In a ground-breaking move yesterday, FERC proposed lifting theprice caps on capacity in the short-term market and allowingpipelines to negotiate the terms and conditions of service withtheir customers. These, as well as other proposals, represent themost comprehensive review of the Commission’s gas regulations sinceOrder 636.

“We have bitten off quite a lot today,” said Chairman JamesHoecker in issuing a notice of proposed rulemaking (NOPR) onregulation of short-term transportation services and a notice ofinquiry (NOI) on regulation of interstate gas transportationservices. He noted that FERC took “both courageous and cautious”steps in the NOPR and NOI, which are the by-product of nearly ayear of debate.

Those in the gas industry who expected something “radical orone-sided” will be “sorely disappointed,” Hoecker said. While theydo not rise to the level of Order 636, the NOPR and NOI represent a”new focus” in making the gas market more responsive. The NOPRproposes removing the price caps on short-term (less than one year)firm, interruptible and capacity-release capacity [RM98-10]. TheCommission hopes to put short-term firm and IT on a more equalfooting with capacity release. In return, it calls for interstatepipelines to conduct daily auctions of their available capacity.The pipes, according to a FERC staffer, would be required to sellthe capacity on a daily basis even it were below their maximumrate. The Commission took this move because it realized that theprice caps limited the amount of pipeline capacity available duringpeak periods, and didn’t protect customers from market power, thestaff member said.

The NOPR also proposes that pipelines be allowed to negotiateterms and conditions of service in both the short- and long-termmarkets, provided they don’t degrade the quality of existingservices, result in undue preference, or hinder capacity-releasetransactions. Pipelines have been lobbying for the authority tonegotiate services ever since they were permitted to negotiatetheir rates. Commissioner William Massey pointed out the NOPRquestions whether negotiated terms and conditions will be viable ina short-term market with daily capacity auctions. The NOPR alsotakes a close look at how the Commission determines “need” whencertificating pipeline projects, and whether affiliate contractsshould be viewed differently in the certification process.Moreover, it proposes the removal of the five-year matching termfor right-of-first-refusal.

The NOI, on the other hand, questions whether traditionalcost-of-service rulemaking for the long-term transportation marketstill is viable [RM98-12]. It takes a look at rate indexing andincentive rates as possible alternatives. In addition, it asks thegas industry to comment on the future of straight-fixed variablerate design. Comments on the NOI and NOPR are due within 90 days oftheir publication in the Federal Register.

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