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Transcript of © UH Institute for Energy, Law & Enterprise 1 Energy, Inc. Natural Gas/Electric Power Overview...
© UH Institute for Energy, Law & Enterprise 1
Energy, Inc. Natural Gas/Electric Power Overview
U.S./Canada Case
© UH Institute for Energy, Law & Enterprise 2
U.S. Gas Issues
Energy Inc. business perspective:• Long run production and deliverability• Demand/supply balances and price impacts• Market oversight and mitigationU.S. energy policy considerations:• Alaska pipeline routes (Canadian considerations)• Conflicts over public lands surface management with
increased drilling• U.S. energy legislation (specific coalbed methane,
CBM, issues deserve consideration)• Market oversight and mitigation
© UH Institute for Energy, Law & Enterprise 3
Natural Gas Value Chain
Oil and Gas Field Production
Processing(If Needed)
PipelineTransportation
Local Distribution
Liquefaction(LNG)
LNG TankerShipment to
Markets
Re-gasification
Liquids Transportation(pipeline, truck, tanker or petrochem stream
for butanes+)
Marketing andDistribution
(propane, butane)
Gas Separation,Gathering
Residential
Commercial
Industrial(Direct Use)
Electric PowerGeneration
(Utilities, IPP,Industrial)
Electric PowerTransmission
Electric PowerDistribution
Direct Use(eg., vehicle transport)*
Oil Refining
Gas LiquidsExtraction
Liquids (LPG) stream (propane, butanes, etc.)
Power stream
Methane stream
*Note thatcompressedmethane andLPG are also usedfor vehicletransport.
© UH Institute for Energy, Law & Enterprise 4
U.S. (Canada) Natural Gas Value Chains
Industrial
Electric (fuel, bulkmarket for power)
Residential, Small Commercial
Physical Bypass
Natural Gas:•Production•Gathering*•Processing*•Intrastate Pipelines* Often vertically integrated
InterstatePipelines
“City Gate”
“LDC”
Transportation (pipe) Sales (commodity)
“Unbundling” involves the separation of transportation from sales to allow third party marketing with pipelines providing “open access” and comparable service to all shippers.
Most Competitive Competitive Least Competitive
Commercial
© UH Institute for Energy, Law & Enterprise 5
U.S. Natural Gas Restructuring
Competitive LDC Industry
State Public Utility RegulatoryCommissions, 1800s-1927
Development of InterstateTransportation
Federal Regulation of InterstateTransportation (PUHCA/FPA ‘35)
Federal Regulation of Wellhead Prices(Phillips Decision ‘54)
Decontrol of WellheadPrices (NGPA ‘78)
First Stage Open Accessfor Pipelines (Order 436 ‘85)
Final Stage of Open Access(Order 636 ‘92)
LDC Unbundling Era?
© UH Institute for Energy, Law & Enterprise 6
Market Design Issues, 2003
• Marketing affiliates of federally-regulated (interstate) pipelines– Market power and reporting
• Price transparency and market gaming– California investigations– Rules for market oversight without reducing
market liquidity
• Deterioration in market liquidity– Price volatility impacts
© UH Institute for Energy, Law & Enterprise 7
Natural Gas Price Change Over Time
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Apr-9
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Apr-9
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Apr-9
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Apr-9
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Apr-0
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Apr-0
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Apr-0
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Month
No
min
al S
po
t P
rice
($/
Mcf
)
Source: U.S. EIA
© UH Institute for Energy, Law & Enterprise 8
U.S. Gas Resource Development
1200
1300
1400
1500
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1800
Jul-8
7
Jul-8
8
Jul-8
9
Jul-9
0
Jul-9
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Jul-0
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Jul-0
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Jul-0
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BC
F
200
300
400
500
600
700
800
900
1000
1100
1200
Gas
Rig
s
Monthly Dry Gas Production12 Month MA, Production
Monthly Gas Rigs
Source: U.S. EIA.
