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ECO 436

ECO 436. Natural Gas. 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. Pipeline regulation (cont’d).

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ECO 436

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  1. ECO 436 Natural Gas

  2. 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 ECO 436 David Loomis 309-438-7979

  3. Pipeline regulation (cont’d) • 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 ECO 436 David Loomis 309-438-7979

  4. Pipeline regulation (cont’d) • 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 ECO 436 David Loomis 309-438-7979

  5. Pricing • Peak load pricing problem • Solution • storage • interruptible tariffs ECO 436 David Loomis 309-438-7979

  6. Pipeline regulation (cont’d) • 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 70’s, surplus in 80’s • 1987 Natural gas provided 22% of total US primary energy requirement • 45% of all delivered residential energy ECO 436 David Loomis 309-438-7979

  7. ECO 436 David Loomis 309-438-7979

  8. 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 ECO 436 David Loomis 309-438-7979

  9. 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. ECO 436 David Loomis 309-438-7979

  10. LDC Regulation • from city gate to burner tip • ROR regulated by state • gas price is pass thru PGA – purchased gas adjustment clause ECO 436 David Loomis 309-438-7979

  11. 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 ECO 436 David Loomis 309-438-7979

  12. 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 ECO 436 David Loomis 309-438-7979

  13. PGA Clause (cont’d) • NICOR proposed an alternative regulation scheme. • Proposal was approved in November, 1999. ECO 436 David Loomis 309-438-7979

  14. Armstrong & Leppel - combination gas and electric • No statistically significant indications of cost complementarity or economies of scale in the combination gas and electric ECO 436 David Loomis 309-438-7979

  15. Lyon & Hackett • Bottleneck or essential facilities - facilities with relatively large economies of scale, substantial asset specificity, initially linking isolated buyers and sellers. ECO 436 David Loomis 309-438-7979

  16. 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. ECO 436 David Loomis 309-438-7979

  17. 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. ECO 436 David Loomis 309-438-7979

  18. Transactional Characteristics • heterogeneity of customers • residential - no storage - can’t 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. ECO 436 David Loomis 309-438-7979

  19. 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. ECO 436 David Loomis 309-438-7979

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