An economic perspective on long-term contracting for gas pipeline service.
Kenneth W. Costello is the senior institute economist at the National Regulatory Research Institute. He may be reached at 614-292-2831, or by e-mail at Costello.email@example.com.
Predictably, pipelines and other industry stakeholders are among the biggest supporters of long-term contracting for pipeline services, as they try to make life easier for themselves.1 In its 2003 natural gas study Balancing Natural Gas Policy— Fueling the Demands of a Growing Economy, the National Petroleum Council (NPC), mainly an industry group, argues that long-term contracts are essential for stimulating adequate investments in gas pipelines needed to meet future natural gas demand. The study points out that 75 percent of pipeline contracts, which are mostly long term, will expire by the end of 2008. NPC is predicting that new contracts will be much shorter in duration, to a large extent the result of state commission policies that allegedly frown upon long-term contracts. The NPC calls for state regulators to reassess the environment that they have created through their past actions and policies (which the NPC characterized as “regulatory barriers”)—namely, one where gas utilities are reluctant to sign long-term contracts because of the fear that they will be financially penalized if events turn out unfavorably.