Williams Gas Pipelines’ Lew Posekany made a proposition lastweek that would make most pipeline customers cringe in disbelief-that FERC in its quest to create a more competitive natural gasmarket should toss out some of the notions of fairness that havebeen woven into its transportation regulations over time.

“Some of the considerations about fairness that have driven gasregulation for years frankly are going to have to bite the dust,”said the senior vice president for group planning and development,who participated in a panel discussion on major transportationissues at NGI’s GasMart/Power ’99 last Tuesday in Dallas, TX.

The remark drew an immediate rise from Washington attorneyKatherine Edwards, who represents producers. “That’s the majorproblem I have with completely unleashing everything because I’midealistic enough to think that regulators still have to guaranteesome basic semblance of fairness in the marketplace…Competitionis one thing, but if by competition it means that people are freeto discriminate, and discrimination is good then I think that is agreater harm than competition is a greater good.

“I think that that’s one of the basic issues and balancing ofissues that the Commission is faced with right now. So it’s not sosimple to say everybody likes competition – hear, hear,” she said.Even a day later, Edwards still was reeling from Posekany’s bluntstatement. “That’s just sticking in my craw. It may be the mosthonest thing I’ve ever heard coming out of the mouth of apipeliner. But I think fairness is fundamental to the process andif you get away from that it would be like losing some of ourconstitutional rights.”

But Posekany countered that equal treatment and fairness werebecoming more difficult in today’s market. “I think, frankly, whatyou need to think about in differentiating markets is how tightlydo we hold on to the old equal treatment for similarly situatedwhen similarly situated gets harder and harder to find,” he said.”There’s also, frankly, the element of opportunism because at leastin my view the next 8 Tcf of load is going to be created byentrepreneurship in the downstream market…It’s going to be drivenby people out there making deals.” In order to get that business”we’re going to have to let go of some of the old concepts ofequality of treatment…”

FERC Commissioner Curt Hebert Jr. assured Edwards thatdiscriminatory behavior would not be condoned in the market. “Idon’t ever see the federal government moving away from regulationin the sense that it’s going to tolerate what will be perceived orruled as discriminatory conduct. I think you’re going to continueto have certain rules of conduct. You’re certainly going to haveaffiliate rules until and if ever you can relax them,” he told gasexecutives at the conference.

He dropped something of a bombshell when he said FERC, however,might not be the enforcer of fairness in the gas industry in theyears ahead. “I’m not sure FERC will be the agency to decide all ofthose rules in the future. It could be the Department of Justice. Ithink that’s where we’d go from here. How quickly we get there I’mnot certain.”

The future for Williams and other pipelines is in negotiatedterms and conditions, Posekany said. “Our main pitch in the NOPRand NOI is more flexibility. We think we need it to make the growthhappen and to keep the business that we got. We’re seeing peoplethat want customized deals that are tailored to meet their needs,not a standardized product that was decided on by five politicalappointees after consultation for several years with 257 industryrepresentatives, each with an equal voice but not necessarily equaleconomics.” Eventually, Williams believes that “most of theindustry is going to prefer negotiated rates, terms andconditions…”

With respect to captive customers, he noted, “they’re going tohave to be taken care of by a regulatory process that works.Whether they ought to get the benefits of innovations and economicsthat are developed for customers with entirely different economiccharacteristics…I’d strongly argue with…”

David D’Alessandro, a Washington attorney representing statecommissions, thinks FERC should bar pipelines from negotiatingterms and conditions with their affiliates, particularly affiliatedgenerating companies. “It seems that the inherent advantages thatare already built into electric company ownership ofpipelines…would only be enhanced further if pipelines couldnegotiate separate deals with their affiliates.” Posekanysurprisingly agreed, saying that “something akin to the existingantitrust laws and maybe some kind of pretty clear views of don’tsin affiliate transactions is probably necessary.”

If generation affiliates of pipelines need special customizedterms and conditions, these could be put in the pipeline tariff andmade available to all competitors of the affiliate, D’Alessandrosaid. Edwards agreed and singled out Reliant Energy as a model.Reliant, which has proposed an hourly firm transportation rateschedule to meet the needs of electric generators, seeks to offerthe terms and conditions on a pro forma basis in its tariff,enabling them to be accessed by its other customers, she noted.Edwards believes this is much fairer than pipelines negotiatingcustomized terms and conditions with individual customers, whichshe sees as a “license” to discriminate.

Posekany generally adhered to the pipeline position on FERC’sproposed auction, saying they were “more trouble than they’reworth.” But he did make a slight departure. “There are probablysituations where on individual pipelines they might work, and thepipeline and its customer base might think [they’re] a good ideaunder certain circumstances. [There’s] no reason not to let thoseevolve…but please [FERC] don’t mandate them.” Still, Williamsthinks the Commission should lift the price caps in the short-termcapacity market. Posekany contends the market has plenty ofcompetition, and the caps are depressing the true value of thecapacity.

“You [Posekany] talk about lifting the price caps, but what Ididn’t hear from you was anything on elimination of the reserveprice. What I heard was you want the upside of market-based rates,but I haven’t heard you [say you’re] willing to assume the downsiderisk of the reserve price,” said Kathryn L. Patton, senior directorand regulatory counsel for Dynegy Inc.

He conceded that most of his “brethren” at the InterstateNatural Gas Association of America (INGAA), and individualpipelines, were “very staunchly opposed” to any kind of auctionwithout a reserve price. But, he believes, “probably there aresituations where if push came to shove it [the auction] could bedone, it could be worked,” although “not most often.”

Posekany noted that most financial analysts “hate the idea of anauction without a reserve price because all it is is an opportunityto lose money.” Commissioner Hebert remarked that the reserve pricewas “the very issue that has made it tough on the auction process.”

On rate design, he said Williams came down on the side ofvolumetric rates. “The pipeline industry is split all over theplace on this…Most of the Williams’ pipelines actually wouldprefer a shift away from SFV [straight fixed variable] to more of avolumetric-based rate design simply because we think we could domore business…”

And, the pipeline welcomes greater transparency in the market.”…[O]ur position is not the same as most of the pipelines. We’reprobably a tad more radical. Our view is frankly we’re happy tohave the Commission and the staff look at anything we do anytimethey want to,” Posekany said.

“The problem I do have with transparency is really more of acommercial [nature]…in that we’re the only business in thebusiness world that when you go out and make a deal with customersthat you’re happy with, then you [have to] submit it to thescrutiny of your competitors and [their] competitors to see if theycan dream up ways” to build on it. “That process, frankly, to theinvestment community that’s looking at risking capital onbig-ticket projects is just nuts.”

Susan Parker, Dallas

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