A.D. Koen
Gulf Coast News Editor
Interstate gas pipelines in the U.S. are facing dramatically increased administrative complexity if the Federal Energy Regulatory Commission implements Order 636 without major changes.
Complexity could increase because pipelines would have to track the status and compile the effects in near-real time of gas moving in and out of interstate systems under thousands of contracts between producers, aggregators, marketers, and end users.
Generally, Order 636 would allow all participants in the U.S. gas industry the right to buy, sell, or trade and transport gas to any other participant. The more interstate gas sales, swaps, or resales, the more transactions pipelines would have to follow.
Because each shipment of gas would be another entity's property, pipelines would have to assure that contractual volumes reach intended customers at intended delivery points. Because of that role, pipelines are sure to face new operational challenges.
Order 636 also would require gas customers to acquire their own gas supplies and arrange deliveries. Each company using interstate pipelines to transport gas would be responsible for balancing its receipts and deliveries.
Producers or aggregators under Order 636 would have to be extremely aware of the status of wells providing their supplies.
Some producers also likely would begin gathering production information electronically to track operations as closely as possible.
Pipelines would have to oversee the process while keeping their interstate systems operating.
To track transactions under Order 636, help hundreds-possibly thousands-of shippers balance receipts and deliveries, and provide related transportation services, pipelines would have to adopt new operating strategies and continue upgrading systems' equipment and instrumentation.
IMPLEMENTATION PROCESS
FERC issued Order 636 Apr. 8 and allowed 1 month for parties to file requests for rehearing of the order and to intervene in individual pipeline restructuring dockets (OGJ, Apr. 13, p. 32).
Since May 8, pipelines have been meeting across the U.S. with various customer groups, outlining how they plan to respond to 636 and receiving feedback.
Some pipelines have disclosed plans to reorganize administrative or management structures to operate more efficiently under 636. One company, Texas Eastern Transmission Corp. (Tetco), a subsidiary of Texas Eastern Corp., last month filed the first compliance proposal outlining new transportation rates, operational issues, and services the company plans to offer under 636 (OGJ, June 15, p. 26).
By July 7, pipelines must tell customers using their systems how they intend to comply. Some settlement discussions are likely.
Pipelines must file compliance plans with FERC by specific assigned dates between Oct. 1 and Dec. 1, 1992. Other companies generally will have 30 days after each pipeline compliance filing to file additional comments with FERC.
After that, FERC will modify each compliance filing in whatever way it deems necessary to bring each plan into compliance with 636 so full implementation can occur by the 1993-94 winter.
REALIGNMENT OF ROLES
Reactions to Order 636 by interstate pipelines and gas marketers are generally favorable. But they are far from agreement about the ways in which it will affect day to day pipeline operations.
Ron Burns, chairman of Enron Gas Pipeline Group, Houston, praised FERC for creating a restructuring rule that allows diverse operational responses. He said there are no major obstacles to implementing 636.
"We see 636 continuing to open opportunities," Burns said. "Pipelines will play an important physical role, but aggregators and marketing companies will play much bigger roles."
Because pipelines under 636 no longer would have to provide merchant services, operations could concentrate on efficiently using transmission and storage capacity and offering as many complementary services as possible, he said.
Burns said 636 would force industry participants to add value in the transportation chain.
"A pipeline or an aggregator that isn't adding true value will find his services won't be necessary," he said. "So a lot of historical relationships are going to break down."
Bums said 636 eventually would encourage companies to sign more long term sales and transportation agreements. "For example, local distributions companies (LDCs) will need more long term gas supplies because they no longer will have a pipeline backstop on a sales basis."
Ken Randolph, senior vice-president and general counsel of Natural Gas Clearinghouse, Houston, said 636 could make the U.S. gas industry more flexible and more responsive to swings in demand.
Randolph said there won't be any problems if end use customers are willing to shoulder new responsibilities under Order 636 and take advantage of the tools it provides. Those tools include long term supply contracts with a portfolio of suppliers and pricing mechanisms or open access storage and no-notice firm transportation service.
