FERC Filings
Capacity Release
EPSA Comments to FERC on Capacity Release (Dockets RM06-21-000 and RM07-4-000)
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Pacific Gas and Electric Co. ) Docket No. RM06-21-000
Southwest Gas Corp. )
Coral Energy Resources, L.P. ) Docket No. RM07-4-000
Chevron U.S.A. Inc. )
ConocoPhillips Co. )
Constellation Energy Commodities )
Group Inc. )
Merrill Lynch Commodities, Inc. )
Nexen Marketing U.S.A., Inc. )
Tenaska Marketing Ventures )
UBS Energy LLC )
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION
The Electric Power Supply Association (EPSA) hereby files these comments in the above captioned proceedings in response to the Commissionâs January 3, 2007 request for comments on the current operation of the Commissionâs capacity release program and whether changes in any of its capacity release policies would improve the efficiency of the natural gas market. The Commission request responds to an August 2006 petition filed by Pacific Gas and Electric Co. (PG&E) and Southwest Gas Corp to remove the price cap on secondary market transactions and an October 2006 petition from a group of natural gas marketers (Marketer Petition) . EPSAâs comments focus on the Marketer Petition because of the significant issues raised concerning the interpretation of the Commission's capacity release rules and policies, and because the clarity requested will assist EPSA members in making fuel supply arrangements that are cost effective and flexible, while otherwise compliant with the Commission's rules and policies.
I. BACKGROUND
Since being instituted, as part of Order No. 636, the Commissionâs capacity release program has been a key element in the development of the competitive natural gas market. The ability for shippers to get access to pipeline capacity that might otherwise go unused increases the efficient use of the pipeline system and gives shippers more alternatives of supply sources, as well as transportation services and rates, allowing them to compete more effectively in these industries that use natural gas. Indeed, the flexibility offered to natural gas shippers through the capacity release program allows generators to offer more competitive power supplies into the wholesale electric market.
The capacity release program and other Order No. 636 and Order 637 innovations have increased the number of transactions in the gas market and the variety of transaction structures available to gas customers. These changes in the gas market have created specific situations that are not squarely addressed by the Commissionâs rules, and that have prompted the petitionerâs questions and the Commissionâs request for comments. Ironically, the success of the reforms brought by Orderâs 636 and 637 in creating a competitive natural gas market necessitates the Commission now taking stock of the status of those reforms and consider enhancements that track current market realities. Thus, in making this assessment of the capacity release program the Commission should consider the changing needs of natural gas shippers and customers consistent with the requirement of non-discriminatory access to the natural gas pipeline capacity.
II. COMMENTS
A. Summary
The Commissionâs capacity release policy has remained relatively static since its inception, while several factors -- including the capacity release program itself -- have contributed to extensive changes in natural gas markets. Competitive power suppliers need Commission policies that track as closely as possible these extensive market changes in order to limit their fuel procurement risk. In light of the language of the Commission's past orders addressing capacity release transactions, as well as the Commission's more recent orders waiving and denying waivers of its capacity release rules , it is not clear that Commission policy and the natural gas market are moving in tandem. This is causing uncertainty in the marketplace that is inhibiting transactions, thereby limiting the flexibility and economic choices available to natural gas customers, including competitive power suppliers. The Commission can and should remove this uncertainty by addressing â and agreeing with -- the clarifications requested by the Petitioners.
The Petitionersâ questions raise valid concerns that warrant clarification from the Commission. Therefore, EPSA urges the Commission to provide the requested guidance so that competitive power suppliers can proceed with confidence with the types of transactions that are the subject of the marketer petition.
In addition, to the extent that the Commission retains the shipper must have title requirement, EPSA supports the Commission implementing a safe harbor exception for inadvertent violations similar to the safe harbor created for price reporting.
B. Portfolio Management Agreements Benefit both the Electric and Natural Gas Markets
Portfolio management agreements benefit electric generators in ways that increase the ability of the competitive wholesale electricity market to provide customer benefits. Portfolio managers can use the size and depth of their portfolio to better manage a particular generatorâs overall gas supply needs (including transportation and storage), than an individual generator can on its own, in many cases. Portfolio management agreements thus provide generators with the potential to better manage their fuel supply risk. By effectively outsourcing fuel procurement, the agreements provide more certainty for a generatorâs natural gas supply allowing the generator to focus its attention on the electric market. In addition, these arrangements eliminate the administrative burdens such as credit and contract administration associated with dealing with multiple suppliers and the overheads, capital requirements and the risks associated with marketing excess gas and dealing with pipeline imbalances.
