Keith Bailey and David W. Biegler discuss FERC policy for pipelines.

What does Order 637, the Federal Energy Regulatory Commission's Feb. 9 Final Rule on short-term pipeline capacity mean for the gas industry? Keith Bailey, chief executive officer at Williams, and David W. Biegler, president and chief operating officer at TXU, give their reactions and describe what else must be done to facilitate growing natural gas demand.

On the Price Cap:

What are the benefits of the price cap removal for short-term capacity markets?

: It is a step in the right direction. It is a move toward market-based pricing, but it, again, is only a move in that direction. It is a positive move rather than status quo.

[What would make it perfect are] freely negotiated rates, terms, and conditions. The way we have proposed it, both as an industry and a company, is that it be done against a safe harbor. If a customer chose to fall back on a regulated pricing model, they would always have that ability to do that. Beyond that, the pipelines and customers could engage in free negotiations like they do in every other part of our business. You could tailor the rates, terms, and conditions to the specific needs of each individual customer.

: It will show that the capacity auction process can be market-driven and be a proper market. The cap was kind of those last vestiges of an attempt to have regulated competition. It became so unworkable because it was applying this average annual regulatory structure on a capacity market that really has to vary from hour to hour. It is the step to opening up capacity auctions toward being more like a market structure.

On Certification:

What is your take on the OEC?

: The optional expedited certificate procedure was put in as a way of more quickly enabling facilities to be built.

One of the challenges that we will face is being able to respond in a timely way to market demands. From a pipeline's point of view, because of the long project lead time, permitting, and regulatory process, we are beginning to approach the [time frame well into the 2005 and 2006]. The industry needs 25 billion [cubic feet] in additional capacity. Part of the challenge is that competitors can intervene and use the certification process as a tool to slow down the projects.

You need to be able to site facilities in a way that meet the environmental and safety concerns that will exist. The concern should only be that it is being done in an environmentally responsible way. That ought to be the only barrier to it. It would get the commission out of the role of trying to decide the facilities needed or trying to choose among competitive facilities because the marketplace would ultimately determine who won and who didn't.

That requires two things to happen. One, the commission has to be willing to let those who are prepared to spend the money, spend it. But [second], those that are spending the money have to be prepared to take the risks associated with that and not look to the commission to in some way correct and reward them if they make a mistake.

: All those issues came up when I was chair of the American Gas Association. I would agree with siting on a market-responsive basis where [customers] enjoying the new capacity are basically taking the risk. That is something that the gas distributors favor heavily.

On Capacity Auctions: .

What is your view of capacity auctions?

: The good part of it is an additional way to price services, but it is something, depending on the boundary limits - it still has something artificial about it.

On Seasonal Rates:

: I am in favor of anything that makes whatever regulatory structure we have more market-responsive. This isn't a judgment as to the merit of each of them; it is a permission to propose alternate rate structures.

If we are going to have a market-responsive system, you at least want to have the ability to propose alternative rate structures. I am a big fan of whatever we can do to continue opening up the whole gas system to more market-responsive rates. Everybody knows that capacity in the winter is worth more than [during] the summer.

What is left for FERC to do with regard to natural gas?

: We need to make some additional progress in terms of our ability to build facilities quickly to respond to the market quickly.

It seems to me that we continue to need to make progress in our ability to negotiate terms and conditions of service [and] pricing with customers because customers are going to represent the largest component of growth in demand, which will likely be power generators. Their needs are very different and they don't have the model that the traditional LDC has of having statistically predictable demand necessarily, nor do they have a regulatory mechanism where that cost is automatically passed to a consumer group. They have more risk associated with their investments. They are going to be willing to take less risk in regard to their contracting practices. We need to be able to be flexible. We need to be able to put pricing in that is responsive to their needs. We need to be able to be responsive in the creation of the types of capacity that they will require to operate.

That means responsive both in the willingness to invest but [also] the ability to invest in a timeframe that meets their needs. If we can't do that, gas will not enjoy the market share that it could based on the size of the resource base and based on the environmental qualities that it has.

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