RESTORE STABILITY
Byron Kelley, vice-president of marketing and supply services for Tenneco Gas, Houston, said 636 could restore needed stability to the U.S. gas industry. Interstate gas pipelines could be ready to operate under 636 very quickly, he said.
"The industry needs a period of stabilization to regroup and make the gas business grow," Kelley said. "I think 636 can provide that."
The main goal of Tenneco Gas in implementing 636 would be to compensate for increased complexity by simplifying the way transactions are carried out. To do that, Tenneco proposes to wipe the slate clean and start over.
"We want to implement procedures, policies, and mutual obligations that will simplify the business," Kelley said. "Our goal is to clean up all the administrative issues that have swamped U.S. gas pipelines for the past 3-4 years."
By simplifying business agreements, Tenneco would aim to increase the ease of doing business and allow itself and customers more flexibility.
Craig Frew, president of Western Gas Marketing Ltd., Calgary, said gas industry changes under 636 would occur so quickly that pipelines are focusing a great deal of attention on developing compliance proposals.
"The uncertainty that causes means we can't put together long term arrangements, so everything goes short term again," Frew said. "When things go short term, that causes even more confusion and crisis. It's probably going to take a couple of years before it begins to sort itself out."
If and when 636 is implemented, WGM expects a small group of major marketers gradually to begin dominating U.S. gas markets because of their diverse supplies and regional markets. That should return stability to U.S. gas markets because large marketers would control gas sales to an extent comparable to the historic hold of interstate pipelines.
For now, Frew said, major marketer/aggregators are making a lot of short term, spot sales, functioning more like clearinghouses.
ALLOWANCE FOR DIVERSITY
Burns said that Enron is adamant about the need for diversity in Order 636 because configurations and characteristics of its pipelines are so different.
Major Enron pipeline group operating companies include Northern Natural Gas Co., Houston Pipe Line Co., Florida Gas Transmission Co., Transwestern Pipeline Co., and Northern Plains Natural Gas Co., managing partner of Northern Border Pipeline.
"If you compare Northern to Transwestern to Florida Gas to Northern Border, it is clear to us that a cookie cutter approach won't work," Burns said.
For example, Northern Natural has very significant storage-about 60-80 bcf of cycle gas and some locations more flexible than others-while Transwestern and Florida Gas have no storage.
Northern Natural gathers gas directly from a large number of wells. Transwestern gathers directly from fewer wells than Northern Natural but from more than Florida Gas. Florida Gas generally buys gas at pipeline interconnects.
Each system's configuration requires a different approach to designing its 636 regulatory program, tariff structure, service structures, and operations.
Burns said, "The challenge is to take the broad framework and flexibility FERC has given us in Order 636 and adapt the system to fit the needs of customers."
NO-NOTICE TRANSPORTATION
Of the many uncertainties raised by 636, one of the most troubling to pipelines is FERC's requirement to provide no-notice firm transportation service.
With no-notice transportation, a customer could receive his full firm gas entitlement without incurring a penalty even if he did not previously schedule that volume for shipment.
FERC said no-notice transportation will assure that pipeline customers receive adequate, reliable gas supplies to meet peak demand.
Historically, most pipelines have served peak customer demand by drawing gas out of system storage or by increasing receipts of system gas.
Under 636, pipelines no longer would have system gas supplies, so no-notice gas would have to be provided through other arrangements. FERC would allow pipelines to borrow gas from customer storage or retain some storage for spare gas to cover shortages without notice.
Kelley said no-notice service would work to an extent, but customers should rely on it only for unexpected situations-not for handling everyday demand swings.
"If you ask somebody to provide you a contract without take obligations but with the right to take huge quantities when you need it, that gas is not going to be inexpensive," Kelley said.
"I'm not sure end use markets will be willing to pay for that when they see the unbundled price."
He said one of the biggest misunderstandings among LDCs is that they have assumed with no-notice service they could take as much gas as they want whenever they want it. However, pipelines say LDCs can take no-notice gas, but then they must contact their suppliers and start putting replacement gas in the system within 24-48 hr, Kelley said.
