Two prominent energy analysts have indicated their concern about some of the natural gas intiatives that FERC is scheduled to act on at its regular meeting this week, with one going as far as to say that the Commission actions may signal the return of regulation for gas.

The “threat of a move back toward heavy-handed regulation stemming from the FERC Commission’s ‘New’ agenda makes us even more cautious” about the immediate outlook for the gas market, said Donato J. Eassey, first vice president of natural gas research for Merrill Lynch.

“This new FERC agenda appears to be examining everything from ROEs [return on equities], re-regulating gathering systems, limiting secondary pipeline capacity activity, and of most concern, instilling stricter marketing-affiliate rules, which could in the extreme, lead to forced divestiture of those marketing affiliates,” he wrote in a Merrill Lynch Bulletin yesterday.

Curt Launer, who heads up the research team for Credit Suisse Equity Research, said he also had “some trepidation as…FERC attempts to tinker” this week with its existing Order 497 standards, which require business transactions between interstate gas pipelines and their marketing affiliate companies to be conducted at arms length. The Commission is expected to repond to requests by industry members, most notably pipeline customers, for proactive enforcement of the standards and expansion of the application of the standards to all affiliates [RM01-10].

Unlike Eassey, however, Launer said that “despite this concern, we remain enthusiastic about the prospects for an improving tone to the regulatory and political risks which have plagued the industry.” This optimism stems from the hearings and comments at FERC that have shown the claims of California politicians for $8.9 billion in electric customer refunds “to be out of line with facts, economics or business realities,” he noted. Chairman Curt Hebert has indicated that the Commission will take up the refund issue at its meeting on Wednesday.

Eassey is expecting “some heavy-handed” rulemaking intitiative with respect to the Order 497 standards because, he said, “that’s Pat Wood’s style.” Although Wood is fairly new to the Commission, he has “a bunch of clout,” he noted. “There’s a very good chance he’ll be the next chairman in the not-too-distant future,” replacing Hebert.

Wood’s “not going to let the grass grown under his feet,” Eassey said, adding he has a “new agenda that’s going to be very focused on gas,” which is a “shame because gas is working.” Based on what “I’m hearing…he’s not necessarily leaning toward free markets on the gas side.”

The Commission “can’t disrupt the entire gas environment because one state [California] can’t get its markets right,” the Merrill Lynch analyst said. This “is not necessarily encouraging to investors” in the gas business, he noted.

In addition to acting on its Order 497 standards, the Commission this week is scheduled to address a proposal to impose a (price and volume) reporting requirement on transporters and sellers into the California gas market [RM01-9]. The reporting requirements would target all sellers of natural gas, and interstate pipelines and local distribution companies (LDCs) that serve the California market. Under pressure from Congress, FERC proposed its plan in mid-May in an effort to determine whether any corrective action was warranted.

The Commission said its proposed action was in response to complaints seeking to re-impose price caps on short-term releases of capacity for service to the California border and to points of interconnection between interstate pipes and LDCs in the state; require sellers to state separately the transportation and commodity components of bundled sales; and to establish a benchmark price for natural gas in the United States. The complaints blamed high gas prices for the exhorbitant power prices in California during the past year.

In addition, FERC is slated to act on a proposed series of actions aimed at boosting energy supply, reducing demand and eliminating the delivery constraints that have plagued the wholesale electricity and natural gas markets in California and other western states [EL01-47].

In a draft order in March, the Commission voted to streamline regulations to encourage greater production of power, and offered incentives to retail and wholesale customers to reduce their consumption of electricity. In addition, it extended rate and other financial incentives, such as a higher return on equity (14.5%) to prompt utilities and gas pipelines to provide additional capacity for the California market in the short term.

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