TESTIMONY OF F. JOSEPH GRAHAM ON BEHALF OF THE UNION CARBIDE CORPORATION TO THE COMMITTEE ON ENERGY AND NATURAL RESOURCES My name is F. Joseph Graham. I am Director of Energy Policy and Supply for Union Carbide Corporation. We appreciate the opportunity to appear before this Committee to discuss Title X of S. 341, the National Energy Security Act of 1991, and the comparable portions of the President's National Energy Strategy, in response to the letter of February 21, 1991 from the Honorable J. Bennett Johnston, Chairman, to Thomas D. Finnigan of Union Carbide Corporation. It is my understanding that Union Carbide has been invited to be on a panel which includes a producer, an interstate pipeline, a local distribution company, and a State Commission, with Union Carbide as a representative of the class of industrial end users, the largest class of natural gas consumers in this country by far. We thus feel an obligation to present, not exclusively our own views, but our best estimate of the general viewpoint of the class of industrial users, acknowledging full well that any such effort may not be completely successful. Union Carbide is in the class of petrochemical companies. Petrochemical companies would represent uses of gas in all industrial applications. It should also perhaps be noted that the class of petrochemical companies can be divided into two sub-sets: those which are vertically integrated with major oil companies and those which are independent. Union Carbide is in the latter sub set. Other independent petrochemical cor anies, represented by the Petrochemical Energy Group, have reviewed this testimony and endorsed it. Those companies are: Dow Chemical U.S.A.; Eastman Chemical Company; Hoechst Celanese Corporation; Quantum Chemical Corporation, USI Division; and Union Carbide Corporation. While, due to the subject matter of the pending legislation, much of our testimony will perhaps suggest problems with transportation in the national sense, let me assure you that there is no personal reflection intended. In fact, Union Carbide itself, until recently, owned an interstate pipeline and presently owns a Hinshaw pipeline. The legislation implementing the National Energy Strategy was not available in time to be incorporated into this filed testimony. Industrial end users are the largest class of consumers of natural gas in this country. An abundant supply of reasonably priced natural gas transported and delivered to industrial facilities at just and reasonable rates is essential to a strong economy, one that is able to compete effectively at home and in world markets. In analyzing any legislation, the test is: will the legislation promote or impede a competitive market for natural gas from the wellhead to the burner tip? S. 341, in general, meets this test, with the possible exception of the Optional Procedures for the Construction of Natural Gas Facilities, one of three parallel methods set forth in S. 341 to achieve expedition in construction of new pipelines. The three parallel methods to achieve expedition are: (1) Authorization to use rulemaking procedures, Section 10005, coupled with making the FERC the lead agency for environmental reviews. the NGPA. (2) Section 10002, Transportation of Natural Gas under (3) Section 10001, Optional Procedures for the Construction of Natural Gas Facilities. The concerns with this last proposal arise because comparable third-party transportation service, necessary for a competitive market, has not been achieved and because market power in the hands of pipelines and brokers continues to exist. While the intent of the Optional Procedures is positive, there are negative potential consequences which merit Committee consideration. Those potential consequences include (1) a bottleneck potential to limit access to markets, (2) a potential for abuse of market power, (3) a potential for creating a monopoly or a monopsony for the interstate pipeline or its affiliate by authorizing construction for the exclusive use of the pipeline or its affiliate (both with respect to new pipelines and additions to existing pipelines), (4) possible negation of open access transportation conditions, and (5) potential for allowing the pipeline to collect and to retain unjust, unreasonable, unduly discriminatory, and preferential rates and services. With respect to transportation under the NGPA, Section 10002, significant and needed reforms are provided, among them being the elimination of restrictions on access by end users and producer/marketers competing with the pipeline and, most significantly, the codification of open access transportation. Recommendations concerning S. 341 include the suggestion that a national grid of transportation service might be better achieved by having a single class of interstate pipelines for purposes of insuring open access transportation and comparable third-party transportation. Sufficient expedition in construction, without untoward consequences, may be achieved by the (a) authority to conduct certificate proceedings by rulemaking, and (b) the new NEPA compliance procedures, the first of the three parallel methods incorporated in S. 341. In the alternative, if a new class of interstate pipelines is to be created or codified, it should suffice to proceed on the NGPA model, Section 10002, dropping the Optional Procedures, Section 10001. The Committee is also requested to consider codifying open access, with comparable service for third party transporters at comparable rates, whether, in the end, there are one, two, three or more different types of interstate pipelines. At the request of Senator Bingaman, certain amendments to S. 341 are addressed and concerns are expressed similar to those expressed relating to the Optional Procedures. While the legislation implementing the National Energy Strategy was not available in time to meet the filing deadline, the policy itself is analyzed. The two pre-conditions to any change with respect to pipeline rates or transportation service are critical. Those are, first, to assure comparable service to third party shippers and, second, to assure that the pipeline does not have market power. Since the determination of market power will be critical to the implementation of the NES, we attach as Appendix B an analysis by Ernst & Young of the present FERC methodology for addressing this issue. If the present system is going to be replaced, a careful look is indicated with respect to the system that will be the replacement to be sure that it will be an improvement. Once the two preconditions have been met, the issues surrounding the adjustment to the regulation of pipeline sales for resale in interstate commerce and to the regulation of transportation in interstate commerce can be addressed. The |