Model electricity on gas market deregulation success, IPAA head says

Weighing in on the electricity debate, the chairman of the Independent Petroleum Association of America called on the US Congress and state regulators not to abandon efforts to restructure electricity markets because of California's missteps. Instead, regulators should reexamine the ultimate success of gas restructuring as a blueprint for the future, Jerry Jordan suggested.

Apr 20th, 2001


By Maureen Lorenzetti
OGJ Online


WASHINGTON, D.C., Apr. 20 -- Weighing in on the electricity debate, the chairman of the Independent Petroleum Association of America called on the US Congress and state regulators not to abandon efforts to restructure electricity markets because of California's missteps.

Instead, regulators should reexamine the ultimate success of gas restructuring as a blueprint for the future, he suggested.

"The lessons we learned with natural gas can be used with electricity. And we now have a situation which will allow us to replicate that system -- because we have a true crisis," Jerry Jordan told the Natural Gas Roundtable Thursday.

"That's what it takes to force industry and government stakeholders to forge solutions. It happened with gas, and it can happen with electric power -- if we handle it right."

Independent oil producers are in a unique position to comment on the issue because they are both large consumers and producers of electricity. Exploration and production processes rely heavily on stable electric supplies. At the same time several producers operate on site cogeneration facilities that sell electricity to the grid.

The California crisis has hurt California producers such as heavy oil producer Berry Petroleum Co., which ended cogen sales to local utilities because of alleged nonpayment of $27.1 million in past due bills (OGJ Online, Apr. 18, 2001).

Soured on restructuring?
Nevertheless, the US Congress appears to be divided on whether the political timing is right to move forward with an electric restructuring package. Congressional staff from the House familiar with the issue indicated there is still interest in resurrecting legislative proposals designed to encourage open market access nationwide. However, Senate staff said the well-publicized problems with California's restructuring may sour interest this year.

There is, however, political support for a so-called emergency "western" power bill designed to shore up reliability in those markets. But it remains an open question whether this short-term fix will hurt what needs to be a long-term strategy to repair the country's fractured transmission grid, Jordan indicated.

"It took 10 years (or more) with gas, and it may take that long or longer with electricity. But let's stick to the effort, and realize the enormous savings of a market-based electricity system. It can act as a great stimulant to our economy -- which is obviously needed today," Jordan told the group.

In his speech, Jordan drew parallels between today's electricity problems and the challenges he faced when gas markets were restructured. He noted as the gas industry developed after World War II, it was highly regulated, both nationally, and on a state-by-state basis.

Federal producer price controls discouraged exploration and development of new supplies, and the low controlled prices created increased demand for gas, he said. Demand went up and supplies went down, creating spot shortages.

Local gas distribution companies had a regulatory obligation to serve customers in their areas. But, in some areas they were unable or unwilling to acquire the gas supplies necessary to meet those needs. Reliability was undermined, especially among industrial customers, who were often curtailed so residential customers could be served. Industrials found they could not rely on the gas utilities, he said.

To solve the logjam, gas marketers acted as middlemen between the industrial customers and producers. Gas transportation deals were worked out, first within states, so that federal regulation could be avoided, Jordan said.

Later, as the need for a national system became apparent, the Federal Energy Regulatory Commission copied the intrastate systems to create what we now call "open access transportation," Jordan said. Prices also were decontrolled as the system was restructured. That led to commodity markets facilitated by the creation of 'market hubs' and interconnected interstate pipelines.

All these developments created the market-based natural gas industry that we know today, said Jordan. It evolved from practical needs of a vital industry. Nobody sat down and planned it out, he said. And so long as government regulation stays out of the way, Jordan said, it works.

Fast-forward a generation and history is in danger of repeating itself.

The California congressional delegation is calling for cost-based electricity price caps that are not supported by the White House or Republican leaders on Capitol Hill. However, some fear Congress may agree to include them to move the issue off the legislative calendar.

Under that scenario, if a price cap materializes, "we think it will look like the $1,000/Mw-hr cap in the Northeast, not cost-based caps supported by the California congressional delegation, predicted Christine Uspenski, an energy analyst with Schwab Capital Markets LP.

Yet for the country to solve the electricity crisis, policymakers need to toughen their "resolve," by passing legislation that will ensure true market reform, Jordan indicated.

Quoting former Federal Energy Regulatory Chairman Jim Hoecker (a Clinton Administration appointee), Jordan said the answer is not "retreat and retrenchment" with restructuring. Instead, market reforms should be pushed full speed ahead. A push for effective regional electric markets is needed, not a price cap bandage.

"The natural gas shortages of the '70s were regional in their scope," Jordan said, not unlike today's power shortages. Some areas were short of gas, while other areas were untouched by the problem. The gas supply and delivery system was "balkanized" because it was developed regionally. The electric industry was in a similar state when restructuring began -- and it remains balkanized, Jordan said.

"I believe that the California crisis is exactly what we needed to finally make progress on the subject. It's our national wake up call. But I hope we haven't waited too long," he said.

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