RP85-11-000 and all pending issues in Docket No. RP86-11-000.7

On March 20, 1989, KN tendered revised tariff sheets purportedly in compliance with the Commission's February 17, 1989 order approving the settlement. Also on March 20, 1989, KN made three other filings. (1) It filed in Docket No. CP89-1043-000 for certificate authorization under NGA section 7 to provide open-access transportation service, and also for section 7 authorization to provide standby sales service for its Rate Schedules CD, SF and WPS customers, which would allow such customers to convert up to 100 percent of their D1 and D2 billing determinants under Rate Schedule FT to standby sales; (2) KN filed in Docket No. RP89-110-000 general terms and conditions applicable to sales and transportation services under Part 284 of the regulations; and (3) KN filed initial transportation rates, rate schedules, and forms of service agreements in Docket No. RP89-111-000 for Part 284 firm and interruptible transportation service.

On April 12, 1989, the Commission issued an order suspending KN's rates, consolidated the proceedings in all five dockets, and set them for hearing. The Commission found, inter alia, that in the previously mentioned March 20, 1989 tariff filing purportedly in compliance with the February 17, 1989 order, KN had varied from the settlement approved by such 1989 order, in that it had redesignated 10 percent of sales volumes as transportation volumes, reallocated costs to transportation (as opposed to crediting transportation revenues against its cost of service), and created a new transportation zone for the purpose of establishing its new transportation rates. On rehearing, the Commission rejected KN's contention that its revised sales rates constituted a compliance filing rather than a section 4 rate proposal and affirmed suspension of KN's initial transportation rates filed March 20, 1989.9

By order issued August 1, 1989, in the Commission issued KN certificate authority pursuant to its previously mentioned March 20, 1989 application Docket No. CP89-1043-000, to provide open access and standby sales service.10 In this order, the Commission also approved an initial rate of $0.3614 per Mcf for KN's standby sales service, subject to KN's developing projected units of service and properly allo

746 FERC 61,165 (1989).

8 47 FERC 61,047 (1989).

950 FERC 61,290 (1990)

10 48 FERC 61,159 (1989).

cating costs in the instant proceeding, Docket No. RP87-86-005 et al. KN accepted these certificates on August 31, 1989.

Pursuant to the Commission's April 12, 1989 and August 1, 1989 orders, KN filed in this proceeding revised tariff sheets pertaining to its open access and standby sales services approved in Docket No. CP89-1043-000. A number of these have been accepted for filing subject to the outcome of this proceeding by Commission letter order.

Following discussions among KN, the Commission staff (staff), and KN's jurisdictional sales and transportation customers, a settlement in principle was reached between KN and its sales customers on all of the outstanding issues in the captioned proceedings. This resulted in the above-mentioned August 9, 1990 settlement offer.

The Settlement Offer

The settlement offer in general provides for continuation of the cost classification, allocation, rate design, and underlying rates described in article I of the settlement.

Article I provides that the settlement rates shall be the base tariff rates which became effective April 1, 1989, in Docket Nos. RP87-86-000, RP86-11-000, and RP85-11-000 (Phase II); the transportation and other related services rates which became effective April 1, 1989, in Docket Nos. RP89-110-000 and RP89-111-000;12 and the sales standby charges which became effective September 1, 1989, in Docket No. CP89-1043-001.13 Article I further provides that these rates will be adjusted by KN to the extent authorized under its PGA, ACA, GRI, and take-or-pay flowthrough tariff provisions. Article I also provides that for purposes of section 154.303 of the regulations, KN's 36-month rate restatement period commenced April 1, 1989.

Article II provides that the settlement employs modified fixed-variable (MFV) cost classification, allocation, and rate design for the design of the settlement rates and continues the revised zone allocation methodology described in the settlement approved in the Commission's February 17, 1989 order. 14

Article III establishes a systemwide representative throughput level of 96,012,807 Mcf, which was used to derive the settlement rates.

11 See note 8.

12 Idem.

13 See Note 10.

14 See note 7.

Of this total, representative sales volumes are set at 74,501,623 Mcf and representative transportation volumes are set at 21,511,184 Mcf. Article III also provides for a continuation of the use of two sales zones and three transportation zones as reflected in the settlement rates.

Article IV provides that the tariff sheets filed by KN in Docket Nos. RP89-110-000 and RP89-111-000, as modified pursuant to the Commission's orders in these dockets, shall be deemed approved as of April 1, 1989, and need not be refiled.

Article V provides that no refunds are due to any party.

Article VIII provides that all proceedings in the captioned dockets will terminate upon Commission approval of the settlement.

Comments

On August 28 and 29, 1990, comments to the settlement offer were filed by the Public Service Company of Colorado, Minnegasco, Inc., and staff. All supported the settlement. Staff's support was accompanied by recommendations for modifications. KN filed reply comments on October 10, 1990. There were no other comments.

