A top-ranking FERC official last week dismissed suggestions thatthe Commission was dragging its feet on key pipeline projects thatwould ship natural gas to the Northeast – namely the proposedMillennium, SupplyLink, MarketLink and Independence lines. “…[W]elove new pipelines,” said Richard O’Neill, director of the Officeof Economic Policy, “but we don’t want these new pipelines to turninto stranded costs.” 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 FERC that they need to build “lotsand lots” of new capacity to accommodate a 30 Tcf market down theroad. But “the concept may very well be that you can embrace a 30Tcf market without embracing lots of new construction because a 30Tcf market” essentially would come from electricity, the demandfor which is greatest in the summer when pipelines have idlecapacity, O’Neill said at the National Association of RegulatoryUtility Commissioners’ (NARUC) winter meeting in Washington D.C.

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 that current types of ratemaking policies – such asthe cost-of-service model – have made it too easy for pipelines toover-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 that federal governance of both thegas and 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 to familiarizeitself with RTOs and quickly. “If they don’t understand RTOs andhow RTOs work and how they [the gas companies] are integrated intoRTOs in regional electric markets, they’re going to lose themarket. In order for gas to compete in the electric market, theyhave to be able to deal with the hourly markets that are occurringin electricity and even the daily market. And we don’t have goodmarket institutions in the gas area to deal with that.”

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