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Energy International, Inc. 02-1119-BR0022-V3 Energy Energy International, Inc./Gastec Technology BV Report No. 02-1119-BR0022-V3 1$785$/*$675$160,66,216<67(023(5$7256,17+(81,7('67$7(6 81,7('.,1*'20$1'$8675$/,$ VW0DUFK 3UHSDUHGIRU 'LHQVWWRH]LFKWHQXLWYRHULQJ(QHUJLH 3UHSDUHGE\ www.energyint.com 2IILFH/RFDWLRQV 86 +HDGTXDUWHUV±%HOOHYXH :DVKLQJWRQ tel +1 (425) 453-9595 fax +1 (425) 455-0981 (QHUJ\,QWHUQDWLRQDO,QF %59 Energy International, Inc./Gastec Technology BV Report No. 02-1119-BR0022-V3 1$785$/*$675$160,66,216<67(023(5$7256,17+(81,7('67$7(6 81,7('.,1*'20$1'$8675$/,$ 7DEOHRI&RQWHQWV ([HFXWLYH6XPPDU\.............................................................................................................. 2 ,QWURGXFWLRQ........................................................................................................................... 3 86$±5HJXODWLRQ%DFNJURXQG............................................................................................ 4 $OOLDQFH3LSHOLQH/3 86$ ................................................................................................ 6 1LFRU*DV 86$ .................................................................................................................. 14 7UDQVFR 8QLWHG.LQJGRP ................................................................................................ 23 9(1FRUS $XVWUDOLD ........................................................................................................... 44 &RPSDUDWLYH$QDO\VLVRI6\VWHP2SHUDWRUV..................................................................... 53 $SSHQGL[*ORVVDU\RIWHUPV ................................................................................................... 73 $SSHQGL[2IJHP&KURQRORJ\±............................................................................ 76 $SSHQGL[&KURQRORJ\IRUWKH(VWDEOLVKPHQWDQG(IIHFWVRI5HJXODWLRQLQWKH8.*DV0DUNHW ............................................................................................................... 84 (QHUJ\,QWHUQDWLRQDO,QF 1 %59 (QHUJ\,QWHUQDWLRQDO,QF*DVWHF7HFKQRORJ\%95HSRUW1R%59 1$785$/*$675$160,66,216<67(023(5$7256,17+(81,7('67$7(6 81,7('.,1*'20$1'$8675$/,$ (;(&87,9(6800$5< This report, examines in detail the structure, operation and regulatory background of four natural gas system operators in those countries that have introduced a competitive and unbundled gas market. The USA, was the first to initiate this process, when in 1995, the Government introduced an order that was designed to produce the separation of gas transportation from all other gas related marketing activities. However, with over 100 pipelines in the USA, the speed of change was not fast enough and the Government subsequently made ‘unbundling’ a mandatory requirement. The UK followed soon after, with the privatisation of British Gas and the Gas Act of 1986 that established competition, firstly in the domestic market and then for the industrial and commercial market. Unlike the USA, the UK had a single, fully integrated gas monopoly, namely the British Gas Corporation (BGC). In the UK, the emphasis has been firstly on reducing gas prices, followed by the break-up and the unbundling of the BGC structure. By comparison, Australia’s utilities, including natural gas, were a mixture, with many being Government owned and in some cases vertically integrated monopolies. The Government decided, where possible, to promote competition through the structural reform of public monopolies and by legislative reform. A wholesale gas market was introduced, commencing operation in March 1999, with the establishment of an independent transmission system and market operator. With these backgrounds, and the establishment of Regulators to enforce the legislation, the four system operators of the natural gas pipelines conduct their business. Whereas the day-to-day operation of the gas transmission system has many similarities – e.g. gas allocation, nominations, balancing, gas trading - the size, structure, geographical areas and the role of the Regulator lead to differences in the framework under which the companies have to operate. The study demonstrated that all the balancing systems considered exacted some form of penalty on shippers for trading out of balance. The US systems exact penalties, which are based generally on the product of a predetermined penalty rate and a volume imbalance i.e. fixed / sliding rates. The Australian and UK systems considered tended to depend on ‘market driven’ penalty costs i.e. variable rates. The objective of this study is to explain and put into perspective these differences. (QHUJ\,QWHUQDWLRQDO,QF 2 %59 ,1752'8&7,21 The European Council is preparing a proposal to amend the European Gas Directive. In this proposal, there will be an obligation for every European Union member