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GAS DEVELOPMENTS AT FERC
A Bi-Monthly Report on Matters of Interest to Gas-Fired Generators
FERC Conference on Natural Gas Infrastructure Signals Upcoming Changes in Gas Storage Rate Design and a “Go Slow” Approach on Generic Gas Quality Rules
FERC’s October 12, 2005 Conference on the State of the Natural Gas Infrastructure gave industry segments an opportunity to advocate directly to the Commission on gas policy changes and priorities needed to respond to gas supply disruptions caused by Hurricanes Katrina and Rita, and in light of the new gas policy initiatives contained in the Energy Policy Act of 2005 (EPAct 2005).
To frame the panel discussions, FERC Staff led off with a report that addressed the already tight supply-and-demand conditions in the gas market that were exacerbated by Hurricanes Katrina and Rita’s destruction of production infrastructure in the Gulf. Staff attributed recent upward price pressure (Henry Hub prices averaged $7.40/MMbtu in April as compared to $14/MMbtu in September) to the combined effects of rising oil prices, increasing electric generator demand for natural gas caused by years of investment in gas-fired generation, and a significantly warmer-than-average summer.
Absent the fortuitous circumstance that storage inventories were above average, Staff believes the price impacts could have been even greater. The Staff also believes prices are likely to stay high this winter, especially if there are cold periods, but does not anticipate supply scarcity except perhaps in the Northeast at the end of the winter. Lost production from the two hurricanes totals approximately 6-7 Bcf/day. Additional supplies from Canada cannot pick up more than a small part of this lost production because of Canadian supply constraints. There is spare capacity in LNG import facilities, but the U.S. market will be competing with England, Korea, and Spain for spot LNG sales this winter so there is unlikely to be sufficient LNG supply to close the gap.
A pipeline industry representative noted that: (i) higher gas prices and tight demand led to a need to reassess OFO penalty levels to insure that shippers do not draft pipeline linepack; (ii) Electronic Bulletin Board information flow posting requirements can impede efficient industry response in times of emergency, and FERC should consider building in additional flexibility in Order 2004 to take this problem into account; and (iii) FERC should issue clear guidelines for how EPAct 2005 penalties will be imposed.
A joint gas pipeline and gas producer representative urged FERC to: (i) further streamline and simplify gas certificate rules by allowing mainline compression modifications under the blanket certificate rules if it is otherwise within the dollar limits; (ii) allow LNG take-away laterals to be treated like other pipeline lateral expansions for purposes of qualifying under the blanket certificate rules; and (iii) allow minor adjustment to storage field deliverability under the blanket rules. Echoing the debate earlier this year concerning the open season provisions under the Alaska Natural Gas Pipeline Act (over whether anchor or foundation shippers for such a pipeline should be accorded preferred contract terms), the joint gas pipeline/producer representative contended it is not unduly discriminatory for FERC to allow pipelines to provide all such foundation shippers preferential rates and contract rights, noting:
[Q]uite often it is worthwhile and very effective for a pipeline to give rate benefits to early committers to the project who create part of the critical mass that allows the project to go forward. If there is a risk that that same rate benefit will be given to later shippers who sat on the sidelines, it creates a bid disincentive for anybody to sign up. So we believe that those anchor shippers and anybody else who signs up through an open season through the normal formal processes up to the deadline, usually the end of the open season, where the pipeline decides to go forward or not to go forward – anybody who forms part of that critical mass should be able to get a rate deal different than subsequent shippers without it being deemed undue discrimination.
Finally, the pipeline and producer representative noted that his groups would be filing a petition for rulemaking on these points in the near future.
Independent gas storage developers asked FERC to utilize its recently granted EPAct 2005 authority to grant market-based rates to new storage developments and again asked for FERC to eliminate the “shipper must have title rule” so that independents can offer a delivered storage service to market areas by combining shipper-owned storage gas with storage operator-owned transportation rights. In response, FERC Chairman Joseph T. Kelliher noted that he shares the goal of reforming FERC’s pricing policies to increase gas storage capacity and stated: “I think my colleagues agree, and we will act in the near future to take the first steps in that direction.”
