FERC Commission William Massey indicated last week that heviewed the proposed initiatives in the infamous notice of proposedrulemaking issued last July with a “substantial degree ofreservation and caution.” This is not “a done deal from myperspective,” he told a group of independent gas producers.

In a speech at the annual meeting of Independent PetroleumAssociation of America (IPAA) in New Orleans, he said he was waryabout both lifting the price cap in the short-term transportationmarket, and about allowing pipelines to negotiate terms andconditions of service [RM98-10]. Also, he expressed some concernabout whether the proposed rule would be “fair to all industrysegments, including small producers.”

The debate over whether the Commission achieved a “properbalance” with this package of proposals is far from over, heremarked. It “is still very fluid. If this set of proposals doesnot achieve the right balance, then we must continue to work untilthe right balance is found.”

Despite the NOPR and other proposals emanating from FERC, Masseyassured the producers that the Commission’s “fundamental approachto regulating pipeline companies is still premised on the notionthat, because of economies of scale and barriers to entry, pipelinecompanies are natural monopolies.” He said he agreed with FERC’s”conservative approach” to pipeline regulation, which up to now hasrequired a pipeline to make a detailed showing that it lacks marketpower to obtain market-based rates.

But he conceded that FERC made an exception to this rule in theNOPR by proposing the removal of the rate cap on capacity in theshort-term transportation market even though market power stillexists there. “The NOPR argues…that the [short-term] market hasmatured sufficiently to allow the Commission to re-direct its focusaway from affirmatively regulating the market and preventingexercises of market power. By taking steps to make short-termtransactions more comparable, the Commission [hopes to] maximizethe potential for competition and be able to adopt a more passiverole where it merely mitigates market power, to the extentpossible, and monitors for abuses of market power, if they shouldoccur.” In the NOPR, the Commission proposed the capacity auctionas a mitigation tool for market power in the short-term market.

Separately, Massey indicated three proposals stand out in theCommission’s debate over how to regulate gas pipelines on the OuterContinental Shelf (OCS). “First, the Commission could declare thatall offshore natural gas facilities are non-jurisdictionalgathering, drawing the bright line between transportation andgathering at the point where the pipeline processes the gas to makeit pipeline quality. That point is onshore.”

Secondly, “we could find that most offshore facilities arejurisdictional interstate transportation, moving the bright line tothe first point in the field (after production) where processing isperformed to separate the water from the natural gas stream.” Andlastly, FERC could switch to lighter handed regulation under theOuter Continental Shelf Lands Act (OCSLA) to ensure that pipelineoperators behave in a nondiscriminatory manner when transportinggas for others. “Whether the OCSLA gives us rate jurisdiction,however, is questionable,” he said.

“Right now, I’m not sure where I stand on all the alternativeapproaches I have heard,” Massey noted, but added that threeprinciples will guide his thinking. “First, I continue to believethat, in the offshore, market power exists just as it does onshore.These are essential facilities for getting the producer’s gas tomarket. Second, I am not inclined to place a whole geographic areaof natural gas transmission service outside the scope of FERCjurisdiction. This would abrogate our statutory responsibilities toensure that the transportation of natural gas is non-discriminatoryand at rates that are just and reasonable. Third, any majorrevision of the Commission’s offshore policy must take into accountthe realities of offshore operations. It’s a harsh environment, andcompanies that construct offshore facilities are entitled to acertain degree of regulatory flexibility, such as in rates, toensure that needed facilities are constructed. At the same time,this flexibility must not compromise our commitment to ensuringnon-discriminatory access.”

Massey also assured independent producers that the Commissionhad every intention of aggressively moving forward with competitionin the electricity market, which producers are counting on to be akey consumer of gas. “Some electric market participants, frightenedby the summer’s Midwest price spikes, have urged us to retreat, toturn the clock backward. They do not believe the electric market isready for competition. There is, however, no sentiment at FERC toretreat,” he said.

“I am advocating that we move forward even more aggressively toremove obstacles to competitive markets. The solution, in myjudgment, is more competition, not less.”

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