While technical conference participants hotly debated FERC’snatural gas transportation initiatives last week, there appeared tobe some areas of agreement – starting with the need for more timeto argue.

The current style of pre-arranged capacity release deals alsoappears to have broad support, as does opposition to requiringexpensive new information systems to implement a capacity auctionscheme.

The request for extended time came from the four major tradeassociations that make up the Natural Gas Council (NGC) and twoother energy trade groups. They asked FERC for a second extensionof the deadline for industry comments on the major notice ofproposed rulemaking (NOPR) and notice of inquiry (NOI), moving thecurrent Jan. 22 deadline to April 22. [RM98-10, RM98-12]. The ideais to come up with alternatives to the Commission’s proposedshort-term capacity auction and at least narrow the differencesamong the industry segments. As of late Friday, FERC had not actedon the request.

Meanwhile pipelines offered FERC a choice regarding itstransportation proposal: either provide an option of seasonal ratesor if driven to an auction they will fight to maintain an auctionreserve price equal to their maximum rate, thereby defeating theCommission’s concept of an auction to establish competitive rates.

Pipelines dropped these alternatives into the mix at the FERCstaff’s second conference last Tuesday on the auction proposalthat’s included in the Commission’s mega-NOPR.

The Commission has proposed auctioning of short-term capacity ona daily basis as quid pro quo for removing price caps in thesecondary market. The conference, rather than resolving any of theissues, only underscored the gas industry’s universal opposition tothe auction initiative. “It’s fraught with a lot of problems, andFERC realizes this,” said a producer source.

The latest proposal to set a floor for the reserve price at thecost-of-service rate is intended “to protect the buyer and themarket from extraordinary and damaging price swings” in theshort-term market, notably during peak periods, according toLorraine Cross, senior vice president of regulatory affairs for theInterstate Natural Gas Association of America (INGAA). In effect itwould allow the auction to set a market price above the maximumlawful price (MLP), but not below it. It also would not allow thepipeline to set a reserve price above the MLP.

As currently proposed, the NOPR denies pipelines the right toset reserve prices in short-term auctions. In effect, it requiresthem to auction all available capacity to shippers, even if thebids received are below their MLP. From the pipelines’ perspective,what FERC is demanding of them is nothing short of “illegal,” saidRichard Baish, president of El Paso Natural Gas.

The NOPR “presupposes that the Commission has the power underthe [Natural] Gas Act to order a pipeline to charge something lessthan the rate that is on file [in] its tariff. Absent a findingunder Section 5 that the rate is no longer J&ampR [just andreasonable], I don’t believe the Commission has that power,” hetold FERC staff. If pipeline revenues are reduced as a result ofnew Commission policies, Baish is particularly concerned this couldunravel El Paso’s 1996 rate settlement with its customers. Underthat agreement, El Paso agreed to assume 65% of the costsassociated with unsubscribed capacity on its system, whilecustomers would shoulder the remaining 35% of the costs.

The Commission is faced with a real dilemma on the reserve-priceissue: if it institutes an auction without a reserve price, thepipelines will lose revenues and subsequently will take FERC tocourt, but if it implements an auction with a reserve price, theproducers will take it to court, said the producer source. However,”FERC is less in jeopardy of being overturned by the courts if itgoes along with a cost-based seasonal rate proposal” as opposed tothe auction, he believes.

The LDCs also cited their disdain for an auction proposal withno reserve price, saying that it would place greater risk onholders of long-term capacity. This is counter to the goal theCommission is trying to achieve as LDCs and state regulatorsgrapple with how to handle expiring pipeline contracts, saidWilliam P. Boswell, vice president and general counsel for PeoplesGas and representative for the American Gas Association (AGA). Italso could negatively affect the next stage of retail competitionat the state level.

Pipes Fear Losses

The proposal for seasonal rates, which would be optional forpipes, is expected to address a major concern of pipelines: thatthe NOPR’s bias towards the short-term market over the long-termmarket would result in the underrecovery of costs for them. “Underthe seasonal pricing model, the pipeline’s projected annualrevenues would not change [be reduced]” in the event of capacityauctioning, said John W. Somerhalder, president of Tennessee GasPipeline. Tariff rates would be set such that pipelines would beable to recover more fixed costs in the per-unit charge during peakwinter periods than in off-peak periods, he explained.

Shippers reacted cautiously to the pipelines’ two proposals. “Isaw no attempt made by the pipelines other than to push all of therisk on to the shippers,” said Jeffrey A. Holligan of AmocoProduction at the day-long conference.

Given that the pipes’ reserve-price proposal, which would allowshort-term auction prices to go above but not below the maximumrate, could mean excess revenue for pipelines, it begs the questionof what would happen to that excess revenue, said Washingtonattorney Kathy Edwards. Would pipelines keep the excess as profitor flow it back to shippers? the producer attorney asked.

Also since seasonal rates wouldn’t be mandatory, “one of thethings that I’d want to look to is whether the price signals of thegeneration market and other aspects of the energy market would bedistorted as a result of having seasonality in one pipeline,” butnot in another, said Tom Brill of Sempra Energy.

“Everybody appears to be saying this [seasonal ratemaking] isgoing to be the solution to the problem. I think what we should bereally looking at is other rate designs other than SFV, perhapsmoving to a volumetric rate [to encourage] the pipelines tomaximize the throughput in their systems,” said Kathryn Patton,director and regulatory counsel for Dynegy Inc.

Another key issue tackled by industry representatives waspre-arranged deals. Kevin Madden, director of FERC’s Office ofPipeline Regulation (OPR), questioned whether excluding capacityassociated with pre-arranged and bilateral transactions fromauctions would, in fact, render auctions meaningless. Most agreedit wouldn’t.

Auction for IT

“The capacity that I’d think you’d find remaining in theauction bloc would be the pipelines’ IT, which there’s still asignificant amount of…that [that] trades. And I think you’ll findthere’ll be some secondary [capacity] in there on a voluntarybasis,” said Denise C. Goulet of the Pennsylvania Office ofConsumer Advocate. “We’re not precluding the prospect of secondarycapacity trading in an auction process, [we’re] only saying that itshouldn’t be mandatory,” she noted.

Goulet’s group believes FERC should require pipelineinterruptible and short-term capacity to be traded in auctions, butnot released capacity. “…[W]e think release capacity marketsare…robustly competitive currently. The vast majority of therelease transactions occur at well below the maximum tariff ratefor the capacity that’s traded. We are aware of no complaints ofmarket-power abuses in this process. In addition, there is noincentive for the primary participants in the secondary capacitymarket [the LDCs] to withhold capacity from the marketplace. So theprimary premise for mandating an auction just isn’t there withrespect to the secondary market,” she said.

“Forcing secondary capacity into a mandatory auction without theability to do pre-arranged deals, without the ability to haverecall rights will not only result in fewer capacity options beingtraded because the LDCs just cannot afford to forego the right tobe able to recall capacity, but you may also find that there arefewer revenue offsets” for residential customers, Goulet said.

Some conference participants were particularly concerned FERCchanges might unravel the state unbundling programs that have beenbased on current rules. Others believe FERC has it all backwards -it should work on long-term capacity issues first and then possiblytackle an auction.

Dynegy’s Patton thinks it might be best to “relegate” the issuesraised in the NOPR, especially the auction proposal, back to NOIstatus. “Quite frankly, the NOPR has more questions thananswers….”

Susan Parker

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