July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
And wires in the air. Together they form the interstate natural gas pipelines and the electric transmission grid. When the talk turns to deregulation, whether on the gas or the electric side, the pipelines and the transmission grid are almost always voted "most likely to." That is, to remain regulated monopolies (em with cost-of-service rates protected by the Federal Energy Regulatory Commission (FERC).
Let's have a look at that idea.
The FERC has unbundled gas commodity sales from pipeline transportation. It touts Order 636 as a triumph. Even so, many gas pipelines are reeling. They won the "right" to recover all their fixed costs through the straight fixed-variable (SFV) method, but someone forgot to ask shippers what they would pay to wrap their gas in steel.
Today, the "monopoly power" in the pipelines that underlay Order 636 is looking a little less than firm. "Decontracting" and shrinking throughput threaten the finances of certain pipelines, especially out West. Released pipeline capacity is trading on a "gray market," apparently to sidestep the FERC's regulatory price ceiling in the secondary market. Why? Unbundling has exposed inefficiencies in gas transportation. Computers and real-time information have turned the pipes inside out, and gas "basis" upside down. It has taught shippers, marketers, and local distributors how to buy more gas with less steel.
Now, the wires business comes to bat. Flushed with victory on the gas side, the FERC wants to do for electrics what it did for gas: It would unbundle the vertically integrated electric utilities to insulate the generating sector from monopoly power in electric transmission. It envisions a regulated grid with cost-based rates to recover transmission "revenue requirement," and perhaps a surcharge for stranded investment. The structure would more or less follow the gas pipeline example.
But how much market power can the wires command? What if the electric "shippers" back out of their firm transmission contracts, as their gas counterparts are now doing? Power traders might come to prefer short-term nonfirm transmission. If that happens, how long can transmission providers hope to exact embedded-cost rates, let alone a surcharge tacked on to recover admittedly uneconomic costs from generating plants (em an entirely different business.
In September I ran into Phil Marston, who graduated a year ahead of me at Yorktown (Arlington, VA) High School, and who I had last seen sometime around 1965, in a neighborhood touch football game. In grade school I followed him as a co-captain in the school safety patrol. These days, Marston holds the position of vice president, regulatory affairs, for Hadson Gas Services Inc., at the company's Washington, DC, office.
At Hadson, among other things, Phil has been assembling data nationwide on gas pipeline capacity release. He can tell you, up to a month or so ago, how much capacity shippers have released on each pipeline, in what size chunk and in how many separate transactions. Working with that primary data, Phil has developed a few ideas on the gas pipeline capacity market:
"The risk of holding [pipeline] capacity that you don't need has gone up. And