FERC Chairman James Hoecker issued an ultimatum to warringfactions in the gas industry last week, saying it is now or neverregarding major new initiatives aimed at a more competitive market,while two other commissioners in speeches in different citiesassured gas representatives they were open to debate andalternatives. But it was not clear that anyone was listening, asindustry leaders reportedly were attempting to forma coalition toask for a second delay – this time for six months – in the deadlineto respond to FERC’s proposals. (See Late Breaking News)

Speaking to members of the Southern Gas Association, Hoeckergave the often-disputing segments of the energy industry,especially the natural gas industry, the ultimatum: either playnice and come to an agreement with the Commission on the series ofmajor proposed initiatives now facing them, or the agency will pullthe plug on comprehensive reviews in the future.

“…[Y]ou and the Commission must either come to grips with thebig issues in the coming few months or the Commission will returnto doing this job as it typically does – one rate case orcertificate case at a time,” he warned the energy industry at theconference in Pinehurst, NC, last Monday.

The simultaneous comprehensive reviews of gas and electricitythat are taking place at FERC now are a one-time opportunity thatboth industries should embrace, Hoecker said. “Unless I completelymiss my guess, it will be years before the FERC once again putssuch an array of public policy considerations on the table at onetime for open debate and resolution,” particularly in the gasarena. “…[I]t simply cannot continue to commit the same level ofresources to generic natural gas market issues that we have in thepast 15 months.”

The gas industry is going to have to get rid of its long-heldview that the business is a “zero sum game – that what goes intoone segment’s pocket as a result of a change in public policynecessarily comes out of someone else’s pocket. If a 30 Tcf marketis ever going to be attainable, the industry must stem this kind ofintramural misunderstanding in favor of a growth mentality, where arising tide can lift all boats.” Hoecker said he was encouragedthat the proposals have led to a “broad exchange of views” so faramong gas officials.

He conceded there were “numerous [and] difficult” issues facinggas. With respect to “leading-edge innovations,” like capacityauctions, many in the industry would prefer to “just say ‘no.’ Ihave even been urged to slow down or stop by a former FERC chairman[Martin Allday], who seems to think that our situation, and energymarkets generally, are static,” said Hoecker. (See NGI, Nov. 9,1998)

Responding to criticism that he is initiating too many changesat one time, Hoecker said “I want you [industry] to see, not aclutter of cases, but a strategy” when weighing the notice ofproposed rulemaking (NOPR) on the short-term gas market, the noticeof inquiry on long-term gas issues, proposals to revise FERC’scomplaint process and its ex parte rules, initiatives oncollaborative procedures for pipeline certificate cases andlandowner notification, as well as FERC’s “ambitious” electricagenda.

The strategy is three pronged: to fine-tune the interstate gasmarket and diminish market power, increase competitiveness in thewholesale power market, and make the Commission morecustomer-oriented.

Massey Wary of NOPR Initiatives

FERC Commissioner William Massey said he views the proposedinitiatives in the short-term gas NOPR issued last July with a”substantial degree of reservation and caution.” These are not “adone deal from my perspective.”

In a speech at the annual meeting of Independent PetroleumAssociation of America (IPAA) in New Orleans, he said he was waryabout both lifting the price cap in the short-term transportationmarket, and about allowing pipelines to negotiate terms andconditions of service. Also, he expressed some concern aboutwhether the proposed rule would be “fair to all industry segments,including small producers.”

The debate over whether the Commission achieved a “properbalance” with this package of proposals is far from over, heremarked. It “is still very fluid. If this set of proposals doesnot achieve the right balance, then we must continue to work untilthe right balance is found.”

Despite the NOPR and other proposals emanating from FERC, Masseyassured producers the Commission’s “fundamental approach toregulating pipeline companies is still premised on the notion that,because of economies of scale and barriers to entry, pipelinecompanies are natural monopolies.” He said he agreed with FERC’s”conservative approach” to pipeline regulation, which up to now hasrequired a pipeline to make a detailed showing that it lacks marketpower to obtain market-based rates.

