After the first heating season of operating under Order 636, U.S. gas suppliers better understand the relative strategic value of firm and interruptible transportation (IT) on interstate pipelines.
William T. Benham, vice-president of regulatory affairs for Amoco Production Co., says the main benefit accruing to gas producers and marketers holding firm transportation (FT) capacity is increased reliability of their supplies and services. The greatest danger: If a supplier can't consistently load his capacity at a high rate, FT can become a significant economic drain.
IT capacity, because it is generally cheaper than FT and can be acquired and disposed of quickly, affords suppliers more flexibility for managing gas production or portfolios and aggregating supplies.
However, the administrative costs of IT transactions tend to be higher, and suppliers risk shut-ins during peak demand periods - when their gas is most valuable - if their IT capacity is needed by a firm shipper.
In crafting Order 636, the Federal Energy Regulatory Commission considered the way in which transportation capacity on interstate pipelines should be assigned, Benham said. Commissioners sought to encourage development of a healthy secondary capacity market while retaining only enough regulatory oversight to assure FERC's authority to settle disputes over access to interstate pipelines.
"After a lot of debate about some of the pipeline specific brokering programs that existed prior to Order 636, the commission in Order 636 decided to go with a capacity release program," Benham said.
FIRST FULL YEAR
As the U.S. gas industry gains experience in operating under Order 636, suppliers, distributors, end users, and state and federal regulators are wrangling over how well interstate pipeline capacity release provisions are working and whether changes are needed.
Benham says producers believe the industry must go through a full yearly cycle to assess how much capacity trading is occurring, how much flexibility is allowed by the release mechanism, and whether it is really promoting competition for secondary capacity.
Several trends have begun to emerge since Order 636 was implemented nationwide Nov. 1, 1993.
While simply holding FT capacity on strategic portions of the U.S. interstate gas pipeline grid is only one part of what it takes to offer reliable service, FT for a supplier is a good way to assure he will have a way of moving gas to points of competition - such as pooling points or hubs - where he can aggregate supplies and access multiple markets and customers.
Based on Amoco's experience, holding FT in some cases can spur construction of new pipeline capacity in areas where production is constrained by transportation bottlenecks.
Also, Amoco has used FT to generate income by offering capacity management services to small gas producers who "often find it more economical to outsource the handling of their capacity needs to larger producers or marketers who have the organizational capability to provide the service," Benham said.
Conversely, in addition to the risk of having to pay FT demand charges for unused capacity, a supplier seeking to resell FT capacity often doesn't receive full reimbursement of his costs. Amoco in some cases has been able to reserve FT for less than the cost of IT on the same pipeline system.
A supplier also can mitigate FT costs by recovering part of his demand charges through contracts with his purchasers.
"Holding FT, particularly if it is held downstream of a supply aggregation point, is a very risky proposition for unregulated suppliers," Benham said.
Benham made his remarks at the Gas Mart '94 conference in Chicago.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
