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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 become key players in the pipeline capacity game as their share of the generation sector has grown—from 3 GW out of 778 GW in 1997 (then the total U.S. electric production base), to 192 GW out of 978 GW by 2005. And like the LDCs, merchant gens are releasing not just their unneeded pipeline rights, but all of their rights, leaving them without dedicated transportation contracts to ship gas to their turbines.

As the marketer petition explains, “These arrangements do not arise from a customer’s desire to rid itself of capacity; rather, they arise as a result of a customer’s desire for efficiency, cost savings, and maximization in the utilization of its capacity.”

To do that, shippers use capacity release to exit the business of arranging for and procuring gas supply. They turn the job over to third parties—to marketers and portfolio managers—whose primary job is to supply the customer (the releasing shipper) with gas. Along the way, the manager invests and trades in pipeline capacity, seeking opportunities to optimize profits.

Assistant General Counsel Craig Collins (SCANA Corp.) explains why in written comments he filed on behalf of South Carolina Elec. & Gas Co. and Public Service Co. of North Carolina. Most LDCs, he writes, no longer enjoy the access to market opportunities or the human resources needed to make the best use of their transportation agreements. And that holds true, even when the requirements of distribution service are limited enough to permit them to divert some of those assets to be used for other purposes, through capacity release.

Sarah Tomalty, senior attorney for FPL Energy, writes further on why LDCs and merchant generators find it difficult to manage their gas supplies effectively, and glean the highest market value from the capacity contracts they sign with pipelines:

“Most LDCs and utilities cannot perform a bundled fuel management function themselves to capture the true market value of their pipeline capacity because activities like gas trading, hedging and ‘swing swaps’ are often discouraged under state regulations.”

She explains also why it can make sense for merchant generators to exit the business of gas-supply management:

“Certain generating units are project financed and have limited control over varying their gas asset portfolio through, for example capacity release, because the assets represent financing collateral. …

“Many merchant [gen] plants have been faced with difficulties in executing long-term purchased power agreements and have encountered low average spark spreads for off-peak and peak periods; therefore, they have been unable to generate the cash flow needed to contract for long-term firm natural gas transportation rights. … It does not make sense for a merchant generator that runs for only certain periods of the year to purchase long-term firm capacity on a year-round or even seasonal basis. …

“Also, fuel managers must have strong credit to meet the credit obligations of suppliers, pipelines, bond financiers, and end-users. As such, many end users rely on large suppliers to perform their fuel management function.” (See comments, FPL Energy, pp. 9-14, filed Apr. 11, 2007.)

According to written comments filed by the American