Discussion

1. Non-gas costs and throughput and depreciation

The Commission notes that the $91,115,404 total non-gas cost of service underlying the settlement rates is the same as that supporting the settlement approved in the Commission's February 17, 1989 order. As required by the April 12, 1989 order,15 KN filed an updated cost and revenue study on May 8, 1989, which was subsequently accepted by the Commission. According to both staff and KN, the study would support a total non-gas cost of service more than $9 million higher than the total non

15 See note 8.

16 General Plant:

Transportation equipment-Each class of transportation equipment is depreciated on a straight line basis using various lives until depreciated value reaches a salvage value of 20 percent.

Construction equipment-Construction equipment is depreciated on a basis of 10 percent per annum

gas cost of service on which the rates in the previous settlement were premised.

Further, staff notes that the throughput volumes underlying the settlement rates are the same as those approved in the Commission's February 17, 1989 order, 96,012,807 Mcf. Staff states it has reexamined the settlement volumes in light of recent throughput results on KN's system submitted by KN in response to staff data requests and that in light of projected throughput levels contained in the testimony and exhibits of KN witness Everett in Appendix D of the settlement. From these, staff believes that the 96,012,807 Mcf figure continues to provide a reasonable basis upon which to design KN's rates. The Commission accepts the negotiated throughput volume as reasonable.

KN states that the annual depreciation rates upon which the settlement rates are premised are as follows: gathering, 4.10 percent; products extraction, 4.00 percent; underground storage, 3.60 percent; transmission, 2.75 percent; distribution, 3.00 percent; and general plant, various, depending on categories. No one has objected to these rates, nor does the Commission.

16

2. Conformity of Settlement Rate Design with Policy Statement

The purpose of the rate design policy statement17 was to give guidance to the parties, the Commission staff, and administrative law judges in developing rates that would, among other things, ration capacity during peak periods, maximize throughput under firm service during off-peak periods, and maximize throughput under interruptible service during all periods. To the extent rates achieve these objectives, the pipeline's facilities will be used at optimal efficiency and unit costs will decrease. The Commission regarded these objectives as interrelated but not exclusive guideposts in determining just, reasonable, and

until depreciated value reaches a salvage value of 10 percent.

Structures-2.50 percent

Other general plant-7.50 percent

17 47 FERC 61,295, at p. 62,054, order on reh'g. 48 FERC 61,122 (1989).

The Commission has evaluated the settlement offer in light of the rate design policy statement, recognizing that none of the parties disputes its consistency with the policy statement, and finds that KN's settlement rates further the objectives of the rate design policy statement, as explained below.

KN has no queue for firm service and there have been no curtailments to firm or interruptible customers even during maximum usage periods.19 KN's system is underutilized on both an annual and a seasonal basis. Largely as a result of a summer irrigation load, 53 percent of KN's throughput occurs during the five winter months and 47 percent occurs during the remaining months. KN's rates reflect differences in the seasonal demand for service by ratcheting the billing demand units used for the winter, shoulder, and summer months.20 Therefore, mechanisms to ration capacity such as seasonal rates or shifting D2 costs to D1 are not warranted.

In the Policy Statement, the Commission described its historical policy of pricing interruptible service at the 100-percent load factor rate, but questioned whether the 100-percent load factor rate yielded a maximum interruptible rate which is too high to efficiently maximize throughput.21

KN's tariff provides for discounting of the 100-percent load factor rate. KN states that interruptible customers enjoy virtually firm service and that it has not interrupted its interruptible open-access service. Thus a 100-percent load factor rate plus KN's ability to discount will permit KN to increase its interruptible throughput to the extent feasible.

The Policy Statement also directs participants to consider whether distance-based rates (i.e. mileage-based or zone rates) are warranted because of material differences in the cost of providing service.22 If such rates are not provided, inefficiency and cross-subsidization may occur. The Commission agrees with the settlement offer that zone rates continue to be acceptable for KN's sales service. Although not as precisely measured as mileage-based rates, zone rates do reflect distance-related differences in the cost of providing service. Because

18 Id.

19 Explanatory statement accompanying KN's offer of settlement at pp. 7 and 15.

20 KN's explanatory statement at p. 9.

21 47 FERC at pp. 62,057-58 (1989).

22 47 FERC at p. 62,058 (1989).

23 Explanatory statement at p. 19.

the embedded transportation component in KN's sales rates reflects zone methodology,23 it is appropriate that its transportation rates should likewise be zoned.

KN's tariff provides for transportation of gas by backhaul24 and displacement, but not by exchange service.25 As previously noted, the term "transportation" embraces exchanges, and staff has recommended that KN's tariff be modified to provide for it. KN has agreed to this. Such transactions can create additional capacity on a pipeline and may also reduce

cost.

The Policy Statement also emphasizes the Commission's stated preference for unbundled service. The Commission directed participants to "fashion records to determine whether the pipeline's storage functions and gathering and other production area services . . . should be offered as separate services with separately charged rates and, if so, what would be the appropriate rates."26 At the present time, KN has an unbundled winter peaking service and a separate gathering area transportation rate. KN has not proposed to unbundle its storage service at this time but is considering offering it in the future. However, it states that it has little available capacity to offer a storage service.27 KN states that no firm sales customers have yet converted to firm transportation. On the basis of these factors, the Commission agrees that the need to unbundle storage service on KN's system is not compelling at this time.

