Hoecker Issues Ultimatum; Industry Considers Delay
FERC Chairman James Hoecker issued an ultimatum to warring
factions in the gas industry last week, saying it is now or never
regarding major new initiatives aimed at a more competitive market,
while two other commissioners in speeches in different cities
assured gas representatives they were open to debate and
alternatives. But it was not clear that anyone was listening, as
industry leaders reportedly were attempting to forma coalition to
ask for a second delay - this time for six months - in the deadline
to respond to FERC's proposals. (See Late Breaking News)
Speaking to members of the Southern Gas Association, Hoecker
gave the often-disputing segments of the energy industry,
especially the natural gas industry, the ultimatum: either play
nice and come to an agreement with the Commission on the series of
major proposed initiatives now facing them, or the agency will pull
the plug on comprehensive reviews in the future.
"...[Y]ou and the Commission must either come to grips with the
big issues in the coming few months or the Commission will return
to doing this job as it typically does - one rate case or
certificate case at a time," he warned the energy industry at the
conference in Pinehurst, NC, last Monday.
The simultaneous comprehensive reviews of gas and electricity
that are taking place at FERC now are a one-time opportunity that
both industries should embrace, Hoecker said. "Unless I completely
miss my guess, it will be years before the FERC once again puts
such an array of public policy considerations on the table at one
time for open debate and resolution," particularly in the gas
arena. "...[I]t simply cannot continue to commit the same level of
resources to generic natural gas market issues that we have in the
past 15 months."
The gas industry is going to have to get rid of its long-held
view that the business is a "zero sum game - that what goes into
one segment's pocket as a result of a change in public policy
necessarily comes out of someone else's pocket. If a 30 Tcf market
is ever going to be attainable, the industry must stem this kind of
intramural misunderstanding in favor of a growth mentality, where a
rising tide can lift all boats." Hoecker said he was encouraged
that the proposals have led to a "broad exchange of views" so far
among gas officials.
He conceded there were "numerous [and] difficult" issues facing
gas. With respect to "leading-edge innovations," like capacity
auctions, many in the industry would prefer to "just say 'no.' I
have even been urged to slow down or stop by a former FERC chairman
[Martin Allday], who seems to think that our situation, and energy
markets generally, are static," said Hoecker. (See NGI, Nov. 9,
1998) But "largely because of competitive initiatives that he and
his Commission colleagues started a decade ago, nothing could be
farther from the truth. It is the very dynamism and
interconnectedness of a competitive (but partly regulated) energy
market that necessitates such a searching inquiry."
Responding to criticism that he is initiating too many changes
at one time, Hoecker said "I want you [industry] to see, not a
clutter of cases, but a strategy" when weighing the notice of
proposed rulemaking (NOPR) on the short-term gas market, the notice
of inquiry on long-term gas issues, proposals to revise FERC's
complaint process and its ex parte rules, initiatives on
collaborative procedures for pipeline certificate cases and
landowner notification, as well as FERC's "ambitious" electric
The strategy is three pronged: to fine-tune the interstate gas
market and diminish market power, increase competitiveness in the
wholesale power market, and make the Commission more
Massey Wary of NOPR Initiatives
FERC Commissioner William Massey said he views the proposed
initiatives in the short-term gas NOPR issued last July with a
"substantial degree of reservation and caution." These are not "a
done deal from my perspective."
In a speech at the annual meeting of Independent Petroleum
Association of America (IPAA) in New Orleans, he said he was wary
about both lifting the price cap in the short-term transportation
market, and about allowing pipelines to negotiate terms and
conditions of service. Also, he expressed some concern about
whether the proposed rule would be "fair to all industry segments,
including small producers."
The debate over whether the Commission achieved a "proper
balance" with this package of proposals is far from over, he
remarked. It "is still very fluid. If this set of proposals does
not achieve the right balance, then we must continue to work until
the right balance is found."
Despite the NOPR and other proposals emanating from FERC, Massey
assured producers the Commission's "fundamental approach to
regulating pipeline companies is still premised on the notion that,
because of economies of scale and barriers to entry, pipeline
companies are natural monopolies." He said he agreed with FERC's
"conservative approach" to pipeline regulation, which up to now has
required a pipeline to make a detailed showing that it lacks market
power to obtain market-based rates.