Randolph said customers with several transportation options would not likely buy no-notice service after they compare the cost of no-notice service with the cost of firm transportation.
Firm transportation would have strict tolerances. But if a customer set up deals with suppliers to meet swings in consumption that stay within those tolerances, he wouldn't need as much-or any-no-notice service, Randolph said.
An executive with a major interstate pipeline who asked not to be identified, said under 636, in many cases, the only time a pipeline is likely to contact some gas suppliers is in the dead of winter when cold weather has driven heating fuel prices to seasonal highs.
"Calling someone and telling him to give you gas when you already have a contract that specifies volume and price is a lot easier than calling somebody you don't have a contract with and telling him to give you gas right pow, and we'll worry about price later," the official said.
He said providing no-notice transportation is a practical problem that can be solved.
"But the practicality is we'll be trying to balance the system in a time of stress, and the two times we had severe balancing problems in the past 10 years occurred during holidays late in December," he said.
TETCO'S FILING
Dick Perkins, Tetco's senior vice-president of marketing, said 636 prompted his company to reformat its tariff and begin rewriting all its service agreements so it could begin an entirely different method of doing business.
Perkins said the most important operating item to Tetco in 636 is the role storage will play in day to day system operations.
"Until now, we've managed gas flow on our system through three bundled sales services that gave us a lot of flexibility," he said. "Under 636, we would have to unbundle sales from transportation and storage, and we no longer would have that flexibility.
"Instead, we'll be robbing Peter to pay Paul on a constant basis and staying alert to operating the system in a way that will give our customers what they need."
Perkins said shippers under 636 would have to cooperate when moving gas into and taking gas from Tetco's pipeline system and would have more responsibility to assure their gas injections and withdrawals match their contractual obligations.
Unlike most pipelines, which use system storage to support day to day operations, Tetco has only storage ear-marked for specific system services. After services are unbundled, that storage will be assigned to customers.
With no sales services to handle demand swings and Tetco storage assigned to customers, Tetco under 636 would have to use customer storage in cooperation with firm transportation shippers to provide no-notice firm transportation and replicate other services its customers have been accustomed to, Perkins said.
SYSTEM BALANCING
Tetco's proposed compliance filing includes incentives to encourage shippers to keep the pipeline system within reasonable balance. Aggregators or shippers would have to pay an additional fee for shorting the system or for having gas in the system too long.
In case of severe customer imbalances during periods of high storage use, as a last recourse Tetco could issue operational flow orders (OFOs) requiring shippers to balance receipts and deliveries on Tetco's pipeline system.
"If they don't balance under the OFO, there's a heavy penalty they have to pay," Perkins said. "But no one will incur a penalty as long as he is managing his business reasonably."
For gas entering its system, Tetco has proposed a transportation, aggregating, and balancing service (TABS) that would allow customers to use Tetco's system to aggregate supply in exchange for allowing Tetco to use that supply to balance system deliveries.
"A customer on the East Coast would never have to worry about balancing because Tetco would have an agreement with another party to put gas into the system to keep it in balance," Perkins said.
"Instead of having individual balancing agreements with 100 customers, an aggregator with a TABS agreement might be serving 20 customers," greatly simplifying the balancing process.
Customers with storage could use that to balance every day, "so they wouldn't have to worry about being out of balance at any time," he said. "Of course, we still would have the responsibility to assure our pipeline system is in tiptop condition to meet daily demand."
NEW NOMINATION PROCESS
Tenneco proposes to ease the daily business of scheduling gas shipments by scrapping its nomination procedure.
Under the company's existing process, a shipper nominates the gas he wants to transport, then Tenneco must contact the producer/supplier and end user to confirm the deal.
"It takes a half day-sometimes longer-and probably 30,000-40,000 transactions/month to get all that confirmed on our system," Kelley said.
