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FERC Proposes More Coordinated Gas, Electric Markets

FERC has issued a proposed rule that seeks to improve the coordination between the natural gas and electric industries by revising the agency's regulations governing the standards for business practices and electronic communications between the two sectors.

To achieve this objective, the Federal Energy Regulatory Commission proposes to incorporate certain standards promulgated by the Wholesale Gas Quadrant and Wholesale Electric Quadrant of the North American Energy Standards Board (NAESB) in its regulations. The agency proposed the rule changes at its regular monthly meeting last week, but the notice of proposed rulemaking (NOPR) wasn't released until Wednesday [RM96-1-027, RM05-5-001].

NAESB filed a recent report with FERC that "highlighted coordination problems between the gas industry and the scheduling practices of independent system operators (ISOs) and regional transmission organizations (RTOs)," the FERC NOPR said. "The Commission is concerned that, although organized markets often rely upon gas-fired generation to meet reliability requirements, the current scheduling processes of these markets may not afford such generators the flexibility necessary to schedule their gas transmission effectively or to recover the full costs of such transactions, especially when gas prices are volatile."

To address these issues, FERC said it is scheduling Section 206 proceedings under the Federal Power Act to examine whether ISOs and RTOs should be required to implement scheduling and compensation mechanisms to ensure that gas-fired generators can obtain gas when the gas-fired generation is necessary for reliability and that they are compensated appropriately when volatility in gas prices makes it difficult to recover gas costs.

The January 2004 cold snap in New England underscored the need for better communication between the gas and electric sectors "as coincident peaks occurred in both industries, making the acquisition of gas and transportation by power plant operators more difficult," the NOPR said (see Daily GPI, April 2, 2004). Shortly thereafter, NAESB established a Gas-Electric Coordination Task Force to closely review the interrelationship of the gas and electric industries and identify potential areas for improved coordination through standardization, it noted.

The NAESB business standards that FERC proposes to incorporate would, for example, require gas-fired power plant operators and interstate pipelines to establish procedures to communicate material changes in circumstances that may affect hourly flow rates, the NOPR said. "These standards would ensure that pipelines have relevant planning information that will assist in maintaining the operational integrity and reliability of pipeline service, as well as providing gas-fired power plant operators with information as to whether hourly flow deviations can be honored," it noted.

The standards would further improve communication by requiring pipelines to provide electric transmission operators, including ISOs and RTOs, and power plant operators, to sign up to receive from connecting pipelines operational flow orders and other critical notices, the proposed rule said. "These standards will ensure that operators of the electric grid can stay abreast of developments on gas pipelines that can affect the reliability of electric service."

Four of the standards require pipes, RTOs, ISOs and/or gas-fired power plant operators to establish procedures to better communicate information with each other. "With respect to these standards, we propose to require each pipeline and relevant public utility to demonstrate compliance by filing a statement as to whether it has established the required procedures with each relevant entity on its system or taken appropriate action, as required by the standards. While the Commission expects that the parties would be able to negotiate acceptable provisions, if an intractable dispute should arise, the parties can submit their dispute to the Commission or resolution," the NOPR said.

NAESB asked FERC to clarify several issues that it believes could improve coordination between the sectors. For one, it asked for clarification of Commission policy with respect to capacity-release transactions using gas price indexes. "The Commission clarifies that...releasing shippers should be free to offer the same type of pricing arrangements that the pipeline offers and, therefore, releasing shippers are free to use gas price indices in pricing released capacity so long as the rate paid by the replacement shipper does not exceed the maximum rate in the pipeline's tariff."

The standards-setting group also requested a clarification regarding the ability of pipelines to permit shippers to shift gas deliveries from a primary to a secondary delivery point when a pipeline constraint occurs upstream of both points. "In most cases, it would be reasonable to permit the reassignment as posited by NAESB, since the shipper seeking to redesignate delivery points already has a transportation contract with primary point through the posted constraint point and has scheduled gas through that point so that reallocating gas to a different delivery point would not pose an operational problem," the NOPR said.

However, it noted that there is one possible caveat. That would be "if the shipper seeks to redesignate a secondary deliver point (outside its path) that is also being requested by another shipper (Shipper 2), and the delivery point is within the path of the Shipper 2. If both secondary nominations to that point cannot be accepted..., Shipper 2, with a contract path through the secondary point, would have priority," the proposed rule said.

NAESB also suggested the possibility of adding an additional intraday nomination cycle with bumping rights to provide more flexibility to shippers, including power generators, with firm transportation rights so they can nominate for natural gas supporting their market-clearing times. "Any standards that would allow better coordination between scheduling of gas and electric markets would be of benefit to both industries, and we encourage NAESB to continue its efforts to develop such standards," the NOPR said.

"With respect to intraday nominations, the Commission's regulations provide that firm transportation capacity must be accorded scheduling priority over interruptible transportation capacity. At the same time, however, the Commission has recognized the interest of interruptible shippers in achieving business certainty by making the last intraday nomination opportunity one in which firm nominations do not bump interruptible nominations...Within the confines of these policies, NAESB may consider whether changes to existing intraday schedules can better provide for coordination between gas and electric scheduling."

It noted that current NAESB standards require intraday nominations to be submitted by 10 a.m. (bumping) and 5 p.m. (nonbumping). "There is no reason why another bumping intraday nomination opportunity could not be introduced between these two or that the timing of these intraday nomination opportunities could not be adjusted to better coordinate with electric scheduling," FERC suggested.

Other areas for potential standards include modifying the requirements for organized electric markets so that the markets clear in sufficient time to nominate within the existing gas nomination timelines, the NOPR said. Or, require gas-fired generators that bid into the day-ahead market to have the appropriate gas commercial arrangements to fulfill an accepted bid.

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