Legal & Regulatory

The New Environment for the Gas and Electric Industries






Natural gas–fired power generation has increased significantly in recent years. This trend generally is considered a positive development for several reasons: the abundance of domestic natural gas reserves at reasonable prices, the environmental benefits of natural gas relative to other fossil fuels, the ability to efficiently site gas-fired generation in proximity to load (thereby avoiding the cost of new transmission capacity), and the quick-start nature of gas as a fuel source to backstop the intermittent nature of renewable resources.

However, services offered by natural gas pipelines typically are not designed to optimize the ramping demands and peaking needs of electric generators. Rather, pipeline services are designed for the predictable, even daily flow demands of local distribution companies. As gas-fired power generation loads increase, pipeline services, infrastructure, and procedures are being examined to assess whether they are ready for the new environment where the electric industry is the gas industry’s biggest customer.

FERC Recognizes the Problem

Since 2012 the Federal Energy Regulatory Commission (FERC) has spearheaded efforts to identify problems and facilitate coordination between the natural gas and the electricity markets.

On July 18, 2013, FERC issued a Notice of Proposed Rulemaking (NOPR) to permit interstate natural gas pipelines and public utility electric transmission providers to share non-public, operational information for the purpose of promoting reliable service or operational planning on either system. FERC has also put in place additional procedures to address gas and electric coordination initiatives. The first requires each of the regional transmission organizations (RTO) and independent system operators (ISO) to appear before the Commission to discuss their past peak season’s operational experiences and identify steps that are being taken to prepare for the upcoming peak season. The second procedure requires FERC staff to provide quarterly updates on gas and electric coordination activities throughout the country.

At a May 16, 2013, meeting, RTO and ISO representatives indicated that FERC’s natural gas and electric coordination initiatives have resulted in voluntary procedures that encourage regional organizations to confer with gas pipelines at least on a quarterly basis and in advance of the summer and winter peak season. These industry discussions focused on topics that enhance situational awareness, including the availability of gas inventories, long-range weather forecasts, planned maintenance work, and other activity that could result in outages. One ISO indicated that no new rules are needed. However, others acknowledged problems with gas infrastructure not keeping pace with demand, with the current process of pre-scheduling natural gas for weekends and holidays (in advance of the energy day) and with generators lacking access to needed gas supplies during peak periods.

RTOs and ISOs also reported on the efforts of working groups and the status of various ongoing regional studies that will analyze the adequacy of gas infrastructure and identify the potential impact that outages on either industry could have on the other industry.

Coordination Improving

On June 20, 2013, FERC staff gave a quarterly update to the Commission indicating that gas and electric coordination activity on the national level has been significant. Specifically, the North American Electric Reliability Corp. (NERC) released its Phase II special assessment on gas and electric power interdependency, which focuses on vulnerabilities that can affect bulk power system reliability. As part of that assessment, NERC recommends incorporating fuel availability into national and regional reliability assessments and increasing the coordination and sharing of operational planning information through formalized communication.

FERC staff also reported on task forces across the country that are dedicated to gas and electric coordination. For example, efforts led by the New England States Committee on Electricity Gas-Electric Focus Group included discussion on proposals to ensure adequate fuel supplies for next winter such as creating a regional energy inventory of 4.2 million barrels of oil equivalent for dual gas/oil-fired generators. In the Pacific Northwest, natural gas pipelines and electric utilities are discussing enhanced communications and coordination through the Power and Natural Gas Planning Task Force meetings. And the Desert Southwest Task Force is working on prioritizing problems with the objective of recommending workable solutions that ensure the reliability of the gas and electric systems during peak periods.

While regional solutions may help resolve some of the problems, the majority of the gas and electric coordination issues require guidance from FERC regarding policies that would be applied on a national level. For example, should shippers with firm gas transportation contracts be entitled to access gas supplies (and “bump” interruptible contracts) later in the day in order to satisfy unexpected demands and promote grid reliability? And how can FERC ensure that a patchwork of regional solutions will not act as barriers to the development of liquid market centers by effectively prohibiting access to gas supplies in other regions?

FERC’s July 18 NOPR clearing the way for the exchange of operational information between gas pipelines and electric providers demonstrates the agency’s willingness to systematically address each of the difficult issues presented by this new environment and provides encouragement that it is just a matter of time before the issuance of a NOPR providing policy guidance on FERC’s natural gas scheduling and market structure rules. ■

Kelly A. Daly is chair of the Energy & Environmental Division of Stinson Morrison Hecker LLP.

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