All the Cards on the Table regarding Gas-Electric Harmonization

The gas industry, through the North American Energy Standards Board (NAESB) has been working on changes to the confirmations and scheduling process since mid-2015. This issue has become a conflict of FERC direction, NAESB scope, electric generators, pipelines serving electric generators, and multiple industry participants, all in the name of progress.

The FERC has been working on issues related to Gas-Electric Harmonization since 2012.  In 2015, the FERC issued Order 809 after NAESB had increased the number of nomination cycles in a day from four to five available cycles, as a Gas-Electric Harmonization solution.  Order 809 instructed the industry, through NAESB, to look at further ways to gain Gas-Electric Harmonization efficiencies, particularly in the areas of confirmations and scheduling, and NAESB has been working on it ever since.

FERC Chairman Bay sent a letter to the North American Energy Standards Board (NAESB) in October regarding the status of NAESB’s work on Order 809 deliverables. In the letter, he charged NAESB to complete the current body of identified work by March of next year.

The FERC has historically utilized NAESB and the NAESB process to encourage the industry to solve problems on its own and this has been a successful relationship. The topic of Gas-Electric Harmonization seems to have taken several very slow baby steps without hitting the real issue that the FERC wants solved.

There are a lot of reasons that factor into this slow progress. 

• Gas and electric industries have very different commercial arrangements and operational environments and, correspondingly, work in a very different way.
• The FERC governs interstate transactions. On the gas side of the house, that means interstate pipelines. A small percentage of gas-fired electric generation supply is provided directly from interstate pipelines.  The majority is provided by a local distribution company (LDC) or utility, over which the FERC does not preside.
• The significant solutions require policy changes or additional pipeline service offerings. These cannot be solved by NAESB. They must be solved by the FERC and the pipelines. Then, if there are standards to be written to insure consistent implementations, NAESB can write those standards.
• NAESB participants, historically, expect standards out of the NAESB process for FERC adoption and, therefore, the standards are expected to be written directed at interstate pipelines. LDCs and gas utilities may have adopted portions-of or variations-of NAESB standards, but they are not required to be NAESB compliant.
• The actionable items have been small actions from an external point of view. The effort to implement those small actions has, in some cases, been significant. NAESB participants determined that some recently implemented changes needed to be in place for a measurable time before determining if additional changes were needed.

 

1              The Gas and Electric industries work differently

Some of the differences in the operational considerations of gas and electricity are common points of discussion.  It is generally accepted that electricity performs on an ‘on demand’ basis while gas flows on an ‘as scheduled’ basis.  It is generally thought that electricity is changed in ‘real time’ while gas flow is changed with prior planning.  Electricity changes and scheduling occur on an hourly and sub-hourly basis.  Gas plans are made on a day-ahead basis and changes can be made up to four times per day.

There are also common factors.  One of the common factors is that both industries charge their commercial customers on a demand basis.  The way that the demand is charged can be very different, but the premise is very similar.

In the electric industry, commercial customers may have a demand meter. This demand meter measures the highest level of usage over a period, often a year, and charges that customer a demand charge, based on that highest level of usage, for the subsequent year.  The demand charge is to compensate the electric service provider for having that high level of capacity available on-demand at any time that the customer needs it.  The electric generator must have the capability to deliver, at any given time, the sum of all the peak demands for these customers and, therefore, charges for that service.

In the gas industry, the commercial customer has a contractual quantity and, for firm service, is charged a demand charge on a demand quantity that is the most the customer can take daily without incurring overrun charges. This negotiated quantity is a quantity that the pipeline can guarantee the ability to delivery daily and the pipeline charges a demand charge for that deliverability.

Some electric generators, in NAESB facilitated meetings, have indicated that they do not want to contract firm service with gas pipelines because of the cost and because they cannot commit to that long-term demand quantity. But those same electric generators are charging their own customers demand charges that are determined in a slightly different way.

Can firm gas contracts be written to utilize some of the terms and flexibility of the electric demand mechanism to make firm gas contracts more attractive to electric generators?  Can pipelines design a firm gas contract for electric generators that charges a demand rate based on their peak gas usage during a period?

To do this, the FERC may have to re-evaluate the terms used to determine the viability of construction of additional pipeline infrastructure.  The current methods may not support this type of change to the existing firm contract policy terms.

2              The FERC governs interstate transactions

Most gas supply used by electric generators is delivered by LDCs and utilities. The FERC does not govern LDCs and utilities that provide transportation services. Interstate pipelines are the supply, in many cases, for the LDCs and utilities and, therefore, effect the service that can ultimately be provided.  However, the interstate is not the ultimate delivery pipeline to the electric generator. If the LDC or utility, providing transportation service, does not adopt the standards that NAESB develops and the rules that the FERC imposes on the interstates, then the solution for the electric generators becomes limited by those providers.  The interstate pipeline services cannot solve this when there are subsequent, downstream services that diminish the capabilities of the interstate.

