Risk Analysis for Natural Gas Pipelines

Abstract

This chapter attempts to pull the various threads from the previous chapters into a cohesive pattern. After this introduction, we consider in several stages the various logical arguments for and against the view that pipeline risk remains high. In the process, we present additional quantitative evidence on the risk of the industry, from stock market data. At the end, we present our views on the level of pipeline risk. This sets the stage for the discussion in Chapter 9 on what we think are the crucial issues that the pipeline industry and its regulators face in the 1990s. First, however, we review the risk debate.

A high degree of risk is inherent in the natural gas industry’s operating with a netback pricing system driven by competition in end-user markets where there is substantial gas-on-gas and interfuel competition and where consumption is affected by weather and business cycles.

The variability in prices and volumes in the end-user sector and increasing competition for industrial fuel markets have increased risks in the retail gas market, [footnote omitted] Regardless of regulatory authorization granted by PUCs to LDCs to quote flexible prices at the burner-tip, reasonable rates of return on capital will not be achieved by LDCs and pipelines if end-user prices are out of line with final demand realities. Therefore, rates of return allowed by regulators for pipelines and LDCs will have to reflect their risk exposure, which is greater than it has been in the past [emphasis added] (Hall 1987, 252, 259).