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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
  • Expect to see more pipelines setting up direct electronic links with their third parties.
    (Restrict Flexibility. An alternative to improving electronic communications to manage the increased flux caused by greater shipper reliance on late and real-time nominations would be for a pipeline to limit such nominations by only fulfilling the minimum GISB requirements (e.g., cutting off all nominations for the next gas day at 11:45 a.m., allowing only one intra-day nomination change.)
  • Measure Profit by Customer . Pipelines must understand how much each of their shippers brings to the bottom line in order to establish a new mechanism for pricing nonstandard deals. In theory, cost-of-service methods used by the FERC to set rates should give pipelines the data to determine profitability by customer, making the minimum tariff rate the floor a pipeline can price at without losing money. But even a casual observer of the gas industry knows that rates based on cost of service often bear little resemblance to the true cost of serving any individual customer. The resulting cross-subsidization of less profitable shippers by more profitable shippers obscures the proper discounting range for maximizing profitability for any individual shipper.
  • Calculate Profitability by Transaction . As the number of nominations increases and deals become more short-term, pipelines must migrate from pricing desks where shippers call to price a deal and preset rates posted on their electronic bulletin boards, to a more dynamic pricing mechanism. Pricing desks will be expensive to maintain as calls increase and preset posted rates lack the flexibility to respond to the energy market's quickly changing variables. Pipelines should strive for a pricing system that is linked to their SCADA (system control and data acquisition) systems (one capable of analyzing the marginal cost of doing a deal at any point in time. For example, a deal that causes another compressor to come on line will have a high marginal cost and should be priced accordingly.)
  • Formalize a Process to Create New Services . Pipelines historically have not had to create new products and services continuously to serve their markets. Instead they generally sought, on an ad-hoc basis, new ways to market existing services. In the future, successful pipelines will formalize a process of innovation that should increase the number of new products and services brought to the market as well as how quickly they are implemented.
  • Consult with Shippers . Be more than an order-taker. As the complexity of the business changes, so will the role of the pipeline employee. For example, as the logistics of gas flow become more electronic, a scheduler's focus can shift from taking orders to actively helping customers accomplish their business in a timely and efficient manner. To prepare pipeline employees for their new roles will require that they have a detailed understanding of the pipeline's business as well as that of their customers. Employees can gain this knowledge in a number of ways (for example, internal and external training and face-to-face interaction with their peers on the customer side.)

Endnotes:

1. Standards for Business Practices of Interstate Nat. Gas Pipelines, Dkt. No.