© uh institute for energy, law & enterprise 1 energy, inc. natural gas/electric power overview...

© UH Institute for Energy, Law & Enterprise 1

Energy, Inc. Natural Gas/Electric Power Overview

U.S./Canada Case


U.S. Gas Issues

Energy Inc. business perspective:• Long run production and deliverability• Demand/supply balances and price impacts• Market oversight and mitigationU.S. energy policy considerations:• Alaska pipeline routes (Canadian considerations)• Conflicts over public lands surface management with

increased drilling• U.S. energy legislation (specific coalbed methane,

CBM, issues deserve consideration)• Market oversight and mitigation


Natural Gas Value Chain

Oil and Gas Field Production

Processing(If Needed)

PipelineTransportation

Local Distribution

Liquefaction(LNG)

LNG TankerShipment to

Markets

Re-gasification

Liquids Transportation(pipeline, truck, tanker or petrochem stream

for butanes+)

Marketing andDistribution

(propane, butane)

Gas Separation,Gathering

Residential

Commercial

Industrial(Direct Use)

Electric PowerGeneration

(Utilities, IPP,Industrial)

Electric PowerTransmission

Electric PowerDistribution

Direct Use(eg., vehicle transport)*

Oil Refining

Gas LiquidsExtraction

Liquids (LPG) stream (propane, butanes, etc.)

Power stream

Methane stream

*Note thatcompressedmethane andLPG are also usedfor vehicletransport.


U.S. (Canada) Natural Gas Value Chains

Industrial

Electric (fuel, bulkmarket for power)

Residential, Small Commercial

Physical Bypass

Natural Gas:•Production•Gathering*•Processing*•Intrastate Pipelines* Often vertically integrated

InterstatePipelines

“City Gate”

“LDC”

Transportation (pipe) Sales (commodity)

“Unbundling” involves the separation of transportation from sales to allow third party marketing with pipelines providing “open access” and comparable service to all shippers.

Most Competitive Competitive Least Competitive

Commercial


U.S. Natural Gas Restructuring

Competitive LDC Industry

State Public Utility RegulatoryCommissions, 1800s-1927

Development of InterstateTransportation

Federal Regulation of InterstateTransportation (PUHCA/FPA ‘35)

Federal Regulation of Wellhead Prices(Phillips Decision ‘54)

Decontrol of WellheadPrices (NGPA ‘78)

First Stage Open Accessfor Pipelines (Order 436 ‘85)

Final Stage of Open Access(Order 636 ‘92)

LDC Unbundling Era?


Market Design Issues, 2003

• Marketing affiliates of federally-regulated (interstate) pipelines– Market power and reporting

• Price transparency and market gaming– California investigations– Rules for market oversight without reducing

market liquidity

• Deterioration in market liquidity– Price volatility impacts


Natural Gas Price Change Over Time

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Apr-9

0

Apr-9

1

Apr-9

2

Apr-9

3

Apr-9

4

Apr-9

5

Apr-9

6

Apr-9

7

Apr-9

8

Apr-9

9

Apr-0

0

Apr-0

1

Apr-0

2

Month

No

min

al S

po

t P

rice

($/

Mcf

)

Source: U.S. EIA


U.S. Gas Resource Development

1200

1300

1400

1500

1600

1700

1800

Jul-8

7

Jul-8

8

Jul-8

9

Jul-9

0

Jul-9

1

Jul-9

2

Jul-9

3

Jul-9

4

Jul-9

5

Jul-9

6

Jul-9

7

Jul-9

8

Jul-9

9

Jul-0

0

Jul-0

1

Jul-0

2

BC

F

200

300

400

500

600

700

800

900

1000

1100

1200

Gas

Rig

s

Monthly Dry Gas Production12 Month MA, Production

Monthly Gas Rigs

Source: U.S. EIA.

