ECO 436
Natural Gas
Pipeline regulation
• 25 pipelines account for 90% of volume
(1987)
• Most LDCs served by 3 or fewer pipelines
• Pipelines bought gas from field producers
on LT contracts 20 yrs. or more
• ROR regulated
ECO 436 David Loomis 309-438-7979
Pipeline regulation (cont’d)
• 2 pt. tariff - demand charge - subscribed for
a certain max level of consumption per
period
• commodity charge - based on quantity
actually consumed
• Pipelines buy gas from producers and resell
to distributor
ECO 436 David Loomis 309-438-7979
Pipeline regulation (cont’d)
• 1985, FERC order 436, did not require
pipelines to offer transportation - only
services, but if they did, access rates must
not be not discriminatory.
• Some pricing flexibility
ECO 436 David Loomis 309-438-7979
Pricing
– Peak load pricing problem
– Solution
1 storage
2 interruptible tariffs
ECO 436 David Loomis 309-438-7979
Pipeline regulation
(cont’d)
• April 92 FERC 636, mandates pipelines to
separate gas sales from transportation and
allowing open access to pipeline transportation for
gas producers and customers
• Gas shortages in 70’s, surplus in 80’s
• 1987 Natural gas provided 22% of total US
primary energy requirement
– 45% of all delivered residential energy
ECO 436 David Loomis 309-438-7979
N a tu ra l G a s S p o t P ric e D iffe re n c e s B e tw e e n S e le c te d P o in ts
A p ril 1 9 9 6
C a lg a ry , A lb e rta
$ 1 .7 8
$ .3 3
$ .1 0
$ 1 .4 9
O v e rth ru s t
D e tro it
$ .1 2
$ .4 1
$ 1 .3 9
N ia g a r a
$ .0 5
L e id y
N e w Y o rk
$ .0 1
C h ic a g o
$ .2 8
$ .0 9
$ .2 3
K e rn
$ .2 2
$ 1 .1 7
San Juan
Lebanon
$ .0 4
P a n h a n d le /H u g o to n
$ .3 2
$ .3 1
$ .1 1
$ .1 4
$ .1 7
$ .9 7
$ .1 1
$ .1 8
A tla n ta
N o rth L o u is ia n a /E a s t T e x a s
$ .2 5
$ .0 2
$ .1 7
P e rm ia n
$ .1 2
D ire c tio n o f F lo w
($ .X X ) P r ic e s in c o n s is te n t
w ith d ire c tio n o f flo w
$ .1 9
S o u th L o u is ia n a
T e x a s G u lf C o a s t
S o u r c e : N a tu ra l G a s W e e k . D a ta th r o u g h A p ril 2 9 , 1 9 9 6 .
N o te s :
M o n th ly a v e r a g e p ric e s fo r s e le c te d d e liv e ry p o in ts fo r d e a ls in A p r il. P r ic e s fo r A lb e r ta a n d N ia g a r a a r e fo r C a n a d ia n s p o t tra n s a c tio n s o f 1 2 m o n th s o r le s s .
P r ic e s u s e d fo r D e tr o it a r e fro m C o lu m b ia G a s a t M a u m e e , O h io . S p o t p r ic e s re fle c t tr a n s a c tio n s o f 3 1 d a y s o r le s s . M o n th ly p r ic e is th e m e d ia n o f th e p r ic e s
a s s ig n e d to a m a rk e t c e n te r a r e a .
ECO 436 David Loomis 309-438-7979
Problem of Differentials
• Max. price was capped for
transportation
• Value of service (shown by price
differentials) exceeded cap
• Marketers that owned capacity would
only sell bundled service
ECO 436 David Loomis 309-438-7979
FERC 637
• Passed Feb 2000
• waived the price ceiling for short-term
released capacity (less than one year) until
September 30, 2002.
• Effectiveness of this unregulated secondary
market for short-term capacity will be
assessed after the trial period.
• permitted pipelines to propose contracts for
capacity with peak/off-peak and term
ECOrate
436 David
Loomis 309-438-7979
differentiated
structures.
LDC Regulation
• from city gate to burner tip
• ROR regulated by state
• gas price is pass thru PGA – purchased gas
adjustment clause
ECO 436 David Loomis 309-438-7979
IL LDCs
• 14 investor-owned gas public utilities in IL in
1999
• NICOR 2,266,470 customers 42.27cents/therm
• Peoples Gas (Chicago) 813,200 customers 64.09
cents/therm
• Illinois Power 399,871 customers 52.27
cents/them
• North Shore 141,806 customers 56.43 cents/therm
ECO 436 David Loomis 309-438-7979
PGA Clause
• Peoples & North Shore proposed
eliminating the PGA clause and include gas
charges in base rates in 1999.
• Commission ordered set fixed gas charge
• Companies rejected the set rate and elected
to maintain PGA
ECO 436 David Loomis 309-438-7979
PGA Clause (cont’d)
• NICOR proposed an alternative regulation
scheme.
• Proposal was approved in November, 1999.
ECO 436 David Loomis 309-438-7979
Armstrong & Leppel combination gas and electric
– No statistically significant indications of
cost complementarity or economies of
scale in the combination gas and electric
ECO 436 David Loomis 309-438-7979
Lyon & Hackett
• Bottleneck or essential facilities - facilities
with relatively large economies of scale,
substantial asset specificity, initially linking
isolated buyers and sellers.
ECO 436 David Loomis 309-438-7979
Bottleneck facilities
characteristics:
1 feature extremely large quasi-rents and require
protection like vertical integration.
2 governed by regulatory policies that protect both
investors and customers.
3 Began as providers of a service that tied upstream
supply with transportation of that supply.
4 Networks tend to grow in scope and complexity
overtime creating greater competition upstream of the
bottleneck facility.
ECO 436 David Loomis 309-438-7979
Reasons for using long-term governance
structures in transactions with upstream
suppliers:
1 quality differences that can only be verified thru experience.
2 If spot prices are not free to adjust instantly, shocks many
cause the markets not to clear.
3 Began as providers of a service that tied upstream supply
with transportation of that supply.
4 Networks tend to grow in scope and complexity overtime
creating greater competition upstream of the bottleneck
facility.
ECO 436 David Loomis 309-438-7979
Transactional Characteristics
1 heterogeneity of customers
– residential - no storage - can’t switch to other fuels
– industrials - dual fuel boiler technology
2 2 forms of reliable service
– instantaneous service - allows buyer to take gas out of pipeline as soon as
buyer as gas put in
– “no notice” peak service - allows buyer to take as much gas as needed
without advance warning to the pipeline
3 Reliability costs
– inventory costs of holding excess gas deliverability
– pipeline costs - holding excess transportation capacity maintaining extra
system pressure (line pack) and monitoring suppliers.
ECO 436 David Loomis 309-438-7979
Critique of order 636
• FERC focuses on benefits of unbundling, but rejects the
possibility of degraded service reliability.
• Some pipelines argued that bundling was necessary for
reliable no notice service (later refuted)
• “We predict the cost of internalizing externalities in the
unbundled system will be greater than in the bundled
system.” p. 390
• FERC 636 should have left bundling as an option.
ECO 436 David Loomis 309-438-7979