A top FERC official dismissed any hint the Commission wasdragging its feet on key pipeline projects that would ship naturalgas 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 strandedcosts.” Also, he cited environmental concerns.

He did, however, appear to question the need for all of theprojects. “If these pipelines were as exciting and as importantas…other people thought, they should be filled up withcontractual obligations. Are they?” Most of the projects, hepointed out, were based on precedent agreements with pipelineaffiliates or on agreements that provided shippers with an “out” ifthey don’t get certain approvals or market support.

The pipelines keep telling the Federal Energy RegulatoryCommission they need to build “lots and lots” of new capacity toaccommodate a 30 Tcf market down the road. But “the concept mayvery well be that you can embrace a 30 Tcf market without embracinglots of new construction because a 30 Tcf market” essentiallywould come from electricity, the demand for which is greatest inthe summer when pipelines have idle capacity, O’Neill said at theNational Association of Regulatory Utility Commissioners’ (NARUC)winter meeting in Washington D.C. last week.

There are some indicators that point to too much pipelinecapacity in the market. For instance, he said 95% of the time themarket for capacity clears at a pipeline’s variable costs. “Thatsays to a traditional economist that maybe we have excesscapacity.”

He believes current types of ratemaking policies – such as thecost-of-service (COS) model – have made it too easy for pipelinesto over-build. COS inherently has provided pipelines with “a verystrong incentive for over-building because the argument is [that]you’re ‘entitled’ to…recover the capital cost of theconstruction.”

Moreover, the policy for rolled-in rate treatment hasn’tprovided a deterrent, O’Neill said, adding that it “doesn’t make alot of sense anymore” since pipelines can come to FERC with costoverruns after their projects are completed and redo their rates.

Separately, he anticipates federal governance of both the gasand electricity industries will give way to regional governanceregimes. The Commission already is heavily promoting this concept,in the form of regional transmission organizations (RTOs), on theelectricity side. “We haven’t pushed very hard on the gas side[yet], but I think the regional governance concept is a variablehere,” O’Neill said. The issue of regional oversight of gas wasraised in both the mega-notice of proposed rulemaking and notice ofinquiry issued last July.

If the gas industry hopes to capture a bigger share of theelectric-generation pie, he noted, it’s going to have tofamiliarize itself with RTOs and quickly. “In order for gas tocompete in the electric market, they have to be able to deal withthe hourly markets that are occurring in electricity and even thedaily market. And we don’t have good market institutions in the gasarea to deal with that.”

Susan Parker

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