Williams Gas Pipelines’ Lew Posekany proposed something thisweek that would make most pipeline customers cringe-that FERC inits quest to create a more competitive natural gas market shouldtoss out some of the notions of fairness that have been woven intoits regulations over time.

“Some of the considerations about fairness that have driven gasregulation 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 transportationissues at NGI’s GasMart/Power ’99 on Tuesday in Dallas.

The remark drew an immediate rise from Washington attorneyKatherine Edwards, who represents major producers. “That’s themajor problem I have with completely unleashing everything becauseI’m idealistic enough to think that regulators still have toguarantee some basic semblance of fairness in the marketplace…Competition is one thing, but if by competition it means thatpeople are free to discriminate and discrimination is good then Ithink that is a greater harm than competition is a greater good.”

Posekany countered that equal treatment and fairness werebecoming more difficult in today’s market. “I think, frankly, whatyou need to think about is in differentiating markets how tightlydo we hold on to the old equal treatment for similarly situatedwhen similarly situated gets harder and harder to find,” he said.”There’s also frankly the element of opportunism because at leastin my view the next 8 Tcf of load is going to be created byentrepreneurship in the downstream market….. It’s going to bedriven by people out there making deals.” In order to get thatbusiness “we’re going to have to let go of some of the old conceptsof equality of treatment…..”

FERC Commission Curt Hebert Jr. assured Edwards thatdiscriminatory behavior would not be tolerated. “I don’t ever seethe federal government moving away from regulation in the sensethat it’s going to tolerate what will be perceived or ruled asdiscriminatory conduct. I think you’re going to continue to havecertain rules of conduct. You’re certainly going to have affiliaterules until and if ever you can relax them,” he told gas executivesat 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 theyears ahead. “I’m not sure FERC will be the agency to decide all ofthose rules in the future. It could be the Department of Justice. Ithink that’s where we’d go from here. How quickly we get there I’mnot certain.”

The future for Williams and other pipelines is in negotiatedterms and conditions, Posekany said. “Our main pitch in the NOPRand NOI is more flexibility. We think we need it to make the growthhappen and to keep the business that we’ve got. We’re seeing peoplethat want customized deals that are tailored to meet their needs,not a standardized product that was decided on by five politicalappointees after consultation for several years with 257 industryrepresentatives, each with an equal voice but not necessarily equaleconomics.” Eventually, Williams believes “most of the industry isgoing to prefer negotiated rates, terms and conditions…..”

With respect to captive customers, he noted, “they’re going tohave to be taken care of by a regulatory process that works.Whether they ought to get the benefits of innovations and economicsthat are developed for customers with entirely different economiccharacteristics….. I’d strongly argue with…..”

David D’Allesandro, a Washington attorney representing statecommissions, thinks FERC should bar pipelines from negotiatingterms and conditions with their affiliates, particularly affiliatedgenerating companies. “It seems that the inherent advantages thatare already built in to electric company ownership ofpipelines…would only be enhanced further if pipelines couldnegotiate separate deals with their affiliates.”

The Williams’ official generally embraced the pipeline positionon FERC’s proposed auctions, saying they were “more trouble thanthey’re worth.” But he did make a slight departure. “There areprobably situations where on individual pipelines they might work,and the pipeline and its customer base might think [they’re] a goodidea under certain circumstances. [There’s] no reason not to letthose evolve…..but please [FERC] don’t mandate them.” Still,Williams thinks the Commission should lift the price caps in theshort-term capacity market. Posekany contends the market has plentyof competition, and the caps are depressing the true value of thecapacity.

“You [Posekany] talk about lifting the price caps, but what Ididn’t hear from you was anything on elimination of the reserveprice. 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 downsiderisk of the reserve price,” said Kathryn L. Patton, director andregulatory counsel for Dynegy Inc.

He conceded most of his “brethren” at the Interstate Natural GasAssociation of America (INGAA), and individual pipelines, were”very staunchly opposed” to any kind of auction without a reserveprice. But, he believes, “probably there are situations where ifpush came to shove it [the auction] could be done, it could beworked,” although “not most often.”

Posekany noted that most financial analysts “hate the idea of anauction without a reserve price because all it is is an opportunityto lose money.” Commissioner Hebert remarked that the reserve pricewas “the very issue that has made it tough on the auction process.”

On rate design, he said Williams came down on the side ofvolumetric rates. “The pipeline industry is split all over theplace on this…Most of the Williams pipelines actually wouldprefer a shift away from SFV [straight fixed variable] to more of avolumetric-based rate design simply because we think we could domore business…”

And, the pipeline welcomes greater transparency in the market.”…[O]ur position is not the same as most of the pipelines. We’reprobably a tad more radical. Our view is frankly we’re happy tohave the Commission and the staff to look at anything we do anytimethey want to,” Posekany said.

“The problem I do have with transparency is really more of acommercial [nature]…in that we’re the only business in thebusiness world that when you go out and make a deal with customersthat you’re happy with then you [have to] submit it to the scrutinyof your competitors and [their] competitors to see if they candream up ways” to build on it. “That process, frankly, to theinvestment community that’s looking at risking capital onbig-ticket projects is just nuts.”

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