Management expert Peter F. Drucker has observed that our society has entered a "post-capitalist" stage in which economic activity is organized around information: "The basic economic resource ... is no longer 'capital' nor 'natural resources'... nor 'labor.' It is and will be knowledge."1 In Orders 636 and 563, the Federal Energy Regulatory Commission (FERC) drafted the gas industry into joining this information revolution.
The FERC wisely recognized that natural gas industry participants were best-suited to develop the standardized formats and protocols required for capacity release and other transactions. The Commission, however, let the pipelines determine the "look and feel" of their proprietary electronic bulletin boards (EBBs) while mandating that certain information be made available. The wisdom of this policy has been called into question by some industry participants.
Initially, the EBB Working Groups labored mightily and
accomplished much to create the data standards for capacity release. Now the torch has passed to the Gas Industry Standards Board (GISB) to develop industrywide standards for customer-specific transactions. Progress, however, has been stalled by factional disputes within the industry. The gas energy information "atlas" is balkanized into the "local roads" and unmapped territories of proprietary EBBs. A patchwork of isolated systems links clusters of market centers to intra- and interstate pipeline systems.
Two barriers block the "on ramp" to the energy information road. First, all industry segments must agree on the standards required for convenient and efficient electronic commerce in natural gas and capacity. Of even greater importance, however, is the need for an easily navigable, interconnected "energy infobahn" that links suppliers, transporters, marketers, retailers, and end users.
If these barriers are not removed and the gas industry fails to establish an innovative, seamless electronic information infrastructure, then 1) the FERC will redraw the "roadmap" for the industry's electronic commerce infrastructure, or 2) users will opt for electricity or renewable energy, which offer more user-friendly and innovative information technology. Electronic commerce in our nation's economy is moving like a high-speed train; the industry must get on board, get run over, or get left behind.
A Natural for Networks
Order 636 has made natural gas one of the most difficult forms of energy to purchase and transport. Unbundling of gas service functions has increased the number of transactions required to move gas from the wellhead to the city gate, and even to the retail meter. A gas seller now needs wellhead purchase and gathering agreements from producers, sales agreements with buyers, and various transportation, balancing, and storage agreements with pipelines. As unbundling develops at the state level, the number of transactions involved in moving gas will multiply further.
The complexity and volume of these transactions has inhibited the growth of natural gas use in various markets, particularly as a fuel for electric power generation. Electric power generation requires reliable fuel prices and supply. Peaking-service turbines require gas that can be dispatched on a moment's notice.
Making standardized transaction information available through integrated gas and capacity electronic trading systems should help remove the difficulties perceived by the electric industry and other end users. But electronic trading of gas as a commodity requires greater standardization of contractual provisions, rights, and responsibilities. Standardized gas-related information must flow rapidly and seamlessly across tightly integrated networks so trading partners can make informed decisions and execute transactions quickly and
We have a physical infrastructure for efficient gas commodity markets: a nationwide grid of interstate and intrastate transmission pipelines and storage fields linked to production areas. Market centers are developing at the key intersections along this transmission grid. An effective electronic information infrastructure is necessary to realize the efficiencies created by these physical production, transportation, and marketing facilities.
Success stories from other industries demonstrate that traditionally "low-tech" industries can create comprehensive electronic information networks when faced with competition. Consider the global banking system. Founded on brick-and-mortar branches, local franchises, and laborious ledger bookkeeping, banking now extends a vast electronic web that transcends national borders. Digital money brings the latest in electronic financial services to customers far removed from the world's largest companies and cities.
In the trucking industry, information systems "masquerade" as freight lines. Satellite-linked long-distance trucks with onboard computers are dispatched across the interstate highway system from central control centers with "precision logistics" supplied by advanced expert software. If industries as diverse as banking and trucking can integrate and coordinate their operations electronically, the gas industry should be able to do so as well.
A Warning Shot
Across the Bow
On September 21, 1995, various industry representatives reported at the FERC's request on the current state and future role of electronic information in the gas industry infrastructure. Shippers, which must "navigate" multiple EBBs, complained that interstate pipelines have no common set of information requirements other than those that GISB has helped establish. (For any business transaction, pipelines require from 13 to more than 30 data elements.) The representative of the Process Gas Consumers Group described the situation succinctly: "Someone not full-time in the natural gas industry has a hell of a time keeping on top of the EBBs."2
Attendees also indulged in much finger pointing and discussion over the slow pace by which information standards for essential gas transactions are developing. The FERC's patience on the pace of efforts to simplify and standardize is clearly wearing thin. Chair Elizabeth A. Moler asked repeatedly whether the FERC needs to do more to improve existing systems. She opined that waiting several more years for development "would be death" for the industry. FERC Commissioner Donald F. Santa, Jr. warned that the gas industry may forfeit market share if it cannot solve its problems. Santa pointed, in particular, to the progress the electric power industry has made in developing real-time information systems (RINs): "If that's not a warning shot across the bow of the natural gas industry, I don't know what is."
The natural gas industry has much to do before it can fulfill its destiny in the information-intensive electronic marketplace for energy now underway. The key players in this effort must
not wallow in the thousands of industry-specific EBB and electronic data interchange (EDI) implementation details and lose sight of the big picture. The EBB Working Groups and now GISB have undertaken to determine: 1) when a particular data requirement should be implemented, 2) what "data set" elements encompass a transaction, and 3) how these transactions will be implemented via EDI. The devil may be in the details, but "vision" must guide the gas industry.
Riding the Third Wave
Alvin and Heidi Toffler observed that our civilization has undergone three "waves" of change. The "First Wave" was the agricultural revolution; the "Second Wave" brought the industrial revolution. The Tofflers now find modern nations undergoing a "Third Wave," by which knowledge (em consisting of data, information, symbols, culture, ideology, and values (em makes up the central resource of the economy. Information-rich electronic commerce marks an essential feature of this new economy.3 Moreover, this new Third Wave economy implies certain keys to wealth. These keys should influence the internal debate over electronic information infrastructure in the natural gas industry.
