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Gas Regulators Get Praise, Advice from IEA

Gas Regulators Get Praise, Advice from IEA

While efforts to deregulate the electric industry at both the state and federal level drag on, at least one international observer found U.S. gas deregulation worthy of praise. Robert Priddle, executive director of the International Energy Agency (IEA) in Paris, told reporters at the 17th Congress of the World Energy Council that the United States leads the world in gas competition.

Priddle said he is heartened by the Federal Energy Regulatory Commission's (FERC) decision to review pipeline rate regulation. Priddle gave his talk to highlight findings of the IEA's report card on U.S. energy policy. The findings stem from a 1998 review and are published by the agency in a 152-page book.

"The outlook for further deregulation of gas transportation is quite mixed," the report says. "Despite a very large number of pipeline companies, wide areas of the country still receive supplies from fewer than three transportation companies. Some cities like Chicago and some states like Louisiana or New York have ample opportunity to choose between different pipelines, but most parts of the country still depend on a small number of lines - sometimes only one." Judging from the IEA's map of the U.S. pipelines, states with a dearth of options include Idaho, Nevada Utah, and the Carolinas.

The review found the secondary market of pipeline capacity to be critical to competition, but it points out trouble with electronic bulletin boards intended to disseminate capacity information.

"Obtaining timely information on - and confirmation of - capacity reservation can become a problem if a shipper needs to line up several pipeline segment reservations, plus possibly other network services, for one delivery. The information and transaction costs can be high because time lags in posting bids and completing transactions typically takes two to three days. FERC has a crucial role in reducing such transaction costs."

The report continued to outline findings that more work remains on capacity rate regulation. "During off-peak periods (the non-heating season), prices have fallen considerably below market value. This has meant that companies in regions with ample pipeline capacity have been unable to earn the regulated rate of return on the released capacity. It clearly reflects how the current system of price regulation does not take properly into account the peak-load characteristics of the gas business reflected in marginal costs."

IEA said the existence of a gray market for pipeline capacity shows in principle that pipeline price regulation is no longer adapted to the market and that regulators make rule adjustments to market conditions too late. "The gray market needs attention because it constitutes a hidden path to vertical re-integration not in the interest of competition in gas marketing. Simply removing pipeline rate regulation would provide no solution because the business is not yet sufficiently competitive." As the gray market does reveal the market's valuation of capacity during peak periods, simply getting rid of it would not be efficient even if feasible, IEA said.

Speaking on electric deregulation, Priddle said, "We have no doubt that the United States is in a dynamic transition phase in its electricity market, and we applaud that." However, Priddle noted that dynamic transition is not taking place in a unified fashion. In other words, every state and the federal government is doing its own thing. Priddle and the IEA recommend that federal policy create a legal framework to shepherd the states transition to competition. This would avoid, for instance, disputes between states power moves between.

Joe Fisher, Houston

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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