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Pipelines: Beware of Riptides

Gas restructuring didn't end with Order 636, it just outran the regulators. Now the rules come from the downstream dealmakers.

Fortnightly Magazine - July 1 1996

the nomination deadline could actually have the opposite of its intended effect and result in a de facto wider accepted window of nominations through late and real-time nominations.

Flexible Prices,  New Services

Historically, pipeline prices have been tariff based. The FERC's recent statement on alternative rates 2 now gives pipelines greater freedom to pursue nontraditional pricing structures. Additionally, as more long-term contracts expire and capacity turnbacks increase, the FERC will allow pipelines to depart from the SFV rate structure for unsubscribed capacity. 3 Convergence of gas and electric markets will also foster new deals with nontraditional pricing. Marketers increasingly will demand nontraditional capacity deals that mirror the financial instruments they use (em such as capacity prices tied to basis differentials between energy hubs. The challenge to pipelines will lie in developing processes and systems that can accommodate flexible prices and track daily fluctuating prices through invoicing.

Services, like prices, have remained tied to tariffs and have proved slow to change. After a decade of intense cost-cutting and reengineering, pipelines will find the richest net-income increases not in cost reduction but in maximizing revenue through new services. The changes that took place in the telecommunications industry after deregulation revealed a heightened focus on new services. As AT&T lost its monopoly, new products and services emerged quickly. Marketing became more aggressive than before. Call waiting and caller ID serve as but two examples. In addition, new types of services evolved to meet the needs of  specialized groups of customers. Consider the numerous calling plans based on the usage of  various customer groups.

Better Technology: Decreased Average Customer Sophistication

As products like Williams's Streamline and Enersoft's Channel 4 on the commodity side, and TransCapacity's T/Nominator on the capacity side, increase in sophistication, users farther and farther downstream will be able to make their own deals. The trip downstream yields steadily decreasing volumes, hence decreasing economic motivation on the part of pipeline customers to fully understand the gas flow process. A

residential user ordering gas via his PC would be the extreme example. Pipelines hoping to serve these new, less-sophisticated shippers must consider the likely increase in customer-service costs per revenue dollar that they will incur if they maintain a relatively generic level of customer service for all shippers.

Strategies for Success

  • Upgrade Info Systems . The growth in the number of transactions will have a significant effect on pipeline information systems. Transaction-sensitive systems that run daily (em such as capacity allocation and balancing programs (em might now take three hours where they once took only one. Pipelines will find that this increase in processing time conflicts with their goal of serving an energy industry that regards fast information as a competitive advantage. Thus, competitive pipelines will align their processes with the energy industry's expectations by upgrading their current information systems.
  • Open Electronic Links . For pipelines to meet the GISB-suggested compressed cycle of nomination and confirmation requires a dramatic improvement in the current third-party confirmation processes. The current system of matching contracts between shippers and operators via phone calls and fax simply will not suffice.