Schedule SG or proposed Rate Schedules SSS or SCT.4

Authorization requested. Panhandle requests the Commission to issue an order authorizing the implementation of the interim GIC proposed to be effective for the period April 1, 1991 through October 31, 1992. Additionally, Panhandle requests authorization to automatically abandon its sales service obligation to the extent that any existing firm sales customer has indicated its desire to reduce its sales service entitlement. Panhandle further requests authorization to implement the Interim Service Agreements submitted with its application. Panhandle further requests authorization to the extent necessary to permit the limitation of its sales obligations by the seasonal nominations of customers, and pregranted abandonment authority to permit changes to such nominations during the effectiveness of the interim services proposed. Panhandle is also seeking pregranted abandonment authorization to the extent that any customer is permitted to reduce its CD as result of circumstances described above or if any customer elects to convert a portion of its CD to firm transportation on April 1, 1991.

Public Notice, Interventions, and Protests

Public notice of the IGIC filing was issued on November 29, 1990, providing for protests, motions, or notices to intervene to be filed on or before December 20, 1990. Timely motions or notices to intervene were filed by the parties listed in the Appendix to this order. Pursuant to Rule 214, 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 motions or notices not listed in the Appendix are also granted in accordance with the conditions of Rule 214.

Numerous parties have raised concerns involving comparability of service issues. Entrade Corp. (Entrade) and Producer-Marketer Transportation Group (PMTG) jointly submit that Panhandle has not and does not propose comparable access. They claim that without more comparable service, Panhandle's proposal is equivalent to a 65-percent minimum bill.

4 Rate Schedules SSS and SCT apply to small customers and were proposed in an offer of settlement in Docket No. RP88-262-000. On December 4, 1990, the Commission issued an order approving the settlement, as modified. Rehearing of the December 4 order is pending before the Commission.

5 The Missouri Public Service Commission (MPSC) states that almost all the off-system storage attached to Panhandle's system is on the northern and eastern parts of its system, the historical market area, far from the gas supply fields. MPSC states that

Many of the parties assert that the most glaring defect in Panhandle's filing is the reservation of all storage rights to Panhandle as a merchant. They assert that without the availability of storage, transportation on Panhandle is inferior to sales service due to the lack of flexibility and ability to meet peak day requirements.5

The Illinois Commerce Commission (ICC) protests Panhandle's inclusion of competitive market analysis in its application for institution of a deficiency-type IGIC. ICC states that a competitive market analysis of Panhandle's city gate markets is not relevant to the determination of whether the proposed rates are just and reasonable. ICC argues that only if Panhandle should propose a permanent marketbased GIC, or the passthrough of Producer Demand Charges (PDCs) on an as-billed basis, does the level of competition in Panhandle's market for firm sales service and the comparability of sales service to its firm transportation service become relevant.

Several parties submit that Panhandle's proposal is deficient with respect to any mechanism for allocating mainline and receipt point capacity between sales and transportation customers. Anadarko asserts that Panhandle should be required to allocate receipt points in the same manner that the Commission required in Natural Gas Pipeline Co. of America (Natural).6 Anadarko states that Panhandle has the ability to interdict capacity on its west end by choosing not to take either sales or transportation gas at Tuscola. When this occurs, firm sales need priority at Haven, the proposed pooling point, and shippers are displaced.

Another point of concern is Panhandle's proposal for pregranted abandonment. MPSC states that since this proposal is for a limited term, Panhandle should not be authorized to automatically abandon its sales service obligation on a permanent basis at the level of customer states conversions. MPSC that customers should be afforded the opportunity to reinstate or reconvert rights at the close of the interim period.

NGC and Anadarko protest Panhandle's conversion options. NGC states that Panhandle

Missouri customers have little or no storage of their own, and that in order to utilize this off-system storage, Missouri customers would have to pay to transport the gas a long distance for injection into storage and then pay again to have it withdrawn and transported back to the city gate. MPSC asserts that since backhaul rates on Panhandle's system are the same as full forward-haul rates, this makes the off-system storage option even less economical.

