Senate Democrats Eye Rate Ceilings on Gas Transportation, Power in West

Initiatives in companion energy bills introduced last week by Senate Democrats seeking to reinstitute cost-of-service (COS) rates for wholesale power sales in western markets and rate caps on secondary natural gas transportation to California have raised red flags in both the electric and gas industries.

The legislation calls on FERC to impose COS-based rates (or load-differentiated demand rates) on power sales in the West at the wholesale level, and would require states to pass through the costs to consumers. It also proposes to roll back the Commission's Order 637, which lifted the rate caps on capacity-release transportation of gas, for pipelines that serve the California market. The latter is designed to "end price gouging" of pipeline capacity in the region, according to a summary of the bill.

"Most of the bill's really good. I don't want to leave the impression that we have a huge problem with it. But our initial read is we don't understand what it [repealing Order 637] is going to do to help with the problem in California," said Martin Edwards, director of legislative affairs with the Interstate Natural Gas Association of America (INGAA).

Undoing Order 637 for California does nothing to "encourage new [pipeline] capacity into the state and within the state," both of which are badly need, he noted. "...[I]f you're not either a) increasing capacity within the state or b) decreasing the demand within the state, you're wasting your time in terms of solving the problems" in the power and gas markets.

These two initiatives by the Democrats --- repealing Order 637 and COS-based rates on wholesale power sales --- could engender an much controversy as the Republicans' proposal to open up the Arctic National Wildlife Refuge (ANWR) to oil and gas drilling.

Edwards said favorable actions for gas proposed in the companion bills include: accelerated depreciation for natural gas pipelines, incentives for expedited construction of an Alaskan pipeline, and streamlining of the FERC certification process for new pipelines and expansions. He noted he also liked the provisions encouraging use of distributed generation, which is a "big market for our product."

Another provision that is likely to trigger some concern would require FERC to order sellers in the "gray market" to disclose the costs of gas and transportation separately in an effort to "create more transparency" in gas prices. "I honestly don't know where this is coming from," Edwards said.

Also of possible concern on the power side, the Senate Democrats' legislation proposes initiatives that could enhance the federal government's role in the market. It calls for a review of FERC standards for assessing market power in the wholesale power and transmission markets, as well as directs the Federal Trade Commission (FTC) to issue regulations requiring power marketers to fully disclose the terms of service.

In the plus column, the legislation addresses an issue that the Republican energy bill steered clear of --- access to onshore public lands for producers. It proposes additional funding for more personnel at the departments of Interior and Agriculture to expedite environmental reviews related to oil and natural gas production. It calls on the Department of Energy (DOE) and the Interstate Oil and Gas Compact Commission to review opportunities for increasing production of oil and gas on state and private lands as well.

At a press briefing on Capitol Hill last Thursday, Sens. Jeff Bingaman (D-NM) --- the chief architect of the legislation --- and Tom Daschle (D-SD), who were joined by other Senate leaders, unveiled their proposed energy reforms in two separate bills: the Comprehensive and Balanced Energy Policy Act of 2001, which calls for a series of policy changes to boost energy demand and manage demand; and the Energy Security Tax and Policy Act of 2001, which proposes $10 billion in tax credits and incentives to encourage production, construction of new delivery facilities and greater use of energy efficient technologies and appliances. The other co-sponsors include Sens. Patty Murray (D-CA), Ted Kennedy (D-MA), Max Baucus (D-MT), Byron L. Dugan (D-ND), Harry Reid (D-RI) and Charles E. Schumer (D-NY).

With respect to other initiatives, the legislation would require the Interior Secretary to proceed with Lease Sale 181 that is planned for the Eastern Gulf of Mexico by no later than December of this year. The president's brother, Florida Gov. Jeb Bush, is staunchly opposed to the lease sale off the coast of Florida, and has asked the Bush administration to put a halt to it. Bingaman favors moving forward with the offshore sale.

Of particular interest to gas, the bill seeks to expedite the construction of a pipeline to transport gas from the North Slope in Alaska to the Lower 48 states. To encourage this, it proposes a production tax credit of 25 cents/MMBtu for gas produced and delivered into interstate commerce before Jan. 1, 2009. Also, it calls for FERC to conduct an interagency review of policies, procedures and regulations to improve the certification process for gas pipes.

On the production side, the legislation proposes a tax credit for marginal wells when the price of oil dips below $14/barrel and the price of natural gas falls below $1.56/Mcf; tax credits to encourage developmental drilling and enhanced recovery work for gas and oil during periods of very low oil prices (below $11/barrel); an interagency study to evaluate and adjust U.S. and state tax and royalty policies to "promote more stable and efficient development" of oil and gas; expensing of payments to hold a lease prior to starting production; expensing of exploration (geological and geophysical) costs; and revising the depreciation schedule to promote the development of remote gas supplies.

For power, the bills would provide a seven-year depreciation schedule for distributed generation, power transmission and gas pipeline/distribution facilities to encourage investment in new facilities; require DOE to evaluate and recommend innovative financing techniques to promote power generation technologies; create an industry-run, FERC-overseen organization to set enforceable (reliability) rules for the interstate transmission grid; and require FERC to adopt rules to ensure the interconnection of distributed generation to local distribution facilities. Susan Parker

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