[BETA] Fortnightly

THE FERC TAKES SUGGESTIONS ON THE FUTURE OF THE GAS INDUSTRY.

Earlier this year, the Federal Energy Regulatory Commission opened a discussion of issues facing the natural gas industry. Its aim? To set "regulatory goals and priorities" for the era following from Order 636, issued in 1992. %n1%n

To gather input, the FERC scheduled a two-day public conference. It asked for comments on a myriad of topics, ranging from cost-of-service rates to hourly gas pricing and services. %n2%n

The conference followed in late May, attended by industry reps and trade-press "gasarazzi." At one point, sensing a lack of creative energy, Commissioner James Hoecker (not yet named the FERC's new chair) implored a witness to push the envelope: "Let's do some thinking outside the box. I'm not hearing much 'big picture' here."

The problem, however, may rest not so much with a lack of will as a lack of reward. Even as the FERC has unleashed upstream markets, it has done little to encourage downstream growth, leaving the pipelines and competitors locked in a zero-sum game.

The point was driven home by Claire A. Burum, v.p. for rates and regulatory affairs, signing off on comments for Koch Gateway Pipeline. She noted that progress is best achieved if the FERC "narrows its focus to the real issues," and "is not distracted by irrelevant arguments regarding division of the economic pie, especially since the size of the interstate pipelines' slice can only get smaller and never larger."

That said, here is a look at some of the issues, gleaned from hundreds of pages of initial comments filed by pipelines, local distribution companies, marketers, vendors, consumers, shippers, associations and regulators.

Of course, these issues serve only as an appetizer for the main course: How will electric restructuring alter the gas industry?

VIRTUAL CAPACITY

(How are pipelines "natural monopolies" when customers compete against them?)

Congress enacted the Natural Gas Policy Act of 1978 partly to integrate what then were two distinct gas markets: Interstate (regulated under the Natural Gas Act, with wellhead price control) and intrastate (largely unregulated).

Today, that effort is touched with irony. Some say that the commission, no matter how well-intentioned, has again created a bifurcated market (em one regulated and one deregulated, but both in interstate commerce. This dual market, the theory goes, pits traditional pipelines (still regulated) against producers, marketers, LDCs, intrastate and "Hinshaw" pipelines, who can now trade in pipeline capacity as "virtual pipelines" and compete more efficiently than interstate pipelines. (See, Comments of the Coastal Companies, pp. 4-5.)

The comments generally agree that the FERC's pricing policies for gas pipelines have failed to keep up, adding to risk for those buying pipeline capacity. Pipeline tariffs for firm capacity remain tied to cost. However, capacity value now appears more dependent on commodity prices (the "basis" differential), especially in areas where pipelines face significant competition. Marketers, aggregators, and off-system LDCs can take advantage, trading in pipeline capacity to capture value in short-term market swings.

Concerns about "turnbacks" and unsubscribed firm capacity appear fairly typical:

[T]here is now a seemingly unbridgeable gap between