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The Monolith is Cracking: Electric Restructuring and its Implications for Gas

Fortnightly Magazine - September 15 1995

through fixed charges that circumvent market price-setting mechanisms.) A glaring example of such arrangements is the PoolCo proposal favorably endorsed by a majority of the California Public Utilities Commission. This proposed decision would insulate nuclear assets from bidding into the pool (while still running these assets and permitting cost recovery). Other assets would face the competitive bidding process for what is left of the market not absorbed by these subsidized assets.

Many electric utilities, while they fight the introduction of competition and push for full recovery of stranded costs, are nevertheless

attempting to alter their contractual commitments to independent power producers. Many of these facilities are gas-fired. Efforts are underway in Congress, at the FERC, and at various state commissions to escape contract commitments or unilaterally to change price and other key contract terms. Utilities should be aware that the arguments they make to escape these contracts could also be made by utility customers seeking to escape stranded costs. There is a more prudent course for policymakers: 1) honor existing contracts, 2) allow recovery of stranded costs, and 3) undertake prospective reform of the Public Utility Regulatory Policies Act only in the broader context of opening all power markets to competition.

While procompetitive reforms are proceeding, utilities are working hard to compromise the transition, particularly at the state level, where their political power is most concentrated. The challenge for gas companies, consumers, and others whose interests depend on an open and competitive electric market is to ensure a swift and complete transition. Only then will the benefits of a competitive market accrue to the economy. t

Richard D. Kinder is president and chief operating officer of Enron Corp. He also serves as chairman of the Interstate Natural Gas Association of America.

What Electric Deregulation Means for Gas CompaniesA host of new challenges and opportunities will arise for natural gas companies:

. Gas-fired IPPs. Pressure on existing contracts with independent power producers means pressure on gas suppliers, transporters, and in some cases, distributors (LDCs).

. Exposed Costs. Open retail markets mean reduced ability for utilities to cost-shift to shield retail markets from end-use gas competition.

. Generation in Flux. Revealed capacity surpluses dampen near-term prospects for new base-load generation. However, retirement of nuclear plants in response to competition and decentralization of generation planning means increased medium- to long-term opportunities for efficient, low-cost gas facilities.

. One Market. Gas companies will pay closer attention to the relationship between the market prices for gas and power, viewing power plants as facilities for "processing" gas into power. Gas merchants will also see opportunities to serve customers with both gas and power products. Pipelines will be forced to pay more attention to electric transmission lines as competitors.

. Pipelines/Producers. Capital reconfiguration will present opportunities for savvy gas companies. Gas producers may vertically integrated into power production. LDCs may see opportunities in spun-off distribution facilities. Pipelines have much to offer when it comes to successfully transitioning power-transmission assets.

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