Any price distortions that are being seen in the short-termmarket, particularly with capacity-release transactions, are theresult of FERC policies and regulations, and can’t be pinned on theindustry publications reporting those prices, according to a jointstudy between pipelines and LDCs that was released last week.

The study, which was sponsored by the Interstate Natural GasAssociation of America (INGAA) and the American Gas Association(AGA), found that the prices fetched for capacity release duringpeak periods were “substantially below” the regulated maximum ratefor firm capacity along major pipeline corridors, and often sentcapacity sellers (principally LDCs and marketers) into the bundledsales/transportation market (gray market) to do deals. The jointstudy blamed FERC policy, which caps capacity-release prices at thepipeline’s maximum rate, for the price distortion in thetransportation market, and urged the Commission to remove theceiling.

“The report is significant because it backs up the messages thatnatural gas utility and pipeline executives have been conveying toFERC commissioners and staff for the last year: namely, regulationsthat put a ceiling on capacity-release prices at the long-termtariff rate can distort the value of released capacity and resultin differences in pricing between capacity-release transactions andbundled sales transactions [gray market],” said Karen Hill, AGA’svice president of regulatory affairs.

Lorraine Cross, INGAA’s senior vice president of regulatoryaffairs, echoed similar sentiments at the FERC staff conference oncapacity auctioning last week, saying that “the dual market ofregulated capacity release and unregulated bundled sales creates adistortion in peak-period pricing.” She and individual pipelineexecutives proposed that term-differentiated and seasonalratemaking, which would allow pipes to collect more of their fixedcosts in per-unit charges during peak periods, would “ameliorate”the problem. AGA had no position on the proposal yet.

Although FERC proposes to address the problem by removing theprice caps in return for capacity auctioning, “I think you willfind many people today who will question whether that proposedauction mitigates potential market power and whether it is evenworkable for the marketers who must use it on a daily basis,” Crosssaid at the day-long conference, which coincided with the issuanceof the report. The review was conducted by Energy and EnvironmentalAnalysis, an energy consulting firm in Arlington, VA.

Specifically, the study compared the average price forcapacity-release deals to the regulated firm rate along 17 pipelinecorridors. In six of the 17 corridors, it found that the averageprice for capacity-release transactions was less than 50% of themaximum rate, and in 16 of the 17 corridors, the average price forcapacity release was less than 75% of the maximum rate. But, theAGA-INGAA review believes that even these values may be overstatedsince they include the assignment of capacity at maximum rates toaffiliates and under some state unbundling programs.

The study came up with similar results when it compared thebasis differentials (the difference between prices at receipt anddelivery points) along 10 transportation corridors to prices paidfor capacity release along those same corridors during similarperiods. In seven of the 10 transportation corridors, it said thevalue of short-term gas transportation (short-term firm andinterruptible) as measured by basis differentials exceeded thereported value of capacity-release transactions. It cited theFERC-imposed constraints on capacity-release prices as the culprit.

Despite what the study says is regulation-driven pricedistortions in the market, it concluded that the transportationprices reported by the industry’s major publications – Natural GasIntelligence, Inside Ferc and Gas Daily – have been “transparent,consistent and reliable.” The study tracked prices dating back to1992. For monthly price data, the average reported price for eachservice has been within about one-tenth of one cent per MMBtu,while daily price data has been within $0.0036 per MMBtu. Any widedisparities in reported prices occurred during peak winter monthswhen prices fluctuated widely, it noted. The study citedJanuary-February 1996 and January-February 1997 as two examples.

Because the results show that there is a “high degree ofconsistency and reliability and transparency” in the reporting oftransportation prices, “we believe that an elaborate electronicauction system is not necessary to create price transparency, andin addition is unlikely to be cost effective,” INGAA’s Cross toldFERC staff at the conference.

Susan Parker

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