[BETA] Fortnightly

The FERC's latest idea throws pipelines for a loop, with implications for power markets, too.

Transmission and distribution (em the business they call "pipes and wires" (em can't last much longer with rates set by cost of service. Contrary to the myth, these services deserve no special status due to their high embedded costs. They carry no intrinsic value apart from the electrons and molecules they deliver.

Imagine Exxon ferrying crude from Japan, where it is valuable, to the Persian Gulf, where it is not, and then asking to "recover our investment." Intuitively, we see that oil tankers earn their keep only on the per-barrel price spread between the drilling platform and the consumer. Why can't utilities figure that out? Commoditization is coming to pipes and wires, with prices set in the trading pit, just as surely as for electric generation and wellhead gas.

That much rang clear from the technical workshop on natural gas pipeline capacity auctions, held on Oct. 20 in Washington, D.C., at the Federal Energy Regulatory Commission. However, the lawyers, traders, and association CEOs in attendance may have been slow in getting the message.

The meeting was widely anticipated. A few weeks earlier, at the DOE/NARUC Natural Gas Forum Pittsburgh, I had spent time with several reps from the American Gas Association. They talked of virtually nothing else, but of how the FERC's proposal to introduce a mandatory auction to allocate short-term transportation rights on interstate natural gas pipelines, issued in July, had thrown the gas industry for a loop. When asked at the Pittsburgh meeting how the FERC could force auctions on the pipelines, chairman James Hoecker replied, "Bring your question to the conference."

Two weeks later they came in droves, loaded for bear, but found no target to shoot at. Hoecker and the commission were nowhere to be seen. Instead it was FERC staffer Kevin Madden, director of the Office of Pipeline Regulation, who led the meeting. He entertained only those questions addressed to technical and operational points (em not the underlying policy.

So hunting season was called off. But FERC Commissioner Curt Hébert, known to climb over the mountain from time to time (and to question FERC authority) , was seated in the audience, to see what he could see.

ON THE SURFACE, THis Latest move RESEMBLES any other natural gas rulemaking proposal. In its notice of nearly 200 pages, the FERC talks of market power, firm and interruptible service, capacity release, nominations (day-ahead and intra-day) Order 636, the "gray market" and prearranged deals, the price cap in the secondary market, GISB standards, primary and secondary receipt and delivery points, and negotiated terms and conditions. All of these issues should sound familiar. Citing the right of first refusal enjoyed by shippers holding rights to firm pipeline capacity, and how they can retain those rights by matching competing offers, the FERC admits that its policies may have skewed the balance of risks, favoring short-term contracts over longer firm rights. To redress the balance, the FERC would consider ending or restricting the right of first refusal. It