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When Shippers Seek Release

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

Fortnightly Magazine - July 2007

have formed the backbone of FERC’s open-access model for natural-gas pipelines and shippers for nearly two decades now, are all under attack and in play in the commission’s gas-rulemaking investigation. ( See Request for Comments, Docket Nos. RM06-21, RM07-4, Jan. 3, 2007, 118 FERC ¶61,005 .)

FERC’s decision to open the door to such a wide-ranging policy discussion stems from a pair of petitions filed last year by companies representing widely different sectors of the U.S. natural-gas industry. First, from the local distribution sector, came Pacific Gas & Electric Co. and Southwest Gas Corp., which joined forces to demand that FERC allow gas shippers to releasing shippers to earn more than the recourse rate. ( See Petition for Rulemaking, FERC Docket No. RM06-21, filed Aug. 1, 2006 .)

Second came a petition from a number of energy producers and marketers, including Coral Energy, Chevron, ConocoPhillips, Constellation Energy Commodities Group, Tenaska Marketing, Merrill Lynch Commodities, and UBS Energy LLC. In this so-called “marketer petition,” the energy companies sought policy guidance from FERC to guarantee that it would allow certain pre-arranged capacity release deals, even if they might appear to violate the price cap, the tying rule, or the posting and bidding rules. ( See Petition for Clarification, FERC Docket Nos. RM91-11, RM98-10, filed Oct. 20, 2006. )

The first petition had asked for natural-gas local distribution companies (LDCs) to receive top-dollar market prices for release and resale of their pipeline-capacity rights. Simply put, the LDCs wanted rights comparable to those granted to interstate pipelines. (The LDCs had become dissatisfied after FERC in early 2006 had reversed policy and had allowed the pipes to negotiate market-based rates for transportation service that reflected “basis differentials.” (See Docket No. PL02-6, Jan. 19, 2006, 114 FERC ¶61,042.) Such differentials track the gas- commodity price spread between two geographic trading points, such as a supply basis and a city gate delivery point.)

The second request, the marketer petition, asserted that commission policy on pipeline-capacity release, formulated largely during the early 1990s, had failed to keep pace with a major new development in natural-gas markets. That development was the rise of industry service contracts for the management of gas-commodity portfolios held by LDCs, load-serving entities and competitive retail-gas suppliers. In this scenario, a large-scale marketer buys up pipeline-contract rights and then calls on its expertise and economies of scale to earn a higher margin on such assets than would have been available if the LDC had continued to hold the assets. The LDC, retail supplier or load-serving utility continues as before to provide retail-gas delivery service to end users, but essentially exits the business of buying, managing, and selling the physical commodity.

So far, the buzz over this new gas-rulemaking initiative only has increased in intensity, now that FERC has completed work on its electric industry Order 890, and has lifted the price cap for resales of grid rights. New Jersey Natural Gas summed up a common industry opinion in its initial comments filed this spring:

“Given this policy shift in electric regulation, it would be perverse to fail