But he conceded FERC made an exception to this rule in the NOPR
by proposing the removal of the rate cap on capacity in the
short-term transportation market despite the existence of market
power there. "The NOPR argues...that the [short-term] market has
matured sufficiently to allow the Commission to re-direct its focus
away from affirmatively regulating the market and preventing
exercises of market power. By taking steps to make short-term
transactions more comparable, the Commission [hopes to] maximize
the potential for competition and be able to adopt a more passive
role where it merely mitigates market power, to the extent
possible, and monitors for abuses of market power, if they should
occur." In the NOPR, the Commission proposed the capacity auction
as a mitigation tool for market power in the short-term market.
Commissioner Curt Hebert indicated he's open to alternatives to
the Commission's proposal for capacity auctioning. "My feeling is
there is no secret to the recipe as long as it tastes the same in
the end. And if you have another recipe, I'd enjoy hearing about
it," he said at a Gas Daily conference in Houston last Wednesday.
Hebert acknowledged the industry outcry that followed the July
NOPR on short-term pipeline capacity. "There are a lot of people,
that, quite frankly, don't like how open you are about the auction.
I, on the other hand, fully appreciate your openness on the other
issues..., and I want to make sure that [you] are heard
because...you know how to run it [your business] better than we
Hebert urged all segments of the industry to comment on the mega
NOPR. "You've got to make sure that the issues are fully debated.
That's your job. That's your duty.You need to be frank and
forthright because.the future of your pocketbook is going to depend
on how frank and forthright you are. And coming...in after the
rulemaking and saying, 'I wish you had.' is not good enough."
Massey also tackled issues unrelated to the policy initiatives.
He indicated three proposals currently stand out in the
Commission's debate over how to regulate gas pipelines on the Outer
Continental Shelf (OCS). "First, the Commission could declare that
all offshore natural gas facilities are non-jurisdictional
gathering, drawing the bright line between transportation and
gathering at the point where the pipeline processes the gas to make
it pipeline quality. That point is onshore."
Secondly, "we could find that most offshore facilities are
jurisdictional interstate transportation, moving the bright line to
the first point in the field (after production) where processing is
performed to separate the water from the natural gas stream." And
lastly, FERC could switch to lighter handed regulation under the
Outer Continental Shelf Lands Act (OCSLA) to ensure that pipeline
operators behave in a nondiscriminatory manner when transporting
gas for others. "Whether the OCSLA gives us rate jurisdiction,
however, is questionable," he said.
"Right now, I'm not sure where I stand on all the alternative
approaches I have heard," Massey noted, but added that three
principles will guide his thinking. "First, I continue to believe
that, in the offshore, market power exists just as it does onshore.
These are essential facilities for getting the producer's gas to
market. Second, I am not inclined to place a whole geographic area
of natural gas transmission service outside the scope of FERC
jurisdiction. This would abrogate our statutory responsibilities to
ensure that the transportation of natural gas is non-discriminatory
and at rates that are just and reasonable. Third, any major
revision of the Commission's offshore policy must take into account
the realities of offshore operations. It's a harsh environment, and
companies that construct offshore facilities are entitled to a
certain degree of regulatory flexibility, such as in rates, to
ensure that needed facilities are constructed. At the same time,
this flexibility must not compromise our commitment to ensuring
Massey also assured independent producers that the Commission
had every intention of aggressively moving forward with competition
in the electricity market, which producers are counting on to be a
key gas consumer. "Some electric market participants, frightened by
the summer's Midwest price spikes, have urged us to retreat, to
turn the clock backward. They do not believe the electric market is
ready for competition. There is, however, no sentiment at FERC to
retreat," he said. Personally, "I am advocating that we move
forward even more aggressively to remove obstacles to competitive
markets. The solution, in my judgment, is more competition, not
Nor is there any retreat on electric issues expected on Capitol
Hill. Chairman Hoecker believes there's a "serious possibility"
that the 106th Congress next year will consider a "package of
measures that could range from system reliability to retail
competition to renewable portfolio requirements to PUHCA reform and
jurisdictional issues involving federal power marketing
administrations and public power."
In the end, Hoecker said electricity will become an "even more
formidable competitor" to natural gas in the end-use markets, while
at the same time it will be an "ally of or complement" the gas
business in energy services markets.
Susan Parker, Washington, DC; Joe Fisher, Houston