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Need for Longer-Term Contracts Demands Regulatory Action, Pipeline Study Says

September 5, 2005
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The sharp reduction in the terms of new gas transportation and commodity contracts in recent years and the regulatory and market disincentives to longer-term contracting could delay much needed gas infrastructure projects, potentially costing consumers $653 billion in higher gas prices and price volatility over the next 15 years, according to a new white paper released by the Interstate Natural Gas Association of America (INGAA), which represents the nation's gas pipeline companies.

Long-term contracts "will be a critical factor in meeting a projected need over the next 15 years for $44 billion in new U.S. and Canadian gas infrastructure investments and a projected need for another $16.4 billion simply to replace existing interstate pipeline to maintain the present level of throughput," INGAA said in a statement.

The white paper was prepared for the INGAA Foundation by Arlington, VA-based Energy and Environmental Analysis Inc. (EEA) and submitted to a joint task force of the National Association of Regulatory Utility Commissioners and the Interstate Oil & Gas Compact Commission. The task force is exploring whether longer-term contracting for transportation and storage would facilitate needed investment in infrastructure and whether state regulations and policies currently inhibit such contracting.

EEA determined that the move away from longer-term agreements of 20 years to much shorter-term deals of five years or less has been accelerated by the decline of the marketing sector following Enron's collapse and the rapid growth of the gas-fired power generation industry. There are far fewer creditworthy counterparties available today with which to sign a long-term agreement.

"Although the ranks of energy marketers have recently been boosted somewhat as large oil and gas producers have increased their gas marketing role and some financial companies have entered the energy trading space, there are real concerns that large-scale natural gas infrastructure projects may be delayed, diverted to other countries or abandoned because they lack assured markets and reduced risks afforded by longer term transportation and commodity purchase contracts," EEA said.

It said regulatory action should be taken to help alleviate the problem. For example, local distribution companies have been "discouraged" from entering into longer term deals for pipeline capacity or gas supply. Risk management through portfolio diversification and hedging is "not yet well understood by many regulators.

"In addition regulators are often reluctant, or in some instances are unable within existing statutory authority to 'pre-approve' a program," EEA said.

The white paper also noted some of the existing market disincentives for generators or industrials to sign long-term agreements. Such contacts can create fixed costs for companies whose power facilities may not be dispatched, or can lock a company into burning gas when a dual-fuel optionality may be desired.

However, regarding the disincentives for utilities to sign longer-term agreements, the white paper suggested some steps that regulators might take to reform certain policies that are undermining incentives for "prudent long-term contacting" or to adopt new policies that promote such contacting. One is adopting procedures for pre approval of contracts in which any subsequent reassessment would be confined strictly to the information that was known at the time the contract was signed. Another is ensuring that retail choice programs don't leave utilities uncompensated for stranded transportation capacity. And a third step is to somehow place a greater value on the reliability benefits of long-term agreements for power generators.

"This is not a 'Field of Dreams' industry where a pipeline company can 'build it and they will come,'" said INGAA President Donald Santa. "Without longer-term contracts for capacity pipelines will be seriously challenged when they seek financing for the projected infrastructure needs."

For a copy of the white paper, contact Martin Edwards at INGAA at (202) 216-5910.

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