FERC eyes less natural gas pipeline regulation

The U.S. Federal Energy Regulatory Commission is seeking public comment on proposals relating to several major issues facing the evolving interstate gas pipeline marketplace. In a Notice of Proposed Rulemaking (NOPR) that was the product of a year-long internal study, FERC proposed to more closely link its regulation of natural gas to the realities of the maturing post-Order No. 636 interstate marketplace, offering new approaches for protecting consumers and providing the benefits of greater

Aug. 10, 1998

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The U.S. Federal Energy Regulatory Commission is seeking public comment on proposals relating to several major issues facing the evolving interstate gas pipeline marketplace.

In a Notice of Proposed Rulemaking (NOPR) that was the product of a year-long internal study, FERC proposed to more closely link its regulation of natural gas to the realities of the maturing post-Order No. 636 interstate marketplace, offering new approaches for protecting consumers and providing the benefits of greater competition to all industry segments.

FERC Chairman James Hoecker said, "Adapting regulation to the competitive changes in the pipeline market is a necessary but difficult task that promises important additional efficiency benefits to the American consumer.

"The commission proposes toellipse maximize competition in short-term markets, mitigate residual market power, and monitor for abuses of market power. We must match regulation and market realities."

FERC observed that, 6 years after Order No. 636, which completed the unbundling of pipeline services and moved the industry toward competition, markets have become dynamic and are driven by short-term and even intra-day transactions.

"However, because residual market power still exists, providing adequate protection to captive customers remains important in the short-term market. For this reason, FERC is examining how long-term contracts can be kept attractive and what options will be available for captive customers."

Proposals

The commission proposed to induce greater competition in the short-term market, including the market for short-term firm, interruptible transportation and released capacity. It also sought comment on various long-term transportation issues.

In the notice, the commission proposed to eliminate price caps for transactions of less than 1 year while continuing cost-based regulation in the long-term market. The proposed rule is intended to create a more open and efficient short-term market while eliminating any regulation-based bias against long-term transactions.

The proposed rule would remove the price cap on released capacity as well as firm and interruptible transportation in the short-term markets, establish mandatory capacity auctions to mitigate market power and prevent price discrimination in short-term markets, and revise nomination and scheduling procedures and flexible receipt and delivery-point policies to allow released capacity to better compete with capacity in the secondary market.

It also would examine pipeline penalty provisions and operational flow orders to deter unwanted behavior without distorting shippers' choices among capacity alternatives; fine-tune reporting requirements so FERC can guard against the exercise of market power; and permit pipelines flexibility in negotiating terms and conditions of service with individual customers in a manner that would promote innovation, foster competition, protect recourse customers, and prevent undue discrimination.

FERC also is asking for comment on how to encourage the construction of new facilities to meet future demand without triggering overbuilding and excess capacity.

Second notice

FERC said these initiatives will affect the long-term market and also asked for comment on a number of additional issues.

In a companion Notice of Inquiry, FERC asked for comment on how to ensure that its policies avoid a bias against either short or long-term service; how to provide accurate price signals and the right incentives for pipelines to provide optimal transportation services; and a range of additional issues, including pricing of existing and new capacity and current rate policies.

FERC said one objective is to ensure that it does not discourage shippers from signing long-term contracts, which it said still is an important way to manage risk and protect captive customers.

It said its gas initiative depends on customers' confidence that service and rate disputes will be processed quickly and objectively, even in an era of lighter-handed regulation.

To that end, it issued a separate NOPR to improve complaint procedures in all of the industries it regulates.

Reactions

The Interstate Natural Gas Association of America said, "The commissioners are sending a clear signal that they see a vibrant natural gas market that is ready for these post-Order 636 reforms, particularly in the areas of negotiated terms and conditions and a competitive secondary market. Ingaa has long supported efforts to introduce competition so that regulations are more responsive to the needs of the growing natural gas market, and it appears the commission is doing just that."

The American Gas Association also praised the FERC actions and noted, "For several years, AGA has urged the commission to adopt lighter regulation as competitive forces take hold. For example, on the issue of negotiated terms and conditions, AGA favors allowing utilities and pipelines to negotiate individual contracts with specific gas shippers that differ from their tariff service, so long as the tariff service is not degraded in any way by the negotiated contract.

"Similarly, AGA has asked FERC to eliminate the mandate for straight-fixed variable rate design. While recognizing that SFV rates may be appropriate in some instances, capacity priced at other than SFV rates may be more marketable and assignable because it allows parties to pay for capacity as they use it."