# Presentation: 135723

## Natural Gas Conveyanceand Restructuring

- Barbara Mariner-Volpe
- February 2001
- Bangladesh Ministry of Energy and Mineral Resources
- barbara.marinervolpe@eia.doe.gov

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## Scope of Presentation

- Transportation market
- Retail restructuring - international
- Information analysis tools

## Overview of U.S. Natural 

- Gas Pipeline Network

- There are more than 160 large natural gas pipeline systems in the U.S.
- These systems represent over 200,000 miles of transmission lines and over 100 trillion cubic feet per day of transport capacity.
- There are more than 1,500 local distribution companies in the U.S. that deliver gas directly to the consumer
- There are over 3,000 natural gas producers, 500 of which account for 90 percent of natural gas reserves in the U.S.
- There are over 1,500 compressor stations on the network
- and 600+ Natural Gas Processing Plants
- and 410 Underground Storage Facilities
- and 100 Liquefied Natural Gas Storage (LNG) facilities.

## U.S. Natural Gas 

- Pipeline Profile

**Interstate vs Intrastate Pipelines **
**Gathering System --> Gas Processing Plant --> Mainline Pipeline System --> Underground Storage --> Local Distribution System **
**Size of pipelines range from 16-42+ inches on mainlines, 2-16 inches for LDCs**** **
**Hubs or Market Centers provide interconnections among pipelines**

## Natural Gas Market Centers Serve As Major Trading and Transshipment Points

- _California Energy Center_

- _Golden Gate Center_

- _PGT Center_

- _Sumas Hub_

- _Waha (Delphi) Hub_

- _PG&E Waha Hub_

- _Mojave Center_

- _Western Center_

- _Waha (Lone Star) Hub_

- _Blanco Center_

- _Katy (Western) Hub_

- _Waha (TECO)Hub_

- _Katy (TECO) Hub_

- _Carthage Hub_

- _Aqua Dulce Hub_

- _Houston Hub_

- _Buffalo Wallow Center_

- _Mid-Continent Center_

- _Egan Hub_

- _Moss Bluff Hub_

- _Henry Hub_

- _Louisiana Center_

- _Equitable Resources Hub_

- _Chicago Center_

- _Columbia Gas Center_

- _Texaco Gulf Star Center_

- _CNG/Sabine Center_

- _Ellisburg-Leidy Center_

- _New York Center_

- _Iroquois Center_

- _Perryville (NORAM) Center_

## Local Distribution Companies are the Connection Between Interstate Pipelines and End Users

## Local Distribution Company Rates

- Represents the costs of moving gas from the "citygate" to the consumer
- Generally cost based rates, but performance based rates are seen.
- Depending on the state, transportation and merchant functions may be separated.
- The cost of gas is a simple pass-through to the consumer

## Supply Reliability

- Ownership of assets equated to control of supply
- Market system relies on diversification and flexibility
- alternate transportation routes
- transportation and storage are both substitute and complementary services
- commercial arrangements
- Supplier performance / Supplier of last resort

## Average Transmission and Distribution Costs Have Declined for Most End-Use Sectors 

##  Financial Transactions are no Longer Closely Tied to the Flow of the Commodity

-  Financial Transactions are no Longer Closely Tied to the Flow of the Commodity

## Restructuring of Pipeline Services - Order 637

- Removed price cap on short-term capacity releases
- Encouraged differentiated peak and off-peak rates
- Requires parking and lending services as a way to avoid imbalances
- Pipeline should minimize operational flow orders
- Revised rules of right of first refusal

## Current Pipeline Policy Issues

- Negotiated rates and terms and conditions of service
- Rate design
- Capacity turnback
- Mergers and affiliate relationships

## To Obtain Transportation Services

- Step 1.	Reserve capacity (via contract) with the pipeline or a releaser of capacity
- Types of contracts:
- Long-term firm transportation (FT)
- Short-term firm service
- Interruptible (IT)
- Capacity release (firm or recall)
- Step 2.	Nominate to use capacity
- Step 3.	Confirmation of nomination by the pipeline company
- Step 4.	Gas flows are scheduled by the pipeline company

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## Capacity Turnback: Defined

- Shipper action of reducing or returning of firm transportation capacity to the pipeline company at the expiration of the contract.

