FERC's Notice Of Proposed Rule-Making (A Dever Device In Disguise For The Reduction Of The Cost Of Canadian Natural Gas In The U.S.A And Canada)
Authors: Fruehauf Winfried 
Published: March 2010

An Unlikely Ally

To date, Canada's efforts to reach a consensus on market-responsive natural gas (gas) pricing have achieved little perceptible progress but for the delineation of special interests. However, now there is hope for a real breakthrough, because the United States Federal Energy Regulatory Commission (FERC) issued its 'Notice of Proposed Rule-Making' (NOPR) on May 30, 1985. If implemented, as proposed, it has the capacity of changing the face of North America's gas map and of reducing the cost of Canadian gas both in the U.S.A. and Canada.

NOPR-Its Objective

Few documents issued by FERC have stirred up as much controversy as the NOPR. Its thrust is directed at the deregulation of interstate gas pipelines (pipelines) after partial decontrol of field prices on January I, 1985, as mandated by the Natural Gas Policy Act (NGPA) of 1978. Among the cries of hallelujah and condemnation of U.S. respondents to the NOPR, Canada's responses seem to be 'damning it with faint praise'. In a nutshell, the NOPR aims at the reduction in user prices of gas by fostering market forces designed to create viable and sufficiently competitive gas markets that are currently suppressed by the 'rolled-in' pricing of decontrolled and still controlled gas. Depending on the mix of such gas, pipelines are capable of purchasing gas whose field prices had reached heady levels of up to $10 – $11/mm Btu.

The rolling-in of high- and low-cost gas increases the average cost of purchased gas to levels that fail to give appropriate market signals to gas suppliers, and that are punitive to U.S. gas users. Apparently, the NOPR also seeks to encourage the thriving U.S. spot market of gas as well as voluntary contract carriage of gas by pipelines. Implicit in the NOPR is the encouragement of pipelines to become increasinglyquasi-railroads for gas owned by third parties by shedding the pipelines' ownership of gas from their transportation function (unbundling issue).

Unbundling of gas ownership and transportation functions of pipelines would pave the way to displacement sales (swaps) of gas in lieu of physical transportation of gas molecules from a specific source to a specific destination in separate or dedicated pipelines. North America's gas pipelines have much to learn from the electric power industry that has practised displacement sales for a long time. Such sales will minimize transmission costs, increase the utilization of existing pipeline capacity and discourage the construction of new pipelines. The latter may send shivers down the spine of North American pipelines believing that the maximization of rate bases is an end and a virtue in itself. The pipeline mergers that have occurred to date or are in progress reveal the foresight of tomorrow's successful pipelines, because they facilitate, under a single corporate roof, gas swaps from coast to coast, and from the Gulf of Mexico to and perhaps beyond the Canadian border.

Essence of the NOPR

What is the essence of the proposed rulemaking (PR)? It focuses on four issues:TransportationTake-or-pay (t-o-p)Optional, expedited transportation certificates (OETC)Billing mechanism for ‘old’ and ‘new’ gas supplies.