PRODUCERS

Proposal Tilts Playing Field Against Producers Brian T. O’Reilly and Richard G. Morgan

Interstate pipelines have submitted some innovative gas sales proposals to the FERC, directed toward retaining and expanding the merchant function of the pipelines. For its part, the commission has encouraged such novel sales programs under the guise of enhancing competition and resolving difficult cost issues for the pipelines.

The commission is guided by its belief that there exists a level playing field for gas sales within the industry. The reality is that the field was never level for producers/ shippers trying to compete with pipelines system sales. Indeed, producers/shippers are faced with a playing field increasingly tilted against them as a result of the new gas sales proposals by pipelines. For their part, producers/ shippers are well advised to remain abreast of develop ments involving such proposals, and to participate in commission proceedings when practicable. The most re- Cent of such proposals concerns Panhandle Eastern Pipe- line Company. [For the viewpoint of LDCs about this proposal, see Moring’s column in this issue.]

The Panhandle Proposal On May 3 1,1989, Panhandle filed its concept of a new

gas sales proposal with the FERC. Panhandle proposed a seasonal sales program (SSP) effective from July 1,1989, through March 31,1991. The new program was prompted by Panhandle’s declining gas sales and a $49-million expense reflecting Panhandle’s deferred-purchase gas balance in Account 191. The Account 191 expense accu- mulated primarily as a result of Panhandle’s purchasing

Brian T. O’Reilly is an associa&, specicrlidng in energy, in the Washington o r u e of the IawjGm Lone & Mittendo$ O’Reilly re- ceived his undergraduate degree from LcMoynr Colbge and his h w degree from Emory Univer- sity. He works closely with Richard G . Morgan, a partner at Lone & Mittendorf, who is the other columnist for producer inatters.

gas at one price and selling it at a lower price. Under FERC regulations, Panhandle could seek to defer the charge or to collect the expense through a surcharge to its sales custom- ers. According to Panhandle, the surcharge would equal about $1.53 a dekathexm.

Disdaining both options, Panhandle created a seusonal delivery allowance aimed at collecting the Account 191 balance through added charges to gas sales customers. Specifically, Panhandle will make gas sales to its custom- ers at commodity rates that equal the total of (1) the average prices for spot sales in the mid-continent area based on three indices, (2) a fuel charge, (3) Panhandle’s ACA and GRI charges, and (4) a seasonal delivery allowance for the peak and off-peak seasons that varies depending upon the zone of =delivery.

The spot price of gas will be tied to three market-rate publications for the Texas Panhandle area. Because Pan- handle is a major purchaser of gas in the area, the company will have a significant impact on the spot price reported in the indices.

The seasonal delivery allowance is a negotiuted charge to be added to the spot price of gas. In Panhandle’s Zone 1. for example, the peak maximum allowance will be 84.15 cents a dekatherm for the period from November through March; the off-peak allowance for the period from April through October will be 44.11 cents a dekatherm. The seasonal delivery allowance will recover Panhandle’s nongas costs, including some transportation costs and the Account 191 balance.

Tilting the Field By itself, the SSP might not tilt the playing field against

producers/shippers competing for sales to Panhandle’s customers. Panhandle has built in a “hammer,” however, which effectively forces its customers to buy from Pan- handle. Under the SSP, at the company’s oprion it may suspend the entire program if aggregate customer pur- chases fall below 90 percent of the “good faith” commit- ments to purchase gas for two consecutive months. This effectively creates a minimum purchase obligation on the part of the customers. Panhandle’s “hammer” is the $49-

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million expense in Account 19 1. If sales fall below the 90- percent requirement, the company may terminate the pro- gram and may direct-bill the Account 191 balance. There- fore, Panhandle’s customers have every reason to partici- pate in the SSP to avoid payment of a separate Account 19 1 surcharge.

On June 30, 1989, the commission accepted the Pan- handle filing and allowed it to go into effect, subject to refund, on July 1, 1989. The commission did modify the proposal by adding certain notice and filing requirements. The commission required Panhandle to give notice to its customers if they fall below the Wpercent purchase re- quirement. In addition, the commission required that Pan- handle file a request with the commission that its PGA be reimposed as a condition for Panhandle’s termination of the SSP and reimposition of its PGA.

Commission Support The commission’s order is important for its several

startling observations. First, the commission claimed that the proposal will have no impact on Panhandle’s existing

. . . Panhandle’s 90-percent purchase requirement is tantamount to a minimum bill that may give Panhandle an unfair competitive advantage for gas sales.

gas-purchase contracts. Second, the commission opined that the program does not give Panhandle an unfair com- petitive advantage in the marketplace. Third, the commis- sion rejected several requests for a hearing on the proposal. In fact, the commission established no additional proce- dures for reviewing the proposal.

One week after the order was issued, a group of produc- ers/shippers and end users filed for rehearing of the order. The group raised many arguments concerning the seasonal sales program. Noting that the program is effectively a gas inventory charge, the group contended that there was no showing of a competitive market and that there were no safeguards imposed on the program to preserve fair com- petition for sales to Panhandle’s customers. On those points, the group claimed that the commission had clearly erred when it refused to order a hearing evaluating those issues.

Analysis Notwithstanding the commission’s insistence to the

contrary, Panhandle’s Wpercent purchase requirement is

tantamount to a minimum bill that may give Panhandle an unfair competitive advantage for gas sales. This would seem to contradict the commission’s claim that the SSP will not affect existing producer contracts. The SSP will most certainly damper! wellhead purchases by Panhandle customers. At a minimum, Panhandle’s 90-percent pur- chase requirement should be examined further.

The producer/shipper and end-user group also noted that the seasonal delivery allowance includes nongas trans- portation costs, a situation which creates an additional competitive advantage for Panhandle. This point is most persuasive. It is difficult to see how there can be compara- bility in transportation rates between the Panhandle pro- gram and third-party transporters on the Panhandle system. There is inherent cross-subsidization in the SSP, because a portion of the transportation costs allocated to the transpr- tation service to be displaced by the SSP is included in the price of the gas sold to Panhandle’s customers. The net effect is to place producers/shippers at a further disadvan- tage by making it impossible to determine what the actual transportation charge under the SSP is.

Conclusion Panhandle’s proposal and the commission order leave

producers/shippers with a much smaller potential market on the Panhandle system. The commission’s level playing field is an illusion, so long as pipelines maintain an eco- nomic stranglehold on their sales customers. In this case, if the customers fail to purchase sufficient gas, Panhandle will simply withdraw the program and, presumably, will seek to recover the Account 191 balance through a sur- charge to the same customers. It is disturbing that the commission failed to fully appreciate the impact of its order, It is even more disturbing that the commission refused to order a hearing to explore these issues more

The fact that the program is permitted to take effect subject to refund does not protect producers/shippers from the unfair competitive advantage in the marketplace given to Panhandle. As the group seeking rehearing correctly notes, ‘““here are no refunds for lost opportunities denied through the exercise of monopoly power by the Pipeline over its sales customers, resulting in discrimination against producers and marketers who are trying to compete with Panhandle.” The angle of the already tilted playing field is increased under Panhandle’s seasonal sales program and, unfortunately, there is little solace to be had for producers/ shippers already straining under the regulatory inequities being imposed upon them in the marketplace.

fully.

16 NATURAL G A ~ E P T E M B E R 1989