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Hoecker Issues Ultimatum; Industry Considers Delay

Hoecker Issues Ultimatum; Industry Considers Delay

FERC Chairman James Hoecker issued an ultimatum to warring factions in the gas industry last week, saying it is now or never regarding major new initiatives aimed at a more competitive market, while two other commissioners in speeches in different cities assured gas representatives they were open to debate and alternatives. But it was not clear that anyone was listening, as industry leaders reportedly were attempting to forma coalition to ask for a second delay - this time for six months - in the deadline to respond to FERC's proposals. (See Late Breaking News)

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

"...[Y]ou and the Commission must either come to grips with the big issues in the coming few months or the Commission will return to doing this job as it typically does - one rate case or certificate case at a time," he warned the energy industry at the conference in Pinehurst, NC, last Monday.

The simultaneous comprehensive reviews of gas and electricity that are taking place at FERC now are a one-time opportunity that both industries should embrace, Hoecker said. "Unless I completely miss my guess, it will be years before the FERC once again puts such an array of public policy considerations on the table at one time for open debate and resolution," particularly in the gas arena. "...[I]t simply cannot continue to commit the same level of resources to generic natural gas market issues that we have in the past 15 months."

The gas industry is going to have to get rid of its long-held view that the business is a "zero sum game - that what goes into one segment's pocket as a result of a change in public policy necessarily comes out of someone else's pocket. If a 30 Tcf market is ever going to be attainable, the industry must stem this kind of intramural misunderstanding in favor of a growth mentality, where a rising tide can lift all boats." Hoecker said he was encouraged that the proposals have led to a "broad exchange of views" so far among gas officials.

He conceded there were "numerous [and] difficult" issues facing gas. With respect to "leading-edge innovations," like capacity auctions, many in the industry would prefer to "just say 'no.' I have even been urged to slow down or stop by a former FERC chairman [Martin Allday], who seems to think that our situation, and energy markets generally, are static," said Hoecker. (See NGI, Nov. 9, 1998)

But "largely because of competitive initiatives that he and his Commission colleagues started a decade ago, nothing could be farther from the truth. It is the very dynamism and interconnectedness of a competitive (but partly regulated) energy market that necessitates such a searching inquiry."

Responding to criticism that he is initiating too many changes at one time, Hoecker said "I want you [industry] to see, not a clutter of cases, but a strategy" when weighing the notice of proposed rulemaking (NOPR) on the short-term gas market, the notice of inquiry on long-term gas issues, proposals to revise FERC's complaint process and its ex parte rules, initiatives on collaborative procedures for pipeline certificate cases and landowner notification, as well as FERC's "ambitious" electric agenda.

The strategy is three pronged: to fine-tune the interstate gas market and diminish market power, increase competitiveness in the wholesale power market, and make the Commission more customer-oriented.

Massey Wary of NOPR Initiatives

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

In a speech at the annual meeting of Independent Petroleum Association of America (IPAA) in New Orleans, he said he was wary about both lifting the price cap in the short-term transportation market, and about allowing pipelines to negotiate terms and conditions of service. Also, he expressed some concern about whether the proposed rule would be "fair to all industry segments, including small producers."

The debate over whether the Commission achieved a "proper balance" with this package of proposals is far from over, he remarked. It "is still very fluid. If this set of proposals does not achieve the right balance, then we must continue to work until the right balance is found."

Despite the NOPR and other proposals emanating from FERC, Massey assured producers the Commission's "fundamental approach to regulating pipeline companies is still premised on the notion that, because of economies of scale and barriers to entry, pipeline companies are natural monopolies." He said he agreed with FERC's "conservative approach" to pipeline regulation, which up to now has required a pipeline to make a detailed showing that it lacks market power to obtain market-based rates.

But he conceded FERC made an exception to this rule in the NOPR by proposing the removal of the rate cap on capacity in the short-term transportation market despite the existence of market power there. "The NOPR argues...that the [short-term] market has matured sufficiently to allow the Commission to re-direct its focus away from affirmatively regulating the market and preventing exercises of market power. By taking steps to make short-term transactions more comparable, the Commission [hopes to] maximize the potential for competition and be able to adopt a more passive role where it merely mitigates market power, to the extent possible, and monitors for abuses of market power, if they should occur." In the NOPR, the Commission proposed the capacity auction as a mitigation tool for market power in the short-term market.

Better Mousetrap?

Commissioner Curt Hebert indicated he's open to alternatives to the Commission's proposal for capacity auctioning. "My feeling is there is no secret to the recipe as long as it tastes the same in the end. And if you have another recipe, I'd enjoy hearing about it," he said at a Gas Daily conference in Houston last Wednesday.

Hebert acknowledged the industry outcry that followed the July NOPR 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 other issues..., and I want to make sure that [you] are heard because...you know how to run it [your business] better than we do."

Hebert urged all segments of the industry to comment on the mega NOPR. "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 and forthright because.the future of your pocketbook is going to depend on how frank and forthright you are. And coming...in after the rulemaking 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 the Commission's debate over how to regulate gas pipelines on the Outer Continental Shelf (OCS). "First, the Commission could declare that all offshore natural gas facilities are non-jurisdictional gathering, drawing the bright line between transportation and gathering at the point where the pipeline processes the gas to make it pipeline quality. That point is onshore."

Secondly, "we could find that most offshore facilities are jurisdictional interstate transportation, moving the bright line to the first point in the field (after production) where processing is performed to separate the water from the natural gas stream." And lastly, FERC could switch to lighter handed regulation under the Outer Continental Shelf Lands Act (OCSLA) to ensure that pipeline operators behave in a nondiscriminatory manner when transporting gas 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 alternative approaches I have heard," Massey noted, but added that three principles will guide his thinking. "First, I continue to believe that, in the offshore, market power exists just as it does onshore. These are essential facilities for getting the producer's gas to market. Second, I am not inclined to place a whole geographic area of natural gas transmission service outside the scope of FERC jurisdiction. This would abrogate our statutory responsibilities to ensure that the transportation of natural gas is non-discriminatory and at rates that are just and reasonable. Third, any major revision of the Commission's offshore policy must take into account the realities of offshore operations. It's a harsh environment, and companies that construct offshore facilities are entitled to a certain degree of regulatory flexibility, such as in rates, to ensure that needed facilities are constructed. At the same time, this flexibility must not compromise our commitment to ensuring non-discriminatory access."

Massey also assured independent producers that the Commission had every intention of aggressively moving forward with competition in the electricity market, which producers are counting on to be a key gas consumer. "Some electric market participants, frightened by the summer's Midwest price spikes, have urged us to retreat, to turn the clock backward. They do not believe the electric market is ready for competition. There is, however, no sentiment at FERC to retreat," he said. Personally, "I am advocating that we move forward even more aggressively to remove obstacles to competitive markets. The solution, in my judgment, is more competition, not less."

Nor is there any retreat on electric issues expected on Capitol Hill. Chairman Hoecker believes there's a "serious possibility" that the 106th Congress next year will consider a "package of measures that could range from system reliability to retail competition to renewable portfolio requirements to PUHCA reform and jurisdictional issues involving federal power marketing administrations and public power."

In the end, Hoecker said electricity will become an "even more formidable competitor" to natural gas in the end-use markets, while at the same time it will be an "ally of or complement" the gas business in energy services markets.

Susan Parker, Washington, DC; Joe Fisher, Houston

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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