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Alliance Gas Pipeline: Early, Late, or Just in Time?

A story of big gambles, big assumptions, and spark spreads now turned upside down.
Fortnightly Magazine - November 15 2000

utility in Manitoba, after Centra experienced problems with its trading/hedging program. This problem had cost the utility more than $10 million.

Westcoast is notable for its ability to dust itself off and move forward. It now appears to hold a new playbook with enormous potential.

Economic Analysis: The State of the Markets

By June of this past summer, some noted that when Alliance came on line this fall it would supplement low inventories heading into the winter heating season. That has not happened. Instead, supplies now are tight not just in the lower 48 states, but also throughout North America.

The Alliance system was designed to deliver more than 1.3 billion cubic feet (Bcf) of natural gas per day on a firm basis from the gas-producing regions of northeastern British Columbia and northwestern Alberta to the Chicago area, where it interconnects with the North American pipeline grid. Thus, Chicago should continue to grow in importance as a natural gas market because of Alliance. Yet back on the East Coast, Alliance will not likely prove any more important than Transco Zone 6. In fact, Alliance and adjoining new pipes should lead to a better integration of eastern and Chicago markets. Alliance also is likely to help better integrate the eastern U.S. markets with the Alberta producing area. On the other hand, however, Alliance and other pipe projects have made gas markets in the western United States a bit more complicated. These markets will continue to go through adjustments, largely because of inefficiencies in gas markets.

For example, natural gas markets operate at the mercy of several unsettling factors: (1) the complexity of geology in producing areas, (2) the "lumpiness" of most new major pipe investments, (3) poor information on capacity available to ship gas, and (4) the market power (open to debate) of incumbent pipes and utilities. Hence, price behavior at different locations does not follow the model of one price-or at least not for extended periods of time in this growing and changing market. The result is price behavior like that observed out West this summer and observed between Alberta and Henry Hub, La., markets between 1996 and fall 1998 .

Gas prices in the West this summer reflected several factors. Among these was a lack of pipe capacity to move gas out of the Rockies to western markets—a possible market power problem, as evidenced by a complaint by the California Public Service Commission to federal regulators. 6 Another factor was unworkable scheduling rules. These rules leave producers unable to ship their gas when pipes may be operating at less than full capacity. As a consequence, prices remain high in an end-use market when demand shifts up, but decline or remain low in a producing market where gas competes with gas for room on scarce pipe space. This situation seems to benefit particular companies, but disadvantages most producers and consumers. Alliance will have little effect on this particular behavior. Prices could remain high in the West as long as capacity appears to be tight on particular systems.

Moreover, prices in the Rockies