LESSONS FROM GAS DEREGULATION Dr. Jeffrey Leitzinger Econ One Research, Inc. December 12, 2002 1
THE RESTRUCTURING PROCESS IN THE GAS INDUSTRY SPANNED ALMOST 10 YEARS Order 436 A & B Open Access Revisited Order 500A-500H Reinstates Open Access Order 636 Mandates Unbundling Order 436 Open Access DC Circuit Court Overturns Open Access RDPS New Rate Guidelines Mega- NOPR First Winter Under Competitive Merchant Business Order 380 LDCs Free to Buy Elsewhere GIC Proposals 1984 1985 1986 1987 1988 1989 1990 1991 1992 2
OPEN ACCESS AND THE EMERGENCE OF A COMPETITIVE NATURAL GAS MARKET 3
SIMPLE SERVICES OFFERED PRIOR TO GAS DEREGULATION COMPLEX SERVICES OFFERED AFTER GAS DEREGULATION 4
COMPLEX SERVICES OFFERED AFTER GAS DEREGULATION 5
AVERAGE OIL & GAS PRICES $4.00 $3.50 Gas Shortage Gas Surplus $40.00 $35.00 (dollars per Mcf) $3.00 $2.50 $2.00 $1.50 Crude Oil Natural Gas $30.00 $25.00 $20.00 $15.00 (dollars per bbl $1.00 $10.00 $0.50 $5.00 Area-wide Rate Cases NGPA $0.00 $0.00 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Note: Crude Oil prices for 1973-78 are Saudi Arabian official prices; 1979 is Iranian official price; 1980-85 are Arab Light spot prices. Source: Natural Gas: Statistics of Interstate Natural Gas Pipeline Companies, EIA (1980, 1982, 1990). Crude Oil: Twentieth Century Petroleum Statistics, DeGolyer and MacNaughton (1988), p.13; Platt s DRI. BETWEEN 1990 & 1998, 18 NEW NATURAL GAS PIPELINE SYSTEMS WERE BUILT IN THE U.S. Tuscarora Pipeline 1995 (110 MMcf/d) Northern Border Extn 1998 (650 Mmcf/d) Bluewater Pipeline 1995 (250 MMcf/d Bi-directional) Empire Pipeline 1994 (500 MMcf/d) PNGTS/Maritime 1998 (632 Mmcf/d) Iroquois Pipeline 1991 (850 MMcf/d) Kern River Pipeline 1992 (750 MMcf/d) Pony Express Pipeline 1997 (255 MMcf/d) Crossroads Pipeline 1995 (250 MMcf/d) Mojave Pipeline 1992 (450 MMcf/d) TransColorado Pipeline 1996 (Southern Leg) (120 MMcf/d) Nautilus Pipeline 1997 (600 MMcf/d) Garden Banks Offshore System 1997 (600 MMcf/d) Mobile Bay Pipeline 1993 (600 MMcf/d) Destin Pipeline 1998 (1,000 Mmcf/d) DIGS Main Pass Gathering System 1997 (200 MMcf/d) Source: The Evolution of Gas Markets in the United States, EIA (May 2000). Manta Ray Gathering System 1997 (300 MMcf/d) Discovery Pipeline 1997 (600 MMcf/d) 6
EXCEPT FOR 1994-96, THE AMOUNT OF ADDED CAPACITY EACH YEAR HAS BEEN ABOVE 4 BCF/D 14,000 12,000 10,000 (MMcf per day) 8,000 6,000 4,000 2,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: The Evolution of Gas Markets in the United States, EIA (May 2000). U.S. NATURAL GAS RESERVES ADDITIONS (Bcf) 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Note: Based on Total Discoveries. Source: US Crude Oil, Natural Gas, and Natural Gas Liquids Reserves Annual Report, EIA (2001), Table D3. 7
6. Markets Make Markets. NATURAL GAS MARKET CENTERS SERVE AS MAJOR TRADING & TRANSSHIPMENT POINTS Sumas Hub Chicago Center PGT Center Golden Gate Center California Energy Center Western Center Mid-Continent Center Columbia Gas Center Iroquois Center New York Center Ellisburg-Leidy Center CNG/Sabine Center Mojave Center Waha (Delphi) Hub PG&E Waha Hub Blanco Center Buffalo Wallow Waha (Lone Star) Hub Center Waha (TECO)Hub Katy (Western) Hub Carthage Hub Katy (TECO) Hub Houston Hub Aqua Dulce Hub Egan Hub Moss Bluff Hub Perryville (NORAM) Center Equitable Resources Hub Texaco Gulf Star Center Henry Hub Louisiana Center Source: The Evolution of Gas Markets in the United States, EIA (May 2000). 8
