U.S. INDUSTRY SPLIT ON GAS PIPELINE ISSUES

Producers have urged the Federal Energy Regulatory Commission, at a hearing examining pipelines' future role in the U.S. gas industry, to adopt generic rules. Pipelines, however, urged FERC to consider comparability of service issues case by case. The agency plans soon to initiate a rulemaking on comparability of pipeline services. Martin Allday, FERC chairman, said it will include provisions to ensure that open access to pipeline transportation achieves its full competitive benefits.

May 27, 1991

5 min read

Producers have urged the Federal Energy Regulatory Commission, at a hearing examining pipelines' future role in the U.S. gas industry, to adopt generic rules.

Pipelines, however, urged FERC to consider comparability of service issues case by case.

The agency plans soon to initiate a rulemaking on comparability of pipeline services. Martin Allday, FERC chairman, said it will include provisions to ensure that open access to pipeline transportation achieves its full competitive benefits.

An additional issue will be "whether particular rate design methodologies, including but not necessarily limited to fixed variable or so-called enhanced fixed variable, are necessary to ensure fair and competitive treatment for all potential sources of natural gas," he said.

U.S. independent producers claim rates must be altered to deny Canadian gas an advantage over domestic gas supplies.

"I believe this country is going to need Canadian natural gas supplies how and in the future," Allday said. "I'm not against Canadian gas, but I am for design fairness."

Late last month FERC reversed itself and decided to allow new pipeline projects in the Northeast to use a full fixed variable rate design rather than a modified fixed variable rate design. The commission will consider applying a full fixed variable rate design to all U.S. pipelines.

PIPELINES' STANCE

The Interstate Natural Gas Association of America and American Gas Association came to the FERC hearing in agreement on nine principles for comparability of service.

Michael Baly, AGA president, said, "These principles set out a framework for achieving comparable transportation and sales services in an economically efficient and cost effective manner. We are proposing these principles to promote competition and thereby protect consumers from unnecessary costs."

Jerald Halvorsen, Ingaa president, said the principles would encourage gas exploration, development, and production through long term contracting and place a greater emphasis on economic efficiency in pipeline services.

Baly and Halvorsen urged FERC not to impose a mandatory framework but allow pipelines and their customers to voluntarily reach settlements. They said given the differences in pipeline systems and the varying needs of their suppliers and customers, "a generic application of comparability is neither necessary nor possible.

"The objective of comparability should be to develop services that are reasonably equivalent to sales service at the city gate for all customers."

They said efforts to instill competition in the pipeline merchant function would be directed at upgrading firm transportation services, and existing settlements and restructuring should not be undermined or delayed.

They said FERC should not abrogate existing service agreements with firm sales customers and should allow pipelines to maintain an economically viable merchant function in order to serve small customers.

Baly said, "AGA agrees with FERC that service comparability is an important component of the open access transportation program. The focus of comparability must be to ensure that customers can freely choose whether to buy gas from their traditional pipeline supplier or from an alternative supplier."

He said settlements filed with FERC in recent years "show the innovative service options that industry members can agree to as long as FERC does not mandate a specific approach for implementing service comparability. A cookie-cutter approach simply won't work."

Ingaa also advised against a generic rule. "In order for competitive forces to work, regulations should establish guidelines that allow pipelines and their customers to make economic choices for their systems while meeting a set of principles that achieve the result of comparability."

PRODUCERS DUBIOUS

The Natural Gas Supply Association offered 10 principles for comparability. It said pipelines should split their services into separate merchant and transportation functions.

"Each sale and transportation service--gathering, processing, storage, transmission, balancing, peaking, etc.--must be separately identified and made available and priced based on pipeline costs attributable to that service alone."

It said the pipeline-transporter should provide some form of physical or "paper" pooling of gas.

NGSA said no pipeline service should subsidize another. For example, the pipeline's gas costs, including take or pay or buyout/buydown costs, should be recovered only from those buying gas from the pipeline.

The Independent Petroleum Association of America urged FERC to reform pipeline rate structures. Denise Bode, IPAA president, said U.S. use of the modified fixed variable rate design places more pipeline fixed costs in commodity rates than do Canadian rate designs (OGJ, Apr. 29, p. 36).

"The result is that foreign gas is taken preferentially to domestic gas because it has a lower commodity rate in those markets served by both supplies.

"This rate tilt becomes more pronounced when new pipeline facilities are involved. Applying a modified fixed variable rate design favors the construction of projects involving imports over the expansion of domestic pipelines."

She said a comparability of service rule would help "prevent the pipelines from using their monopoly control of transportation facilities to gain advantage in sales.

"We recommend that the commission adopt a set of minimum standards regarding the terms and conditions of service, with pipelines being free to propose more flexible terms.

"One important area the commission should include in its definition of comparability is gas accounting. Our members are not paid until the pipelines' accounting systems certify that volumes were delivered. Unwarranted delays in accounting for production have cost our members dearly."