How Commodity Markets Drive Gas Pipeline Values

Deck: 

Has rate regulation become obsolete for natural gas pipelines?

Fortnightly Magazine - February 1 1998
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On Jan. 30, the Federal Energy Regulatory Commission will hold a public conference to review the financial health of the pipeline industry. It will ask whether its regulatory framework still works; whether pipelines can still attract new capital for investment. %n1%n Does rate policy threaten the financial integrity of the pipeline industry? That very question may come before the Commission. %n2%n

Nevertheless, the FERC need not look far for an answer. If the pipeline industry should lie at risk, the cause may go no farther than the Commission itself. In fact, FERC ratemaking policy for gas transportation service now appears to jeopardize the ability of pipelines to recover costs.

Today's competitive markets increasingly prevent pipelines from achieving full cost recovery. During periods when the market places a lower value on pipeline services than the FERC's maximum allowed rate, cost recovery is impossible to the extent that shippers simply decline to purchase long-term firm transportation service. In the case of released capacity, and short-term firm and interruptible service, rates will be discounted to market levels. Studies by the U.S. Energy Information Administration and the Interstate Natural Gas Association of America have found that released capacity and interruptible transportation have been discounted by 60 to 65 percent less than maximum rates in the past three years. %n3%n

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