POST-636 IMPACT ON NATURAL GAS TRANSMISSION AND DISTRIBUTION
| Jurisdiction | United States |
(Jan 1995)
POST-636 IMPACT ON NATURAL GAS TRANSMISSION AND DISTRIBUTION
K N Energy, Inc.
Lakewood, Colorado
Part 1. Post-636 Impact On Natural Gas Transportation
Thumbnail Sketch Of Order No. 636
In the spring of 1992, the Federal Energy Regulatory Commission (FERC) unabashedly announced that it had two purposes for issuing the natural gas restructuring rule in Order Nos. 636, 636-A, and 636-B1 : "(1) to make regulatory changes to permit the development of an interstate pipeline transportation network that provides all gas purchasers with access to the competitive gas market in the production area market on an equal footing and (2) to maintain reliable pipeline transportation service."2
To achieve these purposes, Order No. 636 required pipelines to separate (unbundle) their sales and transportation services and to provide comparable transportation services for all gas supplies, whether purchased from the pipeline or a third party.
[Page 8A-2]
In addition, Order No. 636 "amends the regulations to require pipelines: ... to offer storage on an open access basis, and ... to implement capacity release programs so that firm shippers can release their firm capacity on short or long term bases."3
FERC's goal to bring the benefits of wellhead decontrol to the gas industry was accomplished in Order Nos. 636, et al. As stated in Order No. 636, the rule "will finalize the structural changes in the Commission's regulation of the natural gas industry. This rule will therefore reflect and finally complete the evolution to competition in the natural gas industry...[T]his promotion of competition among gas suppliers will benefit all gas consumers and the nation by ensur[ing] (sic) an adequate and reliable supply of [clean and abundant] natural gas at the lowest reasonable price."4 Order No. 636 unraveled the regulated gas industry and in the words of FERC Chair Elizabeth Moler, "There is no going back."5
Order No. 636 transformed pipelines into transporters of natural gas. Even though FERC assured pipelines that Order No. 636 was not meant to force them out of the merchant role, in reality, no major pipelines continue as merchants. In those instances where the company remained a merchant, the sale of gas
[Page 8A-3]
is usually handled by a marketing affiliate or subsidiary of the company.
In fact, Interstate Natural Gas Association of America's (INGAA) annual pipeline survey "documents the transition between the pre-636 era of bundled gas service and the unbundled post-636 world."6 The survey showed pipeline sales dwindling to 10% of all 1993 gas volumes delivered, with the decreases in pipeline sales "balanced by an increase in firm transportation, and to some extent, by the first released firm transportation flowing from the capacity release market."7 The era of pipeline as merchant is defunct; the era of pipeline as transporter has dawned.
In response to this mandate, the natural gas industry was to change dramatically. Pipelines unbundled sales from transportation services, and opened interstate transportation capacity and pipeline storage capacity to access by any qualified shipper on a firm or interruptible basis.8 Market hubs were
[Page 8A-4]
developed; unique and competitive pipeline services were offered. Local distribution companies (LDC) contracted to buy their own system supply, considered unbundling at the state level, and met prudency challenges from state commissions.
Market Centers Or Market Hubs
One natural gas industry response to the FERC reorganization of pipeline transportation is the market hub or market center. Hailed as a new advanced level of gas marketing sophistication, many believe that market hubs or centers will increase the reliability and flexibility of interstate gas supplies.
