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Pipeline Restructuring: Slicing a Shrinking Pie

Fortnightly Magazine - October 15 1997

(Whither GISB?)

The comments reveal a fair degree of dissatisfaction with the Gas Industry Standards Board.

Rather than focus GISB's efforts on business practices or a debate over policy issues, Natural Gas Clearinghouse urges the FERC to "focus GISB on its original mission, standardizing electronic communications." (NGC, p. 42.) %n29%n

Peoples Gas Light and Coke Co. and North Shore Gas Co. see GISB only as an extension of working groups on electronic bulletin boards. They believe that the FERC has given "uncritical deference" to GISB proposals, even as the board has "delved into" areas not designated for standardization, or not shown to be cost-effective. %n30%n

"[C]onsensus has often been difficult to achieve," writes Peoples Gas, and standards are "diluted to a level of almost meaningless generality." (Peoples Gas, p. 5-6.)

As Koch pipeline puts it, GISB's time has "come and gone." It asks the FERC to "thank GISB for a job well done," and allow the market to drive further progress. (Koch, p. 56-57.)


(Danger signs on Wall Street?)

Some concern emerged at the commission's two-day technical conference over the adequacy of pipeline rates of return on common equity and whether the industry was falling behind other sectors in its ability to attract and retain investment capital. The Natural Gas Supply Association, a producer group, submitted an exhibit showing mean equity returns for 28 natural gas pipelines in the years following FERC Order 636, 1992-95. %n31%n The returns each year fell short of rates of return for the S&P 400 (industrials), as presented by David N. Fleischer, v.p. for investment research at the New York office of Goldman Sachs & Co. The differentials were substantial: 6.0 percent (1992); 3.7 percent (1993); 7.8 percent (1994); and 7.4 percent (1995). (Goldman Sachs, p. 7; NGSA, p. E-4.)

Compounding the problem is the higher level of risk now assumed by the pipeline industry. As outlined by Williams, these risks include: 1) capacity turnback, 2) loss of operation control because of capacity release and segmentation, 3) increased intra-pipeline competition through the secondary market, and 4) reduced service reliability, "in light of customers making market choices on how to use a pipeline system as distinguished from the pipelines making choices on system usage based on operational needs." (Williams Cos., p. 36.)

Is the natural gas industry making enough money? It all depends on what part of the business you're looking at. %n32%n

Speaking at the first afternoon at the technical conference, Curt Launer, v.p. for research at Donaldson, Lufkin & Jenrette, presented both the good news and the bad.

"Gas earnings are very high right now, but that's primarily because of unregulated activities.

"Equities are trading at 16-times earnings, as compared with 14-times earnings only a few years ago. But capital is not going into the pipelines themselves. Unregulated activities make up 40 percent of earnings in the natural gas industry. Meanwhile, regulated pipeline earnings are growing only about 5 percent per year, at max."

Off and on during the technical conference, the FERC commissioners questioned the witnesses on whether gas pipelines are still able