TOP TEN NATURAL GAS MARKETERS Company Enron Duke Reliant Aquila Coral Sempra Dynegy BP El Paso Mirant Natural Gas Clearinghouse PanEnergy Engage Energy Amoco Energy TransCanada Koch Gas Services Associated Gas Services Western Gas Chevron Natural Gas Services Coastal Gas Marketing Mobil Natural Gas Exxon Co. Texaco Natural Gas 2000 1 2 3 4 5 6 7 8 9 10 1996 2 10 7 5 1 3 4 6 8 9 1994 5 2 1 3 4 6 7 7 9 10 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. 9
IN RECENT YEARS NATURAL GAS PRICES SHOW GREATER VOLATILITY $4.50 $4.00 $3.50 1999 Dollars January 1980 - January 2000 Dollars per Mcf $3.00 $2.50 $2.00 $1.50 $1.00 Nominal Dollars $0.50 $0.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: The Evolution of Gas Markets in the United States, EIA (May 2000). 4. Can t Deregulate Natural Monopolies. 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. 10
3. Regulation and Competition Can Coexist, Even With Affiliates in Both. 4. Can t Deregulate Natural Monopolies. 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. 2. The Threat of Stranded Costs is a Powerful Force for Change. 3. Regulation and Competition Can Coexist, Even With Affiliates in Both. 4. Can t Deregulate Natural Monopolies. 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. 11
ESTIMATED STRANDED SUPPLY COSTS $12.0 $10.0 (billions of dollars $8.0 $6.0 $4.0 $2.0 $0.0 1984 1985 1986 1987 1988 1989 1990 1991 1992 Source: Econ One estimation based on Natural Gas Intelligence, Gas Daily, and EIA. AVERAGE OIL & GAS PRICES $5.00 $4.50 (dollars per MMBtu) $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Average Residual Fuel Oil Price Average Delivered Price of Natural Gas $0.00 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Note: Average Delivered Price of Natural Gas to Industrial Users. Source: Petroleum Marketing Monthly, EIA (May 1999), Table 19; Natural Gas Monthly, EIA (January 1989 & 1995), Table 4. 12
1. Except for Stranded Costs Absorbed by the Industry, Consumer Savings are Hard to Find. 2. The Threat of Stranded Costs is a Powerful Force for Change. 3. Regulation and Competition Can Coexist, Even With Affiliates in Both. 4. Can t Deregulate Natural Monopolies. 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. RATES WENT DOWN BECAUSE PRODUCERS & PIPELINES ABSORBED STRANDED COSTS Costs Absorbed by Producers Costs Absorbed by Pipelines $37.2 billion $3.5 billion $9.1 billion Costs Absorbed by Gas Customers Source: FERC Orders 436, 500H, & 636. 13
AVERAGE RESIDENTIAL PRICE OF GAS, 1994 DOLLARS (dollars per Mcf) $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $8.73 $3.10 $6.41 +0.24 $1.84 $3.34 (0.60) $1.24 $3.79 (1.96) $1.83 1984 1994 Average Wellhead Price Transmission Margin Distribution Margin Source: Natural Gas Monthly, EIA. 1. Except for Stranded Costs Absorbed by the Industry, Consumer Savings are Hard to Find. 2. The Threat of Stranded Costs is a Powerful Force for Change. 3. Regulation and Competition Can Coexist, Even With Affiliates in Both. 4. Can t Deregulate Natural Monopolies. 5. Market-based Prices are More Variable than Regulated Rates. 6. Markets Make Markets. 14