Market hubs will increase post-636 competition by increasing reliability and trading opportunities; "an accumulation of traders will make transactions at market centers...more reliable and less volatile. Market centers will have no capacity constraints...Market centers should have firm deals and concentrated real-time technology....There should be intercenter coordination, with hedging and trading activities between market centers."9 Richard O'Neill, Director of the Office of Economic Policy at FERC defines the market hub as a "reliability center" and "an area where many pipelines meet in a reasonably small geographic region (presumably covering less than 70 miles radius). 'It is not line pack and it is not the whole pipeline.'"10
[Page 8A-5]
O'Neill opined that three market hub levels will develop: (1) A base market center to cover firm transportation from wellhead to a center, firm transportation from that center to the citygate or plant gate, and short term emergencies allowing just in time service that may rely primarily on storage. (2) A secondary market center, providing an insurance and reliability function, could develop around firm transportation from the base center to or from another (secondary) market center. (3) Super market centers would be fed by the smaller local centers.11
The role of market hubs in the natural gas industry are described as follows:
...linked by electronic trading systems displaying near-real time market data [market hubs] would form a nationwide clearing house in which any seller across North America would be able to offer supplies to the highest bidders, any buyer could find a smorgasbord of gas supplies and select the source best suited to his needs, and any shipper on equal footing with all other players could obtain the services he needed to efficiently move purchased volumes to end users.12
A working definition for the location of a market hub is as follows: "natural pooling points" with multiple pipeline interconnects sitting midstream between major gas supply and market areas on underutilized interstate gas transportation
[Page 8A-6]
systems with downstream sales capability and access to upstream supply areas.13
The proliferation of market centers14 — currently there are more than forty existing and proposed market centers15 — is the first stage of an industry metamorphosis that will eventually result in significant concentration of gas supply and sales services at physical pipeline and storage interconnects or in the framework of paper deals.16 It is doubtful that this large number of market centers will continue. "Shakeout is imminent." ..."Competitive pressures are increasing." ..."[T]he numbers will dwindle down to a handful."17 This observation is based on the relatively few market centers for other commodities as compared to the number of market centers for natural gas.
[Page 8A-7]
Market centers are in a state of flux; new ones being proposed and established ones adding new and different services. FERC is actively encouraging market centers (1) by prohibiting rate design or tariff language which frustrates market centers, (2) by preferring fully unbundled services which has made market centers easier to develop, and (3) by creating a complementary release market.18
Not everyone would agree with this analysis of FERC's supportive role: "FERC failed to keep its promise not to inhibit development of the centers. Production area hubs are a casualty of FERC's inability to resolve ... production area rate zone rates....Production area rate hubs are eroding as market zone hubs proliferate."19
New Market Center Or Market Hub Services
In order to be successful, the hub or market center must offer flexible buying and selling, the availability of long term contracting and hourly trading, uniform electronic markets, futures trading and capacity release transactions.20 "Hub operators are expected to offer unique services to users, services such as wheeling, ... title transfer, displacement delivery, parking, inverse parking and imbalance penalty management...Hub operators will be the future market-makers,
[Page 8A-8]
featuring full service menus."21
Many new transportation services are being offered by competing transporters. Not all these services are necessarily offered at every market center. Typical among the services offered are trading (sales, purchases, backstopping), transportation and interpipeline transfers, parking, authorized imbalance service, parked quantity delivery service, wheeling, hourly scheduling flexibility service, peaking services, storage services, pooling services, receipt point group service, hub based receipt and delivery points, enhanced transportation rights service, loaning, information relay, and various administrative and financial services such as title transfer, transaction reports, and real time auctions.
While the definitions of these services may vary from pipeline to pipeline, the following are the most commonly held definitions for the new hub services:
Parking — delivery of gas into the hub and "parking" or short term storage at the hub for a very short term one or more days;
Parked Quantity Delivery — transportation of parked quantities of gas from the parking point to an identified delivery point;
Loaning — removal of gas from the hub and its return one or more days later;
[Page 8A-9]
Wheeling — simultaneous receipt of gas into the hub and delivery of gas out of the hub through displacement or exchanges at different receipt and delivery locations;
Pooling — aggregation of gas at the pool;
Authorized Imbalance — hub operator (transporter) will advance gas to shippers who will return the volumes to the hub operator at a later date or upon notice from the operator.
These services are primarily offered on an interruptible or as-available basis.
Another hub service which is becoming more widely used are electronic trading systems. "Streamline" electronic cash trading system and Channel 4 electronic trading system being developed by the New York Mercantile Exchange are becoming available at more and...
To continue reading
Request your trial