FERC's O'Neill Questions Need for New Pipe Construction
A top FERC official dismissed any hint the Commission was
dragging its feet on key pipeline projects that would ship natural
gas to the Northeast - namely the proposed Millennium, SupplyLink,
MarketLink and Independence lines. "...[W]e love new pipelines,"
said Richard O'Neill, director of the Office of Economic Policy,
"but we don't want these new pipelines to turn into stranded
costs." Also, he cited environmental concerns.
He did, however, appear to question the need for all of the
projects. "If these pipelines were as exciting and as important
as...other people thought, they should be filled up with
contractual obligations. Are they?" Most of the projects, he
pointed out, were based on precedent agreements with pipeline
affiliates or on agreements that provided shippers with an "out" if
they don't get certain approvals or market support.
The pipelines keep telling the Federal Energy Regulatory
Commission they need to build "lots and lots" of new capacity to
accommodate a 30 Tcf market down the road. But "the concept may
very well be that you can embrace a 30 Tcf market without embracing
lots of new construction because a 30 Tcf market" essentially
would come from electricity, the demand for which is greatest in
the summer when pipelines have idle capacity, O'Neill said at the
National Association of Regulatory Utility Commissioners' (NARUC)
winter meeting in Washington D.C. last week.
There are some indicators that point to too much pipeline
capacity in the market. For instance, he said 95% of the time the
market for capacity clears at a pipeline's variable costs. "That
says to a traditional economist that maybe we have excess
He believes current types of ratemaking policies - such as the
cost-of-service (COS) model - have made it too easy for pipelines
to over-build. COS inherently has provided pipelines with "a very
strong incentive for over-building because the argument is [that]
you're 'entitled' to...recover the capital cost of the
Moreover, the policy for rolled-in rate treatment hasn't
provided a deterrent, O'Neill said, adding that it "doesn't make a
lot of sense anymore" since pipelines can come to FERC with cost
overruns after their projects are completed and redo their rates.
Separately, he anticipates federal governance of both the gas
and electricity industries will give way to regional governance
regimes. The Commission already is heavily promoting this concept,
in the form of regional transmission organizations (RTOs), on the
electricity side. "We haven't pushed very hard on the gas side
[yet], but I think the regional governance concept is a variable
here," O'Neill said. The issue of regional oversight of gas was
raised in both the mega-notice of proposed rulemaking and notice of
inquiry issued last July.
If the gas industry hopes to capture a bigger share of the
electric-generation pie, he noted, it's going to have to
familiarize itself with RTOs and quickly. "In order for gas to
compete in the electric market, they have to be able to deal with
the hourly markets that are occurring in electricity and even the
daily market. And we don't have good market institutions in the gas
area to deal with that."
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