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Frontlines

Fortnightly Magazine - October 15 1995

the likelihood of being made to pay for a mistake has gone up. But the need for holding capacity has gone down, [since] you can trade information for steel."

To put the problem in perspective, Marston explains: "In the past the LDCs [local distribution companies] in effect 'resold' capacity in bundled rates at the burnertip. But the term 'LDC' is a misnomer. They are [really] gas marketers."

Another problem, however, is that the FERC has barred shippers from brokering capacity (em instead forcing them to release capacity back to the pipelines (em but at the same time continues to regulate gas transportation rates so that pipelines sell firm capacity at FERC-regulated SFV rates, designed to recover all fixed costs. The result, according to Washington, DC, attorney Sheila Hollis, is that "the secondary capacity market has taken on a 'shadowy' nature that was not envisioned by the FERC." A "grey market" has developed in which gas supply and pipeline are packaged together in prearranged deals, making it impossible to discern the capacity price from the commodity price. The lesson? Competitive markets do not necessarily favor bundling or unbundling. They want flexibility.

"The gas industry is driven by flexibility," says Mark Schroeder, vice president and general counsel at Northern Natural Gas. As he sees it, "LDCs are looking for a flexible portfolio of flexible service providers (em but the pipelines can't provide it. If you want vanilla, the pipelines have it. You can have any rate you want, as long as it's SFV."

Monopolies Out There

Not everyone is chagrined that the FERC continues to regulate gas pipeline transportation rates, without granting market-based rates as it has done for electric generation, except, perhaps, for a recent case involving Koch Gateway Pipeline, as reported in Gas Daily, Sept. 14, 1995.

Katherine Edwards, from the Washington, DC, law firm of Travis & Gooch, points out that we still have the Natural Gas Act, which bars discriminatory rates. A comment filed last April on behalf of gas shippers (FERC Docket No., RM95-6-000, Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines), in which Edwards participated as Of Counsel, noted that the Natural Gas Act still imposes a "just and reasonable" standard, requiring rates to fall within a "zone of reasonableness," to balance investor and consumer interests. Moreover, "the FERC must ensure that market-based rates, if approved, are not unduly discriminatory or preferential."

Richard Morgan, an attorney with Lane & Mittendorf, Washington, DC, notes that the FERC expects to issue an order before October 1996 on market-based rates for gas pipelines.

"There are still monopolies out there," warns Edwards. "There are lots of methods short of market-based rates to achieve flexibility."

Editor

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