FERC "pipeline" Commissioner Phillip Moeller held a workshop Sept. 18 to explore the possibility of the commission, on its own or through a third party, establishing an online trading platform for the nomination and confirmation of pipeline deliveries of natural gas. The proposal was made at a technical conference in April by Don Sipe, a Maine attorney, on behalf of the American Forest and Paper Association.
That workshop examined operational and resource issues in the gas and electric industries arising from last winter’s polar vortex. Sipe served two terms as chair of the New England Power Pool and for over a decade was vice chair of NEPOOL for the end use sector.
The potential of an online scheduling tool is just one idea FERC is studying to address several somewhat related issues dealing with getting adequate natural gas to electric utilities during cold snaps. Some proposals deal with scheduling, others with delivery, some only on the natural gas side of the issue, others with better coordination between gas pipelines and electric wholesalers.
Moeller says about the online trading workshop and scheduling issues more broadly, "We have to at least try and move the concept forward before next winter. Pipelines have the incentive to keep their electric generator customer base happy, so they should be in favor of these efforts because generators are not happy now with the lack of transparency and liquidity after hours."
Sipe says the response to his proposal from the industry at large could best be characterized as "thunderous silence." The current system of commodity trading is "old school," where generators faced with short-notice supply needs essentially use, according to Sipe, their rolodexes to call various marketers in search of gas and available capacity.
Joan Dreskin, INGAA general counsel, responds that pipelines are aware of Sipe's proposal, but haven't piped up because Sipe has advanced a concept, not a detailed proposal. "We are eager to learn more, but do have some serious reservations, as to who will pay for the online trading platform, and whether it will add value for our customers." She notes, for example, that some customers could lose out if pipelines have to make their capacity fungible.
"Pipelines have worked to customize tariffs for customers and not all firm transportation recourse tariffs look the same," she explains. "It is unclear how a uniform trading platform would work if you are not comparing apples to apples."
An online trading platform would theoretically allow electric generators to find out much more quickly whether pipelines will be able to supply gas needed on short notice such as when an Independent System Operator (ISO) must quickly find a replacement generator due to an outage or an unexpected change in load. Typically, an ISO, such as the one operating in New England, needs to know, in real time within 15 minutes whether a given generator will be able to supply the necessary power to local electric utilities on any given day. This is particularly an issue during a cold weather snap or a heat wave or when unexpected generator outages require the ISO to dispatch previously offline units.
However, in the current system, it takes much longer for generators to nominate gas on a given pipeline's system, and even longer for the pipeline to confirm it can supply the gas at a given price. That can sometimes take three to four hours. This is particularly tough on merchant generators which frequently don't have firm capacity. At times, this uncertainty will lead the system operator to dispatch more generation than needed because it is unsure which, if any of the units will be able to get gas.
Generators, in turn, may nominate more gas than needed to fulfill ISO requests. Subsequently, the ISO may find itself with more generation that it needs and “dispatch down” a certain number of generators that had gone out and secured supply. Left with excess supply, generators may either have to resell at a loss or face imbalance penalties. If generators cannot recover these costs in some fashion they are harmed, and conversely, if they can recover these costs electricity consumers end up paying these added charges.
The pipeline industry generally believes the solution to the problem is to build more pipeline capacity. "I agree we need to build more pipelines, but that appears to be the sole focus of the industry," explains Sipe. He believes the apparent lack of enthusiasm for considering expanding an online trading platform such as the Intercontinental Exchange, to coordinate more closely with and perhaps automate the nomination and confirmation process in real time trading, has to do with some uncertainty as to whether FERC could mandate such a trading platform, who would pay for it and perhaps some hesitancy on the part of marketers to be more transparent in their pricing. But he believes pipelines and others industry participants could make more money from "being more efficient."
His proposal wouldn't be a panacea," concludes Dreskin, "but we are willing to talk about it."
Mr. Barlas, a freelance writer based in Washington, D.C., covers topics inside the Beltway.