Natural Gas Networks Performance After Partial Deregulation

Abstract

PREFACEAs the first word on a set of quantitative studies of natural gas markets, the preface should indicate who it is intended for, what those readers will find, and what they should take away. All of that is provided in the following five chapters in the context of quantitative studies that intend to be current and topical on certain energy markets, policy and their effects on the economy.This book contains five semi-independent analyses of aspects in the performance of natural gas markets in Canada and in the United States in the recent past decade. The technology of natural gas, interacting with the economics of V vi Preface costs and demands for services to deliver gas to the consumer's burner tip, determines the first level of industry activity in inground gas discovery, development, and production. The second level, at the wellhead, consists of gathering, refining, and transfer of the product to pipeline nodes for transport to other intersecting nodes and ultimately to the third level, that of the distribution system at the point of use. At each point of transfer, there are buy-sell markets and also state and national agencies to regulate the buy-sell process. We carry out analyses of the response of service suppliers at these levels to changes in the extent of regulation in the early 1990s. Our results are intended to inform readers concerned with the effects on gas prices at various points in the networks as a result of such changes known as regulatory "reform", or "partial deregulation".We do not account for the effects of all such changes inherent in "partial deregulation" in the last decade and a half. Instead, we concentrate on what we consider to be the building blocks for changing the performance of the supply side of sales markets. Decisions of the Federal Energy Regulatory Commission (FERC) required the separation of gas ownership from pipeline transportation services, the development of exchange markets for gas and (separate) transportation at hubs that were between field intake and city gate delivery. FERC also required the elimination of price The quantitative studies cover some of the major impacts of FERC deregulation initiatives of the 1990s. There were earlier initiatives as a result of the Natural Gas Policy Act of 1978 which phased out FERC price controls of wellhead gas. The impacts of this earlier decontrol carried over into the later period (particularly, as will be seen, in the behavior of storage markets). And the 1990s deregulation also affected the performance of large industrial gas consumers, and local distributors at retail, on the buying side.We do not undertake quantitative studies of all these effects.The analyses here of price-cost margins and profitability of the major pipelines only allow us to state stylized facts about transportation and gas sales markets becoming more oligopolistic and less profitable.