Kinder Morgan President Michael C. Morgan said Thursday that changes in FERC’s policy on negotiated transportation rates could significantly limit investment in new natural gas pipeline infrastructure in the Rocky Mountains and elsewhere.

“A review of the negotiated-rate policy could chill investment in the natural gas business, and I think that’s something that FERC needs to take up very carefully,” he told energy analysts during a Merrill Lynch-sponsored conference in New York City.

“As we talk about all these expansion projects and the opportunities in gas infrastructure, a critical thing is the ability of a company to go out and negotiate rates with its customers and then commit capital on the basis of those negotiated rates. The risk/reward there is if we as a company commit and take the risk on getting the project done on time and on budget, we give our customers a lot of certainty about what their rates are going to be. That’s a pretty good trade,” Morgan said.

As a result of a notice of inquiry (NOI) begun in July 2002, FERC recently barred interstate gas pipelines from entering into negotiated-rate transactions with shippers which reference “basis,” or the difference between the gas price indexes at two points, citing the potential for pipelines to manipulate spot gas prices. The Commission further cautioned pipes that it would expect more detailed filings on negotiated-rate transactions from them in the future, and would scrutinize the deals more closely. FERC did not signal whether more changes to the negotiated-rate policy lay ahead.

As for new gas pipe projects, Kinder Morgan is focusing its sights on two areas — the Rocky Mountains and Mexico, according to Morgan. The company has a “big footprint in [the] natural gas infrastructure” in both areas. It anticipates that Mexico will be a “dramatic importer of gas over the next decade,” he told analysts.

Morgan believes Kinder Morgan is in a better position than most to fund its pipeline projects. He estimated the company can internally fund $250 million a year for expansion projects without having to go to the capital markets.

But long-term customer support for new pipeline infrastructure in the Rockies “is very slow to develop” following the disappearance of merchant energy companies — which had been big capacity holders — from the market, said Keith O. Rattie, president of Questar Corp. Producers in the Rockies are reluctant to commit to long-term capacity because of the uncertainty over land access for drilling. The process for getting permits to drill in the West actually has gotten worse since President Bush took office in early 2001, Rattie said.

Despite all of the interest in the Rockies, he said it remains one of the most under-exploited regions from a production standpoint and the most under-developed from a pipeline standpoint.

Even with “all of the enthusiasm” for liquefied natural gas (LNG) and the Alaska pipeline, Rattie is convinced that much of the incremental gas supply needed to meet U.S. demand must come from the Lower 48 producing basins. LNG and the Alaska pipe “are not the silver bullet,” he said. If there is a bullet, the Lower 48 “may be the best of the three.”

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