Lower costs and the opportunity to control their own supply arestill the main drivers of industrial bypass of local distributioncompanies, the energy manager for U.S. Gypsum told state regulatorsyesterday.

“The ultimate bypass is when the industrial picks up and movesout of state,” warned Robert B. Cooper. “The states need torecognize that industrials provide jobs, tax revenues and communitybenefits even if they bypass.”The message was delivered at thewinter meetings of the National Association of RegulatoryCommissioners (NARUC) in Washington.

U.S. Gypsum operates 30 plants in 30 states and is a processuser of natural gas. Currently the company uses 30 Bcf/year “andthat is growing.” As long as LDCs charge as much as 85 cents/Dthto move gas two miles, there will continue to be bypass.Distributors need to “get with it,” Cooper said. He said hiscompany generally can recover the cost of building a bypass line insix months to a year and a half, paying only a few cents for thepipeline connection, compared to 50 to 85 cents to the LDC. “Weemploy a lot of people and we’re in a very competitive business. Wedon’t have large margins. If we shut down a plant, that means 200to 400 people out of jobs.”

Besides the cost, Cooper said, the plant needs a stable supplyfor its manufacturing operations. “We want secure, long-term firmtransportation,” he said, adding the company has taken permanentcapacity release from three to four utilities already.Too oftenLDC deliveries to industrials are interrupted.

LDCs meanwhile, continue to accuse pipelines of cherry-pickingtheir best customers. Also, FERC’s straight fixed variable (SFV)rate scheme for pipelines conflicts with the volumetric rates ofmost LDCs and promotes uneconomic bypass, according to Tom Skainsof Piedmont Natural Gas. Appearing on a panel with Cooper at theNARUC meeting, Skains objected to FERC’s paper hearing process,saying without discovery procedures LDCs have trouble identifying”uneconomic bypass at subsidized costs.”

There should be complementary policies between federal and stategovernments, i.e. FERC should move away from SFV. LDCs often end upproviding free stand-by service for large customers who get most oftheir supplies off-system. Skains also objected to the federalcommission’s method of determining when a contract demand reductionis necessary for an LDC which is losing a customer to a pipelinebypass. FERC only recognizes a need for CD reduction if thecustomer had previously had a firm contract with the LDC. Mostdistributors don’t have contracts with their customers, Skainssaid. They serve them under tariff schedules so it is difficult toprovide the information for FERC. Cooper complained that theservice under those schedules without a contract simply means anindustrial customer’s gas can be interrupted and in some casesconfiscated without notice.

Meanwhile, things are looking up. Cooper said he had been in thegas business since 1985. “Each year the industry becomes moreeffective, more creative and more successful at moving gas aroundto make the system more effective.”

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