652 FERC 61,219, at p. 61,775 (1990).

does not offer a significant conversion option to its sales customers. Anadarko states that Panhandle should be required to allow conversion of 100 percent of firm sales service to firm transportation service in the interim period.

NGC and Anadarko further protest Panhandle's failure to file a permanent GIC proposal. Anadarko cites the Commission's policy that a pipeline must also have an application for a permanent gas inventory charge pending before the Commission in order to have an interim GIC in place.?

Panhandle's Answer to Motions to Intervene

On January 8, 1991 Panhandle filed an answer to motions to intervene, requests for rehearing, and requests for technical conference. Panhandle maintains that the essence of the protests on the comparability issue is the notion that nonpipeline marketers and vendors of gas should be placed on the same footing as the pipelines themselves. Panhandle submits that this basic premise is wrong since it is practically and operationally impossible to segregate out the functions of a substantial and complex interstate pipeline network like Panhandle. Panhandle maintains that there are substantial firm sales alternatives available to Panhandle's sales customers who will be subject to the IGIC. Panhandle restates its position that there is substantial flexibility on its sys-,

tem.

In addressing the parties' comments regarding storage service, Panhandle maintains that the parties' contentions do not take into account properly the manner in which it provides service to all of its customers. In addition, Panhandle submits that all shippers and all sales customers on its system benefit from storage as part of the service they receive from Panhandle through its integrated system. Panhandle states that it offers contract storage on an open-access basis through its affiliate Southwest Gas Storage Company. Panhandle submits that it is currently pursuing a contract storage service on its system and will work with any customer that is willing to sign contracts to develop storage service.

Panhandle asserts that the conversion levels reflect the realistic levels that can be anticipated during the interim period. Panhandle states that conversion rights are connected to an IGIC so as to ensure that customers subject to the charge will have an opportunity to

7 Notice of Proposed Policy Statement, Interim Gas Supply Charges and Interim Gas Inventory Charges, 47 FERC ¶ 61,294 (1989).

8 Section 385.213(a)(2) of the regulations does not provide for answers to protests unless otherwise ordered. However, in certificate proceedings the Com

choose to transport gas on their own behalf, rather than rely on pipeline sales. For this interim period, Panhandle concludes, its customers have been offered and have made that choice.

In response to protests that Panhandle has not made a filing to implement a permanent GIC, Panhandle states that it has been attempting to negotiate system restructuring with its customers for some time. Rather than filing for a permanent GIC proposal which could be objectionable to its sales customers, Panhandle asserts that it is negotiating a mutual agreeable GIC.

Finally, Panhandle submits that the Commission should keep the comments of the protestors in their proper context and perspective. Panhandle states, that for the most part the protestors are competitors with Panhandle for sales.

Discussion

Prior to implementing a GIC, a pipeline must demonstrate that its sales customers have access to alternative sources of gas at competitive prices. The Commission has recognized that in the absence of the customers' ability to purchase gas from other sellers, the imposition of a revenue guarantee such as a GIC could have anticompetitive effects. Thus, to avoid the anticompetitive effects of GICs, the Commission has required that customers must be able to freely nominate service levels and receive one-hundred-percent conversion rights. So that such service nominations and conversions rights are meaningful, an important prerequisite to the imposition of a GIC is a showing that the quality of the pipeline's firm transportation service is comparable in quality to the firm transportation service that is embedded in its sales service under the GIC.9

The Commission finds that the transportation service offered by Panhandle is not comparable to its sales service to allow Panhandle to assess even an interim GIC. First, although the application includes revised service agreements which reflect some conversions, Panhandle has not demonstrated that its customers were offered the option to convert 100 percent of their previous entitlements. In previous IGICs authorized by the Commission for Natural and Northern Natural Gas Company (Northern Natural), the pipelines permitted 100-percent conversion of the customers' sales entitlements.

mission has customarily allowed answers to be filed for the purpose of completing the record.

