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Study Sees Capacity Price Distortion As FERC Related

Study Sees Capacity Price Distortion As FERC Related

Any price distortions that are being seen in the short-term market, particularly with capacity-release transactions, are the result of FERC policies and regulations, and can't be pinned on the industry publications reporting those prices, according to a joint study between pipelines and LDCs that was released last week.

The study, which was sponsored by the Interstate Natural Gas Association of America (INGAA) and the American Gas Association (AGA), found that the prices fetched for capacity release during peak periods were "substantially below" the regulated maximum rate for firm capacity along major pipeline corridors, and often sent capacity sellers (principally LDCs and marketers) into the bundled sales/transportation market (gray market) to do deals. The joint study blamed FERC policy, which caps capacity-release prices at the pipeline's maximum rate, for the price distortion in the transportation market, and urged the Commission to remove the ceiling.

"The report is significant because it backs up the messages that natural gas utility and pipeline executives have been conveying to FERC commissioners and staff for the last year: namely, regulations that put a ceiling on capacity-release prices at the long-term tariff rate can distort the value of released capacity and result in differences in pricing between capacity-release transactions and bundled sales transactions [gray market]," said Karen Hill, AGA's vice president of regulatory affairs.

Lorraine Cross, INGAA's senior vice president of regulatory affairs, echoed similar sentiments at the FERC staff conference on capacity auctioning last week, saying that "the dual market of regulated capacity release and unregulated bundled sales creates a distortion in peak-period pricing." She and individual pipeline executives proposed that term-differentiated and seasonal ratemaking, which would allow pipes to collect more of their fixed costs 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 the price caps in return for capacity auctioning, "I think you will find many people today who will question whether that proposed auction mitigates potential market power and whether it is even workable for the marketers who must use it on a daily basis," Cross said at the day-long conference, which coincided with the issuance of the report. The review was conducted by Energy and Environmental Analysis, an energy consulting firm in Arlington, VA.

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

The study came up with similar results when it compared the basis differentials (the difference between prices at receipt and delivery points) along 10 transportation corridors to prices paid for capacity release along those same corridors during similar periods. In seven of the 10 transportation corridors, it said the value of short-term gas transportation (short-term firm and interruptible) as measured by basis differentials exceeded the reported value of capacity-release transactions. It cited the FERC-imposed constraints on capacity-release prices as the culprit.

Despite what the study says is regulation-driven price distortions in the market, it concluded that the transportation prices reported by the industry's major publications - Natural Gas Intelligence, Inside Ferc and Gas Daily - have been "transparent, consistent and reliable." The study tracked prices dating back to 1992. For monthly price data, the average reported price for each service has been within about one-tenth of one cent per MMBtu, while daily price data has been within $0.0036 per MMBtu. Any wide disparities in reported prices occurred during peak winter months when prices fluctuated widely, it noted. The study cited January-February 1996 and January-February 1997 as two examples.

Because the results show that there is a "high degree of consistency and reliability and transparency" in the reporting of transportation prices, "we believe that an elaborate electronic auction system is not necessary to create price transparency, and in addition is unlikely to be cost effective," INGAA's Cross told FERC staff at the conference.

Susan Parker

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