Local distribution companies this week called on FERC to lift the price cap on short-term (less than one year) releases of capacity in the secondary market on a permanent basis, while a major electric company advocated permanently removing the maximum rate cap on all releases of pipeline capacity. Natural gas producers took the middle ground, asking FERC to conduct a new two-year experimental pilot before determining whether caps should be lifted on a more permanent basis.

Permanently lifting the rate cap on all types of capacity releases "would increase liquidity and competition in the secondary market for capacity, ensure that capacity is allocated to those that value it most, and provide a more secure foundation and clearer price signals for [the] development of pipeline infrastructure," said Duke Energy Corp. The Federal Energy Regulatory Commission elicited comments from industry after receiving two petitions requesting changes to its capacity-release regulations.

"In Order 637, the Commission lifted the maximum rate cap for short-term capacity release transactions for a two-year experimental period...Although the Commission elected not to proceed without the rate cap upon expiration of the experiment in September 2002, there were strong indications that the experimental step had, in fact, served its intended purpose," the Charlotte, NC-based energy company said. It noted that former FERC Commissioner Nora Brownell concluded last year that it was time to take another look at the secondary market in a generic proceeding.

"The trend in recent years has been toward concentration of control and management of pipeline capacity in [the hands of] relatively few gas suppliers and portfolio managers that have the wherewithal and expertise to take advantage of market opportunities, largely through gray-market transactions," Duke Energy said.

"The prospect of capturing the true market value of pipeline capacity when not in use to serve primary needs would motivate some electric utilities and other directly served end-users, [who] currently may be inclined to rely upon fuel managers to sell them delivered supply in gray-market transactions, to instead acquire and manage their own pipeline capacity," it noted.

"By the same token, local distribution companies (LDC) that have heretofore ceded control over their pipeline capacity to portfolio managers would be more likely to retain control over all or a portion of such capacity in order to take more direct advantage of secondary market opportunities when the capacity would otherwise be idle," Duke Energy said.

The lifting of the rate cap on all capacity releases "could also encourage end-users and LDCs to enter into longer-term capacity contracts by allowing them to mitigate more substantially the cost of holding such capacity."

But the American Gas Association (AGA), which represents LDCs, advocates only the permanent removal of price caps on short-term releases of capacity in the secondary market.

"The Commission has already found that the current price caps on short-term released capacity are unnecessary to protect consumers...The data collected during the Commission's two-year experiment in Order 637 fully supports the conclusion, upheld on judicial review, that rates for capacity will fall within the zone of reasonableness, and there is not reason to believe that the structural character and behavior of the markets have become less competitive since 2000," the AGA said.

But FERC "should not...lift the price cap on sales of primary pipeline capacity absent a showing on the part of an individual pipeline that it lacks market power," the LDC group noted.

"The ability to obtain primary capacity subject to a maximum rate cap -- including on a short-term firm or interruptible basis -- acts as a restraint on the potential exercise of market power in the secondary market. Lifting the price cap on primary pipeline capacity would thus undercut a major premise justifying lifting the price cap in the secondary market, i.e., that prices can be expected to remain just and reasonable through the availability of capacity from the pipeline at regulated rates," the AGA said.

The Natural Gas Supply Association (NGSA), which represents major gas producers, urged caution. Before taking final action, it asked FERC to reassess the appropriateness of removing the price cap for capacity-release transactions by instituting a new two-year experimental pilot. "This interim step must be taken before the Commission makes a final determination of whether the cap should be lifted on a more permanent basis, an action NGSA does not support at this time," the producer group said.

"Without fresh evidence of how today's market will function with the cap lifted, the petitioners' request to lift the cap for all capacity-release transactions on a permanent basis is too premature and is not a step for the Commission to take at this time," the NGSA noted.

The National Energy Marketers Association (NEM) also urged FERC to tread lightly. "NEM submits that removal of the maximum rate cap must be predicated on a Commission finding that the market is sufficiently competitive to prevent the exercise of market power in capacity-release markets and the setting of unjust and unreasonable rates. This is central to the Commission's charge to protect customers," the marketer group said.

"NEM suggests that the Commission should examine LDCs' control over citygates (primary market delivery points) and their attendant potential to exercise market power to impede retail competition. If, after having conducted this review, the Commission finds there is a lack of market power or that market power has been sufficiently mitigated, then the Commission can consider removing the maximum rate cap. The record for removing the maximum rate cap would be incomplete without affirmative proof of these market conditions."

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