Arkla is not subject to Order No. 528 6 with respect to the costs included in the settlement. However, the costs in the instant filing are not covered by the settlement and, accordingly, Arkla may not use the purchase deficiency allocation method with respect to these costs.

On October 23, 1990, Arkla filed primary and alternate revised tariff sheets to recover $55 million of the new take-or-pay costs that are included in the instant filing. However, the Commission, by order issued November 21, 1990, rejected both sets of tariff sheets because they were incomplete and failed to include sufficient details of the new proposed recovery methods.8 The present filing followed.

The Filing

Arkla asserts that the instant filing addresses the concerns and issues raised in the November 21 order. It further asserts that the alternative proposal is consistent with Order No. 528. The filing would implement the recovery of that portion of approximately $72 million in takeor-pay costs that were allocated to jurisdictional services, which amounts to approximately $61.6 million and which includes the costs that it filed to recover in Docket No. RP91-11-000. Arkla proposes to recover the costs plus applicable interest through a volumetric surcharge on all jurisdictional services, both sales and transportation. It asserts that the costs were paid to producers as of December 1, 1990, or were known and measurable as of that date. Arkla contends that they are the nonrecoupable costs that it paid to settle and restructure contracts in order to resolve claims arising out of its alleged failure to take gas or to pay for gas not taken and in order to reform its contracts to reduce exposure to such claims in the future.

The primary tariff sheets provide for the recovery of 100 percent of these costs, while the alternate tariff sheets provide for Arkla to absorb 25 percent of the costs and to recover the remaining 75 percent through a volumetric surcharge. Arkla argues that it should be entitled to an opportunity to recover all of its prudently incurred costs under a volumetric surcharge and accordingly renews its primary proposal for 100-percent recovery. Alternatively, Arkla agrees to absorb 25 percent at the outset of the recovery period. Thus, the increase in commodity rates under the alterna

6 Mechanisms for Passthrough of Pipeline Takeor-Pay Buyout and Buydown Costs, 53 FERC 61,163 (1990).

7 Arkla Energy Resources, 53 FERC 61,230 (1990).

8 The Commission directed that Arkla, in any subsequent filing to recover such costs, conform to the

tive proposal is designed on the basis of 75 percent of the total costs, or about $46.2 million, with Arkla absorbing about $14.9 million up front.

The mechanism for recovering the costs from the customers is the same under both sets of tariff sheets. Arkla proposes to collect the costs through a volumetric surcharge over a fiveyear amortization period beginning January 1, 1991 through December 31, 1996.9 Arkla explains how the charges will be calculated and adjusted to reflect recovery of costs in the prior period. To determine the charge for the first year under the respective tariff sheets, Arkla will divide either 100 percent or 75 percent of the total costs allocated to jurisdictional services by the number of years in the amortiza tion period. Interest is levelized over the fiveyear period and is added to the principal. The sum is then divided by the total throughput.

Initially, Arkla will use the annual jurisdic tional throughput level of 385 Bcf contained in Arkla's settlement approved in the October 31 1990 order. During the amortization period the throughput level will be adjusted as neces sary to reflect the throughput underlying Arkla's then current approved rates. Under th primary proposal, the initial volumetri surcharge would be $.0401 per MMBtu, whil under the alternative proposal's recovery o about $46.2 million, the surcharge would b $.0301 per MMBtu. In subsequent years, th annual principal amount will be the same, bu interest will be recalculated to reflect th actual approved interest rates in effect durin the previous year.

On March 1, 1991, and on each March thereafter through 1996, Arkla agrees to file status report to reconcile interest. Solely for th purpose of reconciling interest recovered in prior period, the status report will assume tha the entire volumetric surcharge was recovere for all commodities sold or transported. Th principal amount will not be recomputed reflect over- or underrecoveries in any pri year.

The tariff sheets provide for the applicati of Arkla's discount provisions to the maximu rates that include the volumetric surcharge. states that discounting is accomplished negotiating submaximum rate levels wi transporters. It further states that it does n

principles set forth in Order No. 528 that the Co mission intends to use to evaluate allocation metho proposed to be used in place of the purchase de ciency allocation method.

