Register Today for Courses in Cost of Service and Rate Design for Natural Gas Interstate Pipeline Companies (January 26th-27th)
Brown, Williams, Moorhead & Quinn, Inc.

Truly understanding today’s evolving energy markets requires experienced hands who know not only the economic theory but the market forces driving the economic decisions. Translating economic theory into rate design, market assessments, and pricing decisions can often rest on knowing the players as well as the rules of the game.

Competition Analysis

BWMQ can also perform market power analyses in cases that do not involve market-based rates applications. Dr. Gallick and Dr. Ogur each have over 25 years of experience conducting economic analyses, investigations, and studies on a wide variety of antitrust issues. For example, we can analyze a contemplated merger between natural gas pipeline companies or storage companies. We can perform an initial market power analysis to determine whether a contemplated merger is likely to be challenged. BWMQ has extensive experience in the analytical approach used by the antitrust authorities, which includes defining relevant markets, evaluating market shares and seller concentration, and assessing other factors, such as entry conditions, excess capacity, and pricing. We can also perform a more rigorous market power analysis in the event the merger is opposed in a litigated proceeding. We can provide analysis to the merging firms to support the merger or to interveners to oppose the merger.

In addition to merger analysis, BWMQ can perform market power analyses to determine whether a regulated natural gas pipeline has the ability and the incentive to exercise market power. We have experience in evaluating competition between pipelines and their firm transportation customers and in assessing the impact of relationships between pipelines and their affiliates on competition in unregulated gas markets. These affiliates include gas marketers and gathering companies.

We also have experience in analyzing affiliate abuse issues. We can evaluate claims that a regulated pipeline is giving preferential treatment to, cross-subsidizing, or otherwise favoring its unregulated gas-marketing affiliates.

In addition, BWMQ can evaluate the competitive and economic-efficiency issues that arise in contractual disputes. For example, we have experience in facilitating the settlement of disputes over pipeline interconnections by providing interpretations and applications of FERC’s Panhandle Eastern criteria that further the Commission’s goal of increasing economic efficiency in natural gas markets. We can also evaluate exclusive dealing, nonprice payments, and other contractual arrangements to determine whether the contractual provision is or is not anticompetitive.

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Economics

Brown Williams provides consulting services on a wide variety of competition and market power issues that present both opportunities and challenges to industry participants and regulatory agencies. We have the expertise and personnel to help you, whether you are trying to take advantage of a new opportunity, protect yourself against a competitor, or evaluate the market from a regulatory or antitrust perspective. Our PhD economists have unsurpassed experience in competition, antitrust and market power analysis at the Federal level.

In natural gas and oil pipeline transportation markets, Brown Williams provides a complete competitive analysis, as required to justify market-based rates (MBR), including identification of relevant customers and products, identification of good alternatives, and estimating the size of each alternative. Proper analysis of each of these factors is critical to producing a valid competitive analysis. Our PhD economists have evaluated the competition faced by natural gas and oil pipelines in their origin and destination markets using DOJ market share screens, in addition to other factors that may enhance or limit the competitive alternatives for each pipeline. Brown Williams also provides competitive analyses in natural gas storage markets and LNG markets.

In electric utility markets, Brown Williams provides expert analysis of market power and competition issues in generation and transmission markets. Areas of expertise include market-based rates, mergers, affiliate abuse, and contracts. In 2004, the FERC adopted new interim generation market power tests for all sellers requesting or renewing MBR authority in the U.S. electric utility industry. FERC required all applicants with three-year MBR reviews pending before the Commission to revise their generation market power analysis to comply with the 2004 Order. FERC’s new generation market power tests include two new screen tests, the Pivotal Supplier Screen, and the Market Share Screen. An applicant that fails either of these tests may submit an additional market power analysis known as a Delivered Price Test analysis. We have the expertise to conduct all these market power tests and analyses.

Brown Williams also has antitrust expertise on a wide variety of topics including mergers, price discrimination, non-price payments (e.g., the provision of finance, equity, or services in lieu of monetary payments), exclusive dealing arrangements, and contract disputes.

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Innovative Rates

Clients seeking market-based rates need not apply for market-based rates for all of its natural gas transmission services. A novel approach is to submit two different types of applications to FERC depending on the degree of competition at various points on the applicant’s pipeline system. First, an application for market-based rates may be submitted for the major receipt and delivery points on the pipeline system where a high degree of competition and a lack of market power can be demonstrated.

For the remaining captive receipt and delivery points on the pipeline system (where customers have no good transportation alternatives), a second application could be filed asking for flexible value-based short-term pricing as promoted by Order 637.

