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'Fairness' in Gas Regs Should 'Bite the Dust,' Williams Says

'Fairness' in Gas Regs Should 'Bite the Dust,' Williams Says

Williams Gas Pipelines' Lew Posekany proposed something this week that would make most pipeline customers cringe-that FERC in its quest to create a more competitive natural gas market should toss out some of the notions of fairness that have been woven into its regulations over time.

"Some of the considerations about fairness that have driven gas regulation for years frankly are going to have to bite the dust," said the senior vice president for group planning and development, who participated in a panel discussion on major transportation issues at NGI's GasMart/Power '99 on Tuesday in Dallas.

The remark drew an immediate rise from Washington attorney Katherine Edwards, who represents major producers. "That's the major problem I have with completely unleashing everything because I'm idealistic enough to think that regulators still have to guarantee some basic semblance of fairness in the marketplace... Competition is one thing, but if by competition it means that people are free to discriminate and discrimination is good then I think that is a greater harm than competition is a greater good."

Posekany countered that equal treatment and fairness were becoming more difficult in today's market. "I think, frankly, what you need to think about is in differentiating markets how tightly do we hold on to the old equal treatment for similarly situated when similarly situated gets harder and harder to find," he said. "There's also frankly the element of opportunism because at least in my view the next 8 Tcf of load is going to be created by entrepreneurship in the downstream market..... It's going to be driven by people out there making deals." In order to get that business "we're going to have to let go of some of the old concepts of equality of treatment....."

FERC Commission Curt Hebert Jr. assured Edwards that discriminatory behavior would not be tolerated. "I don't ever see the federal government moving away from regulation in the sense that it's going to tolerate what will be perceived or ruled as discriminatory conduct. I think you're going to continue to have certain rules of conduct. You're certainly going to have affiliate rules until and if ever you can relax them," he told gas executives at the conference.

He dropped something of a bombshell when he said FERC, however, might not be the enforcer of fairness in the gas industry in the years ahead. "I'm not sure FERC will be the agency to decide all of those rules in the future. It could be the Department of Justice. I think that's where we'd go from here. How quickly we get there I'm not certain."

The future for Williams and other pipelines is in negotiated terms and conditions, Posekany said. "Our main pitch in the NOPR and NOI is more flexibility. We think we need it to make the growth happen and to keep the business that we've got. We're seeing people that want customized deals that are tailored to meet their needs, not a standardized product that was decided on by five political appointees after consultation for several years with 257 industry representatives, each with an equal voice but not necessarily equal economics." Eventually, Williams believes "most of the industry is going to prefer negotiated rates, terms and conditions....."

With respect to captive customers, he noted, "they're going to have to be taken care of by a regulatory process that works. Whether they ought to get the benefits of innovations and economics that are developed for customers with entirely different economic characteristics..... I'd strongly argue with....."

David D'Allesandro, a Washington attorney representing state commissions, thinks FERC should bar pipelines from negotiating terms and conditions with their affiliates, particularly affiliated generating companies. "It seems that the inherent advantages that are already built in to electric company ownership of pipelines...would only be enhanced further if pipelines could negotiate separate deals with their affiliates."

The Williams' official generally embraced the pipeline position on FERC's proposed auctions, saying they were "more trouble than they're worth." But he did make a slight departure. "There are probably situations where on individual pipelines they might work, and the pipeline and its customer base might think [they're] a good idea under certain circumstances. [There's] no reason not to let those evolve.....but please [FERC] don't mandate them." Still, Williams thinks the Commission should lift the price caps in the short-term capacity market. Posekany contends the market has plenty of competition, and the caps are depressing the true value of the capacity.

"You [Posekany] talk about lifting the price caps, but what I didn't hear from you was anything on elimination of the reserve price. What I heard was you want the upside of market-based rates, but I haven't heard you [say you're] willing to assume the downside risk of the reserve price," said Kathryn L. Patton, director and regulatory counsel for Dynegy Inc.

He conceded most of his "brethren" at the Interstate Natural Gas Association of America (INGAA), and individual pipelines, were "very staunchly opposed" to any kind of auction without a reserve price. But, he believes, "probably there are situations where if push came to shove it [the auction] could be done, it could be worked," although "not most often."

Posekany noted that most financial analysts "hate the idea of an auction without a reserve price because all it is is an opportunity to lose money." Commissioner Hebert remarked that the reserve price was "the very issue that has made it tough on the auction process."

On rate design, he said Williams came down on the side of volumetric rates. "The pipeline industry is split all over the place on this...Most of the Williams pipelines actually would prefer a shift away from SFV [straight fixed variable] to more of a volumetric-based rate design simply because we think we could do more business..."

And, the pipeline welcomes greater transparency in the market. "...[O]ur position is not the same as most of the pipelines. We're probably a tad more radical. Our view is frankly we're happy to have the Commission and the staff to look at anything we do anytime they want to," Posekany said.

"The problem I do have with transparency is really more of a commercial [nature]...in that we're the only business in the business world that when you go out and make a deal with customers that you're happy with then you [have to] submit it to the scrutiny of your competitors and [their] competitors to see if they can dream up ways" to build on it. "That process, frankly, to the investment community that's looking at risking capital on big-ticket projects is just nuts."

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