A major pipeline group last week challenged producers’assertions that they would be competitively disadvantaged ifregulators were to clear the way for lighter-handed regulation ofnatural gas pipelines.

Producer claims are based on “two highly questionable arguments:first, that natural gas market growth requires more regulation ofpipelines; and second, that if regulators do not reduce pipelinerates, wellhead revenues will fall by $20 million a year, resultingin a significant loss of gas supplies,” according to the InterstateNatural Gas Association of America (INGAA) in a briefing paperreleased last week. The paper responded point-by-point to commentsmade by Richard Sharples, president of Anadarko Energy Services,during a speech he gave last month on behalf of the Natural GasSupply Association (NGSA).

INGAA disputed that pipelines still were monopolies. “Today, asa result of industry growth, consumers in market areas have accessto multiple supply basins through multiple pipelines. It isdifficult to argue that natural gas pipelines operate as naturalmonopolies under such conditions,” the pipeline group countered.”This is not to say that market power does not exist in the gastransportation business. But the growth of competitive gascommodity markets that has followed the deregulation of gaswellhead markets and the restructuring and interconnection of thepipeline industry has vastly reduced the degree to which pipelinescan exercise market power.”

Sharples had argued that wellhead revenues would nose-dive by$20 million annually if pipeline and distribution rates weren’tcut. That’s about two-thirds of the $31 million that producersspent last year to find, develop and acquire oil and gas reserves.In contrast, pipelines have invested $26 billion over the pastdecade to expand capacity.

Producers believe pipelines should have “no problem doing that[raising that amount of capital] again over the next decade, evenif regulators clamp down on their rates in order to give producersmore money,” INGAA said. But, “starving pipelines of capital is noway to increase producer revenues. The way to increase producerrevenues is to build more pipelines where they are needed. As morepipeline capacity is built, more gas can move to market. Thisreduces the build-up of gas supplies ‘behind the pipe’ and allowsgas supply prices to increase. Therefore, gas producers benefitfrom additional pipeline capacity.”

To bolster producer arguments, Sharples also cited a Departmentof Energy (DOE) report that forecasted that, in order to achieve a30 Tcf market, the average wellhead price would have to rise to$2.40/Mcf from a 1995 price of $1.61/Mcf, while transmission anddistribution margins would have to decline to $1.44/Mcf from a 1995level of $2.13/Mcf.

“It is not clear why gas wellhead prices will have to increaseby more than the projected 49%, while transmission and distributionmargins will have to decline by more than the projected 32% inorder to achieve the projected 30 Tcf gas supply,” INGAA said.”Producers must believe that the rules of the marketplace workdifferently for [them] than for pipelines. The way to get ratesdown is to promote competition, not increase regulation.”

The NGSA last week took issue with INGAA response paper, sayingit “misrepresents” Sharples “straight-forward message.” In the end,”the question still remains: How can policies that effectivelyderegulate monopolies and unnecessarily raise the gastransportation rates lead to significant increased gas sales?”

Susan Parker

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