Through July 2002


Demand: A Fall Can be Hard

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

100

200

300

400

500

600

700

800

900

ConsumptionWellhead Price

Consumption, bcf Avg. Wellhead, cents/mcf

Source: U.S. EIA


Gas Demand by Segment

24% 22% 22%

13% 14% 15%

36%

46%41%

19%15% 13%

0%5%

10%15%20%25%30%35%40%45%50%

1980/19.9 tcf 1999/21.4 tcf 2000/22.7 tcf

Residential Commercial Industrial Electric Utilities

Gas consumption by customer group

Source: U.S. EIA


U.S. Natural Gas Prices (Real)

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

ResidentialCommercialIndustrialElectricWellhead

$/mcf

Source: U.S. EIA

Electric utilities is YTD


U.S. Value Chain Issues

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Wellhead toCitygate

Citygate toResidential

Citygate toCommercial

Wellhead toIndustrial

Wellhead toElectric

84 90 91 92 93 94

95 96 97 98 99 0

Source: U.S. EIA

Price differentials, $/mcf

Note- Wellhead to electricexcluded for 2000


Market Geography with PipeDe-bottlenecking, 1995-99

Deliveredto

Pipe: AUG-99 JAN 98 JAN 97 JAN 96 JAN 95

ChangeAUG 99-JAN 95

Henry Hub $2.61 $2.25 $3.70 $2.90 $1.43 $1.18

El Paso 2.50 2.20 3.85 2.00 1.17 1.33

Blanco 2.04 2.10 3.80 1.35 1.11 0.93

Oklahoma 2.49 2.15 4.15 2.05 1.23 1.26

Opal 2.19 2.05 3.70 1.25 1.02 1.17

Alberta 2.25 1.05 1.90 1.05 0.66 1.59

Spot prices, $/mmBtu, beginning of month

Source: World Gas Intelligence


U.S. Gas Price Convergence

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Aug-95

Feb-96

Aug-96

Feb-97

Aug-97

Feb-98

Aug-98

Feb-99

Aug-99

Feb-00

Aug-00

Feb-01

Aug-01

Source: Natural Gas Week

$/mcf across all U.S. and Canadamarket centers, hubs and majorcity gates


Japan

223105

12

75

3544

LNG

LNG

66

United Arab Emirates

3

Trinidad and Tobago

99

6

Australia

Algeria

44 10

OmanNigeria

13

Indonesia

346

Qatar

Natural Gas Imports, Exports in 2000

U.S. DOE – Office of FossilEnergy, bcf

Total U.S.Consumption22.7 tcf


Prices Are Converging

0

1

2

3

4

5

6

7

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

LNG (cif Japan) US Henry Hub Oil (Brent)

$/mmbtu Oil indexed LNG v. Henry Hub

Source: BP Gas and Power


Henry Hub Does Rule

1998 1999 2000 2001

Canada $1.91 $2.18 $3.90 $4.36

LNG Imports*

2.31 – 2.84 2.15 – 2.69 2.73 – 3.93 3.29 – 5.00

Domestic/

Henry Hub**

2.08 2.27 4.32 3.98

Natural Gas Prices, $/mmBtu (U.S. DOE – OFE)

* Includes both landed and tailgate prices; lower price is generally landed price.** Mean, daily spot prices.


U.S. Power Issues

Energy Inc. business perspective:• Financial health of electric power industry• Demand/supply balances and price impacts• Market oversight and mitigationU.S. energy policy considerations:• Fuels for power generation• Market design issues and market performance• Financial health of electric power industry• Market oversight and mitigation


Application of Principles: Electricity Restructuring

Early Electric UtilitiesEarly Electric Utilities

Samuel Insull and stateSamuel Insull and stateregulation, early 1900sregulation, early 1900s

Development of InterstateDevelopment of InterstateTransmissionTransmission

Federal Regulation of WholesaleFederal Regulation of Wholesaleand Interstate Commerceand Interstate Commerce(PUHCA,FPA ‘35)(PUHCA,FPA ‘35)

North American Reliability Council, ‘68North American Reliability Council, ‘68

Conflicts on Natural GasConflicts on Natural GasUse (PIFUA & PURPA ‘78)Use (PIFUA & PURPA ‘78)

Commitment to Bulk MarketCommitment to Bulk MarketCompetition (EPAct ‘92)Competition (EPAct ‘92)

Open Access Begins (CPUCOpen Access Begins (CPUC‘‘94, Orders 888/889 ‘96) 94, Orders 888/889 ‘96)

Retail Wheeling Era?Retail Wheeling Era?


