FERC will address the remaining gas policy changes on its platebefore the end of the year, Chairman James J. Hoecker saidyesterday, confirming what other commissioners have indicatedrecently. But some of the main dishes originally on the menuprobably will not show up at the table because most of the industryfound them indigestible, Hoecker told attendees at the 55th annualmeeting of the Interstate Natural Gas Association of America inAventura, FL.

Mandatory auctions of IT, released and short-term firm capacity,and the removalof the price caps in the secondary market will be”teed up for further consideration either in the form of futurepolicy statements or further requests for comment,” he said.

“Clearly the task of gradually incorporating market factors intoour regulations, which the INGAA Foundation would have us do, mustbe a goal that we achieve in increments,” said Hoecker, stressingthat auctions and the removal of secondary market price caps”should not be declared dead but rather works in progress.

“We can already see that some auctions work effectively. Thatmay not make them universally workable now. The solutions to theissues such as their costs and the need for a reserve price areclearly going to require further consideration.”

The industry is not ready for these changes, he acknowledged.”Despite some serious anomalies in our own regulations, the marketis working pretty well. You people are saying to us ‘OK just leaveit well enough alone. Don’t mess around too much.’ So for the timebeing all of us would be more comfortable watching electricrestructuring,” which he noted is gaining momentum on Capitol Hill.

However, that isn’t going to stop FERC from refining itsregulatory model. Despite the industry’s current reluctance to takebold steps, the NOPR experience has been beneficial and will giveFERC more solid ground to work on the next go-around, Hoecker said.He said the Commission’s recent actions should not be construed tosuggest it will approach policy in the future “on an ad hoc basis.

“In my view, the Commission is progressing very deliberatelytoward a market-oriented regulatory model” that fosters competitionwhile protecting captive customers. The best way to continue inthis direction is “through establishing some kind of bifurcatedsystem [with] market-priced services for customers [where pricingis transparent and alternatives are there] and price-controlledservice for captive customers.” Captive customer rates would beestablished independently from pipeline revenues for market-basedservices. “Captive customers would no longer see their ratesincrease due to discounting or make up revenue shortfalls becausecapacity holders did not renew contracts,” he said. Part of thisthinking has already surfaced in the Commission’s recent policystatement on restricting rolled-in pricing on pipe expansions.

The effort to continue toward a more market-oriented regulatorymodel will also require the Commission to be more aware of marketsignals. Some of the areas where FERC expects to make the next tierof changes toward this market model of regulation would include notonly auctions and price cap removal but also term-differentiatedrates and the need for greater flexibility in pipeline serviceofferings. FERC also knows it needs to “take a fresh look at rightsof first refusal,” said Hoecker, particularly in so far as theunderlying basis for such protections begin to disappear with thegrowth of retail competition.”

“I think that once LDCs are satisfied that their obligations atthe retail level are protected through the durability of securecontracts on the interstate system, mechanisms which areessentially regulatory in nature, like right of first refusal, willtend to disappear.”

“I don’t have all the answers, but I envision that revenuerequirements will be less important in setting pipeline rates, thatthere will be fewer price caps on short-term services, that theCommission will be engaged in market monitoring in terms of settingrates up front prospectively in those markets that are competitive.

“We may migrate away from a secondary market that is highlyregulatory in nature, in terms of capacity release, towardsomething that really is capacity brokering.”

The Commission has in focus many of the components that willlead to a more market oriented regulatory approach. That marketmodel “must become the Commission’s North Star,” said Hoecker.

“The Commission is moving its Natural Gas Act responsibility ina particular direction incrementally looking for efficiency gains,looking to help companies make the most economically efficient andenvironmentally responsible decisions they can make so that thenatural gas marketplace continues to increase its scope andvitality.”

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