Frontlines

Fortnightly Magazine - November 15 1998
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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."

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