APPENDIXES TO MARCH 7, 1991 HEARING

(Sections 6003 and 6004 of Title VI and Title X)

Appendix I-Responses to Additional Questions

RESPONSE TO FOLLOW-UP QUESTIONS

SENATOR J. BENNETT JOHNSTON

SENATE ENERGY AND NATURAL RESOURCES COMMITTEE HEARING MARCH 7, 1991

H. LEIGHTON STEWARD

THE LOUISIANA LAND AND EXPLORATION COMPANY

QUESTION 1: To the extent necessary, please supplement your testimony with a more detailed analysis of title II of S.570, the National Energy Strategy Act. Please address both the policy implications of title II and questions raised by the individual provisions of title II.

RESPONSE: LL&E supports the goal of encouraging increased natural gas utilization, including measures similar to title II of S.570 which remove and streamline some of the regulatory impediments caused by existing law. Nevertheless, LL&E believes that any certificate reform legislation should satisfy the following fundamental requirements:

1.

Remove current barriers to entry by permitting anyone, not just existing interstate pipelines, to construct "atrisk" facilities;

2.

3.

Grant distinct legal recognition of "at-risk" pipelines, i.e., projects which rely on market forces and private to establish rates and

negotiation

allocate risks.

not regulation

Establish standards of conduct and clear cut procedures which promote and preserve competition among operators and potential shippers on "at-risk" facilities.

LL&E supports the bill's underlying objective of promoting increased availability and usage of natural gas for domestic consumption. Any new natural gas legislation should focus on providing basic ground rules which will promote the construction of new natural gas pipeline facilities on an expedited basis. However, certificate reform is not simply a matter of getting more pipe in the ground, for the cost of inefficient, unjustified construction will be borne by all segments of the natural gas business. The national interest will not be served by a

and LL&E

proliferation of economically wasteful facilities, therefore recommends a balanced reform package which will promote both competition and efficiency in new construction.

LL&E disagrees with S.570's attempt to restructure the Federal Energy Regulatory Commission (FERC). First, it is difficult to see how incorporation into DOE would expedite the decision-making process. Second, the restructuring proposal would convert the Commission from an independent bipartisan regulatory agency to an arm of the executive branch. Staff input would necessarily increase under a single administrator. The proposed restructuring could further politicize the decision-making process, and remove the current institutional incentive for balanced policy making. LL&E has not always been pleased with the Commission's pace, but speed should be gained by streamlining the existing structure, not sacrificing the Commission's independence.

Finally, LL&E opposes at this time the deregulation of both

sales and transportation services as set forth in S.570. LL&E believes that for the foreseeable future most interstate pipelines will continue to possess both monopoly and monopsony power, and that continued FERC oversight is appropriate and necessary. Unlike the "at-risk" pipelines that would be built under the proposed legislation, most existing interstate pipelines were built on an exclusionary basis (i.e., a monopoly) conditioned upon utilitystyle regulation as provided under the Natural Gas Act. The quid pro quo behind this regulatory "pact" remains to this day and should not be swept aside by deregulation. This does not mean that a lighter handed regulation of the pipelines' services is not appropriate in some circumstances.

In the case of pipeline sales, LL&E has supported negotiated rates where the pipeline has achieved comparability of service on its system. Comparability, however, is a very complex issue on which the Commission only now is beginning to develop its policy and the guidelines for implementing that policy. Many pipelines do not yet offer transportation services that are comparable to sales services. Other related issues, such as the pipeline's service obligation to its customers and customer conversion rights, also remain unresolved on many pipelines. Moreover, in some situations purely negotiated rates may be appropriate for some but not all of the pipeline's customers. In sum, the degree of regulation of the pipelines' sales service remains subject to many interrelated issues which are best resolved through the existing regulatory process at this time.

As to pipeline transportation services, LL&E opposes any form of blanket deregulation at this time. On nearly all interstate pipelines, monopoly power over the transportation service still exists. Even in markets served by more than one pipeline, the market is simply allocated among or between the pipelines. allocation does not equate with market competition.

Market

This is not to say that rates on existing interstate pipelines for all services must always be cost-based. However, there still is a need for regulatory oversight of such rates to assure that they are "just and reasonable" and that the market power of the pipeline over its transportation services is not wielded in a discriminatory manner.

If Congress desires to do something on this subject, it should limit its action to affirming or clarifying the Commission's authority to approve negotiated rates when the Commission determines that such treatment is both consistent with the "just and reasonable" and "no undue discrimination" standards contained in existing law.

QUESTION 2: In particular, please address Section 201 of S.570, the so-called mandatory interconnect provision.

a.

b.

What are the policy issues raised in connection with this section?

Does the section achieve its stated purpose of authorizing the FERC to order upstream interconnection but not downstream interconnection, i.e., bypass?