Imperfect though it may be, Federal Energy Regulatory Commission Order 636 seeks changes essential to the health and growth of natural gas markets. It must not fall victim to ill-informed consumerism.
Congressmen are reacting with alarm to a cost shift implicit in the order's preference for straight fixed-variable (SFV) tariffs. Some want to isolate rate design from the deregulatory process and play consumerist games with it. They must keep their concern in perspective. The switch to SFV from modified fixed-variable (MFV) ratemaking should be examined in the context of its role in improving gas industry competition.
THE COST SHIFT
It's a complicated issue. By definition, SFV ratemaking will shift some costs from one type of gas buyer to another. The change applies to uninterruptible--or firm--transportation service. Tariffs for such service have two parts: a reservation charge and a usage charge. Firm customers pay the reservation charge no matter what; it entitles them to space in the pipeline. They pay the usage charge to the extent they use the space.
Tariff designs differ in how they apportion pipeline fixed and variable costs between these two charges. In SFV transportation tariffs, a pipeline recovers all fixed costs--those that don't vary with throughput--in the reservation charge. It recovers variable costs--mainly compression fuel expenses--in the usage charge. MFV tariffs assign specific fixed costs--returns on equity and related taxes--to the usage charge.
Who wins and loses in this shift of part of the fixed cost burden? If dollar costs don't change, so-called low load factor shippers pay more under SFV. For them, average pipeline use falls well below peak use, which means their total transportation costs involve proportionately more reservation charges than their high load factor counterparts. Low load factor shippers are mostly local distribution companies serving temperature-sensitive residential and commercial gas users. Hence the congressional concern.
Indeed, it's no trifling matter. FERC acknowledges the cost shift prospect in Order 636 and provides a mitigation mechanism. It's a mistake, however, to assume that because the cost burden will shift to low load factor customers, actual dollar costs for those customers must rise.
FERC thinks SFV tariffs for firm transportation will promote competition and reduce costs overall. Under MFV, two producers relying on different pipelines don't compete evenly for gas buyers. Usage charges are higher on the pipeline with greater equity in its capital structure. That's especially important to a high load factor customer shopping for gas and transportation. The usage charge disparity can be enough to swing the buyer's decision in favor of the higher cost producer. Market efficiency suffers.
IMPROVING EFFICIENCY
FERC wants to eliminate distortions like that. To the extent it succeeds with Order 636, market efficiency will improve, which means dollar costs of low load factor customers can decline even as their cost burdens increase in tariff design. There's no way to prove it will happen because no one knows how the market will value newly unbundled transportation services. But rising efficiencies usually mean falling costs.
The commission's arguments favoring SFV tariffs for firm transportation make sense. SFV rates would make competition more even than it has been under MFV tariffs in a market served by unevenly capitalized pipelines with varied rates of return. Consequent efficiency gains would lower costs for all customers. Congress should not scuttle a righteous effort by focusing on what may be a nonexistent problem.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
