FERC'S MEGA-NOPR DRAWS FIRE FROM COASTAL CORP. EXECUTIVE

An official of Coastal Corp., Houston, has urged the U.S. gas industry to push for changes in a proposed federal rule that would unbundle gas pipeline services. Coastal Pres. James R. Paul told the Natural Gas Association of Houston the Federal Energy Regulatory Commission issuance of its unbundling order will disrupt service for gas customers.

Dec. 2, 1991

4 min read

An official of Coastal Corp., Houston, has urged the U.S. gas industry to push for changes in a proposed federal rule that would unbundle gas pipeline services.

Coastal Pres. James R. Paul told the Natural Gas Association of Houston the Federal Energy Regulatory Commission issuance of its unbundling order will disrupt service for gas customers.

The proposed order first appeared in what has been dubbed mega-NOPR for notice of a proposed rulemaking in FERC's drive to deregulate the U.S. gas industry. Notice of the impending order has sparked a debate among industry segments (OGJ, Oct. 14, p. 25).

The Coastal chief executive said, "We believe the rigid standard of restructuring now contained in the mega-NOPR will kill competition, cramp innovation, introduce inefficiencies, and disrupt the industry to an unprecedented degree."

If FERC issues the rule in its present form, gas pipelines will be required to break out their services--gathering, transmission, and marketing--so producers, shippers, and consumers can choose and pay only for the services they want.

That's the wrong move, Paul said.

He warned that issuance of the proposed rule will restrict customer options by outlawing bundled service contracts while unnecessarily changing a system that has worked well for nearly five decades. "If it isn't broken, don't fix it."

Bundled service contracts have resulted in the ability of pipelines to guarantee supplies for peak demand periods, Paul said.

In addition, constantly shifting regulations create uncertainty among investors, he said. "Since 1978, the propensity of regulators to constantly change a gas system that worked well has created tremendous uncertainty in the investment community."

UNINTENDED SIDE EFFECTS

Paul predicted severe, unintended side effects from the proposed rule change:

"Watch the independents drop out, watch investors turn down requests for capital for some and raise the cost to all, watch profits flow to the majors, and watch what happens when one of those Canadian blasts moves into Minnesota, Wisconsin and Michigan, dumping that invigorating arctic air into midwest and east coast cities.

"When a local distribution company tries to buy more gas at a pooling point 1,200 miles or 1,500 miles away, when customer pilot lights shut off because of low pressure, when factories shut down, and schools send the kids home--then you'll know the mega-NOPR just won't work."

Paul said curtailing customers' rights to purchase bundled services would transfer to the customers the burden of managing peak day demand.

Only the biggest producers would have enough supplies to contract efficiently for delivery to the cities, he said, and even the largest producers would not be able to react to peak period demand at single points.

"Local distribution companies and state regulators now stand to take the fall if peak day service falters," Paul said.

"Local distribution companies will assume all the risk management offered by the old, bundled sales service contract ... In this new world, a cold front--even one that misses the local distribution company's service area--will trigger buying at premium prices to cover the just-incase situation."

MAJORS, INDEPENDENTS

Paul also predicted smaller, independent producers would be hit hard by the rule change while major producers profited.

He said small producers typically have relied on pipeline companies to buy their production, blending it into larger streams.

"When majors take over pipeline capacity and customers, the new level playing field will put independents out of bounds," he said. He added the number of U.S. independent producers dropped from 13,000 in 1982 to fewer than 5,000 today because of earlier unfavorable regulations.

"You can imagine the terms the majors will offer a local distribution company or any other customer when (current) purchase contracts expire," Paul said.

"Today, pipelines manage capacity and are closely regulated by FERC.

"In the new world, large, unregulated sellers will control capacity and charge what the traffic will bear--the classic monopolistic pricing policy you read about in economics 101."

PAUL'S ALTERNATIVE

As an alternative to mega-NOPR, Paul proposed that the U.S. gas industry pull together to formulate a comprehensive, industry initiated approach that would benefit customers and all industry segments.

"I am convinced we must eliminate the squabbling and sit down, hash out a real energy industry policy and sell it."

Paul said such a policy should focus on the consumer, help large industrial users meet global competition, encourage a healthy, responsible gas industry, and balance benefits to various segments of the gas industry.

"The ideal solution will definitely not maximize any one segment's hoped-for big kill," Paul said. "What's best for all won't necessarily be best for one in the short run."