Electricity Demand

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

90 91 92 93 94 95 96 97 98 99 00 01

0

200

400

600

800

1000

1200Utilities

Non-utility Providers

Billion kwh Net Generation Utilities Billion kwh Net Generation NUGs

Source: BP

Nonutility generation = 30% of total industry


Natural Gas Consumption forPower Generation

20%

25%

30%

35%

40%

45%

50%

55%

60%

90 91 92 93 94 95 96 97 98 99 00 01

No

n-u

tili

ty P

rovi

der

s

0%

2%

4%

6%

8%

10%

12%

Uti

liti

es

Non-utility Providers

Utilities

Natural Gas Generation as % Total Net Generation

Source: BP


Electricity Price Change Over Time

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01

Month

($/M

Wh

)

PaloVerde Price ($/MWh)Mean (4/96-6/01)Mean efore california (4/96-5/00)After California (6/00-6/01)Competition Era (4/98-6/01)

$ 171.53

$ 73.78$ 53.14$ 27.42

Nominal


What Is a Public Utility?

• Old Concepts:– Technical economies of

scale– Essential services– Capital intensive– Lack of storage– Variable costs and load

factors– Exclusive franchise

• New Concepts:– Technology is not static– Essential services provided

by competition– Changing ratio of capital to

labor– New storage technologies– Pricing for specific

customer needs– Borderless service areas

“Public utilities are public only by law, with limited property rights endowed by their creator (Bonbright, p. 8)”


Summary: A History of Ideas, 1800s-Today

• “Regulated monopoly” as a substitute for competition

• Emerging ideas about competition– Minimize monopoly component– “Contestability” (potential competition) as

substitute for pure competition

• Initiation of the “Deregulation Movement”--Fred Kahn and the “Saturday night stay” for airlines


Principles of Deregulationfor Energy Utilities

• Separate the commodities--natural gas and electricity--from the infrastructure (“pipes and wire”): unbundling

• Contract carriage and nondiscriminatory open access

• Third party marketing• Risk management to hedge against

commodity price volatility


Based on Comparative Research -

Market Design: What Is the Role of Regulation?

• Can regulators act as “market facilitators”?• Can regulators design markets? Should the U.S.

have regional regulatory authorities (“how many regulators do we need?”)

• Is harmonization good or bad?

• Should there be a “uniform code” for North America?

• How does Mexico fit in to the North American regulatory scheme?– Stage of development


Electric Power Driver

It’s Stormy Out There!

Real Time PricingDoes choice

matter?

Load Management& Reliability

Retail Competition?

Competitive Electricity Markets (Restructuring)

Market Structure

Measurement

Aaagghh!


U.S. Restructuring: Gas vs. Electricity

• Natural gas was both a driver, for and set a precedent for, electricity– Increasing integration is the “logic driver” for electric

restructuring

• Gas can be stored, electricity cannot (yet)• Gas is cheapest when used directly

– For electricity, fuel cost of gas is higher -- but capital cost, O&M are less -- than coal or nuclear, thus far

• Seasonal/daily demand, balancing, reliability are challenges for both


Issues for Electricity Restructuring in the U.S.

• Size and complexity of U.S. market• Market design -- How? Who?• Individual state approaches vs. federal

interstate commerce• T&D constraints and development

– Generation capacity installed at load sites

• Permitting and siting for gen, T&D


The Texas Approach: Highlights

• In 1995, wholesale market deregulated• In 1999, SB 7 passed for retail restructuring

– Retail choice date: January 1, 2002– Munis and co-ops opted in as of December, 2000– Utilities must separate businesses - no forced divestiture

• Gencos - limited to 20% across power region

• REPs - affiliates can only offer price to be in traditional service area for 36 months or until 40% of customer load is lost; 3.5 % or 2,000MW of delivered power from renewables by 2009

• Transcos/Discos - open access, nondiscriminatory, PUCT regulated with postage stamp wholesale transmission services

– 50% NOx, 25% SO2 reductions for grandfathered plants

• Pilot beginning June 1, 2001for 5% of market


The Texas Approach: Key Conditions

• PUCT must:– Conduct market monitoring– Certify REPs– Establish reliability standards– Protect customers

• ERCOT ISO:– Must manage information and settlement– May provide nondiscriminatory gen-related ancillary services

to all REPs

• “Gas is Green”:– Railroad Commission charged with encouraging

performance standards for gas-fired megawatts


How We Differ from California

• Us– Market-based– No mandated pool– Allow LT contracts– Price caps only until

December 2001– 10 month avg for

new powerplants– Risk management at

discretion of market participants

• Them– Government-based– Cal PX– FERC instituted!– 5-year price caps

(original law)– 3-year avg for new

powerplants– No allowances for

risk management

© uh institute for energy, law & enterprise 1 energy, inc. natural gas/electric power overview...

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