Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Decontracting: Stranded Costs for Interstate Pipelines?

Fortnightly Magazine - April 1 1996

cost of reserving FT, and set at a level sufficient to discourage customers from intentionally undersubscribing. It should also eliminate price caps for interruptible transportation and short-term (up to three months) FT marketed by the pipeline. At the same time, institute an auction under which all available capacity must be sold to the highest bidder at any price exceeding the pipeline's variable cost. This mechanism will allow unsubscribed capacity to trade at its market clearing value at all times.

Give pipelines incentives to cut costs and lower rates. The FERC should allow the pipeline to 1) depart from SFV rate design to capture new markets or facilitate remarketing, and 2) market short-term capacity at rates exceeding its maximum tariff rates (em but allow these only if pipelines adopt a performance-based mechanism. Such a mechanism must be designed to give a pipeline incentives to minimize its costs and to share ongoing cost savings with its customers through lower rates.

Broaden FERC oversight of capacity expansion projects. To minimize future decontracting, the pipeline infrastructure must be expanded optimally, balancing aggregate pipeline capacity with market demand at the lowest possible cost. This may require the FERC to revise its policies regarding new pipeline construction.

These mechanisms are necessary to mitigate decontracting in the long term. Our industry must begin to balance aggregate pipeline capacity with market demand so that reserving FT, to ensure reliability and continuity of service, retains value. The pipeline grid must be globally optimized, with capacity expansions synergistically using existing infrastructure as much as possible. As suggested above, this will require the FERC to look beyond the stand-alone effects of new capacity.

Fortunately, addressing the decontracting issue does not require us to reinvent the gas industry. The essential tools are already in place. Achieving optimal results through the regulatory process will not be easy; there are no simple answers. What we must avoid at all cost are superficial jingoistic "solutions" or "proposals" designed for parochial advantage. A better approach is to employ fair judgment, sound economic principles, and a willingness to correct policy miscalculations, if any. Then everyone wins. t

Rebecca McDonald is president of Amoco Corp.'s Natural Gas Group. Previously, Ms. McDonald was president of Tenneco Gas Marketing Co. in Houston, TX. She is a member of the executive and budget committees of the Natural Gas Supply Association, a director of the Natural Gas Council, and a member of the industry communications committee of the American Gas Association.

Recent Orders-Capacity Turnback

Electric policy no answer:

FERC rejects argument that its electric policy (the "Mega-NOPR" favors stranded-cost recovery) opens the door to an exit fee to recover pipeline decontracting costs. Says electric utilities must demonstrate "a reasonable expectation that the contract would be renewed." Finds no expectation in El Paso case.

-El Paso Natural Gas Co., Dkt. No. RP95-363-000, July 26, 1995, 72 FERC (pp 61,083.

Shippers need protecting:

"As the Commission considers the problem of turned-back capacity ... we are mindful of our obligation to protect the pipeline's captive customers, who [in this case] have little or no alternative .... [T]he