Natural Gas Industry Restructuring Unbundling of 636

When FERC issued Order No. 636, known as the "Restructuring Rule," in April 1992, the Order was designed to improve the industry's ability to compete effectively for new markets by allowing more efficient use of the interstate natural gas transmission system. Its purpose was to increase competition among gas sellers and diminish the perceived monopolistic market power of pipeline companies.

This deregulation initiative shifted the gas purchasing responsibility from the pipeline to the LDC or end-user. These gas purchasing entities, which have traditionally relied on the pipelines for gas supply purchase logistics as part of the bundled service package, now must contract for these services separately or improve their own gas supply market intelligence so they can participate successfully in this new deregulated market.

A shift of regulatory responsibilities has also resulted from the Restructuring Rule. State regulators have taken on an increased oversight responsibility for gas supply related matters and have seen the need to work more closely with LDCs to evaluate the risks, pricing features, and other particulars of future natural gas supplies.

The restructuring under Order No. 636 has provided the natural gas industry with increased flexibility to respond to new marketing opportunities. Other details of the major provisions of Order No. 636 include:

• Pipeline companies that provided bundled city-gate firm sales service on May 18, 1992, now must offer a new "no-notice" firm transportation service (i.e., service that does not require advance notice by the shipper).

• Pipeline companies must provide open-access transportation that is equal in quality for all gas supplies, whether purchased from their pipeline company or not.

• Pipeline companies must provide customers with open access to storage.

• Tariff provisions cannot inhibit the development of market centers or production pooling areas. [Market centers allow diverse customer demands to combine as a single load. Pooling areas allow diverse supplies to combine as a single source.]

• Two new generic capacity-assignment mechanisms were established. One authorized and required pipeline companies to provide firm shippers on downstream pipelines with access to capacity on upstream pipelines held by the downstream pipeline. The other authorized a reallocation mechanism so that firm shippers can release unwanted capacity to those that want it. These reassignments must first be posted on an electronic bulletin board.

• All fixed costs associated with pipeline transportation service are now recovered through a capacity-reservation fee, i.e., a straight fixed-variable (SFV) rate design. Previously, the commonly used modified fixed-variable (MFV) rate design allocated certain fixed costs to the volumetric charge. As a result of this change, the cost of peaking service has been increased significantly. In addition to SFV, other rate designs may be adopted for very limited special circumstances primarily associated with small municipal customers.

• Pipeline companies were required to use various rate-making techniques to mitigate "significant" changes in revenue responsibility to any customer class. If any customer class experienced a change in revenue responsibility that exceeded 10% after mitigation, pipeline companies were required to phase in the increase over a four year period. This phase-in period was viewed as a temporary measure, serving to soften the sudden cost increases associated with the ratedesign change.

• Pipeline companies were allowed to abandon sales and interruptible transportation service to any existing customer upon expiration or termination of the contract without seeking case-by-case approval from FERC. Service under firm transportation contracts for one year or less could also be abandoned. Under longer-term contracts, such service could be abandoned only if the existing customer failed to match the offer for the capacity made by another potential customer.

• Firm shippers must have flexibility in changing receipt and delivery points.

To the average customer, these changes within the natural gas industry may seem very technical. The impact on the industry, however, has been far reaching:

• Merger and acquisition activity among LDCs has increased as competition and the pressure from state regulators for lower gas costs increases.

• While FERC Order No. 436 caused a great deal of industrial end-use gas to move from LDC sales to LDC transportation service, Order No. 636 has led LDCs to offer services that entice industrial transportation customers back to sales services.

• Many new pipeline, pipeline interconnection, and storage projects have emerged.

• The availability and dependability of natural gas to all sectors of the consuming public has been enhanced.

• Natural gas has become even more competitive with alternative fuels in the industrial sector.

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