Nicholas J. Bush
President Natural Gas Supply Association
Washington, D.C.
The U.S. natural gas industry's transition to a more competitive environment continues.
And, while several major obstacles to achieving a more market based system have been overcome, the frustrations of unraveling more than 50 years of stifling regulations still surface.
Recent congressional hearings on operations and procedures at the Federal Energy Regulatory Commission, for example, raised questions about the effectiveness of this important federal agency.
An ineffective FERC would rightfully be of serious concern to the natural gas industry and as well to America's energy consumers. After all, a consensus has emerged in the U.S. that there are significant energy, environmental, and economic benefits to be gained from greater use of natural gas.
The task of formulating and implementing workable policies that will facilitate greater natural gas use rests with FERC.
How is the agency doing? On balance, very well. Can it do better? You bet. And there is much all of us who are stakeholders-the industry, Congress, and consumers can do to help in this effort.
DRASTIC CHANGES
In less than a decade the commission has had to deal with revolutionary changes in the two major industries it regulates: natural gas and electric power generation.
As assumptions underlying major energy legislation enacted in the late 1970s collapsed, significant disorder in natural gas markets became apparent.
Significant new rulemakings that charted untried regulatory practices have been the rule rather than the exception. Most of those rulemakings have been the subject of prolonged legal challenge from various parties for various reasons.
The challenges frequently have been successful-at least in part. And it's little wonder.
The commission is trying to write regulations appropriate for fast moving, competitive markets based on statutory authority that in some instances is more than 50 years old. That's like trying to win the 1991 Indianapolis 500 in a Tin Lizzie.
Individual participants and segments of the natural gas industry are making progress in shedding behavior that was too litigious. More progress is needed if the industry's most valued customers are to gain confidence in the industry's ability to perform effectively and reliably.
STREAMLINING NEEDED
The commission also confronts the realities of more recent statutory requirements, particularly environmental laws, when it tries to do things such as expedite pipeline construction. Multiple environmental laws with sweeping, often redundant, reporting requirements impose serious regulatory burdens upon an agency already wrestling with imposing operational decisions.
Surely it should be possible for Congress to streamline the environmental review process without undermining the intent of these important statutes.
The commission could streamline its own process as well. FERC's formal hearing process is too time consuming, cumbersome, and expensive.
The commission has pioneered and used successfully "paper" hearings to expedite the decision making process. This technique should be expanded.
Increased use of "technical conferences" to solicit industry views and speed the rulemaking process also would be beneficial.
PIPELINE RATE SYSTEM
FERC needs to do more than simplify its procedures. Important substantive issues remain, the most significant of which is reform of the interstate pipeline rate system.
A critical element in restructuring pipeline rates is the need to unbundle the pipelines' merchant and transportation functions.
Customers need to have the option to purchase their gas from producers, pipelines, or marketers. To be able to make that decision wisely, end users must know how much they are paying for the natural gas itself and what they are paying, or could pay, for other services a pipeline may offer.
Customers should pay only for services they want and use or are directly related to mainline transportation service, unlike today when the transportation purchaser probably is paying for storage it will never have access to or use.
In conjunction with unbundling, NGSA also recommends that services such as storage, upstream pipeline transportation, production, and gathering be unbundled and offered as separate contract services where appropriate and feasible.
Equally as important as unbundling is comparability of service.
It is imperative that the services pipelines offer sales customers also be made available to transportation purchasers. Without this comparability of services only the pipeline will be able to offer a superior form of merchant service that others can't equal, giving the pipeline an uncompetitive advantage in its markets.
The system would be made even more flexible when unbundling and comparability of service are combined with conversion of sales contract demand to firm transportation. The advantage would be that the pipeline's gas inventory charge can become one that relies primarily on privately negotiated rates tailored to the customer's needs rather than standardized rates and service that are governed by a FERC approved formula.
Similarly, regarding transportation rates, NGSA supports the commission's rate design policy statement.
RATE DESIGN CONCEPTS
NGSA feels that to make transportation rates achieve the policy goals outlined in Order 436 FERC should adopt as general principles the following transportation rate design concepts:
- The pipeline's transportation rate should have a one part demand charge component tied exclusively to the level of the customer's contract demand or entitlement. The current two part demand charges tied to 3 day peak usage and to annual nomination levels should be eliminated.
- Allocation of transportation service costs between demand and commodity should be related to reservation of firm capacity on the pipeline with respect to overall capacity availability. A dynamic demand driven mechanism should be employed in making the demand/commodity allocation and not modified fixed variable or other inflexible accounting formulas.
- The maximum interruptible transportation (IT) rate initially should be set equal to the commodity rate for firm transportation as determined by the method described in the previous paragraph. This would result in an equilibrium between firm and IT customers. FERC should discard the 100% load factor rate or any other "load factor" rate for IT customers. Even though 100% load factor rates may be discounted, the availability of discretionary discounting by the pipeline is a poor substitute for IT rates that are properly designed.
- Seasonal transportation rates should reflect the relative difference in demand between peak and off peak periods on the pipeline. Such seasonal rates should comply with the important Order No. 436 principle of rationing capacity in the peak demand period and maximizing throughout in the off peak period.
- Where appropriate, distance sensitive transportation rates should be adopted to give shippers access to more than one pipeline without incurring multiple "postage stamp" or large zone rates.
- Capacity brokering or assignment should be employed as an important adjunct to rate design reform because it provides firm transportation customers with the opportunity to offset part of their demand charges and, at the same time, provides firm transportation to new customers and shippers on the pipeline. The brokered rate should not exceed the "as billed" rate incurred by the original shipper.
Adopting these principles would create a more competitive, market driven transportation system that would benefit all segments of the natural gas industry: producers, pipelines, and end users.
FERC faces significant challenges if it is to complete its work toward achieving a more competitive natural gas industry.
Its chances for success are enhanced by the efforts of a professional, hard working, talented group of commissioners and staff.
But there is a good deal for everyone who has an interest in natural gas supply and demand to do. Now is the time to begin.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
