(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
When Shippers Seek Release
Price caps, secondary markets, and the revolution in natural-gas portfolio management.
Gas Association (AGA), such difficulties may arise also from constraints imposed on the LDC itself from geography or weather.
As AGA explained, an LDC in a cold weather region that serves load driven largely by temperature-sensitive residential and small commercial customers with low load factors may find it difficult to manage its pipeline-capacity rights. The problem is exacerbated if the LDC lacks storage capacity in nearby market areas.
The key to the deal is the package, according to Ron Neal, division director for Macquarie Cook Energy LLC. Neal explains that in these pre-arranged deals for beneficial capacity release, “The combination of the transportation capacity and the commodity is essential to the nature of the product; absent such a combination, the LDC would not be releasing the capacity in the first place.”
Thus, the replacement shipper that acquires the released capacity will want to acquire as diverse a portfolio as possible, of both supply and capacity, so as to maximize margins through greater economies of scale. The larger the margin, the greater the benefits that will be remanded back to the releasing LDC shipper (with a percentage share flowed back to retail ratepayers, as is typically required by state public utility commissions).
These complex deals may involve payment of a transaction fee to the portfolio manager, who becomes the replacement shipper. Payment may come in the form of a lump sum, or as a share of revenues to be earned in connection with future gas sales. Or, perhaps the releasing LDC shipper may agree to reimburse the portfolio manager for capacity reservation fees that the LDC otherwise would have paid to the pipeline.
These diverse revenue streams and forms of payment demand a key question: Do they count in determining whether the price of the release exceeds the cap?
The marketer petition does not ask FERC for a wholesale rethinking of policy. Rather, it asks FERC only to issue a few simple safe-harbor rules. The petition asks FERC to rule that in the context of a pre-arranged release of pipeline capacity, pursuant to a portfolio management deal and at the maximum lawful rate, that payments will not be treated as exceeding the price cap, if payment is tendered as follows:
As a transaction fee, as a lump sum or as revenues to be earned on or in association with gas sales, to be paid by the portfolio manager (the replacement shipper) to the customer (the releasing shipper).
Second, the petition asks FERC to guarantee that a payment by the customer to reimburse the manager for pipeline-reservation charges will not be treated as a set-off that lowers the effective price of the release, which otherwise would trigger a requirement for competitive bidding.
The marketer petitions urge the commission simply to act quickly on their safe-harbor request, without incurring the delays that would come with issuing a formal rulemaking proposal to revamp policy on price caps, and the tying, buy/sell and SMHT rules.
Current rules pose problems, especially now that Congress has granted new enforcement powers to FERC in the Energy Policy Act