KEY U.S. GAS POLICY ISSUES AWAIT ACTION BY FERC DURING 1991
Patrick Crow
Washington Editor
The Federal Energy Regulatory Commission expects to decide several key U.S. natural gas policy issues this year, absent much of the controversy over its actions in recent years designed to inject competition into gas markets.
Chairman Martin Allday said his goal is to allow "competitive forces to work through the marketplace to maintain the appropriate balance between supply and demand in the pipeline and producer program.
He said, "This will be accomplished through continued implementation of policies related to construction certificate requirements, rate design, and restructuring pipeline service obligations, and phased deregulation of wellhead prices."
FERC is grappling with the issues of pipeline rate design, comparability of service, and pipeline permitting changes while continuing to administer rules governing marketing affiliates and gas inventory charges.
PIPELINE RATE DESIGN
FERC has been trying to reconcile its historic cost based ratemaking approach with its goal of shifting to a market based approach.
In May 1989 the commission issued a rate design policy statement to guide pipelines on what designs would be considered "just and reasonable" in the higher competition atmosphere following FERC's shift to open access transportation.
FERC has been exploring the issue since then and held a public conference on the matter last January. It appears to favor rates that assign more costs to rates for firm, peak service, and fewer costs to rates for interruptible, off peak service.
The commission is considering whether pipelines should have different rates for different seasons, reflecting seasonal demand for capacity, and whether they should eliminate dual charges for peak usage and annual usage.
It wants pipelines to offer discounted summer rates that are not subsidized by other rates, lower interruptible service rates, rates for backhauls and exchanges available to all shippers, and separate rates for gas storage, gathering, and processing services.
The rate design policy statement is being implemented in individual pipeline rate filings. The Interstate Natural Gas Association of America says, "Pipeline attempts to comply with the rate requirements of open access transportation have either been delayed or have met with opposition."
Separately, FERC also is encouraging transmission lines to file for incentive rates. A FERC staff report found the current requirement for a new rate case every 3 years is a disincentive for pipelines to make long term investments in more efficient operations because, it said, any savings would flow to their customers in the next rate case.
It recommended a base rate be set, then adjusted automatically. But pipelines say that would penalize lines that are more efficient than the industry average and raises problems of how to set inflation and productivity indices.
ALLDAY'S GOALS
Reacting to one complaint raised in the January rate design conference, Allday ordered the FERC staff to bring uncontested rate settlements before the commission within 45 days after they are certified.
He said, "My goal is to do nothing in our ratemaking that hinders the best use of the pipeline system now that wellhead price controls will disappear by 1993.
"We have moved forward in the last 2 years. We have approved 27 settlements under the policy statement. These settlements, tailored to individual pipelines, were not just business as usual.
"Some of the changes were new ways to bill monthly demand charges, some seasonal rates, lower interruptible rates in over a third of the cases, capacity adjustment mechanisms in nearly half of the cases, and unbundling-separately charging for separate pipeline services-in some form in five cases."
William Scherman, FERC general counsel, recently told the Senate energy committee, "Since May 1989 we have spent considerable resources promoting efficient pipeline rate designs. The primary focus is to design pipeline rates to ration peak capacity and maximize throughput."
He said 68 rate design policy statement cases have been completed or are in various stages of the hearing process.
"In general, the cases presented to the commission represent a wide variety of results. But flexibility has been the key as parties in different cases have adopted different solutions based on pipeline operations and customer needs to implement the commission's rate design policy. Clearly, experience has shown that there is not one, but many solutions."
OIL PIPELINE RATES
Allday said the commission is shifting to "light handed regulation" of oil pipelines that serve competitive markets.
That policy, which will be applied case by case, was set forth in the commission's Buckeye Pipeline Co. decision of Dec. 31, 1990.
Buckeye is one of the country's largest independent oil pipelines, moving products through a 3,400 mile system across 10 states in the Midwest and Northeast.
FERC partially upheld Buckeye's c!aim that market forces, not the commission, should set rates in some of the 22 geographical areas on its system.
The commission decided Buckeye did not have enough market power in 15 of the markets to control prices, and the markets should be allowed to function there.
Buckeye had asked FERC to approve a 5 year experimental program to allow the market to set rates in competitive market areas, rather than FERC applying its stricter ratemaking standards.
FERC decided to apply the experimental system for 3 years, with caps on rates. It generally approved the thrust of Buckeye's plan, which would use price changes in markets where the pipeline lacks significant market power to set caps for price changes in areas where it does have market power.
MARKETING AFFILIATES
Another current issue at FERC is the operation of its marketing affiliates rule, issued as Order 497 in mid-1988.
