NGI The Weekly Gas Market Report
With the high incidence of inter-marrying between the naturalgas and electric markets, the number of affiliate shippers oninterstate gas pipelines has grown commensurately while the ranksof independent shippers have dwindled, raising the level of”concern” among regulators and some industry players about pipelineaffiliate transactions.
“The number of ‘truly’ independent shippers is very small andlikely to grow smaller as ‘energy market convergence’ forces gas[pipeline] companies to [venture into] other energy services, andregulators broaden the definition of affiliates from gas marketersto include electric marketers, generators and utilities,” accordingto a new report by Energy and Environmental Analysis Inc. (EEA), anArlington, VA, energy consulting firm.
The trend toward increasing affiliate transactions “is an issuethat’s being discussed in almost every meeting between shippers andFERC, and also at the state commissions,” said EEA Director BruceHenning, who expects it to be “vetted more fully” at the technicalconferences that FERC staff will hold on Order 637 issues, thefirst of which is set for Sept.19. The issue has become “moreimportant as a result of [concerns] on the electric side, wherethere have been more clear-cut allegations of particular problems.”
At the core of the debate is whether the rise in the number ofaffiliate companies could be paving the way for a greater incidenceof problems involving pipeline affiliates. Undoubtedly, there willbe more opportunities for affiliate-abuse problems to occur simplybecause there are more affiliates. But whether that will lead tomore actual affiliate abuse is another thing, said Henning, whonoted that such allegations generally are difficult to prove.
“It is always possible to identify transactions where anaffiliate made a ‘good’ deal compared to the rest of themarketplace. [But] affiliates also enter transactions that losemoney, just like everyone else. There is sufficient evidence toillustrate any of the different points of view, but, so far, theredoes not appear to be sufficient evidence to prove any of theconcerns” about potential abuse.
He cited Dynegy Marketing and Trade’s contract on El PasoNatural Gas as an example. “There were a significant number ofcomplaints when Dynegy contracted for a large piece of capacity onEl Paso. The raw data indicated that the average basis increased inthe wake of that purchase. But was that price behavior evidence ofthe exercise of market power or a result of tightening marketconditions? Opinions vary and the debate remains,” noted the EEA’s”Pipeline Data Report,” which provides pipeline and storagecapacity data on 30 key pipelines on a monthly basis.
The debate “intensified” even further, it said, when El Pasoaffiliate, El Paso Merchant Energy, took over the 1.3 Bcf/d ofCalifornia-bound transportation capacity that had been held byDynegy. Although affiliate market power in this case was neverestablished, “it’s a concern [in the market]. It could lead toaffiliate abuse, and the question is how do you prove it and whatis the regulator’s role to prevent it in advance of thatoccurring.”
The existing data that pipelines are required to file at FERC isof little help in proving suspicions of affiliate market power,Henning said, because it routinely shows that pipeline marketersand unaffiliated marketers pay “very, very similar rates in termsof discounted services.” In addition to pricing data, the otherbarometers for determining the existence of affiliate market powerare the degree of market concentration particularly in certaingeographical markets, as well as the consolidation of shippersalong long-line pipeline routes. The Commission uses the Departmentof Justice threshold test (2500 HHI) to gauge market concentration,he noted, but “whether or not that’s an arbitrary line in the sandis debatable.”
Henning believes FERC already has taken some important steps tolimit affiliate favoritism. He noted the Commission’s orderapproving the Dominion Resources-CNG merger was important becauseit expanded the definition of affiliates to include more than justpipeline marketing companies, and made them all subject to itsregulations barring affiliate preference. FERC “made it clear thatit will now consider its regulations to apply to all affiliateswithin the corporate familing across energy types,” including”regulated gas distribution or pipeline companies affiliated withelectric generation or distribution companies.”
Also, he thinks the Order 637 data that pipelines must beginfiling at FERC by Sept. 1 — available capacity, contracts andaffiliates — will help somewhat. “The more you know…..the moreyou’re going to be able to identify whether or not there is aproblem,” Henning said.
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