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2011 | OriginalPaper | Chapter

4. The Cost Approach to Pricing: The Tenneco Pattern

Author : Dr. Roger L. Conkling

Published in: Energy Pricing

Publisher: Springer Berlin Heidelberg

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Abstract

Chapter 4 has two parts. The first discusses why and when fixed and variable costs should be assigned to the demand charges of multi-part rates. Each of the four famous methods is covered: the Atlantic Seaboard method, the United method, the modified fixed–variable method, and the straight fixed–variable method. Two other issues are included as well: the demand charge and zoning. The second part of the chapter covers the entirety of the accounting involved in a full rate case before the responsible US regulatory commission, starting with the aggregation of the pipeline’s total costs of service stated pursuant to the commission’s uniform system of accounts, and ending with the allocation of these total costs to the demand and commodity charges of the pipeline’s individual rate schedules.

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Footnotes
1
The methods first permit allocations to classes of service.
 
2
The pipeline’s cost of service is the total revenues needed to cover the pipeline’s operations, including a just and reasonable return on its rate base.
 
3
Consolidated Gas Supply Corp. v. FPC, 520 F.2d 1176, 1185 (D.C. Cir. 1975).
 
4
Both the expert ratemaker and the experienced regulator become uniquely adept at such justification. It’s part of the job.
 
5
Re Atlantic Seaboard Corporation and Virginia Gas Transmission Corporation, 11 F.P.C 43 (1952).
 
6
In this paragraph, the commission unnecessarily overstates its case. It seems to postulate that neither quasi-firm (subject to limited curtailment) nor full interruptible rates can be designed with a demand charge component. While established commission practice had eliminated a demand charge for interruptible service, and no quasi-firm rates had been introduced, these precedents were not set in stone. And, as we will see, some 24 years later, a two-part demand charge was introduced, one related to peak use and the other to annual use, which would have tempered the commission’s statement in this paragraph. (A specific purpose of this change was to provide cost relief to low load factor customers.) However, our point here is simply that the problem as stated did not necessarily require the shift for all rates, firm and interruptible, ordained in Seaboard.
 
7
Re Midwestern Gas Transmission Company and Tennessee Gas Transmission Company 21, F.P.C. 653 (1959).
 
8
Re Natural Gas Pipe Line Company of America 28 F.P.C. 731 (1962).
 
9
Re United Fuel Gas Company and Atlantic Seaboard Corporation 31 F.P.C. 1342 (1964).
 
10
Re Midwestern Gas Transmission Company and Natural Gas Pipeline Company of America 34 F.P.C. 973 (1965).
 
11
Re United Gas Pipe Line Company 3 PUR4th 491 (1973).
 
12
Note the commission’s recourse to cost as a partial justification for its position against SFV. It is ironic to contrast this disavowal of SFV with its later adaption of that method.
 
13
Texas Eastern Transmission Corp., 30 FERC 11 61, 144 (1985); Transwestern Pipeline Co., 32 FERC 11 61,009 (1985).
 
14
The change from MFV to SFV was not a surprise, having been anticipated in a Notice of Proposed Rulemaking issued July 31, 1991, which was promptly dubbed the “Mega-NOPR.”
 
15
Order No. 636-A issued August 12, 1992, affirmed the final Order No. 636 of April 16, 1992. Order No. 636-B was issued November 27, 1992 in further clarification.
These orders were the finalization of an order having the same designation (636) which had been issued October 18, 1985.
 
16
The customer’s “maximum daily use” may be a measurement of actual usage, or a contract volume expressed as a contract demand or, the same, a maximum daily entitlement.
 
17
Déjà vu, the 50–50 split of Seaboard.
 
18
We particularly commend this paragraph to the reader as a succinct list of choices.
 
19
These approximations are not stated in Docket No. RP88-228. They are derived by the writer as very rough estimates.
 
20
A single centroid, or several, may be appropriate depending upon circumstances. If appreciable volumes enter the system at widely separated locations, more than one centroid may approximate the distance of haul, on average, better than a single centroid. For example, the gas supply for the system may originate both from US production areas at the southern terminus of the transmission line and from deliveries from Canadian pipelines at the northern terminus. This would suggest a dual centroid, one southern, the other northern, with each given weight depending upon the volumes received at each as a proportion of the total volumes inputted into the pipeline. Or, appreciable volumes might enter the system from intermediate areas of supply, suggesting additional centroids, each to be given its proportionate weight.
In its initial filing in Docket No. RP88-228, Tenneco proposed five centroids, a “pentacentroid” approach. This is the method reflected in the “allocation factors” stated in Step 7 and in later steps of this chapter. Later, Tenneco simplified its approach, adopting a single, or alternatively a dual, centroid. For all practicable purposes, the simplification does not impact upon the procedure’s end-results, so Step 7 and later steps are stated in the original distance-of-haul units of “pentacentroid.”
 
21
Because the actual numbers are so large, some inputs have been rounded. Therefore, the table should be taken as an approximation, not a precise calculation.
 
Metadata
Title
The Cost Approach to Pricing: The Tenneco Pattern
Author
Dr. Roger L. Conkling
Copyright Year
2011
Publisher
Springer Berlin Heidelberg
DOI
https://doi.org/10.1007/978-3-642-15491-1_4