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Barbarians at the City Gate

Fortnightly Magazine - September 15 1995

peak pipeline capacity costs $1.10 per unit, shaving the maximum load by one-third drops the effective price to 73 cents, leaving a comfortable 37-cent profit. No utility can prudently "compete" on this basis because the utility's obligation is to cover the peak-day load (em not the average daily load.

Daily balancing reduces, but does not eliminate, opportunities to "game" the system. For one thing, the balancing requirement generally includes a tolerance band, permitting daily variations of around 10 percent without penalty. The tolerance band effectively becomes a 10-percent allowance for the peak day (em that is, deliveries to the utility can undershoot customer load by as much as 10 percent without penalty. Even if the deliveries fall more than 10 percent short, the penalty for unauthorized takes of utility gas seldom exceeds $25/Mcf. That penalty is small relative to the $200/Mcf cost of peak-day pipeline capacity, making it economic to fall short on capacity and incur the penalty.

These examples illustrate the significant, artificial profits that are potentially available from supplying core customers with less than firm pipeline capacity. Let's examine how this fact relates to the way utilities traditionally have operated.

The Marketing of "Virtual Firm"

Because of the nature of the business, gas utilities hold a very definite notion of "firm." When gas pressure is lost, the affected residences and businesses need to be visited twice: once to shut down the gas equipment, and again to relight the pilots. A widespread failure, particularly in harsh weather conditions, is a nightmare. The logistics of getting to each affected customer twice are daunting; risks and potential liability to missed customers are enormous.

To a gas utility, firm means whatever it takes to avoid this outcome. In the post-636 environment, firm means gas under contract from reliable suppliers and sufficient space reserved in the pipelines to transport that gas from the producing areas to the city gates. It may also mean reserved storage space and utility-owned, peak-shaving resources like liquefied natural gas and propane.

What marketers sell to consumers often is not firm in this traditional sense. The marketers instead rely on released pipeline capacity that can be recalled by the utility (em on a cold day, for example. Listen to what one marketer recently recounted:

"I know at least four guys who were 40-50 MMcf/day in the hole because their transportation got recalled and they had signed peaking contracts to sell gas to several end-users. They were pretty desperate."3Another tactic is called leveraging of firm, in which the aggregate customer peak-day load exceeds the firm capacity under contract. Leveraging of firm capacity can supply some of the customers all the time or all of the customers some of the time, but it can't supply all of the customers all of the time. Marketers may also rely on balancing tolerances and utility-owned gas to cover peak-day

customer load. Finally, they may depend on utility-granted flexibility to reallocate deliveries among customers after the fact as a fallback.

Marketers are, of course, aware that they are "leaning" on the

system to reduce costs and improve