Copyright (c) 1994 Federal Energy Bar Association
Energy Law Journal
ARTICLE: PRICING AND THE INCENTIVE TO INVEST IN PIPELINES AFTER GREAT LAKES
15 Energy L. J. 377
Daniel F. Spulber *
Natural gas pipeline companies invest heavily in expansion of the United States pipeline system. System expansion projects totaled $ 5.7 billion in 1992. In 1993-94 there was more than $ 3.8 billion of construction projects completed or under construction, and an additional $ 5.2 billion proposed and pending, totaling over $ 9 billion. 1 Over 8,000 miles of new pipelines were installed or under construction in 1993. 2 Much of the new investment involves expanding capacity of existing pipelines by constructing parallel pipes that use existing compressors and follow the same right-of-way, a process also known as "looping." Under traditional regulation by the Federal Energy Regulatory Commission (Commission or FERC), the pipelines have been able to average or "roll in" the costs of expansion, generally raising costs to existing customers. The Great Lakes Gas Transmission Ltd. Partnership (Great Lakes) 3 decision reversed this long-standing policy by requiring new customers to bear the costs of expansion. This article will demonstrate that these alternative regulatory policies have significant consequences for pricing and the incentives to invest in new pipeline construction, and argues that the Great Lakes decision, which is currently under review, should be upheld and extended.
To understand the importance of the rolled-in versus incremental pricing debate, it is useful to observe that the existing transmission network with more than 284,000 miles of pipeline has a book value of $ 54 billion. 4 Therefore, expansion of existing facilities represents only a small fraction of total installed capacity in ...
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