9 Arkla refers to the proposed volumet surcharge as a Commodity Rate Increase (CH charge.

generally negotiate percentage discounts or standard discounts below maximum rates.

Arkla states that it will refund on the basis of a comparison of the accepted maximum total rate and the total rate charged to the customer. Any refunds will be from total rates. Since Arkla's discounts are at negotiated rates, Arkla states it will not refund to customers not paying rates higher than the ultimately determined rates. If costs are undercollected due to discounting, Arkla will absorb the undercollection.

Public Notice, Interventions and Protests

Public notice of the instant filing was issued on December 14, 1990, providing for protests, motions, or notices to intervene to be filed on or before December 21, 1990. Timely notices or motions to intervene were filed by the parties indicated in the Appendix to this order. The City of Winfield, Kansas (Winfield), Indicated Shippers, and Arkansas Gas Consumers (AGC) also filed protests. Pursuant to Rule 214 (18 C.F.R. § 385.214 (1990)), any timely filed motions to intervene are granted unless an answer in opposition is filed within 15 days of the date such motion is filed. Any timely filed motions not listed in the Appendix are also granted in accordance with the conditions of Rule 214.

The protestants raise several objections to the proposed tariff sheets. In general, the major issues raised include: (1) whether the primary or the alternative proposal is consistent with the Commission's equitable sharing policy, including the requirement that pipelines agree to absorb a portion of the costs; (2) whether a mechanism for a periodic true-up of costs recovered compared to costs incurred should be required to prevent Arkla from overrecovering costs when its current throughput is higher than the throughput upon which the volumetric surcharge is based; (3) whether the throughput level from a prior proceeding is appropriate but instead should be based on contemporaneous data that reflects Arkla's actual throughput and should be adjusted in other ways; (4) whether Arkla should be required to refund overcollections or offset them; (5) whether the nature and level of proposed take-or-pay costs are valid and the costs have been allocated properly between jurisdictional and nonjurisdictional customers; and (6) whether a hearing should be established to determine if the costs were prudently incurred or there is a basis for a conference.

Discussion

The Commission accepts the alternate tariff sheets filed by Arkla and rejects the primary tariff sheets, as discussed below. The Commis

sion also directs its staff to convene a conference at which parties should be prepared to discuss settlement.

In Order No. 528, the Commission encouraged pipelines and their customers to reach settlements concerning revised methods for allocating take-or-pay settlement costs. The Commission stated that, in order to accommodate settlement discussions, it might, among other things, convene conferences to discuss the possibility of settlement. In the transmittal letter, Arkla states that the alternative proposal includes revisions that respond to the concerns that the same protestants raised in opposition to Arkla's similar alternative proposal rejected by the Commission in the November 21, 1990 order. Protestants, however, argue that the alternative proposal should be rejected because it fails to address their concerns and they request that a hearing or a conference be established in which they may participate to discuss the alternative proposal.

In these circumstances, the Commission directs staff to convene a conference at which all issues raised by the protestants may be discussed. All parties should come prepared to discuss settlement, and the parties should be represented by principals who have the authority to commit to a settlement. Staff is directed to report the results of the conference within 120 days of the issuance of this order. Thereafter, the Commission will take such further action as is appropriate. Since this order establishes a conference to discuss settlement, the Commission will not establish a hearing on prudence at this time.

Because the parties will have the opportunity at the conference to discuss settlement, the Commission will not address the individual issues raised by the protestants at this time, except with respect to their arguments concerning equitable sharing. In Order No. 528, the Commission stated that, consistent with the principle that all segments of the industry should share in paying the costs of resolving the take-or-pay problem, interstate pipelines also must share in paying a portion of those costs. The Commission required that, absent agreement with their customers and all other affected parties, pipelines must continue to absorb costs as provided in Order No. 500 and the Commission's orders based on Order No. 500.

Under the primary proposal, Arkla does not propose to absorb any of the proposed take-orpay costs. All of the costs would be absorbed by the customers entirely through a volumetric surcharge. This proposal is not based on an agreement between Arkla and its customers, and the protestants argue that, consequently, the proposal must be rejected as inconsistent

with the goal that such costs be shared equitably.

