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Report Recommends States Encourage Use of Long-Term Gas Contracts

To better manage natural gas prices and volume risks, state regulators should encourage gas utilities to use long-term natural gas contracts for transportation, storage and liquefied natural gas (LNG) services, and should consider requiring utilities to develop long-term strategies for pipeline capacity, gas storage and gas supply acquisitions in the "10-plus year range," a joint task force of the National Association of Regulatory Utility Commissioners (NARUC) and the Interstate Oil and Gas Compact Commission (IOGCC) recommends in a new report.

State regulation, particularly as it affects the incentives and ability of gas utilities to transact long-term contracts for delivery service, was the focus of the task force, which was composed of regulators from around the country. Specific attention was given to whether state regulation has erected barriers to long-term contracting that could jeopardize the future development of the gas delivery infrastructure in the United States. A survey of state public utility commission staffs was completed to determine current local distribution companies practices, and the task force conducted a workshop and took comments from interested stakeholders to develop the recommendations.

In its review, the task force found state regulators usually encourage short, one-year contracts, and they usually don't encourage long-term contracts, said NARUC Commissioner Donald L. Mason of the Public Utilities Commission of Ohio. "We also found that utilities were concerned that if they entered into long-term contracts, that they were at risk in future cases with the commissions and staff, should prices drop between the date the contracts were entered into and the time of the audit. Consequently, there was a chilling effect on the desire or purchasers of natural gas to enter into long-term contracts."

Regulators should take a more active role to encourage the use of long-term gas contracts, in part by pre-approving contracts between local gas companies and bilateral parties, and then not second-guessing the contracts later, the report suggests. Regulators also should recognize the "special" features of certain infrastructure projects, specifically the Alaskan gas pipeline and multiple LNG projects, which will require "substantial revenue guarantees."

At a minimum, state regulators "should not outright discourage long-term contracts." FERC also should "revisit its policies for pricing different pipeline services, in addition to its other practices that may be stifling financing of, and contracting for, long-term gas-delivery services." And state regulators, "in addition to regional power operators, should recognize the benefits of electric generators holding firm, long-term capacity for pipeline transportation and storage."

Mason said the NARUC Gas Committee plans to offer a resolution concerning the task force recommendations at the annual convention in November. The report, "Policy Recommendations on Long-Term Contracting for Natural Gas Transportation, Storage Services and Liquefied Natural Gas Delivery," may be reviewed at www.naruc.org.

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