9 See Texas Gas Transmission Company, 50 FERC 61,215 (1990); Northwest Pipeline Corporation, 51 FERC ¶ 61,179 (1990).

While Panhandle claims that the additional conversion option, limited to 15 percent of entitlements as of March 31, 1991, reflects the realistic levels that can be anticipated during the interim period and that its customers have been offered and have made that choice, the Commission is not convinced that such choice was adequate for the Commission to be confident that customers are able to freely choose Panhandle as their gas supplier.

Additionally, Panhandle states that the 15 percent level of conversions is "subject to necessary operational considerations, which are reflected in the ratio of capacity available for conversion from Panhandle's West End and capacity attaching Gulf Coast sources." The Gulf Coast transportation would be dependent upon utilization of transportation rights on Trunkline Gas Company. On January 8, 1991, in Docket No. CP86-585-001, Trunkline filed an amendment to its previously filed capacity brokering proposal. Trunkline's application, as amended, is currently pending before the Commission. Therefore, the 15-percent conversion is subject to the results of a capacity brokering proceeding which has only recently been filed at the Commission. The terms upon which Panhandle has offered conversion do not provide the customers with an adequate assurance that they can actually make alternative supply arrangements.

Second, Panhandle has not offered any contract storage services for converting customers, nor does Panhandle have an application on file with the Commission to render open-access storage services. 10 Because Panhandle has historically used system storage capacity to meet sales levels, it must offer storage with transportation in order to make the services comparable in quality. Further, Panhandle has not demonstrated why it must retain all system storage capacity in light of its substantial reduction in firm sales obligations.11 In contrast, as part of Natural's recently approved two-year limitedterm GIC, Natural offered converting customers a ratio of one Mcf of storage for each five Mcf converted (up to a total limit of 350,000 Mcf/day). Panhandle must offer adequate storage to enable a customer to utilize storage services in formulating its supply portfolio. While Panhandle states that it is actively pursuing a contract storage service on its system, this must be completed before an IGIC is implemented in order to give its customers enough information to make decisions in aggregating gas supply for their needs. In addition,

10 In Loth Natural's and Northern's interim GICs the pipelines had blanket certificates for open-access storage services.

11 Panhandle has historically had a contract demand sales level of approximately 2.6 Bcf per day,

while Panhandle argues there is ample customer-owned storage in its market area and its customers historically have utilized such storage option, its application does not sufficiently demonstrate this position. While Panhandle's claims may be true for some customers, Panhandle has not shown that they are true for all of its customers that will be assessed a GIC.

With respect to Panhandle's assertions that it offers contract storage on an open-access basis through its affiliate Southwest Gas Storage Company, Panhandle has failed to demonstrate the availability of such storage on Southwest's system, that Panhandle's customers could effectively use such storage capacity, or that the capacity would be sufficient to meet their needs. A converting customer should have the knowledge of storage alternatives and the ability to choose them in advance of conversions in order to properly evaluate alternatives to Panhandle's gas supplies.

Third, the Commission is concerned about the lack of a clear method to allocate mainline capacity. Customers may not have the ability to diligently pursue alternative supplies absent a capacity allocation methodology. Currently, Panhandle's proposed capacity allocation method, i.e., requiring conversions to be in proportion to the ratio of 61:39 for the West End pipeline and Trunkline, respectively, is set for hearing in Docket No. RP88-88-006 et al., thus creating uncertainty surrounding mainline capacity allocation.1

12

Fourth, Panhandle's filing does not specify how it will retain or allocate receipt point capacity. While Panhandle asserts that its tariff provides sufficient flexibility, the Commission is not convinced that such flexibility exists. Specifically, Panhandle's current tariff provides that customers may select both firm and interruptible receipt points. However, under the firm transportation schedule, the sum of the quantities may not exceed the contract quantity. In Northern Natural's interim GIC, customers were provided receipt point flexibility totaling 115 percent of firm transportation demand. That amount of receipt point capacity corresponded to the amount of receipt point capacity Northern reserved for itself for its merchant service. Additionally, while shippers have the ability to change receipt points on an interruptible basis upon 8-hours notice, a firm shipper needs to provide 30-days notice before changing receipt points. However, such a condition is not required of

which has been reduced to approximately 1.2 Bcf per day.