## Shippers ReassessedTransportation Requirements in the Late 1990’s

## Emerging Issues for Interstate Transportation Market

- Does the current formula for computing regulated rates send the ‘right’ market signals?
- How, when or will the pricing structure change from cost of service rates to market based rates?
- Shifting risk - capacity turnback
- Regulation v. Competition -- What’s the right balance?
- Encourage addition of capacity without excessive cross customer class subsidization

## Market Changes Affected Physical System Utilization

## Trends in Firm Transportation Contracts

- LDCs hold the bulk of contracted capacity
- Contract expirations are significant
- Shippers want flexibility and reliability
- In the aggregate total commitments have increased slightly
- However, pipeline construction has outpaced contracted capacity
- The average length and size of long-term contracts have decreased
- Market concentration varies by region

## Most Firm Transportation Capacity is Held Under Long-term Contracts

## Interruptible (Non-Firm) Service for Natural Gas

- Increases system load and utilization
- Efficient use of pipeline facility
- Price of interruptible (Non-Firm) service for natural gas is typically heavily discounted because service is not guaranteed
- When heating load is light due to mild winter weather, interruptible service may not be interrupted.  The service may “appear” to be firm.

## Capacity Release

**Order 636 ordered pipelines to establish release programs (EBBs).**
**Shippers are now able to “release” or resell their firm capacity rights.**
**Referred to as the “secondary market” in pipeline capacity.**
**Holders of firm capacity initiate the release and specify terms.**
**Competes with interruptible transportation service offered by the pipeline.**
**The rate structure in Order 636 increased the cost of reserving capacity.**

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## Advantages of Using the Release Market

**For the *****releasing***** shipper:**

**Allows shippers to respond quickly to market changes.**
**Includes flexible terms re:  amount of capacity and duration of release.**
**May set specific pricing terms, subject to regulated cap.**
**May reserve the right to recall the capacity.**

## Advantages of Using the Release Market - Cont.

**For the *****replacement***** shipper:**

**Moderate lead time required**
**Flexible terms re:  duration of contract**
**Ability to obtain capacity - even though the pipeline may be fully reserved**
**Rates for released capacity are often heavily discounted**

## Drawbacks of the Capacity Release Market

- Coordination of multiple contracts can be difficult.
- Revenues may provide only a partial offset for the high cost of reserving capacity.
- Released capacity may be unavailable.
- Only limited price discovery is possible.
- Interruptible transportation may have competitive edge.

## Average Utilization Rates into States Varied in 2000

## As of Sept. 2000, Proposed Pipeline Expansions 2001-2003 (70 projects, 20 Bcf/d)

## Interstate Pipeline Companies Serving the Northeast  

- Interstate Pipeline Companies Serving the Northeast

## Natural Gas Transportation Nomination Schedule

- Natural Gas
- Begins to Flow
- _(9:00 am)_

- Shipper’s Last Opportunity
- to Submit Intraday Nomination
- _(4 hrs before gas flows)_

**Gas Day: 9:00 am to 9:00 am Central Clock Time**

- Shipper Receives Confirmation
- of Scheduled Quantities
- _(4:30 pm)_

- Shipper Nominates
- Next Day’s Gas
- _(11:30 am)_

**1 Day**

## E- business:  Speed is Key

- Auctioning pipeline capacity via the internet
- Bids need to be made, offers accepted and contracts finalized  - QUICKLY
- Submit nominations, perform scheduling
- Facilitate communication - reduce costs of information and price discovery
- Key Question:  Should on-line auctions be administered by a third party?
- Identify alternative routes

## Retail Restructuring

## Issues in Retail Restructuring

- Do the benefits of choice outweigh the cost?
- Should all services be offered competitively?
- How should services be priced?
- “Obligation to serve.”
- Who should pay for the transition costs?
- Marketers and local distributors - a level playing field?
- Reliability
- Business Standards

## Restructuring of U. S. Retail Markets

- Residential and small commercial consumers are, to varying degrees by state, acquiring choice of supplier.
- Electric generators, industrial and large commercial customers have effectively had supply choice for a number of years.

