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Pipeline Restructuring: Slicing a Shrinking Pie

Fortnightly Magazine - October 15 1997

the length of contract term customers are willing to accept and what pipelines need in order to recover costs.

Customers want [contracts] as short as possible and simply will not sign up for long-term capacity. Pipelines, denied the use of variable pricing ... have only the variable of a contract term. ... If the price was right, pipelines would be able to accept shorter-term contracts. (Pacific Gas Transmission Co., p. 2.)

Some say the traditional pipes have lost control of their product:

Instead of controlling virtually all their own capacity, pipelines today control almost none. Any 'capacity rights' discussion should include the question: 'Do pipelines have any capacity rights?' (The Williams Cos. Inc., p. 14.)

Meanwhile, control over pipeline capacity has migrated to marketers, aggregators, and off-system LDCs. Ironically, they appear to be in a better position to compete than the pipeline itself. %n3%n

SECONDARY MARKETS

(Why a price cap or right of first refusal?)

If any gas policy has proved a thorn in the side of federal regulators, surely it must be the price cap (at the interstate pipeline's tariff rate) on pipeline capacity released and then resold separately in the secondary market.

Recently, the FERC set up an experimental pilot program to remove the price ceiling, but met with mixed success. %n4%n Even so, hope still lives that the FERC will see fit to lift the price cap. %n5%n Any effort to lift the price cap faces a "Catch-22." When LDCs release capacity, it competes against short-term firm and interruptible capacity offered by the pipelines. Thus, the FERC does not favor lifting the cap if LDCs can exercise market power behind the city gate. (Williams Cos., p. 53-54.) Retail gas choice for all customers would mitigate such concerns, but it hasn't arrived yet. One reason for the delay stems from concern that LDCs face stranded costs from losses connected with unused pipeline capacity. (Columbia Gas Transmission Corp., pp 10-11.) And why is that? Well, because the LDCs bought firm capacity at the top of the market, but are now forced to sell unneeded capacity below value because of the price cap.

And so it goes. Any solution depends on new questions: Can the FERC craft regulatory policies for interstate pipelines designed specifically to foster competition at the state level? Will such authority conflict with state PUC prerogatives? (See below, "Retail Choice.")

Another important aspect of capacity release concerns the right of first refusal. For those capacity contracts where the term equals or exceeds one year, capacity holders own a "preferential right" to tie up that capacity simply by matching another cost-based bid for a five-year term, %n6%n even if the original bidder (a potential new pipeline customer) would have been willing to pay more or sign up for a longer term. (Williams Cos., p. 18.)

This right of first refusal appeared to draw as many negative comments as just about any other current aspect of FERC gas policy. A typical comment came from the Coastal Cos.:

While ... there may be genuine exceptions, as a general proposition, the commission should