PIPELINES

A Pipeliner Looks at LDCs

Richard G. Smead

If you’ve read the biography under my picture in the last couple of issues, you’ve noticed that I’ve left Tenneco to join Colorado Interstate Gas Company (CIG). As I continue my pipeline column from my new viewpoint, the opinions I express will, as before, be my own, not neces- sarily those of my employer. Of course, as before, I’ll try not to write anything that gets me unemployed.

Things look a little different here in the foothills of the Rockies than they did in downtown Houston. My focus is on CIG, a regional pipeline serving the m a where I live. I’m relearning the implications of working for my local gas company, implications that were very familiar to me during my ten years at Washington Gas Light.

The first implication, and the most pleasant, is that I once again have a direct economic stake in the success of my own city. If Colorado Springs attracts anew business, and that business bums gas, CIG does better. If we’re successful in helping to clean up the air on the Front Range of the Rockies by converting people from wood to gas logs, CIG does better. That feels good. It’s not just selling gas to Yankees a thousand miles away.

The second implication, though, isn’t quite so pleas- ant, especially for a Rate Guy. In Houston, selling gas to Yankees (of whom, of course, I am one), I could be alocal hero if I managed to bring more money into Texas by successfully raising rates. But here in Colorado Springs, I’m hardly going to brag to my neighbors about raising their residential gas rates.

Richard G. Smead h a s been di- rector of rates for the Tenneco Gas Pipeline Group. In early December, he accepted a posi- tion with Colorado Interskate Gas, a subsidiary of Coastal Cop., as vice president of rates. He holds a bachelor of science degree in mechanical engineer- ingfrom the University of Mary- land and a law degree from George Washington University.

What Does This Have To Do with LDCs? It’s this second implication of my move that brings me

to the subject of my column this month: local distribution companies. There’s been a lot of speculation over the last year or so that the FERC is out to get LDCs, viewing them as the last bastion of a perceived anti-competitive utility mentality. Of course, the commission doesn’t have any jurisdiction over the local distribution of gas. It does, however, have an enormous ability to make life difficult for LDCs.

This subject has always been close to my heart. I spent five years as a very active member of AGD, probably the most militant and successful of the LDC trade associa- tions. In AGD, we were acutely aware that the voting consumer didn’t care about pipelines, he didn’t care about producers, he especially didn’t care about the FERC-he was mad at his local gas company if prices went up or supplies got short.

Thus, we worked hard to blame our upstream pipe- lines for anything that went wrong. We did a good job, and as everyone knows, AGD has become such a major force in national gas policy that the remand of Order 436 was entitled AGD v. FERC.

How Are LDCs Perceived Now? Now, however, pipelines have adapted to the world in

which we find ourselves. We’ve become effective com- petitors, doing whatever it took to do so. No pipeline of which I am aware thinks it has a lock on its market. Its prices must be competitive, and its service must be respon- sive. The perception, however, is that LDCs have not yet been fully exposed to the competitive pressures that we pipelines have experienced.

About a year ago, a colleague of mine at Tenneco was on a panel with an executive of a major New York utility. My colleague forever endeared himself by saying to an audience that included representatives of the New York Public Service Commission: “I’m really confused. I take gas from deep-water offshore Louisiana to White Plains, New York, for fifty cents, and then you carry it across town

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for two bucks. Who’s the real problem here?”

Who Is the Real Problem? Well, who is it? If you talk to LDC executives, times

sound pretty tough. They’ve had layoffs; they’re watch- ing every cost. The LDCs with a significant fuel-switch- able industrial load have been discounting to whatever it takes to keep the load. But meanwhile, if you really want to get an LDC executive talking fast, just mention bypass.

The breach of the LDCs franchise area by any kind of pipeline is a matter of almost religious significance. Why? Because the industrial and power-generation customers most subject to bypass are making substantial contribu- tions to the LDCs fixed costs.

If the bypass occurs, those fixed costs have to be reallocated to somebody else, primarily residential cus- tomers, or else the LDC is going to eat those costs. As an executive of a regional pipeline, I can certainly understand a reluctance to invite such a reallocation if it can be avoided. When you get that LDC executive to place the blame for bypass pressure, he almost always says, “It’s the way the PUC makes me allocate costs.”

Cost Allocation vs. Cost Level Chairman Hesse has been quoted suggesting that if

LDCs can’t clear the market against a competing pipeline, they should just learn how to make less money. That’s fine if the problem is a matter of average cost level. If an LDC’s costs are simply too high to compete, they have to be reduced without impairing service. Having gone through that exercise for the last five years, I cannot say it’s any fun.

But the problem in most states is not one of average cost level. It is a problem of cost allocation. After all, if a pipeline can serve a high-load-factor industrial customer cheaply enough to make that customer’s effort to switch worthwhile, the LDC must be charging costs for which that customer is not really responsible. The pipe, com-

pression, administration, and gas supply necessary to serve the same type of customer are not that different for a pipeline or an LDC.

What Is the Real Problem-and Where Is Bypass Going?

What’s happening is that the industrial customer is being required to pay for average gas cost that includes the cost of meeting winter peaks for residential customers; he’s being required to pay for the costs of older urban distribution systems; and he’s being required to pay for the average unit cost of administering several hundred thou- sand customers who each use about a hundred thousand cubic feet a year. This cross-subsidization through charg- ing large customers on an average basis has been a very easy way for state commissions to keep residential utility bills lower than they ought to be, but it is the primary driving factor behind bypass efforts.

Most states realize this and are in various stages of trying to tilt things back to where large customers pay something more closely tied to the cost of serving them. Since such cost-based rates mean charging more to resi- dential customers, however, it is a very delicate political situation. That makes for a slow process, and industrial customers trying to compete in a world market do not have the time-they need cheaper service now.

Where the problem is one of improper cost allocation, state commissions have to bite the bullet immediately and reallocate costs. Failure to do so will result in an irresistible pressure for bypass, even when the pipeline would prefer not to bypass. Under open-access transpor- tation, we do not have any choice.

Where the problem is one of inordinately high LDC costs, which even with proper cost allocation will not clear the market, it is the LDC that will have to bite the bullet of cost reduction, and I can tell you it is not a sweet-tasting bullet.

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