Just so you’ll know: “The natural gas market is a real successstory…..FERC has gotten an enormous amount of things right. Themarket may not be unblemished, but there are lots who consider thenatural gas market the best market in the world offering genuineprice discovery on a daily basis across dozens of products. It’ssomething everyone should be proud of,” Robert Levin of the NewYork Mercantile Exchange told a FERC conference last week.

“The natural gas market has performed remarkably…..through arange of market conditions with hundreds, if not thousands ofmarket participants, using an extraordinary selection of marketinstruments,” Levin continued, adding that the Commission should besupporting the “growth and increased sophistication of commerce.You’re at that point now.”

Warning against so-called solutions offered by some at theday-long conference to increase liquidity or tie the natural gasmarket to the electric market, Levin cautioned “liquidity cannot belegislated. Don’t overreact. The electric market is poorlyregulated. Remedies from the natural gas market should betransferred to the electric market, rather than allow the gasmarket to be corrupted by the regulatory mistakes of the electricmarket.”

Rather than “worry over regulating an hourly market for naturalgas, change the electric market,” which Levin believes hasdeveloped an over-emphasis on the hourly market because of theartificial tilt toward the spot market.

But while Levin warned against too much market meddling, othersamong the more than 30 representatives of the industry and itscustomers testifying at last week’s FERC technical conference oncompetitive natural gas markets argued for a variety of initiativesto increase market liquidity and transparency.

Eliminating the shipper-must-have-title rule, promotingexpansion of the existing pipeline infrastructure (especially inthe Northeast), doing away with straight-fix-variable (SFV) ratedesign, review of firm-to-wellhead rates in the production regionand the allocation of transportation costs between the upstream anddownstream were among the chief proposals proffered by mostlypipeline customers.

However, greater gas market liquidity shouldn’t be confused withincreased competition in pipeline transportation, municipals andproducers told FERC staff during the post-Order 637 conference.”…[W]e’re concerned the Commission may be equating marketliquidity with competition in pipeline transportation. The two arenot the same,” said Arthur Corbin on behalf of the American PublicGas Association (APGA), which represents municipal gasdistributors.

“Even with greater and greater market liquidity, monopoly powerexists in [the] pipeline transportation segment. Captive shipperswill always require a regulated transportation service from any hubto their citygate,” he said.

Much the same holds true for LDCs, noted Bruce Henning, directorof energy practices for Energy and Environmental Analysis Inc.(EEA), who represented the American Gas Association (AGA) at theconference. He agreed market liquidity has improved immeasurably,but he added “there’s not a liquid market center at every pipelinereceipt or delivery point location. Nor is there likely to bemarket centers in all of these locations in the near future…”Consequently, Henning said FERC will need to continue to protectproducers from market power that accompanies “limited access” topipelines.

The day-long conference held last Tuesday in Washington D.C. wasthe first of several that FERC staff plans to hold to explore theimpact of the Commission’s transportation policies on thedevelopment of gas markets.

Christopher A. Helms, president and COO of Panhandle PipelineCompanies, urged FERC not to enact policy changes that would placecommodity market liquidity as the “ultimate goal” at the expense ofthe transportation market. Helms said he advocated policiesencouraging pipeline construction of “optimal amounts of additionalcapacity” to meet the needs of the marketplace. “The single mostimportant characteristic for liquidity in the natural gas commoditymarkets is the availability of adequate transportation capacity.”

Charles Daverio, vice president of KeySpan Corp., echoed thatsentiment, saying FERC could increase liquidity in the New YorkCity market and elsewhere in the Northeast by promotingconstruction of new pipeline capacity to ensure adequate suppliesfor the region year-round. This would reduce energy costs andenhance reliability, he noted.

Panhandle’s Helms also cautioned against policy changes thatwould force the development of new market centers and hubs. Marketcenters should be allowed to develop at their “own pace,” and atlocations 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 tobuy and sell gas daily under “extremely competitive” conditions. Hesaid he’s “confident” more will be added because of the optionsthat they provide to gas customers. As another way to enhanceliquidity, KeySpan’s Daverio — as well as others — supportedeliminating the shipper-must-have-title rule, which requires thecustomer to retain title to the gas while it’s being shipped. Doingaway with the rule would pave the way for the development of newpipeline products and services, such as operational balancing andvirtual storage, he told the FERC staff.

But Dena Wiggins, an attorney with the D.C. law firm ofSutherland, Asbill & Brennan LLP, which represents the ProcessGas Consumers Group (industrial gas customers), said her group was”very concerned” about efforts to repeal the rule. She noted theCommission already has granted exceptions to theshipper-must-have-title rule in certain cases, and should continuewith this policy where necessary.

Moreover, Wiggins said industrial customers were increasinglyworried about the mounting market power of unregulated companies,especially gas marketers.

At the conference, she also expressed her group’s dismay withthe pipeline compliance filings with Order 637, particularly on thepenalty issue. Rather than an “improved” penalty structure,pipelines are proposing higher penalties, Wiggins said. “[We]continue to be shocked at the absolute wholesale departures” from637.

BP’s Jeff Holligan also waded into the fight against all the newservices outlined by pipelines in their Order 637 filings, which hesaid were “nothing more than penalties disguised as balancingservices that customers can’t refuse.” He urged the Commission tocheck with a pipeline’s customers, noting one proposed new”service” is opposed by 100% of the pipeline’s non-affiliatedcustomers. Some of the proposed services, Holligan said, add up tonothing more than degradation of existing long-term firm service.

Holligan, representing the largest producer in the U.S. andCanada, joined other market participants in urging adoption of”standardized allocation (sales), standardized penalty levels, andthe requirement that all pipelines implement a uniform titletransfer tracking process.” In short, “standardizing pipelineservices, certainly on an individual pipeline, and also to a largeextent between and across pipelines is imperative if markets are tobe highly liquid. Individually negotiated services, where everyservice is a different service, or the adoption of a so-called dualtrack market, are the antithesis of a highly liquid, efficient andcompetitive gas market. Standardization of operational terms ofpipeline service is necessary to facilitate trading throughe-commerce.”

FERC “should be striving to commoditize pipeline capacity so itcan be traded along with gas electronically,” Holligan said.

Susan Parker, Ellen Beswick

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