For this effort to be effective, all transporters, whether they are interstate pipelines, intrastate pipelines, LDCs or utilities, must provide peer services that do not diminish the ultimate service to the electric generator. Otherwise, the efforts become ineffective.  States must pick up the baton and implement the NAESB standards in their jurisdictions for Gas-Electric Harmonization to be truly effective.

3              Policy changes are needed

By assigning the task to NAESB, the FERC either presumes that there are no policy changes needed or expects NAESB to identify the policy changes that are needed.  NAESB, to date, has not identified any policy changes that are stumbling blocks to progress.  This is, in most part, because NAESB is responding directly to the FERC’s request and has not identified an instruction to “think outside the box” or “find an ultimate solution.”

For the significant changes to occur, the ones that will show substantive value in Gas-Electric Harmonization, the FERC will need to make policy changes.

4              NAESB standards affect all industry participants

The statement that “NAESB standards affect all industry participants” causes an “of course” response to many industry participants.  There is an equal group that responds “No, they don’t.” NAESB standards apply to all industry participants.  Depending on the participants’ role, the standards may apply in different ways.

Because the FERC’s adoption of NAESB standards applies only to Interstate Transporters, some participants have come to assume that the standards only apply to those Interstate Transporters.  This is incorrect.

In October 2016 NAESB BPS GEH related meetings, it became apparent that one of the breakdowns in discussion of changes to the NAESB datasets involved the LDCs’ implementation of NAESB standards.  While many view the LDCs as Transportation Service Providers (TSPs), states have not historically required LDCs to implement transportation services as a NAESB defined TSP role. Therefore, many LDCs have implemented significant variations to the NAESB standards such that, if NAESB implements the proposed changes that have been identified in the Gas-Electric Harmonization process, the LDCs will be negatively impacted.

These issues are not because changing the NAESB standards would impact LDCs.  These issues are because LDCs have implemented NAESB standards in very non-standards ways.  Because of these non-standard implementations, changes to the existing standards will have a negative impact on the LDCs.

Non-interstate transporters, including LDCs need to recognize that NAESB standards apply to them.  If they need changes to the NAESB standards, then they need to request those changes. This will protect them from unintended consequences when changes are made to the NAESB standards in the future.

5              Time will identify the benefits of previous changes

There were additional items identified for possible standardization or changed standards as part of the NAESB GEH forum meetings related to Order 809.  There was one hitch.  Participants did not have enough experience with the impacts of the NAESB 3.0 changes, which were implemented in April 2015, to determine if additional changes would be warranted or effective.  NAESB determined to delay examination of these items until a business cycle of one year had lapsed so that the benefits and shortcomings of the NAESB 3.0 changes could be recognized.

Time, however, marches on.  The electric industry’s dependence on natural gas for generation reliability is moving forward at a fast pace.

Waiting for the previous decisions to prove themselves may cause other unintended consequences.

What are the real issues that need to be solved?

Each of the issues describe below is a high-level summary.  A full discourse on each of these subjects would require a ten-page introduction to describe the full issue.  This is a summary.

1              Electric generators need to know that gas will be available when needed. This means that gas needs to be available any time, any day, on demand. Electric generators have already increased their reliance on natural gas for electric generation and more units are scheduled to be moved online for gas fired generation.

Gas providers, as described above, work in a different operational paradigm than electric generators.  Additionally, the permitting process to build additional gas deliverability does not line up with the expectations of electric generators.  The electric generator’s compensation model discourages them from engaging in long term firm service agreements.  The gas provider’s construction permitting model requires long term firm service agreements to justify building additional pipeline capacity.  This is an area that the FERC must address outside of the NAESB process.

2              The gas providers that can have the most impact on successful gas supply to electric generators are the Intrastate pipelines and LDCs. FERC regulations and mandating of NAESB standards by the FERC does not apply to Intrastate transporters or to LDCs offering transportation services.

States need to adopt NAESB standards to ensure across-the-grid reliable delivery of natural gas.  Many states have implemented reliability standards within their own states but those standards do not recognize that the supply of gas, in most cases, comes from interstate pipelines that work under FERC rules.  Some states have imposed requirements on their pipelines (Intrastates and LDCs) that contradict the requirements imposed on the interstates and cause conflicts in the exchange of information.

