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Messing With Texas

Armed with calls for gas price transparency, FERC takes aim at intrastate pipelines—the long-forgotten and largely private preserve of the Lone Star State.

Fortnightly Magazine - October 2007

“have fought many battles over the past 15 years at the Railroad Commission and the Texas Legislature in an attempt to make the natural-gas marketplace in Texas more transparent and therefore more competitive and fair.

“All of our efforts have been thwarted to date. … In Texas, we have the worst of all worlds—monopolies with the color of regulation which shields them from antitrust claims. …

“To many of us in Texas, the FERC is right on the money its analysis of the measures that are needed.”

The Midstream Monopoly

Commending FERC for its rulemaking proposal, the Texas Alliance of Energy Producers argues that the Midstream and intrastate pipeline sectors operate in reality as “unregulated regional monopolies.” These monopolies, says the Alliance, serve to hide market “dysfunctions” and undermine the success of FERC’s open-access regime, which aims to make prices transparent for both the unbundled gas commodity and pipeline transportation service.

In particular, the Alliance has filed with FERC a monumental study conducted by Texas attorney John R. Hays Jr., presented last year at an industry conference. (See, Hays, “The Challenge of Producer Access to Natural Gas Markets: Gathering and Other Pipeline Issues,” 57th Annual Conf. on Oil and Gas Law, The Center for American and International Law Institute for Energy Law, attached as Appendix A, Comments of Texas Alliance of Energy Producers, FERC Docket No. RM07-10, filed July 11, 2007.)

Hays argues that lax regulation by the Texas RRC has allowed intrastate gatherer pipelines to deny unbundled transport-only service to gas well owners, producers, and royalty owners, forcing them to sell output directly to the Midstream sector at below-market prices, rather than at trading hubs. They must oblige, Hays argues, or else face the prospect of shutting in their wells, since in most cases producers and well owners remain captive to a single, geographically accessible gathering pipeline, which can use its exclusive control over transport options to extract monopoly rents from the production sector. He claims that producers may realize less than $4/MMBtu for gas that might sell for $8 or more at the hub, and cites estimates that the Texas E&P gas-production sector loses as much as $1.5 billion a year in gas-commodity revenues as a result.

Small wonder, then, as the Texas Producer Alliance points out, that financial institutions such as Morgan Stanley and Warburg Pincus “have so heavily invested in the Midstream sector in recent years.”

Hays notes in his study that interstate pipelines have moved to capture this potential stockholder value through spin-downs and spinoffs of their gathering facilities. He adds that such monopoly rents explain “why a large midstream system with a book value of some $21 million could be sold by a major utility in the latter 1990s for over $100 million to an investment partnership … then resold for over $200 million, without a corresponding increase in investment.”

At the federal level, such fears led two decades ago to FERC Order 636 and the unbundling of the gas commodity from interstate pipeline transportation service. Yet, at the state level, such unbundling has not occurred.