Apply technology. The appropriate data, information, and/or knowledge make it possible to reduce all the other inputs used to create wealth. While
natural resources may be finite, information is for all intents inexhaustible. Appropriate information technologies assist in the efficient acquisition and use of energy.
Customize. Mass production (em the defining characteristic of Second Wave industry (em is becoming obsolete as organizations install information-intensive, often robotized, manufacturing systems capable of customizing products for little added cost. The challenge of providing customized services
for gas customers can be man- aged with effective information technologies.
Innovate. Successful organi-zations must become "early adopters" of new technologies, processes, marketing, and finance. Innovative independent and affiliated information service companies are adding value to the standardized information made available by pipelines through their own proprietary systems. These systems allow electronic: 1) nominations, 2) least-cost
transportation routing, 3) capacity release offers and bids, 4) management for peaking and no-notice service, 5) balancing data, and 6) customized billing.
Even more sophisticated services are becoming available to link all the players in the natural gas marketplace together in one system. These multifunction systems allow online cash sales and purchasing, transportation and storage, as
well as decision support. The CH4ANNELSM System developed by EnerSoft Corp. and NYMEX Technology Corp., for instance,
offers online trading of gas and
capacity, channeling the data feeds from various pipeline EBBs and market centers into a single interface.
Flatten Organizations. Businesses everywhere are increasing their flexibility by downsizing and outsourcing. For the most part, energy has always been outsourced, but the number of individuals responsible for its procurement is growing. Many of these persons are not gas experts. Changes in the scale and shape of organizations, as well as the increased number and complexity of energy transactions, require a sophisticated electronic energy information system.
Integrate Systems. Rising complexity in the economy calls for more sophisticated integration and management. Greater and greater volumes of information pulse through the organization as managers are required to maintain an extremely high order of systemic integration. Natural gas companies that believe it is advantageous to limit information flows must remember that today's managers routinely can retrieve data from their organization's databases with only a few keystrokes.
Build Infrastructure. Organizations are spending billions on electronic networks that link computers, databases, and other information technologies together. Vast information infrastructures knit together whole companies, often linking them to the computers and networks of suppliers and customers as well. Seamless integration via electronic pathways forms the essential infrastructure of the Third Wave economy.
As the electric industry follows the gas industry into the competitive realm, it will make greater use of electronic information technologies. Regional power pools are organized around sophisticated EBBs, as are the developing regional transmission groups (RTGs). Power pools and RTGs could be expanded to integrate with gas company EBBs. The not-too-distant future could see both gas and electric power traded and transported through unified networks. Intelligent software currently under development will change the paradigm for information retrieval from "navigating and searching" to "bringing."4 Software "intelligent agents" or "infobots" could be set loose in the network to ferret out the optimal matchup of supply reliability and price to match a particular customer's needs.
Accelerate Operations. Economies of speed are replacing economies of scale. Timing has become critical in scheduling all inputs in the manufacturing process, including energy. Indeed, the future role of natural gas in electric power generation will depend on the industry's ability to provide minute-by-minute dispatch.
What is to Be Done?
To move the gas industry toward the goal of creating seamless electronic commerce in energy, the FERC should play a three-part role: facilitator (of debate), ratifier (of industry consensus), and, if all else fails, enforcer.
The strategic value of information standards will be realized only if pipelines up their commitment to setting standards. While the regulatory process likely will not keep pace with rapid changes in information technology, the industry's voluntary standard-setting process can be kept moving by FERC-imposed mandatory milestones for particular transaction standards. GISB should continue to encourage and help adopt voluntary standards. It remains to be seen, however, if GISB will emerge as effective arbitrator of factional disputes. If GISB cannot perform this role, the FERC will, by necessity, stand ready to fill the void.
Also, since pipelines have invested heavily in their proprietary EBBs, the FERC should not mandate uniform EBBs to promote seamless commerce across multiple pipelines. Instead, the FERC should recognize the diversity of proprietary EBBs, but require the industry to combine them in an interconnected network. Such a network could be accomplished using existing technology in
conjunction with customized software.
Arguments that the market should determine such a venture are not persuasive. The microcomputer business, one of America's greatest economic successes, was started by "visionary nerds" before a market existed for the product. Moreover, judging by industry sentiment that the proprietary pipeline EBB systems are an impediment, there should be ample support for developing an "energy internet." Given the amount of public good that would result from such a system, it may be feasible to convince Congress to provide tax-related incentives to stimulate private-sector investment.
Finally, fostering an interconnected network for the gas industry would be consistent with the FERC's goal of creating RINs for the electric industry. It makes sense to promote interconnectivity for both industries as we move inexorably toward a converged energy market. The interrelationship between the gas and electricity markets and their common open-access regulatory directives portend a broad-based interfuel market in which gas serves both as a fuel and a direct energy source. In a universal electronic marketplace, both forms of energy could be exchanged or converted physically, financially, or both using leading-edge information technologies. t
Sheila Hollis is senior partner of the law firm Metzger, Hollis, Gordon & Mortimer in Washington, DC. Andrew Katz is a senior associate of the firm.
Electric real-time information networks will offer four major types of information: 1) available transmission capacity, 2) transmission product offerings and prices, 3) specific transmission service requests, and 4) informal transmission communications.
The FERC has mandated a standard information system for the electric industry. The industry working group proposes an "electronic information network" (EIN)-a "same-time" (as opposed to "real time") information system. EINs will employ the same standards across the national and will be capable of two-way electronic communications between transmission providers and customers.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.