Olympian Status for U.S. Gas Market 

Just so you'll know: "The natural gas market is a real success story. ...FERC 
has gotten an enormous amount of things right. The market may not be 
unblemished, but there are lots who consider the natural gas market the best 
market in the world offering genuine price discovery on a daily basis across 
dozens of products. It's something everyone should be proud of," Robert Levin 
of the New York Mercantile Exchange told a FERC conference yesterday. 

"The natural gas market has performed remarkably admirably through a range of 
market conditions with hundreds, if not thousands of market participants, 
using an extraordinary selection of market instruments," Levin continued, 
adding that the Commission should be supporting the "growth and increased 
sophistication of commerce. You're at that point now." 

Warning against so-called solutions offered by some at the day-long 
conference to increase liquidity or tie the natural gas market to the 
electric market, Levin cautioned, "liquidity cannot be legislated. Don't 
overreact. The electric market is poorly regulated. Remedies from the natural 
gas market should be transferred to the electric market, rather than allow 
the gas market to be corrupted by the regulatory mistakes of the electric 
market. 

"Rather than worry over regulating an hourly market for natural gas, change 
the electric market," which Levin believes has developed its over-emphasis on 
the hourly market because of the artificial tilt toward the spot market. 

But while Levin warned against too much market meddling, others among the 
more than 30 representatives of the industry and its customers testifying at 
FERC's conference on competitive natural gas markets argued for a variety of 
initiatives to increase market liquidity by changing the rules for pipeline 
transportation. 

Eliminating the shipper-must-have-title rule, promoting expansion of the 
existing pipeline infrastructure (especially in the Northeast), doing away 
with straight-fix-variable (SFV) rate design, review of firm-to-wellhead 
rates in the production region and the allocation of transportation costs 
between the upstream and downstream were among the chief proposals proffered 
by mostly pipeline customers. 

However, greater gas market liquidity shouldn't be confused with increased 
competition in pipeline transportation, municipals and producers told FERC 
staff during a post-Order 637 technical conference Wednesday. "...[W]e're 
concerned the Commission may be equating market liquidity with competition in 
pipeline transportation. The two are not the same," said Arthur Corbin on 
behalf of the American Public Gas Association (APGA), which represents 
municipal gas distributors. 

"Even with greater and greater market liquidity, monopoly power exists in 
[the] pipeline transportation segment. Captive shippers will always require a 
regulated transportation service from any hub to their citygate," he said. 

Much the same holds true for LDCs, noted Bruce Henning, director of energy 
practices for Energy and Environmental Analysis Inc. (EEA), who represented 
the American Gas Association (AGA) at the Commission staff conference. He 
agreed market liquidity has improved immeasurably, but he added "there's not 
a liquid market center at every pipeline receipt or delivery point location. 
Nor is there likely to be market centers in all of these locations in the 
near future..." Consequently, Henning said FERC will need to continue to 
protect producers from market power that accompanies "limited access" to 
pipelines. 

The day-long conference held yesterday in Washington D.C. was the first of 
several that FERC staff plans to hold to explore the impact of the 
Commission's transportation policies on the development of gas markets. 

Christopher A. Helms, president and COO of Panhandle Pipeline Companies, 
urged FERC not to enact policy changes that would place commodity market 
liquidity as the "ultimate goal" at the expense of the transportation market. 
Helms said he advocated policies encouraging pipeline expansions and 
construction of "optimal amounts of additional capacity" to meet the needs of 
the market. "The single most important characteristic for liquidity in the 
natural gas commodity markets is the availability of adequate transportation 
capacity." 

Charles Daverio, vice president of KeySpan Corp., echoed that sentiment, 
saying FERC could increase liquidity in the New York City market and 
elsewhere in the Northeast by promoting construction of new pipeline capacity 
to ensure adequate supplies for the region year-round. This would reduce 
energy costs and enhance reliability, he noted. 

Panhandle's Helms also cautioned against policy changes that would force the 
development of new market centers and hubs. Market centers should be allowed 
to develop at their "own pace," and at locations where the market "sees fit," 
he said. 

EEA's Henning estimated more than 40 "liquid and transparent" market centers 
exist today, which permit industry participants to buy and sell gas daily 
under "extremely competitive" conditions. He said he's "confident" more will 
be added because of the options that they provide to gas customers. As 
another way to enhance liquidity, KeySpan's Daverio --- as well as others --- 
supported eliminating the shipper-must-have-title rule, which requires the 
customer to retain title to the gas while it's being shipped. Doing away with 
the rule would pave the way for the development of new pipeline products and 
services, such as operational balancing and virtual storage, he told the FERC 
staff. 

But Dena Wiggins, an attorney with the D.C. law firm of Sutherland, Asbill & 
Brennan LLP, which represents the Process Gas Consumers Group (industrial gas 
customers), said her group was "very concerned" about efforts to repeal the 
rule. "...I haven't heard anything yet [today] that satisfies the concerns 
that we might have." She noted the Commission already has granted exceptions 
to the shipper-must-have-title rule in certain cases, and should continue 
with this policy where necessary. 

Moreover, Wiggins said industrial customers were increasingly worried about 
the mounting market power of unregulated companies, especially gas marketers. 

At the conference, she also expressed her group's dismay with the pipeline 
compliance filings with Order 637, particularly on the penalty issue. Rather 
than an "improved" penalty structure, pipelines are proposing higher 
penalties, Wiggins said. "[We] continue to be shocked at the absolute 
wholesale departures" from 637. 

BP's Jeff Holligan also waded into the fight against all the new services 
outlined by pipelines in their Order 637 filings, which he said were "nothing 
more than penalties disguised as balancing services that customers can't 
refuse." He urged the Commission to check with a pipeline's customers, noting 
one proposed new "service" is opposed by 100% of the pipeline's 
non-affiliated customers. Some of the proposed services, Holligan said, add 
up to nothing more than degradation of existing long-term firm service. 

Holligan, representing the largest producer in the U.S. and Canada, joined 
other market participants in urging adoption of "standardized allocation 
(sales), standardized penalty levels, and the requirement that all pipelines 
implement a uniform title transfer tracking process." In short, 
"standardizing pipeline services, certainly on an individual pipeline, and 
also to a large extent between and across pipelines is imperative if markets 
are to be highly liquid..Individually negotiated services, where every 
service is a different service, or the adoption of a so-called dual track 
market, are the antithesis of a highly liquid, efficient and competitive gas 
market. Standardization of operational terms of pipeline service is necessary 
to facilitate trading through e-commerce." 

"The Commission should be striving to commoditize pipeline capacity so it can 
be traded along with gas electronically," Holligan said.