If pipeline and LDC rates continue their upward climb, the”inevitable result” will be a sharp decline in producers’ wellheadrevenues and a subsequent “significant loss” of natural gassupplies, an official of a major producer group said Monday.

The producer’s warning was based on an analysis outlined in theDepartment of Energy’s Energy Information Administration (EIA)Annual Energy Outlook for 1998, which predicted a 30 Tcf gas marketby 2015. Speaking to the Southeastern Association of RegulatoryCommissioners, Richard J. Sharples, secretary/treasurer of theNatural Gas Supply Association (NGSA),noted that pipelines andLDCs were offering proposals at FERC that ignored “critical priceassumptions” that make up the foundation of the DOE forecast.

“Simply stated, the DOE’s forecasts for growth in gas demandrequire reductions in transmission and distribution rates, notincreases,” he told state regulators. But the industry is notseeing any move in this direction so far, he said.

Specifically, the DOE projects that a market reaching 30 Tcf by2015 would see end-use prices of $3.84/Mcf, an increase of only 11cents from 1995. It forecasts the average wellhead price at$2.40/Mcf, up from $1.61/Mcf in 1995. At the same time, itsscenario sees pipeline and LDC margins – or rates – dropping to$1.44 Mcf from a 1995 level of $2.13 Mcf. And, DOE projects thatall needed additional pipeline capacity to service the 30 Tcfmarket will be built under these price assumptions, noted Sharples,also president of Anadarko Energy Services.

Even if pipeline and LDC rates were simply to level off – ratherthan decrease – that would be a blow to producers’ wellhead prices,he said. At constant pipe and LDC rates, he estimated that wellheadrevenues would be reduced by $20 billion annually. That’s equal toabout 65% of the $31 billion that the top 50 producers spent in1997 to find, develop and acquire petroleum reserves, Sharplesnoted. “Clearly, the impact of a failure to reduce transmissionrates would be very significant on gas supply.”

Sharples challenged the pipelines’ contention that, lackinghigher rates and less regulation, they would be unable to buildsufficient pipeline capacity to meet a 30 Tcf market. Pipelinesestimate they will need to invest $25 billion over the next 12years to build the needed infrastructure. But Sharples remindedpipelines that “in the decade of 1987 through 1996, [they]successfully raised and spent $26 billion to expand capacity”without any special rate/regulatory favors.

He also questioned pipelines’ arguments that they are fullycompetitive. “I may not be a regulatory expert, but after 25 yearsin the gas business I can tell you this: interstate pipelines havebeen, are, and will remain monopolies and, as a result, must beregulated.

“This monopolistic nature of interstate gas pipelines willpersist into the indefinite future because existing, depreciatedlines have significant cost advantages relative to new pipelineprojects. As a result, new gas pipelines are built to attach newsupplies or serve incremental consumption markets, not to provide’competitive’ transportation services,” Sharples said.

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