STATES REBELLING AGAINST 636, 636-A

Fear of higher natural gas prices and unreliable supplies is sparking a rebellion by some states against federal plans to decontrol U.S. gas markets.

About a dozen states have joined a petition brought Sept. 29 in the District of Columbia federal appeals court by the Pennsylvania Public Utilities Commission (PPUC) that asks for a judicial review of Federal Energy Regulatory Commission Orders 636 and 636-A.

Gas producers, pipelines, local distribution companies, and state utility and public service commissions also have filed more than 50 petitions challenging the orders in various ways.

Many petitioners say they want to encourage gas consumption in their service areas but contend FERC is trying to make gas markets more responsive in a way that could undermine gas supply reliability.

"If in fact Orders 636 and 636-A compromise the integrity of natural gas supplies, it will destroy gas as a fuel," said Bob Mussallem, chief counsel of the Wisconsin Public Service Commission (WPSC) division of gas, water, and federal intervention. Wisconsin, through WPSC, is one state that has joined PPUC's petition.

PRODUCERS BIGGEST LOSERS?

Mussallem said FERC's schedule for implementing Orders 636 and 636-A amounts to a "game of regulatory chicken" in which the biggest losers likely will be gas producers.

"If litigation causes any sort of stay by the Court of Appeals with respect to implementing 636, I can't help but believe FERC is going to have to back off," he said. "But in the meantime, it won't be good for the gas industry for customers not to know what options they have."

Mussallem said FERC, in drafting the two orders, gave too much to gas producers and interstate pipelines and too little to consumers. By rushing into implementing Order 636, the commission could touch off a transition that will be extraordinarily destructive to the consuming public, he contends.

"FERC sees this as a lightning transition to a great new world," he said. "But from this side of the table, we see it as creating even more doubt and uncertainty about the cost, availability, and reliability of gas."

Mussallem said U.S. consumers in northern states-where winter wind chills can reach -80 F. -won't depend on gas as a heating fuel if supplies are not reliable. He contends FERC policymakers do not understand how Orders 636 and 636-A will affect gas reliability.

"FERC commissioners say they've mandated reliable service and therefore it will happen," he said. "But 1 don't have any confidence that people who have made this decision have a clue as to what the real problems are going to be."

Consumers won't be willing to sign long term gas purchasing contracts until they know what the rules of the game and costs will be. As a result, Mussallem said, "I think you will find a solid wall of states across the northern tier that will be litigating one way or another against the FERC."

SERIOUS DOUBTS

WPSC especially is doubtful of gas service reliability under Orders 636 and 636-A and is very concerned about how the commodity cost of gas will be affected.

Service reliability comes into question for WPSC because of deliverability problems that arose two winters ago, when two Wisconsin communities "came seriously close to losing gas service" because an interstate transportation company "did not have adequate control of its pipeline."

"People were taking too much gas off the line and pressures at the end of the system were failing," Mussallem said. "It was only through the timely diversion of gas from ANR Pipeline that we kept gas service,

"And it was during a mild winter and not a period of peak demand."

WPSC contends 636 and 636-A would put operational control of pipelines more in doubt. FERC's mandate that pipelines provide no-notice firm transportation service to assure reliability of service "is just so much talk," Mussallem said.

"Unless there are adequate operational controls, it's an open question about whether end users will stay within their nominations and the gas will reach the marketplace,' Mussallem said.

INCREASED COSTS SEEN

WPSC frets that provisions of 636 and 636-A would increase gas commodity costs in these ways:

FERC's rapid fire implementation of the rules would create unnecessary transition costs by encouraging pipelines to pay their way out of above market contracts or other imprudent arrangements and then dump the costs onto ratepayers.
Straight fixed variable transportation rate design to be established by the orders would tend to load fixed costs of service onto peak season customers, mostly industrial end users or buyers with firm transportation capacity

Mussallem said allowing pipelines to significantly lengthen the implementation period in most cases would eliminate transition costs. A longer transition would allow shippers and pipelines to let some supply contracts expire and rearrange their supply portfolios.

"Some fixed charges might be trapped and come across, but I think most of the transition costs are tied up in the gas contracts themselves," he said.