APEC Energy Working Group Natural Gas Reform Workshop

1
APEC Energy Working GroupNatural Gas Reform
Workshop
Nancy Gardiner 8-10 November 1999 Bangkok,
Thailand
2
Regulatory Time Line
Natural Gas Policy Act
Natural Gas Act
Area Rates
Order 436
Order 636
Order 587
1938 1960s 1978 1985 1992 1997

• Natural Gas Act, 1938- Gave Federal Power
  Commission authority to regulate the interstate
  transportation and sale for resale of natural
  gas
• - Area Rate Regulation 1960s- FPC set
  artificially low rates for production sold in
  interstate commerce
• - Natural Gas Shortages, 1970s- Production
  declined relative to market due to low wellhead
  prices and dual intra/interstate market
  leading to gas shortages and curtailments
• Natural Gas Policy Act of 1978- Established
  incentive wellhead prices and partial price
  control, established mechanism for limited gas
  transportation
• - Gas Bubble, 1980s- Stimulated drilling due
  to incentive wellhead pricing resulted in excess
  supplies
• Order 436, 1985- Required non-discriminatory
  access to pipeline transportation services,
  creating competitive benefit for distributors and
  end-users
• Order 636, 1992- Unbundled pipeline sales and
  transportation functions, eliminating pipeline
  merchant function
• Order 587, 1997- Created standards for
  administrative business practices (nominations,
  allocations and imbalance management, invoicing,
  and capacity release)

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Characteristics of Pipeline Merchant Functions
Natural Gas Policy Act
Natural Gas Act
Area Rates
1938 1960s
1978

• Aggregated supplies and bundled services with
  cost of service pricing mechanisms
• Business was engineering driven
• Market requirements anticipated by pipeline
• Supply dispatched based on market demand and
  basin and contractual limitations
• Flow management largely a function of pressure
  requirements
• Measurement and settlement lagged 1-2 months
  after production
• Internal processes and systems were segregated
  and independent

4
Characteristics of Pipeline Merchant Function
Natural Gas Policy Act
Natural Gas Act
Area Rates
1938
1960s 1978
Residential Commercial
Industrial
Pipeline

• Producers

LDC
(Profit/Loss)
(Regulated Rate of Return)
Electric Generation
5
Transition to Transportation
Natural Gas Policy Act
Order 436
Order 636
1978 1985 1992

• Initial Formation of U.S. pipeline grid
• Most of pipeline gas stream owned by pipeline
• No standards across grid for gas transactions
  management processes
• Pipeline began building internal infrastructure
  to manage nomination and accounting systems
• Merchant gas absorbed imbalances
• Began to acknowledge customer demands for more
  real time, integrated measurement and billing
  information
• Volume of transactions increased ten-fold

6
Transition to Transportation
Natural Gas Policy Act
Order 636
Order 436
1978 1985 1992
Pipelines
Marketers
Distributors
Consumers

• Producers

Marketing Arms
Pipeline Sales
Residential Commercial
Firm Transport
ECT
LDC
Industrial
Other Marketers
Electric Generation
Inter- ruptible Transport
(Profit/Loss)
(Regulated Rate of Return)
7
Full Common Carriage
Order 636
Order 587
Current

• Pipeline merchant function abolished
• Expanded national pipeline transportation grid
• Customers demand improved services
• - Faster, more accurate flow information
• - Standard nomination and scheduling procedures
  and practices
• - Expanded hours of customer service coverage
• - Knowledgeable, empowered employees
• Customer base diversified
• Internally integrated computer systems managing
  large volumes of transactions
• External customer electronic communication
  mechanisms established
• Competition forced efficiencies, customer focus
  and internal realignment

1992 1997 1999
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Todays Gas Industry
Order 636
Order 587
Current
1992 1997 1999
Pipelines
Marketers
Distributors
Consumers
Producers
Marketing Arms
Residential Commercial
LDC Transporter
Firm Transport
Industrial
EGM
Inter- ruptible Transport
LDC
Electric Generation
Other Marketers
(Profit/Loss)
(Profit/Loss)
(Regulated Rate of Return)
(Profit/Loss)
9
Todays Competitive Environment Requires a Change
in Mind Set

• Yesterdays Paradigm
• Engineering - Driven Management
• Budget Control
• Book Financial Performance
• Rate-Based Management
• Functional Management
• Regulatory Accounting
• Monopoly Development

Todays Requirements Market-Driven
Management Strategic Resource Allocation Sharehold
er Value Asset Management Process
Management Management Reporting Business
Development