Gas Markets
Ron Mosnik
Director, Gas Supply
Wisconsin Public Service Corporation
Energy Utilities Basics
October 5, 2012
Page 1
Gas Markets Agenda
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Page 2
Brief history of natural gas regulation
Gas transportation market
Shale (Natural gas market game changer)
Natural gas pricing
Price and volatility
Wisconsin Public Service Corporation
Profile
 1,363 Employees
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319,000 Gas Customers
12.8 Bcf Gas Storage
38 Bcf System Sales
$178 Mil (Annual Gas Cost)
 441,000 Electric Customers
 2,175 Mw Gen Capacity
Data as of December 31, 2011
Page 3
Regulation of WPSC Gas Utility
 Federal Regulation (FERC) – Federal Energy
Regulatory Commission
 Transportation, Storage & Sales of natural gas
in interstate commerce
 State Regulation (PSCW) – Public Service
Commission of Wisconsin
 Tariff (Distribution Rates, Extension Rules,
Service Rules, etc.)
 Gas Cost Rates (Transportation & Storage, Gas
Purchases, Hedging, etc.)
 Pipeline Safety (Federal & State rules)
Page 4
Natural Gas Industry (Current State)
• Natural Gas Commodity is De-regulated
• Transportation of Natural Gas is highly
Regulated
 Interstate transport
 Gas Storage in interstate commerce
 Why?
 Provide the market “open access” to gas
transportation assets
 Mitigate abuse of limited gas transportation assets
Page 5
Natural Gas Industry (Prior to 1938)
• Local gas production (Coal Gasification)
• Expanding exploration for crude oil
and natural gas
• Steel welding perfected
 High pressure steel pipelines
• Federal Trade Commission (FTC)
 Looked after the growing industry
 Made recommendations to regulate
the natural gas industry
Page 6
Natural Gas Act of 1938 (NGA)
 Federal Power Commission (FPC)
was given authority to regulate…
 Transportation of natural gas in
interstate commerce
 Sales of natural gas in interstate
commerce for resale
 Exempted:
Local distribution of natural gas
Production and gathering of natural gas
Page 7
Natural Gas Act Required…
• Certificates of public convenience and
necessity [NGA §7(C)]
• Abandonment authority [NGA §7(b)]
• Just and reasonable rates
[NGA §4 and § 5]
• Nondiscrimination [NGA §4(b)]
• Reporting [NGA §10]
Page 8
Bundled Sales and Gas
Transportation Service
Producer
Interstate
Pipeline
Gas and
Transportation
Service
(Bundled)
Page 9
Local
Distribution
Company
Natural Gas Policy Act of 1978 (NGPA)
Natural gas supply shortage
in mid-1970s
 Legislation that established…
 Federal Energy Regulatory Commission
(FERC) - Abolished FPC
 Extensive price regulation at wellhead
 Curtailment priorities
 First timeline for natural gas deregulation
Page 10
Federal Energy Regulatory Commission
(FERC)
• Five commissioners
 Appointed by the President
(With advice and consent of Senate)
 Serve staggered five year terms
 Equal vote on regulatory matters
• No more than three may belong to same
political party
• Chair is designated by President to
serve as FERC’s administrative head
Page 11
Present FERC Commissioners
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Chairman Jon Wellinghoff (D)
Commissioner Philip Moeller (R)
Commissioner John Norris (D)
Commissioner Cheryl LaFleur (D)
Commissioner Tony Clark (R)
Page 12
NGPA of 1978 (Objectives)
• Reform of wellhead price controls
(increase supply on interstate pipelines)
• Foster a more competitive environment
(in market areas & along the interstate
pipeline systems)
• Restructure distribution and sales
(to provide “open access” on pipes to
serve market areas)
First step toward present regulatory
system
Page 13
NGPA of 1978 (Outcomes)
• Production boom of late 1970s, early 1980s
• FERC successfully stimulated supply
to meet demand
• Exploration and production segments
flourished
However - Unforeseen jurisdictional and
bureaucratic problems arose
 Had to purchase a bundled package
 “Open access” to marketplace did not
materialize
Page 14
FERC Order 436 (1985)
• Pipelines must transport gas on an
open-access, nondiscriminatory basis
• Pipeline capacity to be allocated
(first-come, first-served basis)
• LDC’s have ability to:
 Convert bundled service to
transportation-only contracts
 Reduce demand volume for gas
purchase contracts
• “Shipper Must Have Title” Rule
Page 15
Orders 500 & 528 (Take-or-Pay)
Painful consequences when FERC
permitted LDC’s to acquire gas directly
from suppliers under Order 436
 Orders 500 & 528 resolved problems
 Allow pipelines to buy out or buy down
supply contracts
 Apportion costs between themselves and
their customers (Take-or-pay provisions)
Page 16
Open Access Transportation and
Bundled City Gate Service
P/L Gas and
Transportation
Service
(Bundled)
Producer
Interstate
Pipeline
Gas Commodity Sales
Transportation
Page 17
Local
Distribution
Company
Natural Gas Wellhead Decontrol
Act of 1989 (NGWDA)
Congress decided price regulation was
unnecessary and anticompetitive
• NGWDA amended the NGPA of 1978 to
phase out all price regulation of natural
gas (commodity)
• Natural gas (commodity) market
completely deregulated as of January 1,
1993
Page 18
FERC Order 636 (1993) – “Final”
Restructuring (Pipeline Services)
 Interstate Natural Gas Pipelines must…
 Unbundle transportation from sales of
gas
Pipelines can only transport
gas for others (Shippers)
 Provide all shippers access to certain
information on electronic bulletin boards
 Allow shippers to release capacity
on permanent or temporary basis
Page 19
FERC Order 636 (cont.)
 Interstate Natural Gas Pipelines must… (cont.)
