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When Shippers Seek Release

Price caps, secondary markets, and the revolution in natural-gas portfolio management.

Fortnightly Magazine - July 2007

manages gas supply for retail choice customers who take delivery from the LDC.

Because of forecasting inaccuracies, or other reasons, notes AGA, competitive retail suppliers on a daily basis often will provide “less gas at the city gate than their retail customers consume, requiring that the LDC provide that gas from its own supplies.”

The problem is exacerbated by the multiplicity of competitive retail suppliers, and the diversity of LDC’s pre-existing supply portfolio, assembled at least in part before the competitive retailers arrived on the scene.

Thus, as AGA adds, “If an LDC were to release a share of its pipeline and storage capacity to choice providers, the individual released quantities would be so small that the replacement shippers would lose the no-notice flexibility that the LDC enjoys.”

Dynegy argues that FERC should reverse course and allow buy/sell transactions, as is the case in Canada, where the Canadian Natural Gas Exchange, an electronic exchange similar to the Intercontinental Exchange (ICE) operates as a clearinghouse for natural-gas transport capacity:

“It is credit-efficient for a market participant to sell delivered product to and buy supply from the same counterparty. No collateral is expended in this instance.

“Under the current rules, even if a market participant has a counterparty with supply zone gas to sell that needs to purchase market zone gas, the market participant is forced to find a third party to buy supply zone gas from in order to avoid a buy/sell. This necessitates additional credit posting or prepayment to the party from which supply is purchased. Moreover, the counterparty with supply zone gas to sell has to look elsewhere in the market rather than efficient transacting with their existing counterparty.”

This complicated explanation recalls the early days of the California ISO, when many electric-industry experts faulted the ISO’s rule that forced scheduling coordinators to submit balanced schedules.

FERC policy requires releasing shippers in many cases to post their offers on pipeline electronic bulletin boards or Internet sites, so that prospective replacement shippers can bid on the rights if the price on the initial release offer falls below the pipeline’s recourse rate. Again, this required practice tends to interfere with the business of pre-arranged deals for gas portfolio management.

Duke Energy highlights how FERC’s posting and bidding rules can interfere with pre-arranged deals.

As is explained in Duke’s comments, most pre-arranged releases by LDCs to allow for outside portfolio management are closely monitored by state regulators to ensure that any assets needed to serve retail load are conferred to third parties only after a showing of ratepayer benefits. Moreover, state PUCs often will require LDCs to conduct a request for proposals (RFP process) before selecting a portfolio manager, and will issue formal orders authorizing the deals.

Therefore, according to Duke, FERC’s bidding requirement “is redundant and tends to compromise the integrity and efficiency of a competitive process that has already taken place.” (See comments, Duke Energy, p. 9, filed Mar. 23, 2007.)

Ameren, clearly in the minority, claims that “the vibrancy of the capacity release market has not suffered under the existing rules.”