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NAESB Committee Approves Standards for Index-Based Capacity Releases

Building on FERC's recent actions to improve competition in the secondary market for pipeline capacity, the executive committee of the North American Energy Standards Board's (NAESB) Wholesale Gas Quadrant voted out a protocol Wednesday for using the differentials between natural gas commodity price index points to price short-term released capacity.

The proposed standards set the formula for how bids and offers using price index calculations for the capacity to be released may be posted on a pipeline electronic bulletin board and how the results may be calculated. The standards still must be ratified by the NAESB membership and filed with the Federal Energy Regulatory Commission (FERC). NAESB President Rae McQuade said she expected that the FERC filing on index transactions would be made by the end of the year.

FERC recently lifted the cap on rates that may be charged for short-term releases of capacity by firm shippers and also expanded its rules to allow free rein to asset management arrangements (see NGI, June 23). This will enable a holder of firm pipeline capacity, for instance a local distribution company (LDC), to hand over management of its contracted pipeline and storage space and gas supply to a management company. That manager will provide the LDC's requirements and sell any excess space or supply into the market.

Soliciting bids based on the difference between the gas price index at the point the supply enters the mainline and the delivery point index price, plus or minus other factors, would provide a quick reference to current capacity values. Power generators, for instance, could bid on extra gas transportation capacity to carry spot market gas during summer heat waves, and LDCs could suspend storage fills for a few days or weeks when they see a higher value for the capacity elsewhere.

"In addition to asset management, this new environment provides an opportunity for firm shippers to be more market responsive through capacity release of their firm space," said Mike Novak, assistant general manager of regulatory affairs for National Fuel Gas Distribution, and vice chairman of the NAESB Gas Quadrant executive committee. He said a few capacity release deals are already bid off the commodity indexes, but the new FERC rules and accompanying standards should expand the business.

Novak said he expects to see some capacity releases tied to prices in the electric power market. Others at the NAESB committee meeting in Houston Wednesday said that while some deals were getting done, the new rules and standards would make the industry "more comfortable" with the practice. They also pointed out that with FERC pushing the initiatives, the process to make them happen could move on a fast track.

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