## Over Half of the States Have 

- Over Half of the States Have
- Residential Retail Restructuring Programs

- About 22 Percent of Eligible Customers are Participating

## Retail Restructuring Varies Across the U.S. for Several Reasons

- States Act Independently of Each Other
- Political/Economic Objectives Differ
- Regulatory Structures Differ
- Market Size to Attract Energy Providers

## Pros and Cons of Customer Choice

**PROS:**
- Increases competition
- Potential for customer cost savings
- Encourages new services
- Leads to greater market efficiency, as market signals are conveyed more directly

**CONS:**
- May result is reduced supply reliability
- Increased price volatility
- Customer burden - some don't want choice
- May reduce supply reliability
- May lead to higher prices
- Retail market may not be a "level playing field"

## Retail Unbundling - May Include More than Supply Acquisition

- Retail unbundling may evolve to include the following traditional distributor services:
- Storage
- Metering
- Balancing
- Standby service - "supplier of last resort"

## Residential Customers Can Benefit From Effective Information Programs

## Canadian Regulators Expect the Following Developments in Canada

- Increased reliance on market solutions
- Competitive pipeline projects
- Pipeline capacity shifting to marketers
- Light-handed regulation
- Market-based tolls
- Continued growth in exports to the U.S.

## European Natural Gas Markets

- Gas service is often combined with other services - water, electricity, telephone, cable
- Regulation is extensive and varies by country: from government legislation, public ownership, regulatory agencies and taxation
- Concession or franchise giving the service provider the exclusive right to operate in a specific area in return for the obligation to serve in that area.
- Prices generally set by the market value of competing fuels.  In some cases the costs of providing the service are also determining factors.
- Distinction between transmission and distribution not always clear
- Current debate (and some steps toward) third party access

## Similarities Between the U.S. and U.K. Gas Markets

- Heavy reliance on domestic sources of supply
- Open access (third party access) prevalent
- Federal regulations but private ownership throughout the gas chain
- Retail unbundling underway

## The Following Policy Objectives are Incorporated to Varying degrees in European Gas Markets:

- Economic efficiency
- Security of Supply
- Social Objectives
- Environmental and climate protection

## The Reform Process in Europe – The Gas Directive 

- Opens-up European gas markets, both within and across geographic boundaries
- Enable large gas consumers to select their supplier.
- Sets minimum levels, implementation is determined by each country
- To date on transmission access, but movement to open distribution is underway, but varies by country.

## Unbundling of Gas Services in Europe

- Great Britain - retail choice is underway both at transmission and distribution level
- Germany - taking steps toward retail choice by abolishing exclusive concessions for gas service
- Italy, Austria, Switzerland - limited unbundling at the transmission level
- Spain - limited unbundling (third party access) is being implemented
- Ireland, Netherlands - moving toward unbundling

## European Gas Markets

- LDCs currently have limited choice of gas suppliers
- Most countries are dominated by one transmission company
- Demand is highly seasonal and access to storage facilities for third party providers is needed to successfully enter the market
- Residential sector accounts for the largest share of gas consumption (26%-45%)
- Current structure is based on exclusive arrangements between supplier and customer.
- Most pipelines are merchants
- Ownership of LDCs is mostly public, but private ownership is becoming more widespread

## Incentives May Be Different in Public vs. Private Ownership of Transmission or Distribution

- Private Ownership - may be interested in maximizing profits
- Public Ownership - may be interested in lowering consumer prices or, may be inclined to maximize profits in order to cross-subsidize other areas
- Alliances, affiliations and other corporate combinations can reduce risk and exposure to changing markets - also may be benefits, e.g. economies of scale in obtaining gas supplies.

