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GOP Support for Market Pricing for Interstate Pipes Spurs Industry Debate

GOP Support for Market Pricing for Interstate Pipes Spurs Industry Debate

Natural gas trade associations last week were divided over recommendations in a Senate Republican policy paper that call on Congress in the next session to terminate open-access requirements and introduce market pricing for natural gas pipelines and storage facilities, as well as reduce the regulatory confusion between states and the federal government and speed up capital cost recovery of energy investments.

The policy paper, "How Congress Should Help Meet the Nation's Natural Gas Supply Needs," was issued Nov. 16 by the Republican Policy Committee, which is chaired by Sen. Jon Kyl (R-AZ). It called on Congress to take the aggressive steps to speed up needed investment in interstate pipeline and storage facilities, which an INGAA Foundation study estimated will be $61 billion over the next 15 years.

"We are...quite disturbed at its suggestion that open-access transportation should be eliminated and 'market pricing' should begin for interstate gas pipelines," said David N. Parker, president of the American Gas Association (AGA), in a letter last Monday to Kyl. "In most cases interstate pipelines are natural monopolies and regulation is necessary to protect pipeline customers," he noted.

"We would like to work with you on actions that Congress can take to achieve your report's stated goals of reducing bottlenecks and ensuring the reliable delivery of affordable gas to all customers. However, revamping the current scheme of pipeline regulation is not one of them," Parker said.

"It's a pretty aggressive proposal. We would welcome a debate" on the issue of market pricing for pipeline services, noted Martin Edwards, vice president of legislative affairs for the Interstate Natural Gas Association of America (INGAA).

"I think the report raises some important questions," namely what has happened since the restructuring Order 636 and wellhead price decontrol, and "is the same old regulatory model still relevant today?" he said.

The Senate Republicans aren't suggesting that Congress repeal the Natural Gas Act (NGA) next week or next year, Edwards noted. He believes that any action by Congress addressing rate regulation for gas pipelines will be "down the road a number of years." But the other two recommendations -- ending jurisdictional confusion between states and federal agencies over gas projects and speeding up capital cost recovery -- stand a better chance of being included in comprehensive energy legislation that lawmakers are expected to take up again next year, according to Edwards.

With respect to market pricing, "the FERC [already] has opened a window to change in this area: in December 2002, the agency terminated open-access and cost-of-service requirements for a new onshore [liquefied natural gas] terminal in Hackberry, Louisiana. This decision, known as the 'Hackberry decision,' authorized the Hackberry facilities to provide services at market-based rates," the GOP policy paper said.

"Congress needs to take the next step by codifying the Hackberry decision for all new LNG terminal construction and expansion. It should also direct the FERC to terminate open-access requirements for natural gas pipelines and gas storage facilities and to authorize operators of these facilities to negotiate mutually agreed upon terms and rates with users of facilities and services. This would increase appropriate investment by allowing market participants to enter into a wide range of contracts that more accurately reflect market conditions," it noted.

While cost-of-service rates are the rule of thumb in the pipeline industry today, FERC does allow interstate gas pipelines to negotiate rates with their system shippers.

Senate Republicans also proposed a way to minimize what they called "jurisdictional confusion," often caused by state challenges under the Coastal Zone Management Act (CZMA) to FERC's jurisdiction over a project. "To improve administrative efficiency and avoid jurisdictional confusion, Congress should encourage all interested federal, state and local agencies to coordinate the timing of their reviews to coincide with, and be part of, the FERC's comprehensive review that is required under NEPA [National Environmental Policy Act]," the policy paper said.

"One way to encourage the relevant government agencies to be involved in the NEPA process would be to make FERC's record of that process the exclusive record for any administrative appeals, such as appeals under the Coastal Zone Management Act or Clean Air Act. By making FERC's record the backstop for administrative appeals, agencies would be encouraged to get involved with the review process that produces that record."

As for reducing investment costs, "Congress could provide an even stronger incentive by allowing companies to immediately write off the expense of investing in natural gas infrastructure, rather than depreciating it over a number of years," the paper noted.

"Over the next 15 years, the U.S. natural gas industry will need to invest as much as $61 billion in natural gas infrastructure to maintain the integrity of the system and keep up with rising consumption. Even a minor delay in investment could lead to billions of dollars of consumer costs," said the Senate Republicans in urging Congress to take these aggressive steps in the upcoming session.

The INGAA Foundation study estimated that delaying investment for just two years could cost consumers more than $200 billion by 2020 due to increasing capacity bottlenecks and the inability to get gas to market.

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