POWER September 2012 - 75

GAS & ELECTRICITY
For example, in Florida, pipeline expansion
on Florida Gas Transmission and the
construction of a competing " green field "
pipeline (Gulf Stream) was accomplished
through long-term contracts with power
generators to meet FERC traditional certificate
requirements. This indicates that
planning for some firm gas transportation
services is often included in the planning
for reliable electricity supply under vertically
integrated electric systems. Inclusion
of gas supply infrastructure is only one of
many other aspects of evaluating the appropriate
electric market structure.
Implications for the Gas Industry
The structure of the North American gas
market has created numerous market centers,
where gas transactions provide liquid
and transparent market signals. At periods
when pipeline capacity is not constrained,
the basis differential (the difference in
the short-term prices at two locations) is
generally well below the regulated firm
transportation rate designed to recover
the pipeline's cost and provides a reasonable
return. When the average annual basis
differential is well below the cost of firm
transportation, pipelines face difficultly in
contracting capacity and face cost-recovery
challenges. This situation exists for a
number of pipelines, where the changing
location of new shale gas supplies has left
segments of the pipeline underutilized.
If the manner in which ensuring gas
supply reliability to power generators
creates additional pipeline capacity in all
markets, the average basis differentials
in the markets would be expected to decrease.
This could exacerbate the changes
to pipeline cost recovery in the regions
where pipeline capacity and demand are
in reasonable balance.
The electric industry has approached
this situation through the Transmission
Planning Standards and Contingency Considerations
developed by NERC, which requires
regional markets to maintain plans
consistent with NERC standards. The
natural gas market transportation services
market has been designed with reliance
on contracts that are signed in response to
market conditions, without regional reliability
requirements. Reconciling these
two approaches will likely take years.
Two Hard Questions
Finding workable solutions to these challenges
will require regulators, stakeholders,
and possibly legislators who thoroughly understand
the structure, complexity, and differences
between the gas and power generation
businesses. Two contentious questions must
September 2012 | POWER
be asked and answered before better integration
of the natural gas and power generation
industries can occur.
What is the optimal level of reliability
that should be developed? Reliability
can always be improved through the construction
of redundant facilities. But redundancy,
by definition, reduces system
utilization. When systems and equipment
are operating " as designed, " the redundant
facility is idle, yet its costs must still be
recovered.
How much redundancy should customers
be required to pay for?
That is a public policy question. Perhaps
the electricity and gas markets will
be given time to answer this question, or
maybe regulations will be quickly enacted
as a proxy for market response and consumer
preference. ■
-Bruce Henning (bhenning@icfi.
com) is vice president and Judah Rose
(jrose@icifi.com) is senior vice president
for ICF International.
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