Pipelines and Participants: Creating the Mutually Beneficial Natural Gas Network of the Future

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As the natural gas industry is undergoing tremendous changes its’ participants must reflect on the issues that need to be addressed to prepare for the future. Previously there was a fundamental realignment of the gas supply basins that drove major pipeline expansions and supported new natural gas fired power generation. Oddly, other facets of the industry remain frozen in the 1990s. The successful pipeline of the future must engage with other participants and develop innovative strategies to utilize the opportunities presented within the regulatory structure.

THE CHALLENGE: Economic, regulatory, cultural, and geopolitical forces effecting the energy industry continue to dramatically impact natural gas pipelines and their shippers. Collectively pipelines should focus on long-term strategies that align future operations and commercial success with the imminent green energy economy to retain market share and yield reasonable returns. Consider some of the industry changes of recent years.

• The gas supply basins that are the source of the natural gas pipeline network transportation load has fundamentally realigned.

• The portfolio of clients served by pipelines nationally, and more acutely in specific regions, is tilting to power generation or export load. This trend continues.

• The commercial operations of some pipelines have significantly changed since implementation of their Order 636 service structures and tariffs, potentially leaving them unaligned with their current service portfolio.

• Physical pipeline operations may have also changed since Order 636, altering gas flows, and producing more frequent waivers of tariff specifications.

• Renewable portfolio standards are driving changes in pipeline utilization, pricing, and EBITDA, to name a few. No one knows for sure the ultimate impact of this process.

• Social, political, and economic forces are aligning to shape a green energy economy with evolving opportunities for natural gas.

• Regionally, activists make it difficult, if not impossible to build new pipeline infrastructure and have endorsed expensive regulations on existing pipes.

• Regulations continue to be in a state of flux, with various agencies lurching from policy to policy depending on the Administration.

• The cost of regulatory uncertainty cannot be determined and the cost of regulatory compliance and ongoing regulatory maintenance (e.g., integrity costs) continues to escalate.

• Although some pipelines captured long-term maximum rate contracts during the expansion of the Marcellus shale infrastructure, this commercial framework likely will not repeat.

OPPORTUNITIES: Markets need commercial alternatives to the inflexible structure established by the FERC post Order 636 pipeline ratemaking and services. Today’s market participants require services that efficiently and reliably deliver natural gas with the operational flexibility necessary for today’s pipeline load. Simultaneously, pipelines require compensatory prices recognizing the value of their investment in a long-lived asset and each market participants characteristics of service.

• Power generators need capacity that is firm, flexible, and flexibly priced.

• LDCs need flexible portfolio management solutions simultaneously fulfilling customer use and regulatory oversight requirements.

• Pipelines and customers seek services that require updated tariff provisions recognizing current system operational and commercial realities.

• Pipelines need a realistic opportunity to recover integrity program costs.

• Pipelines need some unilateral ability to manage capacity and timely respond to markets.

• Market participants need to redefine the concept of Market Power, its application to service pricing and the potential to redefine the commercial model to manage the limitations of the current regulatory model.

Industry experience yields unique, innovative solutions

SOLUTIONS: The perspective of industry experience provides insight for the issues of today as variations of historical challenges. Pipelines and their shippers can create innovative solutions and achieve better outcomes than those of recent history. Still, as a pipeline operates in a regulated environment, participants must evaluate the impacts of regulatory lag on their efforts to implement innovative strategies. Thus, while setting and achieving long-term strategies and goals are vital, establishing achievable shorter-term targets will be equally critical.

• Create flexible transportation pricing with roll-your-own-services and rates, pricing ratchets, and service differentials promoting rate certainty to shippers and revenue surety to pipelines.

• Create flexible transportation services with discrete features designed to address identified customer needs so pricing can reflect market requirements.

• Create flexible capacity options with specialized capacity management programs, engineering / technical designs and regulatory strategies promoting flexibility.

• Create operating and pricing alternatives for substantially or fully depreciated assets.

• Create a long- term strategy to provide market pricing, or effective market pricing on key pipelines.

• Create a model encouraging integrated transmission system growth rather than disconnected, incremental growth.

Natural gas pipelines may have a promising future if they are successful in joining with other market participants who value the benefits of the commodity they transport. There is a path forward, even in the structure of the regulated markets.