The natural gas market benefits from the overall efficiencies that portfolio management arrangements create as the result of the more load-responsive gas supply, greater diversity of pipeline shippers, and the increased utilization of transportation capacity. For example, capacity held by an LDC may be underutilized during the summer months, when it could be used to transport gas to an electric generator. The LDC may lack the capability to identify and contract with such generators. On the other hand, portfolio managers, such as the petitioners, have broad customer bases and are better equipped to deal with the logistics, credit requirements and risks of selling gas to what the LDC (and its regulators) would view as âoff system customers.â
The capacity release program will be able to provide more economic value if the Commission provides clarification on its existing rules as they relate to portfolio management arrangements for several reasons. First, generators want full non-discriminatory access to all potential providers of gas management services. Portfolio managers should not be prevented from providing valuable services because the capacity release program rules lack clarity and create unnecessary regulatory risk. Todayâs natural gas market has evolved to a level of complexity not envisioned in the original rules. As the Commission has recognized with its request for comments, the maturation of the capacity release market now requires additional clarity. This is especially true in light of the waiver decisions in the Northwest/Duke and Louis Dreyfus cases, which have not provided clear guidance for market participants regarding when a waiver is (or is not) required for capacity release transactions to be complaint with commission regulations. But a requirement for waivers would be highly unproductive, because of the number of portfolio management agreements and the need to have them finalized relatively quickly.
C. Marketersâ Petition
From the perspective of electric generators, the fact that many of the nationâs largest gas suppliers are unwilling to enter into portfolio management arrangements with generators due to regulatory uncertainty means that generators are almost certainly missing attractive fuel supply alternatives.
The marketer petitioners requested that the Commission clarify that:
•prearranged releases of capacity may be made in association with gas supply or purchase arrangements, where the parties freely agree to such a combined transaction and it is referenced in the posting of the release (for informational or bidding purposes, as appropriate), and such releases will not be viewed as involving an improper tying of released capacity to a condition or compensation outside of the release process;
•prearranged releases of capacity may be made on an aggregated basis, on the same pipeline or different pipelines, when the parties freely agree to such a combined transaction and it is referenced in the posting of the release (for informational or bidding purposes, as appropriate), and such releases will not be viewed as involving an improper tying of released capacity to a condition or compensation outside of the release process;
•in the context of a prearranged temporary maximum rate release of capacity under a portfolio management arrangement, the payment of a transaction fee, as a lump sum or as revenues may be earned or in association with gas sales, by the portfolio manager (the replacement shipper) to the portfolio management customer (the releasing shipper) will not be viewed as a payment exceeding the pipeline's maximum rate; and
•in the context of a prearranged temporary maximum rate release of capacity under a portfolio management arrangement, the payment of reservation charges by the portfolio management customer (the releasing shipper) to the portfolio manager (the replacement shipper) will not cause the release to be biddable.
The paragraphs that follow further explain EPSAâs support for the marketersâ petition.
1. Tying Arrangements
The Commission should continue to prevent the coercive tying of the right to use transportation on a pipeline to a purchase or sale of gas involving the releasing shipper. That sort tying of transportation and commodity was objectionable in Order No. 636 and remains objectionable today; however, there are many transactions in todayâs marketplace involving both commodity transactions and the release of pipeline capacity that do not constitute the same form of tying. For example, prearranged capacity release transactions where the parties freely and openly agree to combine a release of capacity with a gas supply arrangement should be permissible.
The packaging of capacity release with a gas supply agreement does not result in discrimination against other shippers that might want to bid on the capacity. Quite simply, generators who hold pipeline capacity typically are not going to release it unless they are certain that they can get reliable gas supply to their facilities.
Generators are wiling, however, to release their capacity in the context of a portfolio management agreement, because the arrangement assures them of continued fuel supply at known costsâas well as other potential benefits. In short, without the ability to enter into portfolio management agreements, generators will continue to hold their capacity, but will probably pay more for fuel and have to deal with additional logistical headaches.
There are two reasons why prearranged deals should not be viewed as an improper tying. As an initial point, posting the terms of the release that reference the commodity transaction, whether for informational purposes or only for bidding, will mitigate the possibility of any hidden or extraneous arrangements and assure transparency in the marketplace. Second, no undue discrimination would be involved because the prearranged replacement shipper would have freely agreed to the transaction and is not captive to some other element of another transaction.
