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Gas a 'Real Success,' Needs Minor Adjustments

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 market."

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 pipeline customers.

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 distributors.

"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 pipelines.

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 637.

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 e-commerce."

FERC "should be striving to commoditize pipeline capacity so it can be traded along with gas electronically," Holligan said.

Susan Parker, Ellen Beswick

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ISSN © 2577-9877 | ISSN © 1532-1266
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