Through July 2002
© UH Institute for Energy, Law & Enterprise 9
Demand: A Fall Can be Hard
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
100
200
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400
500
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700
800
900
ConsumptionWellhead Price
Consumption, bcf Avg. Wellhead, cents/mcf
Source: U.S. EIA
© UH Institute for Energy, Law & Enterprise 10
Gas Demand by Segment
24% 22% 22%
13% 14% 15%
36%
46%41%
19%15% 13%
0%5%
10%15%20%25%30%35%40%45%50%
1980/19.9 tcf 1999/21.4 tcf 2000/22.7 tcf
Residential Commercial Industrial Electric Utilities
Gas consumption by customer group
Source: U.S. EIA
© UH Institute for Energy, Law & Enterprise 11
U.S. Natural Gas Prices (Real)
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01
ResidentialCommercialIndustrialElectricWellhead
$/mcf
Source: U.S. EIA
Electric utilities is YTD
© UH Institute for Energy, Law & Enterprise 12
U.S. Value Chain Issues
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Wellhead toCitygate
Citygate toResidential
Citygate toCommercial
Wellhead toIndustrial
Wellhead toElectric
84 90 91 92 93 94
95 96 97 98 99 0
Source: U.S. EIA
Price differentials, $/mcf
Note- Wellhead to electricexcluded for 2000
© UH Institute for Energy, Law & Enterprise 13
Market Geography with PipeDe-bottlenecking, 1995-99
Deliveredto
Pipe: AUG-99 JAN 98 JAN 97 JAN 96 JAN 95
ChangeAUG 99-JAN 95
Henry Hub $2.61 $2.25 $3.70 $2.90 $1.43 $1.18
El Paso 2.50 2.20 3.85 2.00 1.17 1.33
Blanco 2.04 2.10 3.80 1.35 1.11 0.93
Oklahoma 2.49 2.15 4.15 2.05 1.23 1.26
Opal 2.19 2.05 3.70 1.25 1.02 1.17
Alberta 2.25 1.05 1.90 1.05 0.66 1.59
Spot prices, $/mmBtu, beginning of month
Source: World Gas Intelligence
© UH Institute for Energy, Law & Enterprise 14
U.S. Gas Price Convergence
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
Aug-95
Feb-96
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
Aug-01
Source: Natural Gas Week
$/mcf across all U.S. and Canadamarket centers, hubs and majorcity gates
© UH Institute for Energy, Law & Enterprise 15
Japan
223105
12
75
3544
LNG
LNG
66
United Arab Emirates
3
Trinidad and Tobago
99
6
Australia
Algeria
44 10
OmanNigeria
13
Indonesia
346
Qatar
Natural Gas Imports, Exports in 2000
U.S. DOE – Office of FossilEnergy, bcf
Total U.S.Consumption22.7 tcf
© UH Institute for Energy, Law & Enterprise 16
Prices Are Converging
0
1
2
3
4
5
6
7
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
LNG (cif Japan) US Henry Hub Oil (Brent)
$/mmbtu Oil indexed LNG v. Henry Hub
Source: BP Gas and Power
© UH Institute for Energy, Law & Enterprise 17
Henry Hub Does Rule
1998 1999 2000 2001
Canada $1.91 $2.18 $3.90 $4.36
LNG Imports*
2.31 – 2.84 2.15 – 2.69 2.73 – 3.93 3.29 – 5.00
Domestic/
Henry Hub**
2.08 2.27 4.32 3.98
Natural Gas Prices, $/mmBtu (U.S. DOE – OFE)
* Includes both landed and tailgate prices; lower price is generally landed price.** Mean, daily spot prices.
© UH Institute for Energy, Law & Enterprise 18
U.S. Power Issues
Energy Inc. business perspective:• Financial health of electric power industry• Demand/supply balances and price impacts• Market oversight and mitigationU.S. energy policy considerations:• Fuels for power generation• Market design issues and market performance• Financial health of electric power industry• Market oversight and mitigation
© UH Institute for Energy, Law & Enterprise 19
Application of Principles: Electricity Restructuring
Early Electric UtilitiesEarly Electric Utilities
Samuel Insull and stateSamuel Insull and stateregulation, early 1900sregulation, early 1900s
Development of InterstateDevelopment of InterstateTransmissionTransmission
Federal Regulation of WholesaleFederal Regulation of Wholesaleand Interstate Commerceand Interstate Commerce(PUHCA,FPA ‘35)(PUHCA,FPA ‘35)
North American Reliability Council, ‘68North American Reliability Council, ‘68
Conflicts on Natural GasConflicts on Natural GasUse (PIFUA & PURPA ‘78)Use (PIFUA & PURPA ‘78)
Commitment to Bulk MarketCommitment to Bulk MarketCompetition (EPAct ‘92)Competition (EPAct ‘92)
Open Access Begins (CPUCOpen Access Begins (CPUC‘‘94, Orders 888/889 ‘96) 94, Orders 888/889 ‘96)
Retail Wheeling Era?Retail Wheeling Era?
© UH Institute for Energy, Law & Enterprise 20
Electricity Demand
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
90 91 92 93 94 95 96 97 98 99 00 01
0
200
400
600
800
1000
1200Utilities
Non-utility Providers
Billion kwh Net Generation Utilities Billion kwh Net Generation NUGs
Source: BP
Nonutility generation = 30% of total industry
© UH Institute for Energy, Law & Enterprise 21
Natural Gas Consumption forPower Generation
20%
25%
30%
35%
40%
45%
50%
55%
60%
90 91 92 93 94 95 96 97 98 99 00 01
No
n-u
tili
ty P
rovi
der
s
0%
2%
4%
6%
8%
10%
12%
Uti
liti
es
Non-utility Providers
Utilities
Natural Gas Generation as % Total Net Generation
Source: BP
© UH Institute for Energy, Law & Enterprise 22
Electricity Price Change Over Time
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01
Month
($/M
Wh
)
PaloVerde Price ($/MWh)Mean (4/96-6/01)Mean efore california (4/96-5/00)After California (6/00-6/01)Competition Era (4/98-6/01)
$ 171.53
$ 73.78$ 53.14$ 27.42
Nominal
© UH Institute for Energy, Law & Enterprise 23
What Is a Public Utility?
