GAS PAINS
The government says it is finally deregulating the gas business. Hold on to your wallets.
Natural gas is going to cost a lot more this winter, and not just because prices have risen over the past 18 months. Your winter heating bills will also reflect the effects of a new regulatory scheme devised by the Federal Energy Regulatory Commission (FERC).
Called Order 636, the plan, designed when President Bush was still in office, is the final step in a decade-long effort to deregulate the natural gas industry.
But 636 does something else. It attempts to make gas pricing more rational by eliminating what was in effect a subsidy for residential users from business and industrial customers. And it helps bail the pipeline companies out of high-priced, long-term contracts they took on in the early 1980s.
The timing couldn't be worse. The price of natural gas, which hit a seasonal low of $1.04 per million BTUs after the 1991-92 winter healing season, is now $2.25. Since most utilities started buying long-term contracts in 1991, they have been able to shield their customers from the full effects of the increase--so far. But it is only a matter of time before these increased prices work their way into every customer' s gas bill.
On top of that will be the costs of Order 636. How much more will that add? The exact numbers aren't yet known, but according to preliminary filings from the pipelines with FERC, the one-time cost of switching to the new pricing system will be $5.7 billion, or about $100 per residential gas customer. And in its report to the Committee on Energy and Commerce, chaired by Congressman John Dingell (D-Mich.), the Government Accounting Office estimated that the new regulatory scheme could add as much as $40 to $80 a year to residential customers' gas bills. Add to that the increase in raw materials costs, and customers could get a shock this winter.
Why is FERC choosing to act now? "I supported the restructuring rule for one simple reason," Elizabeth Moler, the chairwoman of FERC, wrote to Dingell in March. "The old set of regulations simply did not work. "
That's an understatement. A huge oversupply of gas, known in the industry as "the bubble," which began in 1982 and ended only this past winter, was the result of FERC regulations that led pipeline companies to buy gas under long-term, fixed-price supply contracts. The regulations were put into effect when prices were still rising sharply and supplies were hard to get.
But FERC also permitted large industrial and utility buyers to buy from middlemen on the unregulated spot market. So when spot prices later fell, the middlemen became a far cheaper source of gas than the pipelines, and the pipelines were stuck with gas they couldn't unload.
This fiasco, known as take or pay, ended up costing pipeline companies and their customers about $10 billion over 10 years.
No wonder FERC wants to get out of the business of pricing and controlling natural gas.
While 636 eases regulations and price controls, its main objective is to separate the cost of transporting natural gas from the price of the raw material itself. In industry patois this is known as "unbundling. " In essence, 636 finally allows the market to deride the correct value of both natural gas at the wellhead and the pipeline that brings it to market.
When gas prices rise, as they have over the past 18 months, 636 will encourage drilling. Where gas is in short supply, as it was on the East Coast for many years, 636 will encourage additional pipeline construction. Where pipeline capacity is in surplus, as it is now in California, charges will fall and consumers will benefit. The government is completely removed from the picture.
But first, yesterday's bill must be paid. There is still an estimated $3.9 billion in future costs left over from the old contracts, and they will be rolled into the restructuring of rates under Order 636.
This makes Wall Street happy. Stocks of pipeline companies have risen 43% since 636 was first proposed in April 1992.
But as Alan Gaines of New York City-based investment bankers Gaines Berland warns, the final details of 636 are still being written. Meddling by a more proconsumer FERC under Clinton, or by congressional worry- warts like Dingell, may force pipeline companies to absorb more of the 636 restructuring costs than investors now believe.
8/10/96
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