The natural gas industry’s views on whether FERC should continue to waive price caps on short-term capacity release transactions beyond the Sept. 30 expiration deadline are, at best, mixed so far. But customers in the West are adamant — they want price caps, at least in some limited form, reinstated in markets served by El Paso Natural Gas and Northwest Pipeline.

Those who favor removing the price cap on short-term releases (less than one year) permanently, or extending the current waiver for a couple more years, include local distribution companies (LDCs), some interstate pipelines and state consumer advocates. Opposed are major gas producers and industrial consumers, particularly those in the Pacific Northwest [PL02-4].

Gas customers in the Southwest and Pacific Northwest, citing constrained pipeline capacity in their markets, offered alternative proposals. The Arizona Public Service Co. and Pinnacle West Energy Corp. said they favored FERC’s experimental waiver of the price ceiling on capacity-release transactions, except in the case of the capacity-short El Paso system. They called on the Commission to reimpose the price cap on the El Paso system for at least the remaining term of the pipeline’s global 1996 settlement with its customers, which expires in 2005.

Because FERC failed to “mandate” the seasonalized turnback of capacity as part of its plan to re-allocate capacity on El Paso, Arizona Public and Pinnacle contend that El Paso’s contract demand shippers are holding onto “unneeded capacity with the expectation of reaping financial benefits in the [uncapped] release market.” They believe a return to price caps in El Paso’s case may spur the shippers to make pipeline capacity more readily available to the Southwest market.

Northwest Industrial Gas Users (NWIGU), a group serving the Pacific Northwest markets, believes that the “most prudent course” for FERC would be to reinstate the price cap on short-term releases. If the Commission should decide otherwise, however, they proposed that the agency adopt a “reasonable” compromise for the western gas markets.

Specifically, NWIGU urged FERC to adopt a “price cap of three times the tariff rate” on short-term releases for all pipelines serving the western and Pacific Northwest regions over the next two years. “When FERC imposed [a] soft price cap for western electric markets, it recognized that the western United States faces unique energy challenges.” This uniqueness applies to the gas markets in the Pacific Northwest, where the majority of customers are captive to a single pipeline — Northwest Pipeline, NWIGU said.

“A price cap for short-term release capacity set at three times the tariff rate would provide shippers with some degree of protection, while still enabling holders of capacity to charge greater than tariffed rates when capacity is constrained. Adopting this compromise as part of this experiment would limit volatility in an area in which there is not sufficient pipeline competition to protect customers from market abuse,” NWIGU said.

The industry comments were in response to a FERC staff white paper, issued in early June, that reviewed the performance of the capacity-release market during the two years in which the agency’s experimental waiver of the price cap was in effect. Staff sought comments on whether the Commission should continue the waiver, which expires on Sept. 30.

In the nearly two years since FERC lifted the price ceiling on short-term release transactions, staff found there was only a marginal effect on capacity-release prices and volumes. Specifically, it concluded that transportation capacity released at above-cap prices accounted for only 2% of all capacity-release deals (including long-term transactions) and released volumes, while the average release rates were never more than $0.03 MMBtu/d higher than what they would have been with prices still capped.

Indicated Shippers, which included ExxonMobil, Shell Offshore, Conoco and Chevron U.S.A., attacked the data in the staff report, calling it “flawed and incomplete” and insufficient to show that uncapped rates for capacity releases would be just and reasonable. They support a return to capped rates in the release market or, in the alternative, continuing the existing experiment for two more years so FERC can “collect complete and useful data to determine whether the rates charged are just and reasonable.”

But “it appears that certain markets are so uncompetitive that removing the price cap…even on an experimental basis might lead to rates that are unjust and unreasonable,” the producers said, citing the markets served by Transcontinental Gas Pipe Line as an example. “The data made available in Transco’s rate case demonstrates that there are few, if any, effective competitive alternatives for customers seeking capacity during many time periods in a number of markets served by Transco’s system.”

In contrast, the American Gas Association (AGA), which represents LDCs, said FERC staff’s data “clearly indicate” that the Commission’s decision to remove the price cap on short-term deals was appropriate. “Overall, the analysis by staff illustrates a capacity-release market that is vibrant, competitive and fully utilized without the price cap in place.” It asked FERC to remove the rate ceiling on a permanent basis or, in the alternative, to continue the experimental waiver for five more years.

The “current lack of consumer, regulatory and market participant confidence in energy markets warrants another two-year experiment with this [price-cap waiver] policy during which time the Commission should continue to closely monitor, and collect data, on [release] transactions,” said the National Association of State Utility Consumer Advocates.

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