Competition from Order 636 has gas customers rethinking their firm capacity options.
Just when everyone thought we had put Order 636 behind us, up pops perhaps our greatest challenge yet: the turnback (or "decontracting") of firm capacity on interstate natural gas pipelines. This phenomenon, now emerging on a few major pipelines, such as Transwestern, El Paso, and Natural Gas Pipeline Co. of America, inspires different reactions. Some see the problem as a natural outgrowth of competition. Others believe it foretells a dire future. Either way, the issue will play a central role in ongoing and future debates over rate design, rate incentives, and the management of pipeline capacity.
Decontracting occurs at the point where competitive opportunities (born of Order 636) run headlong into the as-yet, relatively uncompetitive pipeline infrastructure. Strictly defined, "decontracting" describes the behavior of pipeline customers (shippers) that fail to renew their contracts for firm transportation (FT) service. The trend draws concern from pipelines: If they prove unable to resell that released firm capacity, they may find it difficult to recover costs.
No one knows how widespread this phenomenon will become. Last September the Interstate
Natural Gas Association of America (INGAA) released a paper that predicted only a moderate decline in demand for long-term FT. Even though contracts for nearly half of pipeline firm capacity will expire before 2002, INGAA expects three-quarters of that capacity will be resubscribed on a long-term basis, so that over 85 percent of total capacity will continue under long-term contracts. Nevertheless, decontracting will likely develop into a more serious problem in certain supply-to-market corridors.