state to introduce a System Operator (SO) for its natural gas transportation network. The Dutch government is exploring the possibility of introducing a SO in the Netherlands, and is investigating the role of system operators in other countries as part of that process. This project examines four system operators responsible for important transmission networks in three countries with liberalized natural gas markets – two in the United States (US), and one each in the United Kingdom (UK) and Australia. The four system operators are as follows: • Alliance Pipeline L.P. (USA) • Nicor Gas (USA) • Transco (UK) • VENCorp (Australia) This study provides an overview (corporate, geographic, and operational) of each SO, and describes their responsibilities, roles and functions. It concludes with a comparative analysis of the operational frameworks within which they operate. (QHUJ\,QWHUQDWLRQDO,QF 3 %59 86$±5(*8/$7,21%$&.*5281' The driving force behind the regulation of the gas industry in the USA, which began some fifteen years ago and was, based on the conclusion that separating or ‘unbundling’ the gas commodity from interstate transportation was an essential element of vibrant competition. The regulatory body that was set up is Federal Energy Regulatory Commission (FERC), which is an independent regulatory agency of the U.S. government. 7KH)(5& • A U.S. Government Agency • Independent Executive Branch Agency • Decisions subject to review by U.S. Courts • 5 Voting Commissioners, appointed by the President, confirmed by the Senate, five-Year Terms • Around 1250 Employees o Engineers, Technical Specialists o Lawyers o Economists FERC regulates rates, terms and conditions of service for over 100 interstate natural gas pipelines and it also approves the siting and construction of pipeline facilities, including the environmental review. 7KHUHJXODWRU\EDFNJURXQG The restructuring process began in 1985 with a transitional program that allowed and encouraged unbundled transportation, but did not require it. Prior to 1985: • Natural gas producers sold gas to interstate pipelines • Pipelines sold bundled product (natural gas and transportation capacity) to Local Distribution Companies (LDCs) In 1992, the Commission adopted Order No. 636, based on our conclusion that a more aggressive regulatory framework was needed to achieve a truly open and competitive market for natural gas. The cornerstone of this Order was its requirement that all interstate pipelines eliminate their bundled sales services and allow third-party access without discrimination. In the United States, the jurisdictional split between the federal and state governments makes it difficult to develop a coherent and consistent regulatory policy. The FERC has jurisdiction over wholesale transactions and interstate transportation. Each of the 50 states has a regulatory commission with jurisdiction over local distribution and end use transactions. They are not subject to FERC authority. In the era of unbundled services, natural gas marketers have emerged as important participants in the market. In fact, gas marketers are replacing the local distribution companies as the primary owners of firm pipeline capacity. The marketers also provide a variety of hedging and other portfolio management services that make them key strategic players. By the time regulation came into force, pipeline companies had already begun to create affiliated companies, namely marketers and brokers who buy and sell market priced gas. The creation (QHUJ\,QWHUQDWLRQDO,QF 4 %59 of pipeline marketing affiliates raised the question as to how could the FERC ensure that the pipeline would not use its monopoly control over the physical pipeline system to discriminate in favor of its affiliated marketer. Ultimately, the FERC chose to adopt rules that seek to prevent potentially abusive behavior by pipelines and their marketing affiliates rather than tougher remedies, such as complete divestiture. The FERC considers that, although there have been a few complaints of favoritism; this system has proven to be a reasonable balancing of all interests involved. The restructuring of the natural gas industry in the USA has achieved: • Robust competition for natural gas supply • Increases in natural gas use • Financially healthy pipelines • Availability of innovative and non-discriminatory pipeline services • Reliable and reasonably priced natural gas and pipeline services • Development of scores of market hubs and pooling points • Commoditisation of natural gas • Integration of North American natural gas market • Electronic communication via Internet Recently however, the FERC has been criticized for its failure to protect consumers when markets spiraled out of control in the Western United States. This, together with the debacle over the
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