Natural Gas Quality Standards

By Ellig, Jerry | Regulation, Winter 2005 | Go to article overview

Natural Gas Quality Standards


Ellig, Jerry, Regulation


STATUS: Petitions await FERC action

Just when consumers thought they had heard all the bad news about winter" natural gas prices, along comes an impasse that could elevate gas prices just a bit more.

Natural gas producers have petitioned the Federal Energy Regulatory Commission (FERC) for a rulemaking on gas quality and interchangeability. Producers want FERC to mandate a procedure for setting a hydrocarbon dew point (temperature at which liquids condense from the gas) for interstate transmission pipelines that do not specify one in their tariffs. A pipeline customer could seek to change the standard via a complaint, but in assessing the complaint FERC would take into account steps that the customer could take to address the problem. Producers advocate a similar approach to establish standards governing interchangeability of gas delivered by a pipeline to a given location.

Various parties may be reluctant to make additional investments (in natural gas development, liquefied natural gas import facilities, pipeline modifications, other facilities needed to alter gas quality, or gas-using equipment) until they know the standards and understand the process for determining who will shoulder what costs of dealing with gas that fails to meet the standard.

What we have here is a classic incomplete contract. If some gas has a relatively high dew point or fails to meet interchange standards, who should pay to remedy the situation? The producer or importer, who could process the gas? The pipeline, which might add some insulation to keep the gas warmer at a particular location? The industrial customer, which might modify its equipment to treat or use gas of a different quality?

In a world with clear property rights, one might expect that negotiations could resolve that question. It would be in everyone's interest that the party who could solve the problem at lowest cost would do so. …

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