Remaining captive customers will retain the right to purchase pipeline capacity from the pipeline under a long-term cost-based recourse rate under this analysis. For customers choosing short-term service that will not commit to long-term service, more flexible value-based short-term pricing is appropriate, particularly when additional revenues from short-term services are shared with long-term recourse rate customers.

Since Order No. 636, the industry has witnessed a dramatic growth in the use of marketers to sell gas, arrange transportation, or provide both services to LDCs, industrials, end users, and electric generators. The growth of downstream markets has affected the transportation market as well. Shippers now have the choice of buying gas in upstream markets and transporting that gas to their downstream delivery points or purchasing gas in downstream markets. A more competitive pipeline transportation market has also developed with shippers able to choose between alternative means of acquiring pipeline capacity. Shippers can choose either short- or long-term services from the pipeline or acquire capacity from other shippers through the capacity release mechanism. Contract renegotiation, both as to coverage and term, has increased the risks for pipelines that may have greater difficulty reselling capacity. Today pipelines face greater risks in terms of long-term contract coverage, a greater reliance on short term contracts, and discounted contracts.

Commission policy has allowed cost shifts associated with discounting and decontracting to be recovered from the pipeline’s long-term captive rate customers, although the Commission has expressed concern over the level of these cost shifts and has tried to address these specific problems in Order No. 637. In Order No. 637, the Commission stated that peak/off-peak rates could allow pipelines to increase revenue recovery from peak period, short-term shippers. Such increased cost recovery from peak short-term services would lower the level of costs that need to be recovered from long-term customers and minimize the cost shifting that occurred with off-peak discounting. By reducing the rates in the off-peak periods, peak/off-peak rates could reduce discounting and reliance on discount adjustments. The Commission clearly recognized that peak/off-peak rates would better reflect the value of capacity during peak and off-peak periods, again reducing the need for discount adjustments.

Innovative rate proposals have three basic benefits. First, to the extent that a pipeline is allowed to charge short-term value-based rates, as Commission Order No. 637 allows, the pipeline may see an increase in the total amount of revenue recovery from short-term value-based services. The pipeline may be able to charge higher short-term rates that recover more of its fixed costs on higher demand days than would be possible if the short-term rates remain equivalent to the long-term recourse rates. Natural gas pipeline companies are very capital intensive and, given the large fixed costs of pipeline infrastructure investments, it is unlikely that pipeline company management will make investments in pipeline facilities if they are unable to recover some of their fixed costs in longer-term firm contracts. This proposal is expected to increase the recovery of fixed costs from firm contracts. Second, to the extent that potentially higher short-term value-based rates contribute to the overall revenue requirement of the pipeline, these higher revenues will lower the pipeline’s revenue requirement from its long-term firm shippers, and thus lessen the cost recovery imposed on those long-term firm customers. The third benefit is that to the extent that short-term rates are determined by market conditions, higher rates for short-term services will provide more efficient price signals on the short-term value of the pipeline’s capacity. Pipelines and their customers carefully monitor the capacity release and short-term markets for daily price information about capacity. To the extent that prices rise in these daily markets, it will encourage end users and LDCs to sign up for longer-term firm contracts instead of speculating that they can meet their peak demand requirements through a combination of IT, capacity release, and short-term services. The Commission clearly recognizes that, in competitive markets, price efficiently allocates capacity to customers that value it the most and this should be true for short-term pipeline service.

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Market-based Rates Consulting

In addition to merger analysis, BWMQ can perform market power analyses to determine whether a regulated natural gas pipeline has the ability and the incentive to exercise market power. We have experience in evaluating competition between pipelines and their firm transportation customers and in assessing the impact of relationships between pipelines and their affiliates on competition in unregulated gas markets. These affiliates include gas marketers and gathering companies.

We also have experience in analyzing affiliate abuse issues. We can evaluate claims that a regulated pipeline is giving preferential treatment to, cross-subsidizing, or otherwise favoring its unregulated gas-marketing affiliates.

In addition, BWMQ can evaluate the competitive and economic-efficiency issues that arise in contractual disputes. For example, we have experience in facilitating the settlement of disputes over pipeline interconnections by providing interpretations and applications of FERC’s Panhandle Eastern criteria that further the Commission’s goal of increasing economic efficiency in natural gas markets. We can also evaluate exclusive dealing, nonprice payments, and other contractual arrangements to determine whether the contractual provision is or is not anticompetitive.

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Mergers & Acquisitions

Mergers and acquisitions are subject to regulation by the Department of Justice, the Federal Trade Commission and in many instances by other regulatory agencies. We provide testimony, expert advice and economic studies to enable you to achieve approval of these transactions. We provide information to providers of financing for these transactions to enable you to clear the due diligence financing process.

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