## International Energy Agency:Member Countries

- Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, U.K., United States

## International Energy AgencyGoals

-  Energy diversity, efficiency, flexibility
-  Environmentally acceptable
-  Technology development and application
-  Free and open trade, promote investment
-  Responsive to energy emergencies
-  Undistorted energy prices

## Japanese Natural Gas Market

- Goals
- Energy security
- Economic growth
- Environmental protection
- Hurdles to Market Expansion
- Developing the network
- Reducing the cost of LNG

## Japanese Natural Gas MarketCharacteristics

- Fragmented into many regional companies (245 but 3 dominate)
- Exclusive service areas (franchises)
- Virtually no third party access
- Little competition and market entry is difficult
- Large consumers can negotiate prices

## Restructuring of Gas Market in Japan

- Moving toward partial retail liberalization (for both gas and electricity market)(petroleum market is decontrolled)
- Large customers can negotiate supply prices and terms
- Government is encouraging market flexibility and expansion (co-generation, trigeneration) as well as load balancing
- Encouraging market based pricing - moving to expand to more customers

## Countries are Establishing  Independent Regulatory Bodies as Part of Restructuring

- Australia
- Finland
- Italy
- Norway
- Netherlands
- Spain

- Sweden
- U.K
- U.S.
- Germany
- New Zealand

## Features of Independent Regulatory Bodies

- Independence from regulated companies
- Legal mandate separating regulators and regulatory body from political control
- Organizational autonomy
- Obligations for transparency and accountability

## Example of EIA Tools to Analyze the Transportation Market

## Examples of Analytic Tools EIA Uses In Analyzing Infrastructure Issues

- Deliver Model
- EIA Natural Gas Geographic Information System (EIAGIS)

## DELIVER Features

- Linear programming model
- Objective: minimize costs of supplying gas
- Demand is differentiated by customer class
- Explicit representation of pipeline capacity and production availability
- PC-based model

## DELIVER Capabilities

- Examine issues related to system ability to meet demand on a state-by-state basis
- Scenario analysis potential: supply disruptions, severe weather, transportation disruptions, natural disasters
- Analyze pipeline and supply availability

##      EIA Natural Gas Geographic  Information System 

**EIAGIS-NG**  - geographic information system (GIS) centered on the natural gas industry.
**EIAGIS-NG  **- being developed by DOE/EIA as an analytical and tracking tool to expand our capabilities to study an industry undergoing rapid and significant changes.

## EIAGIS

- Includes Maps For:
- 53 Interstate Pipeline Systems
- 45 Intrastate Pipelines and Local Distribution Companies
- Includes Point Locations for:
- More than 1100 Compressor Stations
- Over 7500 Delivery Points
- Over 800 Receipt Points
- Over 1000 Interstate Interconnections
- 77 Proposed Storage Projects
- 390 Existing  Underground Storage Sites
- 360 State Border Crossings
- as well as for Electric Power Plants, Cogeneration Facilities
-  and other energy facilities.

## Mapping Selection Menu 

* ** *A mapping selection menu allows the user the flexibility to:
- Choose by pipeline or state
- Request  specific types of points to map
- Alter the level of geographic detail desired

## EIAGIS-NG Mapping

- Upon display of the requested map the user may select from a number of options:
- Alter Map display, e.g., Zoom in/out.
- Identify (label) points according to type.
- Perform statistical summarization and graphing
- Execute and produce hardcopy reports of selected data
- Display information on selected point(s)
- More ...

