The U.S. Federal Energy Regulatory Commission soon will complete its overhaul of natural gas industry regulation. As early as next month, it will put finishing touches on a far-reaching rule - called the mega-NOPR - that turns interstate gas transportation into a catalog of services. At some less definite but probably imminent date it will decide how to rescue pipeline construction from its Order 555 of last September. Successful completion of those matters will make the gas business, for the first time in history, subject more to markets than to federal regulation.
The measures will help everyone in the gas business, even producers now pummeled by a price collapse. Past regulation created a lumbering, inflexible transportation system that became a serious competitive disadvantage for an otherwise attractive fuel. FERC has been working on repairs since 1985.
THE UNBUNDLING ISSUE
The mega-NOPR segregates pipeline sales and transportation services, makes transportation available equally to all comers, and inclines FERC toward the straight fixed-variable rate design. Its unbundling provisions - which subdivide transportation services and rates - became the biggest point of contention. In general, producers said FERC couldn't achieve its goal of service "comparability" unless pipelines priced services separately and provided equivalent access to them. Pipelines worried that without bundled services they could not promise customers gas deliveries during demand spurts.
A technical conference last month seems to have convinced balky pipelines that nothing in mega-NOPR precludes their repackaging services once rates are clear. The ,measure aims to prevent cross-subsidization of services, not to deprive pipeline companies of control over their systems. With that settled, mega-NOPR can and should proceed.
Order 555 has greater problems. FERC seems to have wanted to homogenize inherently slow regulation in the interest of speed. Instead it poisoned the process.
The commission had a better idea in its seminal Order 436 of 1985. It provided for speedy non-environmental certification under Natural Gas Act Section 7(c) of pipeline construction projects in which sponsors assumed market risks. Projects able to pass environmental muster could start construction quickly if their sponsors guaranteed throughput-meaning they agreed not to seek compensatory rate adjustments if they couldn't keep the new lines full. A prospective pipeline builder thus had a choice: It could assume market risks and start construction quickly or let its customers assume the risks and wait while FERC assessed project markets and supply under traditional, slow procedures. One method relied on market discipline, the other on regulation. What was wrong with that?
UNHAPPY MIDDLE COURSE
Order 555 tries to find some happy middle course and doesn't. It imposes "at-risk" conditions - proof that pipelines can operate at capacity for 10 years - that pipelines say they can't meet. FERC is reexamining the order. This time it should build on its earlier idea: a choice between market efficiencies and regulatory protections.
Completion of the mega-NOPR process and repair of Order 555-if the regulatory products survive the courts-will at least clarify federal rules governing a new age for natural gas. At best they will enable the gas business to interpret and react swiftly to market changes-which should mean demand growth. With federal regulation shrinking, the future depends on how aggressively the industry sells its product, how intelligently it writes its contracts, and how effectively it communicates security of gas supply to utility managers and regulators.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
