Gas a 'Real Success,' Needs Minor Adjustments
Just so you'll know: "The natural gas market is a real success
story.....FERC has gotten an enormous amount of things right. The
market may not be unblemished, but there are lots who consider the
natural gas market the best market in the world offering genuine
price discovery on a daily basis across dozens of products. It's
something everyone should be proud of," Robert Levin of the New
York Mercantile Exchange told a FERC conference last week.
"The natural gas market has performed remarkably.....through a
range of market conditions with hundreds, if not thousands of
market participants, using an extraordinary selection of market
instruments," Levin continued, adding that the Commission should be
supporting the "growth and increased sophistication of commerce.
You're at that point now."
Warning against so-called solutions offered by some at the
day-long conference to increase liquidity or tie the natural gas
market to the electric market, Levin cautioned "liquidity cannot be
legislated. Don't overreact. The electric market is poorly
regulated. Remedies from the natural gas market should be
transferred to the electric market, rather than allow the gas
market to be corrupted by the regulatory mistakes of the electric
Rather than "worry over regulating an hourly market for natural
gas, change the electric market," which Levin believes has
developed an over-emphasis on the hourly market because of the
artificial tilt toward the spot market.
But while Levin warned against too much market meddling, others
among the more than 30 representatives of the industry and its
customers testifying at last week's FERC technical conference on
competitive natural gas markets argued for a variety of initiatives
to increase market liquidity and transparency.
Eliminating the shipper-must-have-title rule, promoting
expansion of the existing pipeline infrastructure (especially in
the Northeast), doing away with straight-fix-variable (SFV) rate
design, review of firm-to-wellhead rates in the production region
and the allocation of transportation costs between the upstream and
downstream were among the chief proposals proffered by mostly
However, greater gas market liquidity shouldn't be confused with
increased competition in pipeline transportation, municipals and
producers told FERC staff during the post-Order 637 conference.
"...[W]e're concerned the Commission may be equating market
liquidity with competition in pipeline transportation. The two are
not the same," said Arthur Corbin on behalf of the American Public
Gas Association (APGA), which represents municipal gas
"Even with greater and greater market liquidity, monopoly power
exists in [the] pipeline transportation segment. Captive shippers
will always require a regulated transportation service from any hub
to their citygate," he said.
Much the same holds true for LDCs, noted Bruce Henning, director
of energy practices for Energy and Environmental Analysis Inc.
(EEA), who represented the American Gas Association (AGA) at the
conference. He agreed market liquidity has improved immeasurably,
but he added "there's not a liquid market center at every pipeline
receipt or delivery point location. Nor is there likely to be
market centers in all of these locations in the near future..."
Consequently, Henning said FERC will need to continue to protect
producers from market power that accompanies "limited access" to
The day-long conference held last Tuesday in Washington D.C. was
the first of several that FERC staff plans to hold to explore the
impact of the Commission's transportation policies on the
development of gas markets.
Christopher A. Helms, president and COO of Panhandle Pipeline
Companies, urged FERC not to enact policy changes that would place
commodity market liquidity as the "ultimate goal" at the expense of
the transportation market. Helms said he advocated policies
encouraging pipeline construction of "optimal amounts of additional
capacity" to meet the needs of the marketplace. "The single most
important characteristic for liquidity in the natural gas commodity
markets is the availability of adequate transportation capacity."
Charles Daverio, vice president of KeySpan Corp., echoed that
sentiment, saying FERC could increase liquidity in the New York
City market and elsewhere in the Northeast by promoting
construction of new pipeline capacity to ensure adequate supplies
for the region year-round. This would reduce energy costs and
enhance reliability, he noted.
Panhandle's Helms also cautioned against policy changes that
would force the development of new market centers and hubs. Market
centers should be allowed to develop at their "own pace," and at
locations where the market "sees fit," he said.
EEA's Henning estimated more than 40 "liquid and transparent"
market centers exist today, which permit industry participants to
buy and sell gas daily under "extremely competitive" conditions. He
said he's "confident" more will be added because of the options
that they provide to gas customers. As another way to enhance
liquidity, KeySpan's Daverio --- as well as others --- supported
eliminating the shipper-must-have-title rule, which requires the
customer to retain title to the gas while it's being shipped. Doing
away with the rule would pave the way for the development of new
pipeline products and services, such as operational balancing and
virtual storage, he told the FERC staff.
But Dena Wiggins, an attorney with the D.C. law firm of
Sutherland, Asbill & Brennan LLP, which represents the Process
Gas Consumers Group (industrial gas customers), said her group was
"very concerned" about efforts to repeal the rule. She noted the
Commission already has granted exceptions to the
shipper-must-have-title rule in certain cases, and should continue
with this policy where necessary.
Moreover, Wiggins said industrial customers were increasingly
worried about the mounting market power of unregulated companies,
especially gas marketers.
At the conference, she also expressed her group's dismay with
the pipeline compliance filings with Order 637, particularly on the
penalty issue. Rather than an "improved" penalty structure,
pipelines are proposing higher penalties, Wiggins said. "[We]
continue to be shocked at the absolute wholesale departures" from
BP's Jeff Holligan also waded into the fight against all the new
services outlined by pipelines in their Order 637 filings, which he
said were "nothing more than penalties disguised as balancing
services that customers can't refuse." He urged the Commission to
check with a pipeline's customers, noting one proposed new
"service" is opposed by 100% of the pipeline's non-affiliated
customers. Some of the proposed services, Holligan said, add up to
nothing more than degradation of existing long-term firm service.
Holligan, representing the largest producer in the U.S. and
Canada, joined other market participants in urging adoption of
"standardized allocation (sales), standardized penalty levels, and
the requirement that all pipelines implement a uniform title
transfer tracking process." In short, "standardizing pipeline
services, certainly on an individual pipeline, and also to a large
extent between and across pipelines is imperative if markets are to
be highly liquid. Individually negotiated services, where every
service is a different service, or the adoption of a so-called dual
track market, are the antithesis of a highly liquid, efficient and
competitive gas market. Standardization of operational terms of
pipeline service is necessary to facilitate trading through
FERC "should be striving to commoditize pipeline capacity so it
can be traded along with gas electronically," Holligan said.
Susan Parker, Ellen Beswick