Recent analyses of the natural gas market typically ignore the sweeping changes that might be expected to follow fran the elimination of the current deliverability surplus. In this paper, we explore the implications of these potential changes, both in terms of their on sectoral performance and the willingness of energy finance markets, above all, banks, to fund future natural gas development.
The natural gas market has been undergoing a steady transformation since 1978 when the National Gas Policy Act was enacted. The NGPA provided for Policy Act was enacted. The NGPA provided for partial decontrol effective January 1, 1985 and de partial decontrol effective January 1, 1985 and de facto decontrol upon exhaustion of old gas supplies. In contrast, Order 436, which was implemented by the Federal Energy Regulatory Commission (FERC) in late 1985, envisaged a fundamental restructuring of the industry, one in which competition would replace regulation as the dominant input into market performance. Central to Order 436 and subsequent Commission rulings was the need to eliminate the direct market control exercised by pipeline companies. This control applied in both upstream (field) and downstream (city gate) markets, and was underpinned by the joint merchant and transportation roles performed by transmission companies. Once the two functions were unbundled, it was widely assumed that prevailing market distortions would be eliminated. prevailing market distortions would be eliminated. To this end, Order 436 among other things conceded to end-users the right to convert from firm sales to firm transportation, enabling consumers to source some or all of their natural gas supplies directly from producers. Given the increased number of potential buyers, the monopsony control exercised by potential buyers, the monopsony control exercised by pipelines in many field markets would be pipelines in many field markets would be eliminated. In the same way, direct purchase of natural gas supplies would eliminate pipelines' sales mmopoly at the city gate. Thus, competition would prevail from one end of the pipe to the other, causing prices to converge to wellhead values: pipelines would either have to charge competitive pipelines would either have to charge competitive rates or else risk further attrition of their contract sales base.
The Commission's approach was found to be flawed even before the ink on Order 436 was dry; nor have subsequent rulings completely eliminated the resulting deficiencies. To illustrate the point, we focus on transport and deliverability reliability, functions that are an integral part of conventional system purchases but not of direct sourcing. Now, in a fully competitive market, transportation must be as reliable as a pipeline's firm gas sales. Otherwise end-users could hardly be indifferent between the two options, and pipelines could continue to charge supraompetitive rates. practice, current FERC transportation rate and practice, current FERC transportation rate and access structures insure that the two are not equivalent, though recently proposed innovations, including the possibility of brokering firm and interruptible capacity, could ease or substantially eliminate current distortions.
The same lack of equivalence applies with respect to gas supply reliability. Pipeline ownership of a multitude of gas supply contracts gives the industry the ability to balance load by smoothing random supply disruptions. To be insulated from potential deliverability shocks, distributors and end-users relying on direct contracts would have to
assemble similar contract supply portfolios,
arrange with intermediaries for equivalent backup service, or
by default, assume greater risk of possible supply interruptions. possible supply interruptions.
These discrepancies highlight a number of critical issues that have significant longer term implications for the natural gas industry.