The Commission agrees with protestants that, in the absence of agreement, the primary proposal is inconsistent with the Commission's equitable sharing policy. As the Commission observed in Order No. 528, the court of appeals

has stated in a case where the Commission disallowed a pipeline's recovery of the costs of a failed gas supply project,

We therefore assume that the natural gas pipeline and its ratepayers were equally blameless for the losses at issue. That assumption, however, need not lead to the conclusion that Natural's ratepayers must, through the utility's cost of service, make good on all or any part of the money Natural lost. The Natural Gas Act simply does not guarantee the shareholders of even a prudently managed utility that ratepayers can always be stuck with the bill for supply projects that turn out to be total failures, however praiseworthy the utility's motives for undertaking those projects may have been. 10

Just as with failed supply projects, the Commission believes that it is appropriate that Arkla's proposed costs be spread equitably between itself and other segments of its system, in the absence of an agreement. This is consistent with Commission precedent that was reaffirmed in Order No. 528. Accordingly, the primary proposal is rejected.

Under the alternative proposal, Arkla agrees to absorb 25 percent of the costs at the outset before the remaining 75 percent is amortized over the proposed 5-year period. This level of absorption is consistent with the Commission's equitable sharing policy. Under Order No. 500, the Commission permitted pipelines to recover 50 percent of their costs through a volumetric surcharge and 25 percent through a fixed charge and absorb the remaining 25 percent. The Commission only required a pipeline to absorb more than 25 percent of its costs where it sought guaranteed recovery through a fixed charge of more than 25 percent.

Here, Arkla, having proposed no fixed charge, does not seek to do that. Protestants, however, contend that Arkla's absorption of costs under its alternative proposal is inadequate for two reasons. First, Indicated Shippers point to the Commission's statement in Order No. 528 that a pipeline must continue to

10 Natural Gas Pipeline Company of America, 765 F.2d 1155, 1163-1164 (D.C. Cir. 1985).

11 Arkla Energy Resources, a Division of Arkla, Inc., 53 FERC ¶ 61,127.

12 Order No. 528, 53 FERC ¶ 61,163, at p. 61,596 (1990).

absorb the same amount of its take-or-pay settlement costs as it is currently absorbing under its existing mechanism. Indicated Shippers interpret this statement as applying to new costs not previously included in an Order No. 500 filing, as well as to old costs included in the pipeline's existing passthrough mechanism. Indicated Shippers argue that Arkla should accordingly absorb the same 33.3 percent of take-or-pay settlement costs as it is currently absorbing under its existing passthrough mechanism in the settlement approved by the Commission in the October 30, 1990 order.11 Indicated Shippers further request that the Commission require Arkla to include 33.3 percent in a fixed charge to its sales customers that is based on contract demand level, while the remaining 33.3 percent would be collected through volumetric charges to all customers.

The Commission denies Indicated Shipper's request that Arkla be required to absorb 33.3 percent of the proposed costs. Under the alter nate tariff sheets, Arkla is not proposing to recover costs previously approved to be col lected through a direct bill based upon the purchase deficiency allocation method, bu rather new costs not previously included in Arkla's existing passthrough mechanisms Order No. 528's statement concerning pipe lines' continued absorption of the same per centage of costs they previously absorbed wa made in the context of establishing principle for filings to reallocate costs already include in their direct bills. The statement arose from the Commission's concern that changes i existing passthrough mechanisms should b minimized so as to avoid the disruption tha major changes would entail. Thus, the Commi sion sought to achieve this objective by, amon other things, requiring that the percentage costs absorbed in existing passthrough mecha nisms should not change as a result of th reallocation of costs required by AGD II. How ever, the concern about disruptive change does not apply to new costs, since those cos have never been included in the pipeline existing passthrough mechanisms. In addition the Commission also indicated in Order N 528 that the policies and precedents esta lished under Order No. 500 will continue

apply.12 Pipelines have always been free und Order No. 500 to propose a percentage absorption for new take-or-pay settlement cos which is different from the percentage used previous take-or-pay filings.13 The Commissi

13 See ANR Pipeline Co. 47 FERC 61,1 (1989), accepting a pipeline's proposal to absorb percent of certain additional take-or-pay settleme costs, direct bill 25 percent, and recover the rema der in a volumetric surcharge, after the Commissi had previously accepted a filing by the same pipeli

did not intend to change this policy in Order No. 528. However, Order No. 528 is subject to rehearing and Arkla's filing ultimately will be evaluated under the policies announced on rehearing of Order No. 528.