3              Firm service agreements are not attractive to electric generators. Firm service agreements, traditionally, identify a quantity of gas to be delivered, on a daily-basis, for a period-of-time.  That period-of-time may be less than one month or more than five years.  These are negotiated as part of the service agreement.

The demand quantity assumes a constant flow throughout the day, though a few pipelines offer the ability for a shipper to shape their nominations within the day. There may be allowances for seasonal variations, where the demand quantity may have different quantities at different times of the year. This demand quantity is structured much like the peak-demand quantity that electric generators charge their commercial customers and, it works in a similar fashion. There is an opportunity to re-define the contracting of demand quantities, in natural gas transportation contracts, so that it aligns with the demand quantities that electric generators use for their customers.  These re-defined services may apply only to electric generators and the service providers that transport for electric generators. This opportunity, however, is hindered by the current definitions of the demand quantity, its defined purpose and its use in evaluation of pipeline capacity construction permitting.

4              Interstate pipelines are required to offer capabilities for electric generators to make changes on the pipeline throughout the gas day, on an as-needed basis. The mechanisms that pipelines have used to solve this problem varies significantly across pipelines and can create grid-wide synchronization issues.  Are those the issues that need to be solved?  No one participating in the NAESB process has voiced this as a concern.  Does that mean that there is no problem? Does it mean that generators don’t want the FERC to change the way ‘their’ interstate pipeline serves them?

Pipeline services can solve some of the Gas-Electric Harmonization requirements if those services are available on each pipeline in the supply chain of the customer.  These services are being discussed as part of the NAESB process as options that a pipeline, as a transportation service provider, may offer. There is currently no requirement for these services to be offered.  And the services being discussed are offered on some pipelines today, but not all pipelines. Note that these services are not directly related to the instruction of Order 809 to find efficiencies in the confirmations and scheduling processes, but they have been identified as items that could solve some of the issues that arise during the confirmations and scheduling process.

The ability to create a shaped-nomination or profile-nomination on a pipeline has value to the electric generator by allowing the generator to identify an hourly flow rate to the pipeline. This gives the pipeline the ability to schedule the entire day of gas and identify any potential hourly constraints that may arise. These shaped-nominations, where currently in use, give shippers the ability to change the projected flow on any of the five existing NAESB nomination cycles without requiring that pipelines schedule the entire pipeline more times during the business day.

Best efforts nominations, offered by some pipelines, allow shippers to nominate between the NAESB defined nomination cycles to have incremental changes to gas flow.  This service provides space-available changes outside of the standard cycles which means that pipelines need to have rules or practices in place to deal with the possible inability to confirm the flow and the possible resulting imbalances. When this service is trued-up at the subsequent standard cycle, the imbalance risk can be minimized.

Both above described capabilities should be defined as services, within a contract type, on a pipeline. They need to be defined with boundaries, limitations, and corresponding service related rates, if applicable. The pipeline should have the option to limit the availability of this service to electric generators or those service providers specifically delivering to electric generators.

If the FERC wants to get creative to solve this issue, then it should look at then the concept of first-come-first-serve should be examined, within a service level, that permits pipelines to schedule capacity throughout the gas day, after an initial timely scheduling cycle.  This would invite the opportunity for real-time confirmations and real-time scheduling on a net-change basis.  This would require acceptance of newer technology, such as XML transactions rather than EDI transactions, but it could be done.

5              What can NAESB solve in the confirmations and scheduling processes?  Honestly – not much!  NAESB can fine tune the business process of confirmations, and there are some efficiencies to be gained.  This is what the NAESB process is working on today, although there has been resistance to change voiced because of the additional issues described above.  Cleaning up the confirmations process will gain efficiencies in timing and, if a few more changes are made, can add volume surety to the confirmations process.

As far as scheduling goes, there are not any changes that NAESB can make. Pipeline scheduling processes are distinct for every pipeline.  This is because the physical construction of the pipeline is a huge factor, the operational constraints for each pipeline are different, the operational focus of the pipeline is a huge factor, the services offered by that pipeline must be considered, and, of course, the customers and the quantities they elect are factors.  Each pipeline’s scheduling process and scheduling priorities must be determined by that pipeline’s factors and that pipeline’s tariff.  There is nothing that NAESB can do in this space.

Conclusion

NAESB can make some changes in response to the charge administered by FERC.  These changes are not going to effectuate the results that the FERC is looking for.  To get the desired results, there must be policy changes by the FERC, adoption of better business practices at the state level, and new services adopted by the pipelines.  Inside of these non-NAESB decisions, NAESB can make the necessary standards to ensure a consistent implementation plan and useable standards.

This is my opinion. There are participants in the industry that NAESB as the source of additional solutions that could solve these problems.