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Gas Transport Rates: A Puzzling Prospect

Why does FERC want to limit pipeline discounts?

Fortnightly Magazine - April 2005

by holding them exempt from paying a capacity reservation charge. With captives paying only about 20 percent of what they would otherwise have to pay for a comparable level of firm service, how could anyone argue that they have been made worse by gas-on-gas discounting?

The Unvarnished Truth

Roughly five years ago, in its supporting opinion issued to accompany Order No. 637, FERC recognized clearly the extent to which competitive forces, expressed through the concept of basis differential, have come to control the market for natural gas pipeline services.

Quoting an article published in , FERC agreed that "gas commodity markets now determine the economic value of pipeline transportation services in many parts of the country. … It is within the commodity markets that one can see revealed the true price for gas transportation." ( See Order No. 637, Docket No. RM98-10, Feb. 10, 2000, 90 FERC ¶61,109 , quoting Mary L. Barcella, " How Commodity Markets Drive Gas Pipeline Values ," Fortnightly, Feb. 1, 1998.)

And more recently, as Gulf South explains, the pipeline auctioned off a large block of firm transportation service for a two-year term at a discounted rate that was generated through the auction and which was tied directly to the forward basis differential between Texas and delivery points Mississippi. ( See, Comments of Gulf South Pipeline Co., L.P., at p. 18, FERC Docket No. RM05-2, filed March 2, 2005 .)

Yet today, with its NOI, the commission seemingly would turn back the clock. It would target pipeline discounts as an evil that "shields" consumers from price signals. And yet any price signal embodied in cost-of-service tariffs must in the end prove false, as they themselves mask the true price, which is found in the basis differential, the difference in the gas commodity price at point of receipt and point of delivery.

Congress likely wants to believe that gas pipeline rates are still fully regulated, and who is FERC to want to convince them otherwise? Especially now, with gas prices rising and politicians more vulnerable than ever to a consumer backlash.

Yet, for anyone who does ask, it appears quite obvious that cost-of-service rates for gas transportation are little more than a memory. In spite of what the law says, pipeline rates aren't much regulated any more. FERC knew that once, but now seems to have forgotten.

Perhaps we should compare today's gas pipeline market to the airline industry, as Kinder/Morgan and NGPA suggest in their comments.

Suppose that federal regulators decided that because airline passengers don't always get a rock-bottom fare, but sometimes have to pay full fare on those few routes where there isn't much competition, that therefore "all consumers on all airlines on every flight must pay full fare as determined and mandated by regulation."

Without all those cheap air fares, how could FERC staffers get to all those regional meetings on industry restructuring?