Watching Government Decontracting

With Patrick Crow
from Washington, D.C.

One of the aftereffects of the Federal Energy Regulatory Commission's Order 636, which unbundled gas pipeline rates, is a trend by local distribution companies (LDCs) to reduce subscriptions of firm pipeline capacity.

This capacity turnback or "decontracting" poses problems for pipelines, which must recover fixed costs formerly allocated to departing LDCs.

Producers also are concerned the issue may force FERC to retreat from the straight-fixed/variable (SFV) rate method, a keystone of Order 636. SFV unloads fixed costs from the commodity rate, allowing lines to recover most costs through a demand charge to customers. That decreases the incremental charge to transport gas and increases netbacks.

SFV rates

In a Natural Gas Pipeline Co. of America (NGPL) decontracting case last October, FERC allowed a departure from SFV rates.

FERC has said it will not let long lines impose exit fees on departing customers, shift the cost of unsubscribed capacity to remaining customers, or insulate themselves from the consequences of unsubscribed capacity.

It has offered flexible solutions such as reduced depreciation rates, levelized rates, changes in the volumes used to design rates, and a shift from SFV.

Patricia Hammick, Natural Gas Supply Association vice-president, said, "The decontracting trend results from the increasing availability of new pipeline connections, storage facilities, and capacity management services. These have created lower cost options to year-round capacity reservation.

"Decontracting also results from the move toward LDC unbundling, now under way in 22 states. LDCs require less firm capacity as end users begin to rely on marketers and other third parties for gas supply delivery to the city gate."

She said if decontracting prompts pipelines to seek rate increases and higher reservation charges for the remaining firm customers, it would reduce the competitiveness of gas.

Decision defended

FERC Commissioners William Massey and Donald Santa defended the NGPL decision in recent talks.

Massey said FERC helped the company but cannot solve the whole decontracting problem facing pipelines.

"Traditional regulatory solutions are not the answer for the problems of a highly competitive industry," he said. "Pipelines should be responsible for marketing unsubscribed capacity and should be permitted the corresponding rewards of obtaining new markets."

Santa predicted, "We haven't seen the last of the decontracting issue. It's likely to surface on more than just the handful of pipelines we dealt with in 1995.

"Because the causes of capacity turnback may not be the same in all cases, the commission's policy will need to incorporate flexibility."

But he warned that departure from SFV rate design is no panacea for decontracting.

"This is readily apparent when one looks at the level of unsubscribed capacity on certain pipelines as well as the extent to which those pipelines have had to discount much of their unsubscribed capacity. Thus, just as SFV isn't the sole cause of decontracting, its elimination alone will not be the solution."