all the bargaining power, and the two pipelines will have none. 
This is unlikely to be the case. If the total capacity of the two 
pipelines is not greatly in excess of the demand for transportation 
service in the markets served by the two pipelines, competition between 
the customers for the pipelines' capacity should give the pipelines 
some ability to minimize any discounts and target the discounts they do 
give to the customers whose demand will increase with a lower rate so 
as to fill the pipeline.
    55. Moreover, pipelines have an incentive not to discount too 
deeply, because they recognize that, to the extent they do file a rate 
case to attempt to raise rates to their remaining customers, the demand 
of those customers could go down. Also, those customers would then have 
more of an incentive to seek alternatives of their own, for example 
through participating in the expansion of another pipeline. The 
affidavit of Bruce Henning, submitted by INGAA and relied on by IMGA, 
pointed out that long-run elasticities of demand are always higher than 
short-term demand elasticities, usually two to three times.\51\ That is 
because in the long-run consumers can make capital investments to 
increase price responsiveness, including investments to increase their 
efficiency, and their alternative fuel capacity. In addition, the 
pipelines should recognize that the Commission has stated that it may 
not permit a full discount adjustment in situations where that would 
lead to an inequitable result.\52\
---------------------------------------------------------------------------

    \51\ Henning Affidavit at 15.
    \52\ See Natural Gas Pipeline Company of America, 73 FERC ] 
61,050 at 61,128-29 (1995), and El Paso Natural Gas Co., 72 FERC ] 
61,083 at 61,441 (1995).
---------------------------------------------------------------------------

    56. There is nothing in the record developed in response to the NOI 
to suggest that the Commission's general policy of permitting pipelines 
to propose discount adjustments for gas-on-gas competition has led to a 
widespread cost shift to captive customers. The NOI asked the 
commenters for specific examples of rate cases where the discount 
adjustment has impacted captive customers. No party was able to point 
to any rate case where discounts due to gas-on-gas competition actually 
caused a substantial cost shift to captive customers. In response, IMGA 
referred to discounts in Docket No. RP95-326, Natural Gas Pipeline Co. 
of America, where, IMGA asserts, discounts produced adjustments in 
throughput that resulted in rates so high that Natural chose not to 
increase their tariff rates as much as could have been justified. IMGA 
also referred to Southern Natural Gas Co.,\53\ where it had submitted 
testimony concerning discounts given by Southern during the period May 
1992 through April 1993. Northern Municipals referred to the discount 
given to CenterPoint on Northern.
---------------------------------------------------------------------------

    \53\ 65 FERC ] 61,348 (1993).
---------------------------------------------------------------------------

    57. These specific Commission proceedings cited by the parties 
seeking rehearing do not support a finding that gas-on gas discount 
adjustments have caused a significant cost shift to captive customers, 
requiring a drastic policy change seeking to discourage such discounts. 
Instead, they support the conclusion that individual rate cases provide 
the appropriate forum for determining the extent to which a discount 
adjustment for this type of discount is just and reasonable in the 
circumstances of the particular case. As IMGA points out, in the 
Natural

[[Page 70810]]

decision, the circumstances resulted in the pipeline not implementing 
the full discount adjustment. Indeed, in its rehearing request,\54\ 
IMGA recognizes that Natural, and a second pipeline which faces 
substantial gas-on-gas competition, Gulf South Pipeline Company, have 
been able to engage in effective and efficient competition. As a 
result, they have not had to shift large amounts of costs to captive 
customers through discount adjustments. IMGA also recognizes that one 
factor in the ability of these pipelines to successfully compete has 
been the Commission's 1996 policy of permitting pipelines to negotiate 
rates using a different rate design from their recourse rates.\55\
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    \54\ IMGA rehearing at 20.
    \55\ Alternatives to Traditional C