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Market Evolution

Market Evolution. FERC/INGAA Accounting Liaison Meeting November 9, 2000. Byron Wright Vice President, Pipeline Group Strategy and Capacity Pricing. Agenda. Supply and Demand Outlook 21 st Century Industry Drivers Market Forces’ Impact on Regulation Changing Market Structures

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Market Evolution

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  1. Market Evolution FERC/INGAA Accounting Liaison Meeting November 9, 2000 Byron Wright Vice President, Pipeline Group Strategy and Capacity Pricing

  2. Agenda • Supply and Demand Outlook • 21st Century Industry Drivers • Market Forces’ Impact on Regulation • Changing Market Structures • Tomorrow’s Priorities and Challenges

  3. 1.6 2.8 Regional Demand Growth 1998-2005 1.3 1.6 6.4 7.9 3.7 4.1 9.6 11.4 3.3 3.9 5.5 6.6 5.1 6.7 2.9 3.8 17.6 19.4 0.1 0.6 U.S. Demand 1998 57.0 Bcf/d U.S. Demand 2005 68.2 Bcf/d

  4. Demand Change from 1998-2005 Total CAGR% = 2.7% 5.5% 1.1% 2.8% 2.2%

  5. 7.8 0.0 2.6 0.9 0.2 0.0 13.9 0.0 1.1 1.2 0.5 8.3 3.9 4.2 3.8 6.7 3.3 0.1 11.4 1.4 1.6 2.6 0.6 0.6 0.9 0.4 6.1 17.5 0.6 6.8 0.2 4.0 0.4 7.5 3.0 3.2 Regional Supply Growth 1998-2005 Canadian Imports LNG North Central Rockies Mid-continent California LNG Arklatex Appalachia Alabama Permian San Juan LNG SLA & MS 1.5 Bcf/d (530 Bcf) of supply went to net storage build due to low demand 1998 Total 58.5 Bcf/d 2005 Total 68.8 Bcf/d Texas Onshore Gulf of Mexico LNG

  6. Changes in Gas Flow - 98 to 05 +0.6 Bcf/d +3.1 Bcf/d 0.5 0.1 2.9 0.2 0.6 0.1 0.3 0.1 0.2 2.3 +.7 Bcf/d 0.3 .7 0.3 0.3 0.3 0.6 -1.0 Bcf/d -1.0 Bcf/d 0.6 0.7 0.4 0.4 LNG +1.3 Bcf/d 1.3 1.3 0.3 0.1 +3.6 Bcf/d 0.3

  7. Structural Consolidation Merger/restructuring/rationalization Accelerating Growth Environmental & technology developments Supply Issues Expanded access Value Conflict Dynamic tension between physical & financial Public Policy Regulatory “amphibians” Natural Gas in the 21st CenturyIndustry Drivers

  8. Two General Observations • “Utilities” provide services with product components • Dial Tone Conversation/Data • Voltage Light/Sound • Gas Heat • Regulators want fairness, markets want choice, and customers want solutions.

  9. Differing Values Regulator Values Customer Values Transparency Uniformity Nondiscriminatory Prices Open Auctions Universal Access Simplicity Special Needs Bargain Transactions Certainty Security Commodities Customization

  10. Regulatory Impact Regulatory Model “One Size Fits All” Result is a higher cost product with lots of bells and whistles that not all customers need, want, or are able to pay for.

  11. Regulatory Model Fallout The players that are in the game get a highly reliable product with a lot of good characteristics at a premium cost. Some players are excluded from the game. They can’t afford to pay for all the bells and whistles.

  12. Air Transportation-One Industry’s Deregulation Experience Before 3 Quarterly Higher After 26 50,000/day Lower Classes of Service Fare Changes Average Ticket Price

  13. Price vs. Volume Deregulated environment results in lower average rate, but increased revenues due to larger volumes. Price P1 Pr P2 Quantity Q1 Qr Q2

  14. Regulatory Transition-Gas Industry • Unbundling • Order 436 • Order 636 • Unraveling • Spin-downs • Consolidations • Retail Restructuring • Decontracting • Commoditization Customization • Reconstructing Service • Reinventing Prices • Revising the roster • Recontracting

  15. Commoditization vs. Customization Customization Commoditization Customization Physical Demand Financial Demand Physical Demand Receipt Service Mcf Hourly Pressure Demand Flows Unique Capacity Delivery Service Mcf Hourly Pressure Demand Flows Unique Capacity Transmission Basis Differentials Interchangeable Capacity Market Access Daily Dth

  16. Synthetic Pipeline Financials Financials Financials Producers End-Users Marketers/ Aggregators • Industrial • Commercial • Power Generation • Residential Marketers/ Aggregators Gathering/ Processing Marketers/ Aggregators Pipeline Transportation LDC Transport Virtual Pipeline (Secondary Capacity) Full Bandwidth Competition

  17. Transportation Contracts = Options • Utilize for own demand • Secondary Points • Segmenting Transport Capacity Owner • Asset Management Service • Storage Arbitrage • Capacity Release • Long Term • Short Term • Recallable

  18. Why Do Molecules Want To Become Electrons?

  19. Industry EvolutionTomorrow’s Priorities • Bias towards growth • Pursue frontier supply • Consistent policy commitments • Real time services and realistic pricing • Expand service/facility “Bandwidth”

  20. Industry EvolutionTomorrow’s Challenges • New participants • New contract structures • Increased complexity • Shorter timeframes

  21. Questions and Answers If you would like a copy of the slides used in this presentation, please e-mail me at: wrightb@epenergy.com

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