But he conceded FERC made an exception to this rule in the NOPRby proposing the removal of the rate cap on capacity in theshort-term transportation market despite the existence of marketpower there. “The NOPR argues…that the [short-term] market hasmatured sufficiently to allow the Commission to re-direct its focusaway from affirmatively regulating the market and preventingexercises of market power. By taking steps to make short-termtransactions more comparable, the Commission [hopes to] maximizethe potential for competition and be able to adopt a more passiverole where it merely mitigates market power, to the extentpossible, and monitors for abuses of market power, if they shouldoccur.” In the NOPR, the Commission proposed the capacity auctionas a mitigation tool for market power in the short-term market.

Better Mousetrap?

Commissioner Curt Hebert indicated he’s open to alternatives tothe Commission’s proposal for capacity auctioning. “My feeling isthere is no secret to the recipe as long as it tastes the same inthe end. And if you have another recipe, I’d enjoy hearing aboutit,” he said at a Gas Daily conferencein Houston last Wednesday.

Hebert acknowledged the industry outcry that followed the JulyNOPR on short-term pipeline capacity. “There are a lot of people,that, quite frankly, don’t like how open you are about the auction.I, on the other hand, fully appreciate your openness on the otherissues…, and I want to make sure that [you] are heardbecause…you know how to run it [your business] better than wedo.”

Hebert urged all segments of the industry to comment on the megaNOPR. “You’ve got to make sure that the issues are fully debated.That’s your job. That’s your duty.You need to be frank andforthright because.the future of your pocketbook is going to dependon how frank and forthright you are. And coming…in after therulemaking and saying, ‘I wish you had.’ is not good enough.”

Massey also tackled issues unrelated to the policy initiatives.He indicated three proposals currently stand out in theCommission’s debate over how to regulate gas pipelines on the OuterContinental Shelf (OCS). “First, the Commission could declare thatall offshore natural gas facilities are non-jurisdictionalgathering, drawing the bright line between transportation andgathering at the point where the pipeline processes the gas to makeit pipeline quality. That point is onshore.”

Secondly, “we could find that most offshore facilities arejurisdictional interstate transportation, moving the bright line tothe first point in the field (after production) where processing isperformed to separate the water from the natural gas stream.” Andlastly, FERC could switch to lighter handed regulation under theOuter Continental Shelf Lands Act (OCSLA) to ensure that pipelineoperators behave in a nondiscriminatory manner when transportinggas for others. “Whether the OCSLA gives us rate jurisdiction,however, is questionable,” he said.

“Right now, I’m not sure where I stand on all the alternativeapproaches I have heard,” Massey noted, but added that threeprinciples will guide his thinking. “First, I continue to believethat, in the offshore, market power exists just as it does onshore.These are essential facilities for getting the producer’s gas tomarket. Second, I am not inclined to place a whole geographic areaof natural gas transmission service outside the scope of FERCjurisdiction. This would abrogate our statutory responsibilities toensure that the transportation of natural gas is non-discriminatoryand at rates that are just and reasonable. Third, any majorrevision of the Commission’s offshore policy must take into accountthe realities of offshore operations. It’s a harsh environment, andcompanies that construct offshore facilities are entitled to acertain degree of regulatory flexibility, such as in rates, toensure that needed facilities are constructed. At the same time,this flexibility must not compromise our commitment to ensuringnon-discriminatory access.”

Massey also assured independent producers that the Commissionhad every intention of aggressively moving forward with competitionin the electricity market, which producers are counting on to be akey gas consumer. “Some electric market participants, frightened bythe summer’s Midwest price spikes, have urged us to retreat, toturn the clock backward. They do not believe the electric market isready for competition. There is, however, no sentiment at FERC toretreat,” he said. Personally, “I am advocating that we moveforward even more aggressively to remove obstacles to competitivemarkets. The solution, in my judgment, is more competition, notless.”

Nor is there any retreat on electric issues expected on CapitolHill. Chairman Hoecker believes there’s a “serious possibility”that the 106th Congress next year will consider a “package ofmeasures that could range from system reliability to retailcompetition to renewable portfolio requirements to PUHCA reform andjurisdictional issues involving federal power marketingadministrations and public power.”

In the end, Hoecker said electricity will become an “even moreformidable competitor” to natural gas in the end-use markets, whileat the same time it will be an “ally of or complement” the gasbusiness in energy services markets.

Susan Parker, Washington, DC; Joe Fisher, Houston

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.