At a FERC hearing, commissioners considered numerous orders on compliance and standards of conduct filings under the marketing affiliates rule.
Commissioner Jerry Langdon noted FERC has received a number of complaints about situations in which pipelines and their marketing affiliates share the same employees.
Langdon said the pipelines should be more diligent on the reporting of shared personnel. "I think the pipelines ought to know we like to be aware of who those people are and what jobs they have, and I think that ought to be one of the things we look hard at."
Scherman said the FERC staff will begin random sampling of pipelines' electronic bulletin boards to determine how much information is available and how pipelines and their marketing affiliates are separated.
Langdon and Commissioner Branko Terzic said the commission will review that report and the operation of the marketing affiliates rule before reporting requirements expire Dec. 31.
Pipelines say the marketing affiliates rule has placed their affiliate companies at a competitive disadvantage, and the rule is unnecessary due to the increased competitiveness of the gas market.
COMPARABILITY OF SERVICE
Sometime this spring, FERC is expected to unveil a major, proposed rulemaking on "comparability of service" issues, which will include some pipeline rate issues. Allday said a final rule will be issued within a year.
The notice of proposed rulemaking (NOPR) said the rule would require comparability between an open access pipeline's firm transportation and firm sales services. It also would require pipelines to offer open access contract storage.
The rule may discuss scheduling, penalties, handling of imbalances, and methods of allocating receipt point and mainline capacity. It would require that firm transportation customers of downstream pipelines be assigned firm capacity on upstream lines.
Ingaa said, "The concept of comparability of service implies that interstate pipeline customers should be able to choose either firm transportation service or firm sales service based on market considerations and not regulatory factors. Thus, the terms and conditions a pipeline offers in its firm transportation service should be comparable to the transportation service it provides itself as a merchant."
It said pipelines want comparability rules to be flexible enough to apply to different types of pipeline systems, while allowing them operational flexibility and control.
LARGE RULEMAKING SEEN
Allday predicts the proposed rule on comparability will be a large one.
"It's going to deal with an awful lot of thorny issues," he said. "At the heart of it will be two of the biggest questions of all: What is the pipelines' service obligation and role in the future of the industry, and what is the commission's role in guaranteeing the structure of the industry?
"I hope this NOPR will finish-at last-the transition that gas markets entered 5 years ago and will be a foundation industry can build on for a new era of full and open competition.
"I hope it will put an end to government guarantees that can't be enforced. All the obligation-to-serve in the world didn't conjure gas out of the ground for interstate markets during the 1970s.
"Most of all, I hope this NOPR will recognize clearly and decisively that we have entered a new era in the gas industry, where the terms of gas supply are up to the seller and the buyer and not any government body, and pipelines can go on offering gas supply as well as transportation, provided they compete on an even basis with everyone else."
Scherman noted, "Service obligations and comparability of service are perhaps the most critical elements preventing further progress toward a truly market based gas industry. As with rate design, there is more than one approach to comparability.
"Several issues appear to be critical elements to any debate about comparability. Customers must have adequate access to storage and to transmission capacity on upstream pipelines, in production areas, and on main lines.
"There must be reasonable, predictable allocation methods to apportion capacity among shippers. Terms and conditions of service, such as scheduling requirements and imbalance penalties, must not impose a greater burden on shippers than on purchasers.
"Capacity curtailment provisions should treat sales and transportation customers equally. And finally, there is unbundling of each of the transportation services embedded in sales service."
PIPELINE CERTIFICATES
A continuing, major issue at FERC is how to speed the commission's approval process for pipeline construction.
Last August FERC issued an NOPR on pipeline construction certificates. A final rulemaking is expected this spring. Some of the changes have been placed in effect on an interim basis.
FERC is under pressure from Congress to speed its review of pipeline applications. The Bush administration's proposed National Energy Strategy and other energy policy legislation propose changes in FERC's process, and a House government operations subcommittee has conducted oversight hearings on the subject.
Scherman said, "The August proposal increased the dollar limits for self-implementing construction under the existing blanket certificate program and created an expanded blanket certificate program that would allow construction of mainline capacity costing up to $50 million. It reformed environmental filing requirements so applicants will know beforehand what environmental information is needed."
Allday said since August 1990 FERC has approved construction of more than 1,260 miles of pipeline with combined capacity of nearly 2 bcfd and a cost of $1.5 billion.
"We also have issued 13 preliminary determinations for new construction projects," he said. "And the commission has issued final orders on two of these. The remaining 11 deals represent more than 2,600 miles of new pipe with a combined capacity of almost 5.5 bcfd. These facilities will cost another $2.5 billion to construct.
