[BETA] Fortnightly

WELCOME BACK, MY FRIENDS, TO THE SHOW that never ends."

So said two weary commission staffers, trudging out of the hearing room late Friday afternoon, Jan. 31, as the Federal Energy Regulatory Commission adjourned its technical conference on the financial outlook for natural gas pipelines.

The hearing ran way behind schedule (em further evidence that before she left last summer for the Department of Energy, former FERC Chairwoman Elizabeth Moler neglected to pass along to successor James Hoecker whatever gene she possessed that allowed her to keep meetings moving right along. By 5:30 p.m., when many witnesses had left for the airport, Hoecker at last relented. "I know when it's 'Miller Time,'" he said, but his remark fell flat.

Double Your Money

On time or not, the "show" at the FERC could not have been more revealing. Natural gas pipelines sit poised between two worlds. They look like monopolies. Federal law (the Natural Gas Act) still treats them that way. Using that law, and relying on the discounted cash flow model, the FERC now promises pipelines a return on equity no higher than 10.88 percent. (I explain further below.) But Wall Street feels differently. To the brokers and fund managers, you're either growth stock, or you're toast. With the S&P 500 earning 20 percent or more for three consecutive years, and with companies like Williams, PanEnergy and Sonat beating even the S&P since December 1991, the Street wants the FERC to award big, guaranteed equity returns for the pipes or says it will take its capital elsewhere. Never mind that the high-flying pipes owe their success primarily to outside investments, like (for Williams) telecommunications.

In Texas, they explain how pipelines double their money. "Just fold your wallet in half and put it in your pocket." That boast would elicit no protest from Stanley W. Balis at the American Public Gas Association who adds, "Pipeline earnings are insured by an agency of the federal government. Duke ought to change its name to 'Panhandler Energy.'"

Keith Bailey, CEO of Williams Gas Pipelines, is undaunted. At the conference, he noted that the five major oil companies returned 18.4 percent on equity in 1997, and that's with a capital structure of three-quarters equity.

"What oil company would invest in gas pipelines at an average return of 10.88 percent?" asks Bailey. Curt Launer, from Donaldson, Lufkin & Jenrette, suggests that Bailey's stock price at Williams would probably go up if Bailey allowed the company to book less than required on pipeline asset depreciation and abandon the rate base.

Says John Olson, an analyst from Merrill Lynch, which claims to be the largest single holder of all natural gas stocks: "You [the commission] have told the pipelines to go out and compete. You've unbundled just about everything but profit."

These analysts would have the FERC treating gas pipelines as anything but utilities. They see Keith Bailey as another Ted Turner or Boone Pickens, betting capital on high-risk ventures. They argue that all across North America, the pipelines are proposing a raft of new construction projects: Alliance, Viking Voyageur,