## Adding Data Points and Pipelines

##        Information Tool Example

-        Information Tool Example

- EIAGIS-NG   MAPPING SYSTEM

- Example of how the user may
- select on a particular point and
- have information on it
- displayed.
- Example shown is
- Compressor Station on the
- Texas Eastern system.

## EIAGIS-PPApplications

- Provide maps to management
- Identify specific infrastructure for FEMA’s damage estimates
- Visually perform emergency impact assessments
- Visually develop remedial plans
- Aid in analytical endeavors

## The Lower 48 Pipeline System in DELIVER

**Notes:**

In addition to understanding the likelihood of various
types of infrastructure failure, EIA needs to determine 
what remediation is economically viable.  For this, we  will 
have the Deliver model
Goal: to model system capability to deliver gas 
     from the wellhead to customers
Markets are modeled on a state-by-state basis

Deliver is a linear programming model 
Objective: minimize costs of supplying gas
Demand is differentiated by customer class
Explicit representation of pipeline capacity and 
     production availability
PC-based model

## A Major Pipeline Disruption Leads To Re-Direction of Pipeline Flows and Some Delivery Curtailments

- BLUE indicates States experiencing curtailments

- RED designates pipeline corridors at maximum flow

**Notes:**
This disruption case is average winter-day 
conditions with major pipeline failure between 
Mississippi and Tennessee.  Surprisingly, a 
capacity limit was reached in Michigan, where a
a bottleneck was already known to exist.

## Why Are Analysis Tools of Natural Gas Infrastructure Needed?

- Industry and others want to how natural gas marketing and transmission has been impacted by restructuring.
- Market participants must now make their own arrangements for shipping gas.
- Want to know about available transportation options
- What services are available to them from whom.
- Pipelines are interested in capacity levels on existing routes on which they might propose expansions.
- Knowing the current infrastructure is necessary for planning for demand projections of 32 Tcf demand by 2020.
- Assessing impact of infrastructure bottlenecks and disruptions.

## Examples of Infrastructure Analysis

- The capabilities of the various interstate pipeline systems that make up a large part of the U.S. natural gas pipeline network.
- Usage levels on these pipelines. To what degree has it changed since the start of the decade and why.
- Pipeline expansions - completed since 1990 and proposed through 2000. Driving forces?
- Factors that have had a major impact on how the natural gas pipeline network now operates, i.e. FERC Order 636, Market Centers, Electronic trading, etc.

## Components of the Analysis of Infrastructure Adequacy

- 1.	Production capabilities and the ability to move supplies onto the interstate network
- 2.	Transmission of gas along the major natural gas transportation corridors
- 3.	Deliverability into major natural gas end-use markets

## Production Capabilities and the Ability To Move Supplies Onto The Interstate Network

- Identification of the major producing areas:
- Recent levels of development and production
- Expansion possibilities
- What interstate pipeline systems access the area?
- What are their capabilities (capacity) to receive supplies?
- Indications of capacity constraint?
- Measures being taken (if any) to resolve the problem
- To what degree are storage and support facilities integrated?

## Transmission of Gas Along The Major Natural Gas Transportation Corridors

- Major corridors delineated (e.g. within the U.S. and Canada)
- For each corridor
- Major expansions and new pipelines since 1990?
- Identify pipeline systems that ply the corridor
- Current capabilities and utilization levels
- Indications of service bottlenecks
- Amount and type of underground storage serving shippers
- Market centers/hubs and their role within the corridor
- Expansion possibilities
- For the network as a whole: Overall capacities/usage growth.

## Deliverability Into Major Natural GasEnd-use Markets

- Major market areas examined
- For each market area:
- Major expansions and new pipelines
-  Identify pipeline systems that feed into the market
-  Current capabilities and utilization levels
-  Integration of underground and LNG storage deliverability
-  How end-use customer usage shifts have influenced expansions and utilization of available capacity
- Expansion possibilities
- Comparison of recent growth among regions and why capacity into certain markets is expanding