 Allow shippers to have flexible receipt and
delivery points
 Provide “no notice” service to protect certain
shippers in the event of a sudden need for gas
(balancing)
FERC adopted Straight Fixed Variable rate design
Demand charge (fixed costs)
Commodity charge (variable costs)
Page 20
Open Access Gas Transportation
Producer
or Broker
Gas Commodity Sales
Transportation
Page 21
Interstate
Pipeline
Delivery Point
U.S. Gas Transportation System
Page 22
Upper Midwest Gas
Transportation Market
Page 23
Natural Gas Market Game Changer
Page 24
Shale Production Outlook
History
Forecast
Bcf/d
Western
Canada
Appalachia
$/Dth
Gulf Coast/Midcontinent
History of NYMEX Gas Prices
Courtesy TransCanada
Page 25
North American Gas Supply
History
Forecast
LNG/Other
Shale
WCSB
Bcf/d
Conventional
Eastern U.S.
Rockies/San Juan
Permian/Anadarko
Big Four Shales
Onshore Gulf
Gulf of Mexico
Mexico
Courtesy TransCanada
Page 26
North American Gas Demand
History
Forecast
LNG Exports
Bcf/d
Electric
Generation
Industrial
Commercial
Residential
Pipe/Plant Fuel
Courtesy TransCanada
Page 27
Natural Gas Pricing
What Drives Natural Gas Prices?
Natural gas is a traded commodity
(New York Mercantile Exchange - NYMEX)
Law of supply and demand
Page 28
Natural Gas Pricing
(Supply and Demand)
 Drivers for lower prices:
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Increased shale production (Supply)
Adequate storage inventories (Supply)
Greater energy efficiency (Demand)
Economic down-turn (Demand)
Weather (Demand)
Warm winter
Cool summer
Page 29
Natural Gas Pricing
(Supply and Demand)
 Drivers for higher prices:
 Production losses from hurricane
damage (Supply) ???
 Low winter storage inventories (Supply)
 Increased gas usage for fuel
switching/emissions control (Demand)
 Economic recovery (Demand)
 Weather (Demand)
Cold winter
Hot summer
Page 30
Natural Gas Pricing
 Other factors influencing price
 Value of the dollar (global commodity)
(currently - U.S. price insulated)
 Speculators trading in market (i.e.,
Natural Gas Fund, derivatives, etc.)
(Oversupplied market – non issue)
Page 31
Page 32
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
$/MMBtu
Historical NYMEX Gas Futures Prices
Delivery Months: January 2001 through August 2012
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Historical NYMEX Gas Futures Prices
Delivery Months: January 2001 through August 2012
$16.00
Supply/Demand in Balance
Supply/Demand in Balance
$14.00
$12.00
Market Oversupplied
$8.00
$6.00
$4.00
$2.00
Page 33
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
$0.00
Jan-01
$/MMBtu
$10.00
Natural Gas Pricing
What Drives Natural Gas Prices?
Natural gas is a traded commodity
(New York Mercantile Exchange - NYMEX)
Law of supply and demand
 Purchase location (Location Basis)
 Timing of delivery (Futures Basis)
Page 34
Natural Gas Pricing (Purchase Location)
 Purchase Location
(Location basis)
 Influenced by:
 Supply at purchase locations
 Transportation capacity at purchase locations
(Receipt Points)
 Demand at Delivery Points along pipeline
Page 35
Natural Gas Pricing (Purchase Location)
Example - Location Basis
(Trade date: Sept. 10, 2012 Delivery)
Location
NYMEX
ANR Ok
ANR La.
Chicago
Page 36
Price ($/Dth)
$2.81
$2.54
$2.59
$2.76
Basis ($/Dth)
($0.27)
($0.22)
($0.05)
Natural Gas Pricing (Timing of Purchase)
 Timing of Delivery
(Futures basis)
 Influenced by:
Point in time the gas is to be delivered
Gas storage costs (factor)
Page 37
NYMEX Future Strip Prices
NYMEX Gas Prices ($/Dth)
Trade Date 9/11/2012
$4.80
$4.60
$4.40
$/Dth
$4.20
$4.00
$3.80
$3.60
$3.40
$3.20
$3.00
N
D
Nov 12 - Oct 13
Page 38
J
F
M
Nov 13 - Oct 14
A
M
Nov 14 - Oct 15
J
J
Nov 15 - Oct 16
A
S
O
Nov 16 - Oct 17
Natural Gas Pricing Mechanisms
 Pricing Mechanisms (Physical Supplies)
 First of month index
Price fixed for the month
 Daily price
Price fixed for the day
 Fixed price
Price fixed for a future delivery period
Page 39
Natural Gas Market (Price and Volatility)
Any event or trend that indicates a
change in gas supply or gas demand
can also trigger a change in price
Page 40
Natural Gas Price (Market)
NYMEX First of Month Natural Gas Prices
Delivery Months: January 2001 through August 2012
$16.00
Hurricanes
$14.00
Cold Winters
Energy Complex
Price Run-up
$12.00
$8.00
$6.00
$4.00
$2.00
Page 41
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
$0.00
Jan-01
$/MMBtu
$10.00
Natural Gas Market (Price and Volatility)
The price volatility of a commodity is a
function of the relative rate at which the
price of a commodity moves up or down
Volatility Metric
(Std Dev of the % change in gas prices
month to month)
Page 42
Natural Gas Price Annualized Volatility
NYMEX First of Month Natural Gas Prices
Delivery Months: January 2001 through August 2012
$16.00
$14.00
$12.00
48% Volatility
$8.00
$6.00
$4.00
$2.00
67% Volatility
Page 43
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
$0.00
Jan-01
$/MMBtu
$10.00
Gas Markets
Page 44