• Old Concepts:– Technical economies of
scale– Essential services– Capital intensive– Lack of storage– Variable costs and load
factors– Exclusive franchise
• New Concepts:– Technology is not static– Essential services provided
by competition– Changing ratio of capital to
labor– New storage technologies– Pricing for specific
customer needs– Borderless service areas
“Public utilities are public only by law, with limited property rights endowed by their creator (Bonbright, p. 8)”
© UH Institute for Energy, Law & Enterprise 24
Summary: A History of Ideas, 1800s-Today
• “Regulated monopoly” as a substitute for competition
• Emerging ideas about competition– Minimize monopoly component– “Contestability” (potential competition) as
substitute for pure competition
• Initiation of the “Deregulation Movement”--Fred Kahn and the “Saturday night stay” for airlines
© UH Institute for Energy, Law & Enterprise 25
Principles of Deregulationfor Energy Utilities
• Separate the commodities--natural gas and electricity--from the infrastructure (“pipes and wire”): unbundling
• Contract carriage and nondiscriminatory open access
• Third party marketing• Risk management to hedge against
commodity price volatility
© UH Institute for Energy, Law & Enterprise 26
Based on Comparative Research -
Market Design: What Is the Role of Regulation?
• Can regulators act as “market facilitators”?• Can regulators design markets? Should the U.S.
have regional regulatory authorities (“how many regulators do we need?”)
• Is harmonization good or bad?
• Should there be a “uniform code” for North America?
• How does Mexico fit in to the North American regulatory scheme?– Stage of development
© UH Institute for Energy, Law & Enterprise 27
Electric Power Driver
It’s Stormy Out There!
Real Time PricingDoes choice
matter?
Load Management& Reliability
Retail Competition?
Competitive Electricity Markets (Restructuring)
Market Structure
Measurement
Aaagghh!
© UH Institute for Energy, Law & Enterprise 28
U.S. Restructuring: Gas vs. Electricity
• Natural gas was both a driver, for and set a precedent for, electricity– Increasing integration is the “logic driver” for electric
restructuring
• Gas can be stored, electricity cannot (yet)• Gas is cheapest when used directly
– For electricity, fuel cost of gas is higher -- but capital cost, O&M are less -- than coal or nuclear, thus far
• Seasonal/daily demand, balancing, reliability are challenges for both
© UH Institute for Energy, Law & Enterprise 29
Issues for Electricity Restructuring in the U.S.
• Size and complexity of U.S. market• Market design -- How? Who?• Individual state approaches vs. federal
interstate commerce• T&D constraints and development
– Generation capacity installed at load sites
• Permitting and siting for gen, T&D
© UH Institute for Energy, Law & Enterprise 30
The Texas Approach: Highlights
• In 1995, wholesale market deregulated• In 1999, SB 7 passed for retail restructuring
– Retail choice date: January 1, 2002– Munis and co-ops opted in as of December, 2000– Utilities must separate businesses - no forced divestiture
• Gencos - limited to 20% across power region
• REPs - affiliates can only offer price to be in traditional service area for 36 months or until 40% of customer load is lost; 3.5 % or 2,000MW of delivered power from renewables by 2009
• Transcos/Discos - open access, nondiscriminatory, PUCT regulated with postage stamp wholesale transmission services
– 50% NOx, 25% SO2 reductions for grandfathered plants
• Pilot beginning June 1, 2001for 5% of market
© UH Institute for Energy, Law & Enterprise 31
The Texas Approach: Key Conditions
• PUCT must:– Conduct market monitoring– Certify REPs– Establish reliability standards– Protect customers
• ERCOT ISO:– Must manage information and settlement– May provide nondiscriminatory gen-related ancillary services
to all REPs
• “Gas is Green”:– Railroad Commission charged with encouraging
performance standards for gas-fired megawatts
© UH Institute for Energy, Law & Enterprise 32
How We Differ from California
• Us– Market-based– No mandated pool– Allow LT contracts– Price caps only until
December 2001– 10 month avg for
new powerplants– Risk management at
discretion of market participants
• Them– Government-based– Cal PX– FERC instituted!– 5-year price caps
(original law)– 3-year avg for new
powerplants– No allowances for
risk management