Natural Gas Pipelines: Roadmap to Reform

Fortnightly Magazine - April 1 1995
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Gas pipeline reform is looming on the horizon like the stealth bomber. It faded from view a couple years ago, when the Federal Energy Regulatory Commission (FERC) completed Order 636 and turned to electric issues. Yet gas reforms are more pressing: They began earlier, their direction is clearer, and their completion is closer at hand. In fact, without a more price-responsive market for gas transportation, we cannot fashion an efficient and integrated energy industry. Electric restructuring, too, could fall short of its full potential.

New Players, New Theories

Deregulation in natural gas has created many new players, such as marketers, brokers, and service providers that offer natural gas balancing, price hedging, and storage capabilities. In this new environment, shippers have gained opportunities to tailor services to their needs.

As shippers and pipelines become accustomed to a more competitive market, regulators are responding. At the federal level, regulatory reform has included both market-based rates and incentive-based ratemaking. Some interstate oil pipelines are regulated today with this combination. In markets that have been declared workably competitive, the FERC has allowed oil pipelines to set their prices according to market. At the same time, however, the FERC maintained oversight by requiring shippers and pipelines to submit periodic reports to ensure the market remains competitive. In markets found not to be workably competitive, the FERC has turned to rate regulation, either by cost-of-service or by incentive-based ratemaking, limiting future rate increases to the average change in competitive markets.

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