July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Electronic Trading: Toward an Hourly Market in Natural Gas
THERE IS MUCH TALK ABOUT CONVERGENCE.
The Federal Energy Regulatory Commission asks, "What needs to be done to enable the gas and electric markets to work together to become more integrated?" The real question is more direct: "How can the gas industry transform what is presently, at best, a daily market, with daily procedures, to an hourly or quarter-hourly electric generation business and gain benefits at the same time?"
Will the answer come from hourly gas trading and pricing? Yes, but the system won't work smoothly unless something is done about the information and business practice infrastructure underlying gas transportation. Remember that there are two commodities to take into account: the methane and capacity to transport it through time and space. Creating an hourly market for gas title transfers from today's daily market is relatively simple. The real challenge rests with communications (em the acquisition, transfer and coordination of capacity information.
Gas transportation, especially across multiple systems, is plagued with complicated and often conflicting plans for nominations (requests), confirmations (clearing) and scheduling (recording the deal). Moving gas requires the coordination of contracts among buyers and sellers. It involves communication of information to transporters and interconnected parties up and down the line. The simplest transaction involves five parties (em producer, operator, pipeline, local distribution company and end user. The average transaction, which crosses two pipelines, can involve eight or more parties. The parties involved in these transactions are disparately organized with widely varying technological savvy.
Without market improvements in the gas industry, it is likely that the electric industry will consolidate and make permanent its present advantage in time-differentiated products. Why is it important that the gas industry match this capability? Simple. It's all about margins, value and competition. If gas can match the time-differentiation of electricity, then producers and owners of both methane and pipeline capacity will capture margins that otherwise would be available only to electricity generators and transmitters. Such a competitive allocation of revenue will prove essential to a long-term balance of investment and innovation in the energy business.
The task, nevertheless, is not easy. Making use of capacity also requires coordination of one's intentions (em not only with trading partners, but with intermediate transporters, operators and usually an LDC. It is here that the intellectual and technological challenges, although manageable, appear daunting.
To reach this next plateau will require more market information and a better process of supporting the exchange of facilitation information. Only then can the gas and electric markets work to become more integrated. Only then can the growth potential of natural gas in electricity production be realized.
Capacity: Flows and Impediments
At present, gas flows vary hour to hour to meet an electric generation load that varies hour to hour. However, no standard conventions and operating practices exist; this puts buyers and sellers at a disadvantage. Buyers and sellers of gas cannot subdivide their instructions (em ownership orders and changes (em and communicate those plans in a way that will allow transporters to receive, clear and record any changes to initial intentions. What is needed are