Today:

1

• Today
• walk through history of restructuring
• Historical setting
• Orders 436/636
• price and spot markets
• legal issues associated with restructuring

2
Traditional Market Structure
Remember, under NGA/Phillips, there was a glut of
(cheap) intrastate gas and shortages of
(expensive) interstate gas. WHY?
Producer Pipeline/Transporter LDC End User
How competitive, or prone to natural monopoly,
are each of these parts of the industry?
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3

• Natural Gas Restructuring
• Natural Gas Policy Act of 1978
• Slow, staged movement from regulated wellhead
  prices to higher deregulated prices
• Treated interstate and intrastate gas
  differently, allowing intrastate gas prices to
  float
• Pipeline owners not required to provide
  transportation to third parties
• PRODUCER ? PIPELINE ? LDC OR INDUSTRIAL
  END-USER

4
NGPA
Producer Pipeline/Transporter LDC End User
How did the market (consumers and producers,
respectively) respond to the NGPA?
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5
Natural Gas Restructuring
NGPA Firms entered into long term take or
pay contracts for interstate gas. What is a
take or pay contact? Why would sellers or
buyers enter into such a contract? As prices of
interstate gas were allowed to increase ? an
oversupply resulted but price didnt fall. Why?
What happened next?
6
Natural Gas Prices Paid by Consumers (annual
avg.) Source EIA
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As wellhead prices increased, so did exploration
and supply. Market price decreased, but LDCs
locked in to price gt market price through TOP
provisions.
NGPA
Producer Pipeline/Transporter LDC End User
TOP provisions locked in supply at what seemed
like a good price at the time
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Meanwhile consumers had already begun switching
to lower cost alternatives (fuel oil), leaving
LDCs (and pipelines) caught in the middle.
8

• Natural Gas Restructuring
• SMPs and the Maryland Peoples Counsel case (DC
  Cir. 1985)

pipeline
producer
LDC
Take or pay contracts
Industrial user
industrial bypass
9

• Natural Gas Restructuring
• Order 436
• Formalized ad hoc approvals into a regulatory
  regime
• Mandated open access transportation
• Common carrier status
• Unbundling ? transportation service only

10

• Natural Gas Restructuring
• Order 636 (1992)
• Functional unbundling
• not full separation
• transmission tariff
• Capacity release firm vs. non-firm service
• Rate design common formula
• Capacity curtailment
• Transition costs

Antitrust concerns?
11
Is it fair for the FERC to allow pipelines to
recover TOP contract costs from captive customers
(ultimately, ratepayers)?
Filed rate doctrine FERC has exclusive
authority to determine the reasonableness of
wholesale rates. This means that when an electric
utility purchases power from a wholesale
provider, only FERC can decide if the price
charged is fair. Once the FERC decides that a
wholesale price is fair, a long line of cases
also provides that the utility may pass along
those wholesale costs to its ratepayers. TOP
charges? With departing load?
12
Spot Market...What is it ?

• Market for on the spot purchases
• Time Frame can be short-term (1-30 days)
• Prices set at various locations (Hubs etc.)
• What is the purpose of the spot market?

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(No Transcript)
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Natural Gas Prices Can Vary Between Hubs
15
Siting pipelines OG condemnation Retail
restructuring
16
Natural Gas Restructuring Map Source EIA
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U.S. Market Structure Traditional New
Producer Pipeline/Transporter LDC End User