Storage developers returned to this topic in a later panel, urging FERC to authorize market-based rates for both greenfield developments and existing storage field expansions, even if the owner has market power, as EPAct 2005 now permits. Commissioner Suedeen G. Kelly seemed unconvinced, however, noting: “What concerns me is where there is market power. And LNG is different than storage because it competes with other sources of gas and gas is deregulated in this country and it’s competitive. If potential users of storage don’t want to pay for it today at market prices, then do they need it? And if they don’t need it, why should we cause it to be constructed?”
The response offered was that storage is very competitive across the whole marketplace today because it basically feeds into the grid—a broad statement that some would contend is valid for most production area storage but perhaps not for market area storage. Another argument that also did not attract much Commission enthusiasm was that although the marketplace is not willing to pay high rates today due to the current high cost of gas, the long lead time for new storage construction will eventually permit market-based rate recovery for storage and thus is necessary to attract capital to such projects.
In contrast to FERC’s treatment of the Red Lake storage project two years ago (where FERC rejected a market-based rate proposal for a market area storage facility to be located near Phoenix), Staff now seems receptive to providing rate incentives for new market area infrastructure (both storage and LNG), perhaps due to the to the pressing policy concern evident now (in light of Hurricanes Katrina and Rita) to enhance the nation’s gas infrastructure reliability. Although it is risky to draw conclusions based on a regulator’s failure to comment on a particular topic, it should be noted that FERC Staff failed to offer any endorsement for providing rate incentives to encourage new production area infrastructure.
A later speaker (speaking independently but generally representing investor-owned utilities) returned to the issue of market power for storage generally and suggested the FERC’s current screens for evaluating storage market power are not very accurate and don’t provide a good picture. It will be hard to demonstrate storage facility market power, he opined, because storage competes with pipeline capacity, flowing gas supply, and pipeline services such as park and loan.
A local distributor representative suggested that: (i) FERC should not rush into a gas quality rulemakingbefore DOE completes ongoing studies; (ii) gas quality is not a great concern currently for individual consumers as “it is not an appliance issue generally”; and (iii) although gas quality impacts the generating section, better understanding of the technology would help achieve eventual consensus both within that sector and throughout the industry generally. When asked directly by Commissioner Nora Mead Brownell whether there was an immediate need to set quality standards, the distributor representative demurred, and indicated that there was a lack of consensus on this question. However, a pipeline industry representative immediately spoke up to contend there is a need for such a rulemaking, but not this winter. Commissioner Kelly expressed concern that given the tight gas supply picture, FERC does not want to set a standard that would be too high for the pipelines in any such rulemaking.
An electric generator/marketer representative led off his presentation by reminding the Commission that his industry segment does not support a long-term firm transportation or supply requirement for electric generation. There are many different fuel sources besides firm service available in the marketplace and, where firm service is available, it is very expensive. Actions by state commissions to unbundle local distribution service, he asserted, have allowed more efficient use of competitive capacity and have led to release of additional firm capacity on either a temporary or permanent basis. He contended that FERC needs to let dynamic market forces continue to work to allow generators to efficiently manage their risks and costs.
Returning to the issue of gas quality, he pointed out that generators need a consistent natural gas quality to stay within environmental parameters and restrictions and consistency in pipeline tariffs is thus required. In response to a question from Chairman Kelliher, he indicated that gas quality issues have generally been worked out to date, but the big issue is not gas quality but rather changes in gas quality that can cause reliability problems for generators.
Near the end of the conference, a representative of the investor-owned utilities indicated his group would not be enthusiastic about FERC going to a gas quality rulemaking until such time as the necessary testing is completed so it can be understood how LNG is going to perform in combustion terms and combined cycle. Urging FERC to await the completion of the DOE studies, the representative suggested the FERC should not rush into a gas quality rulemaking until there is publicly available data that GE, Westinghouse and OEMs [original equipment manufacturers] are willing to support that can be used for analysis.
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of recent developments in energy law. It is not intended, nor
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Copyright © 2005, Davis Wright
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