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FERC Investigates Gas Transportation Pricing

Fortnightly Magazine - April 1 1995

The Federal Energy Regulatory Commission (FERC) has asked for comments on alternatives to traditional cost-of-service pricing for interstate natural gas pipeline transportation rates (Docket No. RM95-6-000). In response to many requests from pipeline companies to approve rates based on other pricing methods, some cost-based and some not, the FERC wants to develop a framework for analyzing alternative proposals. Although the FERC traditionally used cost-of-service rate regulation to prevent natural gas pipelines from exercising market power, it has allowed alternative pricing methods in cases where applicants have shown that competition prevents the exercise of such power.

A staff paper, released along with the requests for comments, proposes criteria for evaluating the proposals. The paper draws from basic antitrust market power analysis and suggests three steps:

s Define product and geographic markets

s Measure firm size and market concentration using the Herfindahl-Hirschman Index

s Evaluate other factors (em ease of entry, excess capacity by competitors, buyers' market power.

The FERC also requested comments on whether to revise its policy on incentive ratemaking approaches adopted October 30, 1992 (PL92-1-000), but has received no proposals to date.

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