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Energy, Inc. Natural Gas/Electric Power Overview U.S./Canada Case

Energy, Inc. Natural Gas/Electric Power Overview U.S./Canada Case. U.S. Gas Issues. Energy Inc. business perspective: Long run production and deliverability Demand/supply balances and price impacts Market oversight and mitigation U.S. energy policy considerations:

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Energy, Inc. Natural Gas/Electric Power Overview U.S./Canada Case

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  1. Energy, Inc. Natural Gas/Electric Power OverviewU.S./Canada Case

  2. U.S. Gas Issues Energy Inc. business perspective: • Long run production and deliverability • Demand/supply balances and price impacts • Market oversight and mitigation U.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

  3. Natural Gas Value Chain Electric Power Transmission Electric Power Generation (Utilities, IPP, Industrial) Electric Power Distribution Pipeline Transportation Local Distribution Industrial (Direct Use) Re-gasification Commercial Processing (If Needed) Residential LNG Tanker Shipment to Markets Liquefaction (LNG) *Note that compressed methane and LPG are also used for vehicle transport. Gas Separation, Gathering Direct Use (eg., vehicle transport)* Liquids Transportation (pipeline, truck, tanker or petrochem stream for butanes+) Oil and Gas Field Production Marketing and Distribution (propane, butane) Methane stream Oil Refining Liquids (LPG) stream (propane, butanes, etc.) Gas Liquids Extraction Power stream

  4. U.S. (Canada) Natural Gas Value Chains Physical Bypass “LDC” Industrial Commercial Residential, Small Commercial Interstate Pipelines Electric (fuel, bulk market for power) • Natural Gas: • Production • Gathering* • Processing* • Intrastate • Pipelines • * Often vertically • integrated “City Gate” “Unbundling” involves the separation of transportation from sales to allow third party marketing with pipelines providing “open access” and comparable service to all shippers. Transportation (pipe) Sales (commodity) Most Competitive Competitive Least Competitive

  5. U.S. Natural Gas Restructuring Federal Regulation of Wellhead Prices (Phillips Decision ‘54) Federal Regulation of Interstate Transportation (PUHCA/FPA ‘35) Decontrol of Wellhead Prices (NGPA ‘78) First Stage Open Access for Pipelines (Order 436 ‘85) Development of Interstate Transportation Final Stage of Open Access (Order 636 ‘92) State Public Utility Regulatory Commissions, 1800s-1927 Competitive LDC Industry LDC Unbundling Era?

  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

  7. Natural Gas Price Change Over Time Source: U.S. EIA

  8. U.S. Gas Resource Development Through July 2002 Source: U.S. EIA.

  9. Demand: A Fall Can be Hard Consumption, bcf Avg. Wellhead, cents/mcf Source: U.S. EIA

  10. Gas Demand by Segment Gas consumption by customer group Source: U.S. EIA

  11. U.S. Natural Gas Prices (Real) Electric utilities is YTD Source: U.S. EIA

  12. U.S. Value Chain Issues Price differentials, $/mcf Note- Wellhead to electric excluded for 2000 Source: U.S. EIA

  13. Market Geography with PipeDe-bottlenecking, 1995-99 Spot prices, $/mmBtu, beginning of month Source: World Gas Intelligence

  14. U.S. Gas Price Convergence $/mcf across all U.S. and Canada market centers, hubs and major city gates Source: Natural Gas Week

  15. Algeria 44 Japan Indonesia Nigeria 3 13 Oman Qatar 10 46 Trinidad and Tobago 99 United Arab Emirates 3 Natural Gas Imports, Exports in 2000 U.S. DOE – Office of Fossil Energy, bcf Australia 6 LNG 66 75 3544 Total U.S. Consumption 22.7 tcf LNG 12 223 105

  16. Prices Are Converging $/mmbtu Oil indexed LNG v. Henry Hub Source: BP Gas and Power

  17. Henry Hub Does Rule Natural Gas Prices, $/mmBtu (U.S. DOE – OFE) * Includes both landed and tailgate prices; lower price is generally landed price. ** Mean, daily spot prices.

  18. U.S. Power Issues Energy Inc. business perspective: • Financial health of electric power industry • Demand/supply balances and price impacts • Market oversight and mitigation U.S. energy policy considerations: • Fuels for power generation • Market design issues and market performance • Financial health of electric power industry • Market oversight and mitigation

  19. Application of Principles: Electricity Restructuring North American Reliability Council, ‘68 Federal Regulation of Wholesale and Interstate Commerce (PUHCA,FPA ‘35) Conflicts on Natural Gas Use (PIFUA & PURPA ‘78) Commitment to Bulk Market Competition (EPAct ‘92) Development of Interstate Transmission Open Access Begins (CPUC ‘94, Orders 888/889 ‘96) Samuel Insull and state regulation, early 1900s Early Electric Utilities Retail Wheeling Era?

  20. Electricity Demand Nonutility generation = 30% of total industry Source: BP

  21. Natural Gas Consumption forPower Generation Source: BP

  22. Electricity Price Change Over Time

  23. 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 What Is a Public Utility? “Public utilities are public only by law, with limited property rights endowed by their creator (Bonbright, p. 8)”

  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

  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

  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

  27. Electric Power DriverIt’s Stormy Out There! Market Structure Does choice matter? Real Time Pricing Load Management & Reliability Retail Competition? Measurement Aaagghh! Competitive Electricity Markets (Restructuring)

  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

  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

  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

  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

  32. 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 How We Differ from California

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