"To bring all this into context, between fiscal years 1988 and 1991 the commission approved 120 major construction certificates with total capacity of nearly 12.6 bcfd. These facilities represent a $7 billion investment in more than 7,300 miles of pipeline. We're not just throwing paper out the door either. Much of what we've approved in starting to go into the ground.
"While we've made great progress, we still have to act faster. We will continue to try to act on preliminary determinations for new construction applications within 120 days after the filing of a complete application. And we will continue to try to consider all necessary certificate authorizations for applications to meet proposed in-service dates."
ENVIRONMENTAL REVIEWS
A key problem in certifying gas pipelines is obtaining environmental reviews required by law.
Allday said, "The commission's ability to process applications seeking to build and operate new natural gas pipeline facilities is largely dependent on how fast the commission can conduct a proper environmental review for the numerous proposals it receives.
"This process can be costly and time consuming, especially where the applications are for large facilities in environmentally sensitive areas. Thus, in many instances, the environmental review process sets the pace for how fast the commission can process and consider applications it receives.
"It is clear that given the number of applications currently on file, as well as those expected for fiscal 1992, the time it takes to conduct proper environmental review may be hampering the commission's ability to review these applications in an expedited manner."
FERC officials have asked Congress to make it the lead federal agency in conducting and determining what is necessary for environmental review for lines.
INVENTORY CHARGES
FERC will continue to consider gas inventory charges (GICs) for major pipelines this year. It has approved five.
GICs resulted from decontrol of interstate pipelines. That allowed customers to use interruptible transportation to buy low priced spot market gas rather than taking pipeline system supply.
FERC requires pipelines to bear the cost of maintaining system supply to satisfy their service obligations, but customers have no obligation to buy the gas or pay the cost of maintaining its availability. GICs allow lines to recover the cost of maintaining system supply.
A GIC requires a customer to nominate the level of firm sales service it wants a pipeline to provide. If that level is lower than before, the reduction in contract volumes is automatically abandoned, and the pipeline no longer has to stand ready to provide that volume, thus avoiding take or pay liabilities associated with the unsold volume.
Two forms of GIC have been advanced. One is based on purchase deficiencies with respect to a customer's nominated volume and the second on a holding charge or demand charge for inventories reserved by a customer.
The American Gas Association says GICs must be approved for all pipelines as soon as possible.
It said, "In January 1980, local distribution companies (LDCs) purchased 83% of their total peak month supplies from pipelines. But in 1991, LDCs anticipate purchasing only 56% of their peak month supplies from pipelines.
"As a result of this decreased demand for system gas, pipelines have released large volumes of gas and/or sold their company owned gas reserves. Between 1980 and 1990 there was a 58.6% drop in reserves owned or committed to pipelines, from 88.6 tcf in 1980 to 36.7 tcf in 1990."
SLOW PROGRESS
Allday recently said, "A year ago I thought GICs would finish the movement to a fully competitive market for natural gas as a product. That movement began more than a decade ago with the Natural Gas Policy Act and has gotten stronger with each passing year."
But he said GiCs haven't worked out as well as he wished.
"We always knew there were several prerequisites for market based GICS, including: the pipeline shouldn't control so much of the available gas supply that it could either get monopoly profits from its own gas sales or stop its own customers from buying gas elsewhere, and the pipeline had to offer other sellers the same quality transportation service it gives itself.
"Those principles are still right. That's what it takes for the pipeline to shoot straight and play fair in the market.
"But when it came to making comparable service work, we kept running into problems. You could sum it up this way: There is a whole structure of regulation and contracts based on the assumption that the pipeline is the primary seller of gas. That was fine 30 years ago when the pipeline did own almost all the gas it transported.
"But now, every time you try to get a fair solution you run into all the agreements people built over the years and were enshrined in the commission's regulations about the pipeline's role. Most of all, you run into assumptions about the pipeline's obligation to serve its customers: what sort of service, how long, with what set of mutual obligations.
"The problems aren't easy to solve. And they crop up everywhere."
PREDICTABILITY OF RULES
The FERC chairman said the main goal of the commission this year will be to reestablish predictability in regulation. He pointed out that the entire gas industry is fundamentally long term.
"Whether you're sinking a well into the ground, buying a gas fired heater, or building a pipeline, folks are paying a lot of money now and often they need some reasonable assurance about the future."
He said FERC cannot control fluctuations in the gas market, "but we should try to remove anything that adds to unavoidable risks. That's why we must let people make the prudent deals they want without fear the government is going to come back later and pull the rug out.
"I think we've made some progress on predictability this past year. I hope the time and care we're putting into rate design, the obligation to serve, and comparability will lay the foundation for far more predictability in the future."
Copyright 1991 Oil & Gas Journal. All Rights Reserved.