Protestants also contend that, even if Arkla need only absorb 25 percent of the settlement costs addressed in this filing, its tariff must be revised to ensure that Arkla actually absorbs that 25 percent. They contend that Arkla is likely to recover significantly more than the $46.2 million included in the volumetric surcharge, since its actual throughput is likely to be significantly higher than the throughput upon which the volumetric surcharge is designed. They assert that Arkla's current throughput is higher than the throughput upon which the proposed surcharge is based, that throughput has been steadily increasing, and that throughput will increase significantly when Arkla completes a major expansion of its system. They request that the Commission direct Arkla to clarify its proposed provisions for discounting and refunds, and adopt a trueup mechanism by which to adjust for overrecoveries under the proposed volumetric surcharge.

The Commission agrees with protestants that a true-up mechanism must be included as part of the proposed annual reconciliation procedures to prevent Arkla's overrecovery of costs under its proposal and to ensure its equitable absorption of 25 percent of the total costs. Generally, the Commission does not use such true-up mechanisms in non-gas commodity rates. As a general rule, non-gas commodity rates are developed based on projections of costs and throughput and, to the extent actual throughput or costs are different, the pipelines may retain any overrecoveries but must absorb underrecoveries.14 Up to now, the Commission has used that method in approving take-or-pay volumetric surcharges where the amount of costs is known (and not projected) but the throughput is projected. However, the Commission is now persuaded that in this context, where the pipeline is not recovering based on cost projections but is allowed to recover a definite amount, the pipeline should not have the potential to overrecover. In these circumstances, a form of true-up mechanism is appropriate. This true-up mechanism should correct for most of the over- or underrecoveries of costs (Footnote Continued)

with respect to other settlement costs in which the pipeline agreed to absorb 50 percent of the costs and direct bill the other 50 percent in ANR Pipeline Co., 46 FERC 161,022 (1989).

14 The Commission handles gas costs recovered through the PGA mechanism differently. It allows

resulting from Arkla's actual throughput being different from the projected throughput upon which the volumetric surcharge is based and ensure that Arkla does not overrecover its costs. Thus, Arkla will not overrecover its settlement costs because of an inaccuracy in the forecast of its throughput.

The true-up mechanism should not and may not correct for underrecoveries of costs resulting from Arkla discounting its volumetric surcharge. Such underrecoveries would be the result not of inaccuracies in the projected throughput used to design the volumetric surcharge, but of market conditions preventing Arkla from collecting the full amount of the volumetric surcharge. Consistent with the Commission's general policy that pipelines may not recover the value of transportation discounts given to one customer from their other customers, 15 Arkla shall absorb the costs of any discount given of the take-or-pay surcharge and should not be permitted to shift those costs to its other customers through a true-up mechanism included in the volumetric surcharge. Thus, to the extent Arkla discounted its volumetric surcharge during a particular year, it could not seek to recover the discounted amounts in the succeeding year by including them in its true-up. So that there will be no dispute concerning whether a particular discount relates to the volumetric surcharge or another part of Arkla's rates, the Commission directs that all transportation discounts given must be attributed first to the take-or-pay volumetric surcharge. To the extent discounts are in excess of the volumetric surcharge, the portion in excess of the volumetric surcharge will not be considered related to the volumetric surcharge.

Each year, as part of the proposed reconciliation, Arkla is directed to compare actual volumes to projected volumes. Any revenue difference due to throughput volumes over- or under-projections would be included in the remaining balance due Arkla for the total amortization period. This total then is to be divided by the remaining number of years in the period to derive the next year's volume. During the fifth year, Arkla has the option to stop billing when it collects the total costs or to continue the surcharge through the final year and provide for refunds. The parties should resolve the details for implementation of the

those costs to be tracked for accurate recovery of the exact cost paid by the pipeline.

