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FERC's O'Neill Questions Need for New Pipe Construction

March 1, 1999
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FERC's O'Neill Questions Need for New Pipe Construction

A top FERC official dismissed any hint the Commission was dragging its feet on key pipeline projects that would ship natural gas to the Northeast - namely the proposed Millennium, SupplyLink, MarketLink and Independence lines. "...[W]e love new pipelines," said Richard O'Neill, director of the Office of Economic Policy, "but we don't want these new pipelines to turn into stranded costs." Also, he cited environmental concerns.

He did, however, appear to question the need for all of the projects. "If these pipelines were as exciting and as important as...other people thought, they should be filled up with contractual obligations. Are they?" Most of the projects, he pointed out, were based on precedent agreements with pipeline affiliates or on agreements that provided shippers with an "out" if they don't get certain approvals or market support.

The pipelines keep telling the Federal Energy Regulatory Commission they need to build "lots and lots" of new capacity to accommodate a 30 Tcf market down the road. But "the concept may very well be that you can embrace a 30 Tcf market without embracing lots of new construction because a 30 Tcf market" essentially would come from electricity, the demand for which is greatest in the summer when pipelines have idle capacity, O'Neill said at the National Association of Regulatory Utility Commissioners' (NARUC) winter meeting in Washington D.C. last week.

There are some indicators that point to too much pipeline capacity in the market. For instance, he said 95% of the time the market for capacity clears at a pipeline's variable costs. "That says to a traditional economist that maybe we have excess capacity."

He believes current types of ratemaking policies - such as the cost-of-service (COS) model - have made it too easy for pipelines to over-build. COS inherently has provided pipelines with "a very strong incentive for over-building because the argument is [that] you're 'entitled' to...recover the capital cost of the construction."

Moreover, the policy for rolled-in rate treatment hasn't provided a deterrent, O'Neill said, adding that it "doesn't make a lot of sense anymore" since pipelines can come to FERC with cost overruns after their projects are completed and redo their rates.

Separately, he anticipates federal governance of both the gas and electricity industries will give way to regional governance regimes. The Commission already is heavily promoting this concept, in the form of regional transmission organizations (RTOs), on the electricity side. "We haven't pushed very hard on the gas side [yet], but I think the regional governance concept is a variable here," O'Neill said. The issue of regional oversight of gas was raised in both the mega-notice of proposed rulemaking and notice of inquiry issued last July.

If the gas industry hopes to capture a bigger share of the electric-generation pie, he noted, it's going to have to familiarize itself with RTOs and quickly. "In order for gas to compete in the electric market, they have to be able to deal with the hourly markets that are occurring in electricity and even the daily market. And we don't have good market institutions in the gas area to deal with that."

Susan Parker

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