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Improving Competitive Position with Natural Gas Storage

Fortnightly Magazine - October 15 1995

be received or the costs that could be avoided by having gas readily available for each unit decline in the daily temperature below normal.

Management could use this information for marketing and planning objectives. Such an equation could be used to evaluate service from a contract for flexible salt storage against a contract for relatively inflexible conventional storage reservoir. Thus, the equation could be used for a variety of scenarios to gauge the expected value of all premiums the company could gain if it acquired a contract for flexible salt storage. Weather and withdrawal records from previous years could be used to develop these scenarios. Equations could also be estimated using readily available data that includes additional variables such as the estimated level of storage on a day or week relative to expected deliveries on the next day or week.

These estimates could be used for planning purposes. Such tools are likely to grow in importance as distribution companies are forced to compete with independent producers that attempt to sell more gas to end-use customers and as other energy providers attempt to capture customers in the increasingly competitive and unregulated energy marketplace. t

John H. Herbert is currently senior economist at the Energy Information Administration, U.S. Department of Energy, and adjunct professor of statistics, Virginia Polytechnic Institute and State University. He has written extensively about natural gas storage, wellhead prices, and contracting practices in the gas, cash, futures, and related derivative markets over the last five years. Mr. Herbert has written more than 50 refereed articles in

energy, economic, and statistical journals; more than 20 proceedings, articles, and reports; and a book. He has over 15 years' experience as an energy consultant in the private and public sector and regularly conducts seminars for industry and professional audiences.

1. For a discussion and presentation of the details supporting the statistics reported in this section and elsewhere in the article see Energy Information Administration, "The Value of Underground Storage in Today's Natural Gas Industry" (DOE/EIA-0591), 1995. The views expressed are those of the author and do not necessarily represent those of the Energy Information Administration, U.S. Department of Energy.

2. During 1994, however, the share of capacity filled monthly exceeded that of 1993 throughout the nonheating season, and by September it even exceeded the 1991 share. The 1994 nonheating season was the first under Order 636, and thus the first during which a significant amount of interstate storage came under the management of parties other than the pipeline companies. For the most part, these parties are local distribution companies, and it is not surprising that during this first year they may have filled, in aggregate, a higher portion of available capacity than did pipeline companies. A decline in gas prices in late summer also may have encouraged more rapid filling of storage.

3. For a discussion of this see the classic article N. Kaldor, "Speculation and Economic Stability", VOl. 7, 1939, 1-27. For a modern treatment see J. Williams, "The Economic Function of Futures Markets", Cambridge University Press, Cambridge, 1986.

4. In this analysis