Gas Industry Lacks Harmony in NOPR, NOI Comments
FERC Chairman James Hoecker said recently he didn't expect to
see much "consensus" from the natural gas industry on the major
initiatives in the notice of proposed rulemaking (NOPR) and notice
of inquiry (NOI). Judging from some of the comments that flooded
into the Commission yesterday, he was right on target.
This lack of harmony was apparent in the comments of the Natural
Gas Supply Association (NGSA), the American Gas Association (AGA)
and the American Public Gas Association (APGA) - the only major
gas trade groups that had their NOPR and NOI comments available at
press time [RM98-10, RM98-12].
In a nutshell, the AGA, a major LDC group, was the only one of
the three that favored giving interstate pipelines the authority to
negotiate terms and conditions of service, while the NGSA - which
represents producers - stood alone in its support of auctioning of
short-term capacity in the event the price caps on the capacity are
lifted. AGA was the lone proponent of lifting the price cap on
capacity-release transactions, which - together with short-term
firm and interruptible - make up the short-term capacity market.
The natural gas LDCs conditioned their support for negotiated
authority for pipelines on the availability of a "high-quality
recourse service" and the implementation of the Commission's
expedited complaint rule. The recourse service/rate must
"appropriately reflect cost reductions" and protect recourse
shippers from "subsidizing the market-responsive services offered
under negotiated rate policies."
Producers, however, were dead set against awarding such
authority to pipelines - unless a showing is made that the
short-term market is sufficiently competitive. They insist the
negotiation of terms and conditions "will inevitably result in
preferential contracts, especially for contracts between the
pipelines and their affiliates, whether they be in the business of
producing, processing, gathering, marketing, distribution of gas or
the generation of electricity."
The APGA municipal distributors agreed, saying negotiated terms
and conditions would be "nothing less than Commission approval of
unduly discriminatory and preferential transportation services,"
and would be "inimical to all major regulatory reforms embraced by
the Commission in the last decade."
The group contends that empowering pipelines with negotiated
authority "is fundamentally a zero sum game that can only adversely
affect captive customers," such as municipal distributors.
Moreover, the APGA insists such authority would "unfairly" devalue
their released capacity by "slant[ing] the playing field in favor"
of interstate pipelines selling capacity. "The pipeline can, if it
chooses, sell premium capacity at the same price that the captive
customer can sell its inferior tariff capacity."
If the Commission should remove the rate cap in the short-term
market, which NGSA opposes, it believes all available uncapped
pipeline capacity should be competitively auctioned. The auction
should be mandatory and standardized across all pipelines, the
producer group said. "To optimize the effectiveness of the auction,
prearranged capacity-release transactions should be disallowed for
periods of one calendar month or less."
In AGA's estimation, however, "an auction would be a step in the
wrong direction because it would add costs and constraints to the
market." Furthermore, it said auctioning of released capacity isn't
necessary to act as a check against potential abuses of market
power "because the secondary market in capacity is robustly
The municipal customers contested the auction mainly because of
its complexity. As an example, they cited the auction proposal of
Natural Gas Pipeline Co., which created a matrix of reserve prices
using 12 potential time periods and 15 potential markets to define
the range of minimum prices that could apply to any single auction.
"Focusing on this one complexity alone - a matrix of reserve
prices that may change from auction to auction - how can the
Commission assure shippers, particularly small shippers, that they
will be able to meaningfully understand the information that will
be provided in an auction?" the APGA asked. "The absence of any
description in the NOPR of how the auction of all short-term
capacity will be conducted underscores the failure of the
Commission to come to grips with the complexity of its auctioning
The APGA believes that moving away from straight-fixed variable
(SFV) rate design would be the closest thing to a cure-all for the
industry. It noted that it "wholeheartedly" endorsed a proposal
submitted by a coalition of LDCs in February, which called for a
mandatory shift from SFV for interstate pipelines and the adoption
of a rebuttable presumption whereby 35% of pipeline fixed costs
would be recovered through volumetric/commodity rates.
The coalition and APGA believe that a move away from SFV would
help with the turned-back capacity situation, remove the bias in
favor of short-term contracts, provide incentives to maximize
pipeline throughput, reduce the risks associated with new pipeline
contracts, and limit the potential for stranded costs associated
with retail unbundling.