To operate under 636, Tenneco wants companies involved in each deal to schedule shipments through a series of simultaneous nominations on its Tenn-Speed computerized electronic data and communication system. With the proper tariff provisions and customer agreement, a transaction would work like this:
- A producer would nominate the gas volume he intended to flow on Tenneco's system at a pooling point in a supply area.
- The shipper of the gas would nominate the contract volume he is to receive from the producer at the specified pooling point and identify the delivery point where the gas is destined.
- The market or end use customer would nominate what he expected to receive.
"All three parties would be talking to one another," Kelley said. "They could simultaneously enter computer nominations on our Tenn-Speed system, and if the nominations match the gas would flow with no phone calls involved."
Kelley said simultaneous nominations would simplify the process of moving gas through Tenneco's system, improve data accuracy, and eliminate a lot of administrative work for everyone involved. Tenneco is working on change to Tenn-Speed that would be needed before simultaneous nominations could begin.
SHIPPER BALANCING
Tenneco proposes to control shipper imbalances with operational balancing agreements (OBAs).
"We think the industry has to get to the point where OBAs are mandatory," Kelley said. "I think that's going to be a big issue in tariff filings under Order 636."
A long time proponent, the company has optional OBAs at more than 40% of its active metering stations, representing far more than 50% of the pipeline's total system volume. It has signed OBAs at both ends of pipeline system-with LDCs and producers-and allows OBAs with aggregators.
Kelley said gas flowing under an OBA takes the swings between what really happens and what was nominated in the OBA without affecting transportation agreements.
"In theory, with an OBA on both ends of the system, a shipper moving gas from point A to point B will never have an imbalance," he said. "The OBA on the receipt end is between the pipeline and producers. Any differences between what the shipper nominates and what the producer delivers will be worked out between the pipeline and the producer.
"At the other end, any difference between what the shipper told us to give to the LDC and what the LDC took will be in an OBA between the LDC and the pipeline.
"That does away with imbalances under shipper agreements."
Tenneco signs OBAs with a producer or end use customer covering more than one receipt point, so either can aggregate and balance all points as a single pool of gas.
Kelley said companies on the receiving end of Tenneco's pipeline system have been very receptive to OBAs, but there is resistance among producers and aggregators.
ELECTRONIC BULLETIN BOARDS
Order 636 would step up the growing use of electronic bulletin boards by interstate natural gas pipelines because of the heavy reliance on near-real time data.
Electronic data interchange (EDI) would help pipelines, brokers, aggregators, producers, and gas customers deal with the increased administrative and operational complexities introduced by 636. Under 636, EDI would be a key component in managing unbundled, open access transportation and storage.
Many interstate pipelines have been converting to electronic, computerized measurement, monitoring, and control systems for several years.
With EDI, all gas industry players have access to near-real time information about the markets and their own operations.
Pipeline officials have current measurements of pipeline system performance: points where there is unused capacity, flow at different positions on the system, input at receipt points, and output at delivery points.
Under 636, shippers would be able to review the current balances of their receipts and deliveries, identify the owners of available transportation or storage, or work out displacement deals.
Tetco is installing equipment that will calculate gas flow virtually every second and report it to gas control by microwave or radio transmission. A central computer system will page each remote location every 10 min for hundreds of pieces of data.
Data will be held at the collection point, so if there is a communications problem field personnel can retrieve the data by going to the site. Customers will be able to get the information from the bulletin board at the same time as Tetco.
Tetco in its 636 filing proposed a daily electronic bidding window from 10 a.m. to noon in which customers could offer excess transportation or storage capacity to other shippers.
Customers would post bids during that window. At the end of the bidding period, capacity would be reassigned to whoever makes the best offer. At that time, Tetco would be ready to contract and start moving gas the next day.
Frew said WGM is tied into electronic bulletins boards of more than 20 pipeline companies, each with unique characteristics.
"Each has its own format and way of exchanging information," he said. "There is even different terminology for the same type of data."
Frew said a year or two of operational confusion is likely while the industry tries to standardize presentations and terminology.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
