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FERC Warned Against Underestimating Pipe Monopolies

October 12, 1998
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FERC Warned Against Underestimating Pipe Monopolies

A regulatory expert last week called on FERC to impose a moratorium on awarding market-based rates for primary transportation capacity due to the expected continued "monopoly" nature of major interstate pipelines.

Despite the "fundamental structural changes" proposed by the Commission, "in the near [term] pipelines will continue to have market power so that the FERC should not approve market-based pricing for any significant portion of any major interstate pipeline," said Pam Prairie, director of the Institute of Public Utilities at Michigan State University, during the seventh annual DOE-NARUC natural gas conference in Pittsburgh, PA.

Although "the wholesale transportation market has come a long way," it is "still a far cry from being workably competitive with respect to transportation, storage and primary capacity markets," she told state regulators and gas industry executives. "For all practical purposes, interstate natural gas delivery systems remain a monopoly just as they have been for the past 50 years."

That interstate pipelines retain market power was confirmed by FERC last month when it denied market-based transportation rates to Koch Gateway Pipeline. The decision marked the first time that the Commission had considered a request for market-based transportation rates on a major long-haul gas pipeline. In 1996. it approved similar rate authority for KN Interstate Gas Transmission's Buffalo Wallow system, but that involved short-haul transportation.

Despite the "growing number of second and even third pipelines [into] many regions of the country, incumbent pipelines continue to have a disproportionately larger share of the firm transportation market." There are "significant barriers" that prevent competing pipeline projects from entering into new markets. "...[I]t's very difficult to build a duplicate pipeline at prices that compete with the incumbent's prices," Prairie noted.

This isn't to say there haven't been significant pipeline expansions in recent years. But despite these, "[incumbent] pipelines continue to maintain market power both in terms of [the] share of the long-term firm capacity market...and with respect to their ability to exercise market power through discriminatory prices," she said. Even in markets where there are alternative pipelines systems available for customers, "the number of competing pipes suggest that what we have is a tight oligopoly rather than a fully competitive market."

Susan Parker

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