Industry groups disagree on FERC policy

Gas pipelines, utilities, and producers have offered the U.S. Federal Energy Regulatory Commission differing views on whether it should act to improve the financial health of the U.S. pipeline industry. At a recent FERC conference, the Interstate Natural Gas Association of America (Ingaa) said the pipeline industry must plan new construction projects now to meet the expected increased U.S. demand for gas.

Feb. 23, 1998

5 min read

At a recent FERC conference, the Interstate Natural Gas Association of America (Ingaa) said the pipeline industry must plan new construction projects now to meet the expected increased U.S. demand for gas.

Jerald Halvorsen, Ingaa president, said there are predictions of a 36% increase in gas demand to 30 tcf/year by 2010, largely due to the electric power industry's growing need for gas and U.S. efforts to reduce greenhouse gas emissions.

Halvorsen said FERC rules on how to calculate pipeline rate of return work against those goals by making it difficult for pipelines to compete in financial markets for the capital to build new projects. He said the pipelines' inability to tailor service offerings to new customers with market-responsive rates, terms, and conditions could stem the gas market's growth.

Halvorsen said, "We're using the regulatory tools of yesterday to deal with the promise of a 30 tcf industry for tomorrow. We need to discuss these issues now. Pipelines can't wait for the market to get here first."

Producers' views

David Sweet, vice president of the Independent Petroleum Association of America, urged FERC to consider whether there is any tangible evidence of a financial crisis that would warrant a change in policy.

"Not only are today's returns sufficient, but they are overly generous to pipeline investors. The commission needs to stay the course and not attempt to fix something that is not broken."

Sweet said FERC should be willing to examine whether existing returns are too high, given risks facing gas pipelines and the reduced cost of capital throughout the economy.

He said gas pipelines have experienced reduced operational risks under FERC regulations: They no longer face supply risks as pure commodity transporters; straight, fixed-variable rate design has reduced the volatility of pipeline revenue streams; lines no longer must file periodic rate cases; and they have been able to maximize returns with negotiated rates for some services.

"There is no evidence that pipelines are unable to raise the investment capital needed to meet projected demand," said Sweet. "Pipelines generate substantial funds through earnings and depreciation that could be used to fund construction.

"To the extent that equity or debt markets need to be tapped, the superior financial performance of pipeline stocks and the strong ratings of debt issues indicate that outside financing would be available."

AGA's concerns

The American Gas Association urged FERC to focus on the efficient use of existing pipeline capacity.

AGA Chairman David Biegler said, "because of the interrelationship between risk and reward, you can't reach a sound decision about financial requirements for pipelines unless pipeline regulations allow systems and markets to operate at optimal efficiency."

Biegler, who is president and chief operating officer of Texas Utilities, Dallas, said, "FERC should act to allow maximum efficiency in capacity markets rather than generically determining appropriate risk-reward balance for all pipelines."

He said that would allow the market to signal where and how much capacity should be added and whether pipelines need higher returns to attract the capital to build the needed capacity. This will also mitigate the risk of under-subscribed capacity and capacity turnback, he said.

"Good examples of steps FERC can take are eliminating the price cap and the auction requirements for the secondary market and removing the current mandate for straight fixed-variable (SFV) rate design. Without SFV, new contracts will encourage pipelines to maximize throughput and will make both short and long-term capacity more marketable and assignable. This, in turn, will enhance the efficiency of capacity markets, which will reveal where new capacity is needed."

He said AGA doesn't oppose new capacity, but that FERC should guard against unjustified cost increases to customers of existing capacity. Biegler said pipelines sponsoring new capacity should be required to accept the risk of that new capacity and not be allowed to increase their transmission rates to existing shippers that are locked into contracts and therefore vulnerable to unilateral rate increases.

Capacity turnbacks

In a separate study, AGA surveyed natural gas utilities on their projected management of existing firm pipeline capacity contracts with interstate pipelines. The survey showed that nearly 60% of local gas utility respondents plan to reduce their firm pipeline capacity contract levels over the next 5 years, while less than 15% expect to increase the amount of capacity under contract.

The survey also showed that an overwhelming majority of respondents want shorter-term contracts (1-3 years) when recontracting for capacity.

AGA said, "The report shows that capacity turnback exists today as a potential problem for the natural gas industry. To the extent that capacity turnback is driven by greater customer choice, new retail gas merchants may contract for all or part of that capacity.

"However, to the extent that these contracts are not renewed or easily transferred, pipelines, shippers, and regulators will have to devise solutions to ensure that remaining customers are not saddled with excess costs and that market-responsive solutions are put in place to facilitate the needs of customers in the new, deregulated energy environment."