FERC'S GAS INDUSTRY MEGA-MOVE

While attention focuses on a looming energy policy battle in Congress, developments just as crucial are under way in the Federal Energy Regulatory Commission. FERC is sifting through comments on a notice of proposed rulemaking (NOPR) aiming at nothing less than overhaul of a natural gas industry still weepingly in need of change.

Whatever its technical merits, the FERC effort, appropriately dubbed Mega-NOPR, deserves applause for scope. It tries to accomplish much all at once. The charm of this ambitious approach is that it offers each gas industry sector plenty to love and much to hate. No sector can try to sabotage the process without sacrificing something.

Yet no sector gets everything it wants, either. FERC's regulatory broadside forces producers, pipelines, and distributors to haggle over legalities now, before the regulation takes effect, instead of later, when they should be concentrating on commercial technicalities such as price, volumes, and delivery parameters. The Mega-NOPR thus might reduce the amount of future gas business conducted in FERC hearings and in court. What a welcome change that would be. What a lift for gas marketability.

THREE BROAD OBJECTIVES

The Mega-NOPR works toward three broad objectives: to separate pipeline sales and transportation service, to provide equivalent access to pipeline transportation, and to redesign pipeline tariffs. It seeks to replace the pipeline sales obligation with freely negotiated contractual obligations. It "unbundles" pipeline sales and transportation services. It pursues "comparability" in interstate pipeline transportation service and use for all gas supplies. And it favors a straight fixed-variable tariff structure over the modified fixed-variable design FERC has preferred in recent years.

Naturally, the initiative raises many questions. Will it force pipelines totally out of their already diminishing roles as gas merchants? Absent pipeline service obligations and with firm sales representing a shrinking share of the market, what will assure consumers of supply during peak demand periods? Once transportation services are unbundled and paid for, will enough value revert to the wellhead to justify production and replacement of reserves? Who will bear the inevitable costs of change? The list goes on.

Industry sectors clash over many issues. Pipelines, for example, resist a total mandate for unbundling, arguing that their ability to provide bundled service on short notice is the only way to assure distribution companies of peak-demand security of supply. Producers counter that FERC can't attain its service comparability goal without mandated unbundling and say unbundled services can be repackaged and sold as before. And although there's surprising accord on a general move toward straight fixed-variable rate design, disagreement arises over the extent to which FERC should mandate the shift.

WORTH THE STRAIN

FERC and the industry have a huge chore in sorting through these confusions and making the Mega-NOPR work. It will have been worth the strain, however, if the gas industry emerges more focused than before on the business of producing, transporting, and selling a fuel that should play a growing role in U.S. energy supply.

The Mega-NOPR caps a FERC effort that began in the mid-1980s to repair an historic perversity of natural gas economics; namely, the surplus of legal fees and political costs embedded in each BTU of delivered gas energy. Success of the effort would be good for natural gas and, therefore, for the industry that produces and delivers it. It also would represent a major advance in U.S. energy policy.