ECO 436

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ECO 436

• Natural Gas

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Pipeline regulation

• 25 pipelines account for 90 of volume (1987)
• Most LDCs served by 3 or fewer pipelines
• Pipelines bought gas from field producers on LT
  contracts 20 yrs. or more
• ROR regulated

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Pipeline regulation (contd)

• 2 pt. tariff - demand charge - subscribed for a
  certain max level of consumption per period
• commodity charge - based on quantity actually
  consumed
• Pipelines buy gas from producers and resell to
  distributor

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Pipeline regulation (contd)

• 1985, FERC order 436, did not require pipelines
  to offer transportation - only services, but if
  they did, access rates must not be not
  discriminatory.
• Some pricing flexibility

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Pricing

• Peak load pricing problem
• Solution
• storage
• interruptible tariffs

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Pipeline regulation (contd)

• April 92 FERC 636, mandates pipelines to separate
  gas sales from transportation and allowing open
  access to pipeline transportation for gas
  producers and customers
• Gas shortages in 70s, surplus in 80s
• 1987 Natural gas provided 22 of total US primary
  energy requirement
• 45 of all delivered residential energy

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(No Transcript)
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Problem of Differentials

• Max. price was capped for transportation
• Value of service (shown by price differentials)
  exceeded cap
• Marketers that owned capacity would only sell
  bundled service

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FERC 637

• Passed Feb 2000
• waived the price ceiling for short-term released
  capacity (less than one year) until September 30,
  2002.
• Effectiveness of this unregulated secondary
  market for short-term capacity will be assessed
  after the trial period.
• permitted pipelines to propose contracts for
  capacity with peak/off-peak and term
  differentiated rate structures.

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LDC Regulation

• from city gate to burner tip
• ROR regulated by state
• gas price is pass thru PGA purchased gas
  adjustment clause

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IL LDCs

• 14 investor-owned gas public utilities in IL in
  1999
• NICOR 2,266,470 customers 42.27cents/therm
• Peoples Gas (Chicago) 813,200 customers 64.09
  cents/therm
• Illinois Power 399,871 customers 52.27 cents/them
• North Shore 141,806 customers 56.43 cents/therm

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PGA Clause

• Peoples North Shore proposed eliminating the
  PGA clause and include gas charges in base rates
  in 1999.
• Commission ordered set fixed gas charge
• Companies rejected the set rate and elected to
  maintain PGA

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PGA Clause (contd)

• NICOR proposed an alternative regulation scheme.
• Proposal was approved in November, 1999.

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Armstrong Leppel - combination gas and electric

• No statistically significant indications of cost
  complementarity or economies of scale in the
  combination gas and electric

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Lyon Hackett

• Bottleneck or essential facilities - facilities
  with relatively large economies of scale,
  substantial asset specificity, initially linking
  isolated buyers and sellers.

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Bottleneck facilities characteristics

• feature extremely large quasi-rents and require
  protection like vertical integration.
• governed by regulatory policies that protect both
  investors and customers.
• Began as providers of a service that tied
  upstream supply with transportation of that
  supply.
• Networks tend to grow in scope and complexity
  overtime creating greater competition upstream of
  the bottleneck facility.

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Reasons for using long-term governance structures
in transactions with upstream suppliers

• quality differences that can only be verified
  thru experience.
• If spot prices are not free to adjust instantly,
  shocks many cause the markets not to clear.
• Began as providers of a service that tied
  upstream supply with transportation of that
  supply.
• Networks tend to grow in scope and complexity
  overtime creating greater competition upstream of
  the bottleneck facility.

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Transactional Characteristics

• heterogeneity of customers
• residential - no storage - cant switch to other
  fuels
• industrials - dual fuel boiler technology
• 2 forms of reliable service
• instantaneous service - allows buyer to take gas
  out of pipeline as soon as buyer as gas put in
• no notice peak service - allows buyer to take
  as much gas as needed without advance warning to
  the pipeline
• Reliability costs
• inventory costs of holding excess gas
  deliverability
• pipeline costs - holding excess transportation
  capacity maintaining extra system pressure (line
  pack) and monitoring suppliers.

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Critique of order 636

• FERC focuses on benefits of unbundling, but
  rejects the possibility of degraded service
  reliability.
• Some pipelines argued that bundling was necessary
  for reliable no notice service (later refuted)
• We predict the cost of internalizing
  externalities in the unbundled system will be
  greater than in the bundled system. p. 390
• FERC 636 should have left bundling as an option.