15 See 18 C.F.R. § 284.7(d)(5)(iii). The Commission has only permitted pipelines to recover from their customers the value of transportation discounts given to producers as a trade off for the settlement of takeor-pay claims or for contract reformation.

true-up mechanism at the conference, including the disposition of the balance remaining in the fifth year.

A review of the tariff sheets reveals that Arkla does not separately identify the amount of the volumetric surcharge added to its commodity rate. Within 15 days of issuance of this order, Arkla also is to file revised tariff sheets to separately state the take-or-pay surcharge added to the commodity rate. This should be done by including a footnote on the appropriate rate sheets to identify the current surcharge level that is rolled into the commodity rate.

Arkla's request for a January 1, 1991 effective date does not provide for the full 30-day notice required by section 4 of the Natural Gas Act and the Commission's regulations. The Commission stated in Order No. 528 that it did not intend to waive the 30-day notice requirement for filings pursuant to that order. Accordingly, the Commission accepts and suspends Arkla's filing to be effective January 11, 1991, thereby providing a full 30-day notice period.

Supporting Data and Motion for a Proposed Protective Order

Arkla filed the agreements and other necessary data in support of its filing under separate cover for treatment as confidential and privileged material under the Commission's regulations for protective treatment.16 Protestants request an opportunity to review the information to verify the costs. Arkla submits a proposed protective order in its filing to govern the parties' examination of the data. It states that upon Commission approval of the protective order, it will make the confidential material available to the appropriate parties.

As the Commission has stated in similar filings, the parties have a legitimate need for information about the producer agreements underlying the proposed surcharge in order to determine whether the costs were prudently incurred or are eligible for recovery as take-orpay costs. However, the Commission will deny Arkla's request for approval of the proposed protective order to govern the parties' access. The Commission has stated that it will issue protective orders only if necessary and that it prefers for the pipeline to enter into protective agreements voluntarily with the individual parties seeking access to the materials in order to provide for the orderly examination of all relevant data without Commission involvement.17 Only if the parties are unable to negotiate a satisfactory protective agreement with Arkla will the Commission consider a request

16 18 C.F.R. § 388.112 (1990).

17 Trunkline Gas Co., 52 FERC ¶ 61,226 (1990); reh'g denied, 53 FERC ¶ 61,065 (1990).

for the issuance of a protective order by th Commission. Accordingly, Arkla is directed t negotiate with the parties to enter into protec tive agreements with them that will gover their examination of the relevant data. Accept ance of the alternate tariff sheets is cond tioned upon the review of these documents b the Commission.

Suspension

Based upon a review of the filing, the Con mission finds that the proposed tariff shee have not been shown to be just and reasonabl and may be unjust, unreasonable, unduly di criminatory, or otherwise unlawful. Accor ingly, the Commission shall accept the tari sheets for filing and suspend their effectivene for the period set forth below, subject to t conditions set forth in this order.

The Commission's policy regarding rate st pensions is that rate filings generally should suspended for the maximum period permitt by statute where preliminary study leads t Commission to believe that the filing may unjust, unreasonable, or that it may be incc sistent with other statutory standards. S Great Lakes Gas Transmission Co., 12 FEF ¶ 61,293 (1980) (five-month suspension). It recognized, however, that shorter suspensio may be warranted in circumstances where si pension for the maximum period may lead harsh and inequitable results. See Valley C Transmission, Inc., 12 FERC 61,197 (198 (one-day suspension). Such circumstances ex here where the pipeline is filing because changed circumstances resulting from a co remand as recognized by the Commission Order No. 528. Accordingly, the Commissi will exercise its discretion to suspend the ra for a shorter period and permit the rates take effect on January 11, 1991, subject refund and subject to the conditions set forth the body of this order and in the orderi paragraphs below.

The Commission orders:

(A) The alternate tariff sheets descrit above and listed in Footnote No. 2 are accept for filing and suspended, to become effect January 11, 1991, subject to refund, the o come of the conference, the review of the pri leged materials, and the conditions set forth (B) below. The primary tariff sheets a described above and listed in Footnote No are rejected, as more fully described above.

(B) Within 15 days of issuance, Arkla directed to file revised tariff sheets t