Who Pays, Who Benefits, and Adequate Investment in Natural Gas Infrastructure

Article excerpt


The issue of who should pay for natural gas pipeline capacity expansions and how the rates should be structured has been a subject of debate among interested parties during the past few years. The issue is whether the cost of a pipeline expansion should be borne only by the new expansion customers (incremental rates), or whether a pipeline company can spread the cost of providing the new service over all its customers, both existing and new (rolled-in rates).

On September 15, 1999, the Federal Energy Regulatory Commission (the FERC or the Commission) issued a Policy Statement, Certification of New Interstate Natural Gas Pipeline Facilities (1999 Policy Statement).1 The 1999 Policy Statement was a refinement of a policy statement issued in 1995 (1995 Policy Statement).2 Before the FERC's 1999 Policy Statement, the Commission applied a presumption in favor of rolled-in rates when the cost impact of the new facilities would result in a rate impact on existing customers of five percent or less and some system benefits would occur. The 1999 Policy Statement, on the other hand, established that the threshold applicable to existing pipelines is whether the project can proceed without subsidies from their existing customers. This generally means that expansion projects will be priced incrementally, so that expansion shippers will have to pay the full costs of the project, without subsidy from existing customers that could lead to uneconomic expansion and discourage entry by new pipeline companies. However, the 1999 Policy Statement acknowledges that there are cases where costs can be rolled-in (for instance, "inexpensive expansibility" made possible because of earlier costly construction, existence of vintage capacity, or where facilities are needed only to improve service for existing customers).3 The absence of pipeline-to-pipeline competition has also been presented as a justification to permit rolled-in pricing.

The relevant academic literature on pricing of capacity pipeline expansions, as well as the more general literature on public utility pricing, shows that the desirability of rolled-in or incremental pricing as the most efficient and equitable policy depends on the particular characteristics of the project at issue and the particular ratemaking goals the author treats as paramount. It also supports the idea of considering all of the costs and benefits of a project in the test of public convenience and necessity. Any bias in favor of incremental pricing might then prove as harmful as any bias in favor of rolled-in treatment. An analysis of the relevant economic principles and their implementation in specific cases leads to the conclusion that a generalized bias towards incremental pricing is neither economically efficient nor equitable: (i) forcing pipelines to support new projects financially without relying on charges from existing customers fails to consider that many projects create significant benefits that go beyond just direct benefits to incremental customers; (ii) it may promote inefficient subsidization from new customers to existing customers; (iii) it would promote a risk-reward imbalance among industry participants that would strongly discourage the investment in pipeline infrastructure necessary to achieve system benefits and grid efficiency; (iv) it may promote undue discrimination in favor of existing customers who impose the same incremental costs but pay lower rates; and (v) it fails to achieve an equitable sharing of the costs and benefits of new additions since existing customers do not pay for the benefits they enjoy.

The natural gas industry is currently facing short-term and long-term interrelated concerns that can have disastrous consequences on domestic manufacturing competitiveness and consumer benefits: mainly, price spikes and price volatility, lack of adequate basic infrastructure connecting supply with demand, insufficient gas supply and the high vulnerability to a numerous range of hazards (for instance, coordinated terrorist attacks on energy infrastructures, natural disasters-hurricanes, earthquakes, floods, landslides, forest fires-or unintentional human errors). …