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A Round Robin of Residential Unbundling

Fortnightly Magazine - October 15 1996

Gas Co., a subsidiary of Coastal Corp. of Houston. Reid also serves as chair of the policy analysis committee of the Interstate Natural Gas Association of America (INGAA).

Philip Marston, an attorney in the Washington, DC, practice of Dewey Ballantine and a former special counsel to the solicitor at the FERC. Marston notes that his views do not reflect those of his law firm or his clients.

Should the FERC lift the cap on secondary rates from its July 31 notice of proposed rulemaking (NOPR) on capacity release?

Edwards: "If there is a sufficient showing of lack of market power, then under those limited circumstances, it might be appropriate to remove maximum lawful price ceilings, price caps. ... Absent a showing of lack of market power, I do not think it's appropriate, or legal even, to remove price caps.

Reid: "The cap has, in fact, already been moved from bundled transactions in the secondary market. If you bundle transportation with gas supply, and gas supply is obviously deregulated, and you deliver a bundled commodity to the city gate, how do you determine how much of that is transportation and how much is gas supply? You can't. . . . The value of the transportation will achieve whatever is necessary in order to achieve an equilibrium.

"This will free up the market to a certain extent, allow other people to participate. But as I understand from INGAA's data, about 75 percent of the transactions in the secondary market are prearranged deals for capacity release. And that 75 percent basically constitutes this grey market."

Marston: "That's a complex question. The downstream market has become complex, and the downstream markets are their own individual markets. This is a not a linear market.

"The Commission has largely succeeded in fungibilizing capacity. It's much more fungible today than it was prior to Order 636. So what that means is that the downstream market has its own set of prices that are determined by market conditions in that the downstream market may reflect supply pricing in a half-dozen different supply basins, alternate fuel pricing, plus transmission cost coming from a whole bunch of different pipelines.

"How do you even calculate the new ceiling price?

"I guess what I would say, without taking a specific position on whether the cap should be raised or not, is that the markets are much more complex than that when you talk about adding various value-added services to a delivered product. And I think the NOPR doesn't really recognize that market complexity and dynamism."

Shifting to the FERC's alternative ratemaking policy statement: Is a negotiated rate with a default rate fallback (or recourse rate fallback) the way to go?

Edwards: "I think the negotiated recourse rate structure, in many ways, is the worst of all possible worlds because it permits pipelines to negotiate rates (em i.e., implement market-based rates. But this is with the express concession on everybody's part, and acknowledgement on everybody's part, that the pipeline retains

market power. And so what this means is that there will be cross-subsidies between the