US Adopts Market Rates For Gas Transportation Over Interstate Pipelines
By David Schumacher
The Federal Energy Regulatory Commission last month ordered regulated interstate gas pipelines in the United States to be more flexible in the services they provide and authorized market rates to be charged for gas transportation.
FERC took the action in Order No. 637. The order will take effect at the end of March.
It reflects the agency’s view that competition has increased enough in interstate gas markets to ensure efficient allocation of interstate gas pipeline capacity without the need for command-and-control regulation by the federal government.
The following rules will apply in future to gas transportation over interstate pipelines.
Firm Transportation Rights
Until September 30, 2002, FERC will allow holders of firm transportation capacity rights on interstate pipelines to release, or assign, these transportation rights to third parties at whatever price the market will bear, if the term of the release is less than one year.
This means that firm transportation customers, which include many independent power producers, could temporarily release their firm capacity rights at a rate above the rate that the customer is paying the pipeline for the service. However, FERC will not allow the pipelines similarly to charge rates above the maximum regulated rates for short-term transportation services that they sell directly to customers.
On one hand, this policy change could allow holders of firm capacity rights to earn a profit on the firm capacity rights for which fixed demand charges are usually paid. At the same time, those transportation customers that rely on short-term transportation services purchased on the capacity release market could see prices for such service increase above the regulated transportation rate established by FERC, particularly during peak demand periods.
In an effort to make the cost-based, regulated rates that the pipelines can charge for transportation services more accurately reflect the market value of the transportation capacity, FERC will allow the interstate pipelines to implement seasonal rates and term-differentiated rates. More specifically, pipelines will be permitted to establish rates for short-term (i.e., less than one year) firm and interruptible services that differ depending on season.
This means a pipeline could charge higher rates during the peak period over which the short-term service is being provided.
In addition, pipelines will be permitted to charge rates that vary depending on the term for which the service is contracted. For example, transportation rates for services under a ten-year contract could be less than the transportation rates charged under a two-year contract. These changes in FERC’s rate design policy will impose more price risk for transportation customers seeking to rely on shorter-term transportation services.
In an effort to make pipeline services more market responsive, the interstate pipelines will be required to implement imbalance management services and limit the assessment of imbalance penalties to instances when necessary to maintain reliable service. While this new policy should provide shippers with more flexibility to utilize the pipeline system to manage their gas flows and reduce the impact of imbalance penalties on the end-users’ cost of gas, it also may require shippers to purchase additional services from the pipelines to manage imbalances.
FERC is requiring the pipelines to disclose more information about the transportation arrangements they enter into with their customers. Among the information that each pipeline will now be required to provide publicly, upon entering into a transportation transaction, is the name of its customer, the rate being paid relative to the maximum rate it can charge for the service, receipt and delivery points being used, the contract quantity, and the duration of the transaction.
In addition, the pipelines will be required to provide daily information on available, scheduled and design capacity.
FERC’s intent is to create a more transparent transportation market, which it believes will have the effect of mitigating pipeline market power. However, from the perspective of the pipelines’ customers, FERC’s requirement may result in the disclosure of sensitive commercial information, including specially-negotiated rates.
FERC has decided to maintain its right-of-first refusal, or ROFR, procedure, which allows shippers having a firm transportation contract of at least one year in duration and requiring payment of the maximum approved rate for service to retain the capacity rights available under the contract at the end of the contract’s term by matching the highest rate bid (up to the applicable maximum regulated rate) and the longest term bid (up to five years) for that capacity.
By keeping this policy in place, shippers with long-term contracts will have the means, as a matter of law, to retain their firm capacity rights when their contracts expire.
FERC believes that further changes to its policies may be necessary as the open-access transportation markets become more mature. Therefore, FERC will be convening public conferences during the year to discuss whether its policies need to change to increase liquidity in the gas markets, whether changes in its policies are needed to accommodate increasing convergence in the gas and electricity markets, and whether its policies regarding the design of pipeline rates need to be further revised to enhance quality and efficiency of pipeline services.