12 Order on Remand and Establishing Hearing Procedures and Consolidating Proceedings, 52 FERC 61,127 (1990).

Panhandle, thereby placing the pipeline in an advantageous position in aggregating and delivering gas supplies.

13

Similarly, in Natural, the Commission stated that Natural should not have preferential access to receipt point capacity over converting customers unless the capacity is needed to avoid incurring take-or-pay costs.1 The Commission concluded that if Natural were allowed to retain receipt point priority over converting customers permanently, Natural would have an inherent competitive advantage when negotiating for new sales supplies and when competing for sales. In response to that order, Natural agreed to file an allocation plan to limit the amount of capacity it could reserve on its system for its sales service.14

Where the Commission has approved IGICS, the pipelines had permanent GIC applications on file which served to further develop comparability of service issues. While Panhandle states in its application that an application for a permanent GIC will be filed by April 1, 1991, Panhandle has since informed the Commission that it will not be in a position to submit such an application by that time. Consequently, the interim GIC, as proposed, would be in place with no ongoing forum established to further address comparability of service issues.

In the Natural proceedings, despite the fact that complete equivalency in the quality of services had not been established on Natural's system, the Commission approved Natural's GIC settlement Docket No. CP89-1281-007.15 The Commission based its decision upon a delicate balancing of the benefits and detriments of Natural's proposal. Among those benefits were the opportunity for Natural's customers to convert up to 100 percent of their firm sales service to firm transportation service, to receive significant mainline and supply area capacity rights upon conversion, and to obtain guaranteed access to storage capacity. As discussed above, those benefits are not present here.

In sum, the Commission could not disagree more completely with Panhandle in its view of the need for comparability:

Several Protestants raise so-called comparability of service issues. The essence of the Protestants' position on these issues is the notion that nonpipeline marketers and vendors of gas somehow should be placed on the

13 52 FERC 61,219, at p. 61,775 (1990).

14 By order issued August 30, 1990, the Commission approved Natural's allocation plan. 52 FERC ¶ 61,219 (1990).

15 53 FERC ¶ 61,212 (1990), order on reh'g, to be issued contemporaneously with this order [54 FERC ¶ 61,304].

exact footing for business purposes as the pipelines themselves. Panhandle submits that this basic premise is wrong since it is practically and operationally impossible to segregate out the functions of a substantial and complex interstate pipeline network like Panhandle's in order to enable any entity to utilize the pipeline as if it were its own to market gas in direct competition with the pipeline itself. 16

Without comparability in the quality of the firm transportation and sales services offered by the pipeline, GICs would be anticompetitive. It would be inconsistent with the Commission's public interest responsibilities to condone the concept that a pipeline should be able to gain an advantage in making sales from its transportation monopoly. Panhandle's assertion that comparability may never exist cannot be used to justify the pipeline retaining a competitive advantage over other gas sellers because of the pipeline's control over transportation, and more importantly the pipeline's refusal to make transportation available on terms that even approach the flexibility that the pipeline retains for itself.

The pipelines' refusal to transport gas sold by others, in preference for the pipelines' own sales, was the reason the Commission issued Order No. 436 [FERC Statutes and Regulations, Regulations Preambles 1982-1985 ¶ 30,665] promulgating the Part 284 transportation regulations. Open-access shippers are entitled to receive a firm transportation service that is comparable to the transportation service embedded within the pipeline's firm sales service. For meaningful open access, the firm shipper must have a transportation service comparable in all material respects to the transportation service it would receive if it were a firm sales customer. This was the fundamental purpose underlying Order No. 436 and is still the Commission's objective.

The Commission finds that Panhandle's proposed IGIC is substantially deficient with respect to comparability of service. The application has failed to demonstrate that Panhandle has made sufficient progress in placing its firm transportation service on a comparable basis with the transportation embedded in its sales service so that its sales are not favored. The Commission finds that to accept this application would require extensive modifications,

16 Section III page 3 of Answer of Panhandle Eastern Pipe Line Company To Motions To Intervene, Requests For Hearing and Requests For Technical Conference, filed January 8, 1991.