2. Aggregated Capacity Arrangements
The Commission should clarify that it will permit the prearranged release of multiple capacity entitlements on one or more pipelines, together in a single package, where the parties are in agreement and the combined transaction is posted for informational or bidding purposes, as appropriate. Indeed, Order 636-A appeared to explicitly permit the packaged release of capacity when it would âincrease the marketabilityâ of the package.
Unfortunately, the recent waiver orders have muddied what Order 636-A seemed to make clear. Transactions of this type are economically rational because quite often a set of transportation contracts is needed to optimally move gas between different supply sources and loads. Requiring the piecemeal release of the capacity would undermine the synergies and could result in higher delivered gas costs.
3. Transaction Fees
Whether a transaction fee is a paid as a lump sum payment, an agreement by the portfolio manager to share net proceeds earned on incremental sales of gas to others, or as a pricing formula for delivered gas that results in a below-market commodity price for the customer, it should not be considered as compensation related to the release of the capacity. Such fees are part of the consideration for the overall transaction, which has multiple synergistic components that can include gas purchases, sales, risk management services and the release of capacity. The fee cannot be associated with any specific facet of the arrangement, and therefore should not be viewed as a payment exceeding the pipelineâs maximum rate.
4. Reservation Charges
Sellers of natural gas often price their commodity on a two-part basis: reservation and delivery. Indeed, outside the context of portfolio management agreements, the reservation portion of the price sometimes represents the cost associated with the reservation of pipeline capacity to ship the seller's gas to the buyer. It could also very well include fixed payment obligations incurred by the seller to secure upstream gas supplies, gathering or processing services. The variable portion covers the commodity gas and variable transportation costs. The payment of demand charges by a generator as a portfolio management customer to the manager is a matter of negotiation involving the overall transaction. It is more straightforward than burying transportation costs in the delivered price of the commodity.
Therefore, EPSA asks that the Commission clarify that, in the context of a prearranged temporary maximum rate release of capacity under a portfolio management arrangement, the payment of reservation charges by the portfolio management customer (the releasing shipper) to the portfolio manager (the replacement shipper) will not cause the release to be biddable.
D. Shipper Must Have Title
EPSA takes no position on whether the Commission should eliminate its shipper must have title policy. But in the event, the Commission retains the shipper must hold title requirement; it should provide a safe harbor for inadvertent violations. Despite its apparent simplicity, absolute compliance with the shipper must hold title (SMHT) requirement can be difficult due to multiple transactions with several parties on the same pipeline, agency arrangements and other factors. This is especially true when gas sales must be hastily arranged to avoid imbalance penalties, which are increasingly being levied on a daily (or even hourly) basis. These market conditions, can create instances where even those companies taking every precaution to fully comply with the Commissionâs rules, including SMHT, can inadvertently make a mistake in the transfer of title with no intentions whatsoever of willful misconduct. Penalties for SMHT violations may be appropriate for intentional efforts to circumvent the commissionâs shipper must hold title policy, but not for inadvertent human error. Therefore, violations should not be presumed when unintentional errors are occasionally discovered and corrected.
EPSA supports a âsafe harborâ provision similar to the safe harbor that the commission adopted for price reporting to index developers. EPSA is not proposing specific criteria but as example a safe harbor could be structured as follows: If a shipper (1) conducts appropriate training of scheduling personnel, (2) has a compliance program targeted at identifying potential SMHT issues before gas flows, and (3) conducts an annual independent audit of its gas transportation practices designed to identify SMHT problems there would be a rebuttable presumption that any violation of the SMHT policy was inadvertent. A provision of this nature would allow for Commission consideration of the overall program prior to launching an investigation or imposition of penalties, unless the violation was purposeful and caused harm to customers or other shippers.
III. CONCLUSION
WHEREFORE, EPSA requests that the Commission rule expeditiously on the clarifications requested by the Petitioners regarding the existing capacity release program rules and address the shipper must have title requirement as set forth above. .
Respectfully submitted _________________________
Nancy Bagot, Vice President of Policy
Jack Cashin, Senior Manager of Policy
Electric Power Supply Association
1401 New York Avenue, NW
11th Floor Washington, DC 20005
(202) 628-8200
April 11, 2007
CERTIFICATE OF SERVICE
I hereby certify that I have served a copy of the comments by first class mail, postage prepaid, or via email upon each person designated on the official service list compiled by the Secretary in this proceeding.
Dated at Washington, D.C., April 11, 2007.
Mark Bennett
EPSA Comments to FERC on Capacity Release (Dockets RM06-21-000 and RM07-4-000).PDF