3. Modifications recommended by staff

In its comments of August 29, 1990, staff recommended a number of changes in the tariff sheets accompanying the settlement offer. Staff takes note of a statement on page 6 of KN's explanatory statement that the rates for transportation service under KN's individual section 7(c) certificates, set in certificated agreements executed prior to KN's open-access filing, fall within the maximum and minimum open-access transportation rates contained in the settlement. Staff recommends that a provision be added to KN's tariff setting the rates for service under these certificates at the maximum Part 284 open-access rates. KN has not acted on this recommendation. In its reply comments, it states that at the very least, such a proposal should be implemented on a pro

spective basis after approval of the settlement by the Commission, inasmuch as KN has not filed rates for pre-existing section 7(c) transportation arrangements proposing Part 284 maximum rates.

The Commission has no authority to direct a pipeline to raise its rates. However, since KN's prior section 7(c) transportation rates fall within its maximum and minimum rates for Part 284 service, KN can transport under Part 284 at the same rate as the § 7(c) service by discounting. Our policy is that transportation rates should be the same unless the section 7(c) service is different in character from the Part 284 service. Otherwise, to charge a lower rate for section 7(c) service is unduly preferential.

In its comments, staff questions the creation by KN of a third production area transportation zone, but without establishing a third sales zone. Staff also questions provisions that if a customer's gas traverses more than one zone, then rates for the highest zone will apply. (Substitute Original Sheet Nos. 13 and 36.) In its reply comments, KN replied that the third zone was created so as to have a rate reflective of the cost of providing service within the limited confines of the production areas and to be more competitive. It contrasted this with sales, stating that there its whole interstate system is employed. As to rates, it states that zone rates have been acceptable to the Commission, since they recognize the distance gas is transported. The Commission accepts that the third zone may be desirable on KN's system. However, KN has not supported charging at the highest zone rate where more than one zone is traversed. Since we assume that the zones account for the higher cost of transporting greater distances, it appears that this pricing technique could have the effect of causing intrazone shippers to pay the same rate as interzone shippers. Nevertheless, the Commission will approve this aspect of the settlement on the basis that none of the parties object to this treatment. However, in KN's next general rate proceeding, we direct the parties to further review this issue to determine if any further modifications are necessary.

In Original Sheet No. 15, Vol. 1-B, General Terms and Conditions, staff objects that the description of curtailment is too vague and broad. KN replies that the language used was the subject of extensive proceedings and was approved as part of a settlement in Docket No. RP76-90-000, which provided that the settlement language remain unchanged, unless agreed to by all the parties. We note that KN has changed its description of curtailment to be applicable to both transportation and sales service functions. However, we decline to order staff's proposed change on the basis that the

subject description is sufficiently clear and understandable.

With regard to Second Substitute Original Sheet Nos. 29-33 and Original Sheet No. 33-A, Vol. 1-B, staff recommends that section 13(d) be modified to clearly reflect that the priorities therein govern only situations involving capacity shortages, and urges that gas supply curtailment of interruptible sales must reflect the same end-use categories set forth in sections 13 (a), (b) and (c) of KN's General Terms and Conditions. KN replies its original March 20, 1989 submission in this proceeding used enduse categories for interruptible sales, but that the Commission in its April 12, 1989 order, rejected this approach, determining instead that there must be "equal treatment of all interruptible customers." Pursuant to the order, KN filed replacement tariff sheets combining post open-access interruptible sales with interruptible transportation and providing for curtailment of both categories on the basis of capacity and rate criteria (i.e., highest rate service curtailed last, lowest first). These sheets were accepted subject to refund by a letter of the Director of the FERC Office of Pipeline and Producer Regulation issued June 1, 1990.

We find KN has misconstrued the intent of the April 12, 1989 order. By equal treatment, the order did not mean that KN should drop the end-use gas supply curtailment procedures which had been applicable to all its sales, including interruptible sales, for many years. The Commission only meant for KN to treat interruptible sales and interruptible transportation as equal during capacity constraint situations. The Commission will require KN to refashion these tariff sheets to better satisfy the intent of the April 12, 1989 order.

Staff objects to KN's submission of First Revised Sheet No. 44, Vol. 1-B, General Terms and Conditions, because it has been superseded. KN admits it is superseded, but submitted the sheet to demonstrate its compliance with Order No. 497 [FERC Statutes and Regulations 30,820]. The Commission sees harm in allowing the filing of superseded Sheet No. 44 for KN's purposes, since the record will clearly show that sheet has been superseded.

no

Relative to section 8.4, Orig. Vol. No. 1-A, staff sought to eliminate quarterly updating of creditworthiness, and KN responded that it would require an annual update for financial purposes. This is not appropriate-the Commission has not required such updating. Once the pipeline accepts a transportation request, it must rely on timely payment of bills as evidence of creditworthiness. Accordingly, KN must remove this provision from its tariff.