Natural Gas (CB 7)

SECTION A

Natural gas is methane which is the most common hydrocarbon (how is there water in anything with a chemical formula of CH4? Where’s the water?) which is useful only when it’s stored underground.

There are four levels of the distribution of natural gas – producers (or the well and mine operators), transmission pipelines from the wells to distributors, distributors (like your local utility) and then end users (us or power plants).

A transmission pipeline may have firm customers, people who pay a premium to make sure that they have access to their requirements. They are charged both for the gas they use, and, even if they use no gas, for the pipeline capacity that is committed to them. Other users, who are very acute to price, have the capacity to get their power needs from anything other than

The rest of A is all background, and you can read it if you want.

For a really good reading on Natural Gas, I recommend this.

And this is National Geographic’s overview on the current shale gas page, with links to all of its materials

SECTION B

This section is about the legal concept of split estates. A short property review (and I did terribly in property, so double check that I’m saying this right), but an owner in fee simple is allowed to see the rights to their property however they want. In a split estate, the current owner of the surface lands, for farming, or for living, or whatever, has no control over what the person who owns the mineral rights might do. Both have valid estates, but the way to use the mineral estates will harm the surface owner (or vice versa). Who wins in this dispute? We saw this problem in the coal section, and I think it applies here again. How do we get natural gas out of the land?

For my two cents, I think you want to buy out whichever estate owner you can. Obviously, you can’t always, but that should be the first choice. What happens when you can’t buy someone out? Historically, it had been the dominance of the mineral estates under the doctrine of a ”royalty” being the sovereign’s prerogative, and the idea that minerals aided the land in general. But that’s been whittled away, with the city zoning ordinances, and the accommodation doctrine, and acts of the legislature. We can talk about all of these, but I think there is something to be said about the idea of the primacy of the sovereign and the good of all.

One of the themes throughout this book is the way that local groups with a NIMBY (Not In My BackYard) attitude can limit what the rest of the society wants. Here, the supremacy of the mineral rights really does seem to help protect against NIMBY attitudes. It does, however, come at a cost, where people who own land may be deprived of the rights to that land. I’d like to talk about which of the costs involved here should be born and by whom. Of particular concern for me, especially given that we’re dealing with land, is the fact that money damages may not make a party whole, even though that seems to be the preferred damages remedy. How does it work, and who decides which is the right choice of action?

Further, on the split estates, is the hot button issue of “Fracking” or fracturing of coal beds to release the methane trapped in them. If you don’t believe it’s that important, take a look back over this past election and see how many elections turned on, or at least had as a major issue, fracking. Off the top of my head, I can think of Utah, Wyoming, Pennsylvania and New York where it was an issue. And I’m sure I’ve missed some.

Basically, fracking is sending high pressure water with some sort of “wedge holder”, device into a coal bed which will fracture the bed. When the lines appear, the “wedge holder” holds the fracture open so that the gas that is involved remains free to be extracted back up the injection well. Then there is the problem of what to do with the excess water that is involved. Some parts of the country can’t handle that much water, or supply it, and some of it is toxic when it’s used. What then?

We have the same issues with regards to access on fracking as we had with oial, and with the split estates on private land. Plus, since many locales where this type of activity can occur are on federal land, we have the issues of whether it should occur on federal land. Who decides here? Who should win in a dispute between the various estate holders? Let’s talk about this too.

There’s a lot of law here, which raises as well the basic question of whether the courts or the legislatures should be involved in this issue. But, given that we are almost sure to have a problem with a gridlocked U.S. Congress for at least two years, what should we hope for? And can we wait to solve these problems? I believe we can wait, that we have waited this long to solve them, another two years is not a problem. But they are not easy problems to solve and really need an absence of the rhetoric that so often accompanies these debates.

SECTION C

Federal Framework of Natural Gas Regulation
Overview
One of the things that I initially found interesting was that the article suggested that natural gas deregulation was responsible for significant air quality improvements. I wonder if alternative fuels and other sources of energy might also have become more widely adopted if natural gas had not been turned into an economical option by the federal government.
The regulation of natural gas pipelines as natural monopolies seemed to make sense because of the high cost of entry into the market; however, I found it interesting that Congress was willing to give natural gas pipelines so much power in 1938 by refusing to require the pipelines to carry third party natural gas. It was also interesting that oil and natural gas pipelines would be regulated differently than oil pipelines when the two seem to be very similar.
Additionally, giving the FPC an almost impossible task of setting natural gas prices when sold by any independent gas producers seems contrary to the fact that natural gas production is not a natural monopoly like pipelines are. It seems particularly curious that the Supreme Court refused to give very much deference to the agency. All this succeeded in doing was creating a natural gas shortage which effectively stunted the industry’s growth.
Finally, after several years of high prices, Congress allowed the FPC (now FERC) to create new regulatory scheme with categories of natural gas each with different rules and price ceilings. The largest problem stemmed from the fact that Congress anticipated this deregulation process occurring over several years.
FERC issued a series of regulatory orders that deregulated the natural gas industry.
Order 436 required that third parties be allowed equal access to the natural gas pipelines.
Order 451 did away with ceiling prices that had been set under the previous statute.
In essence, this did away with much of the monopoly held by the natural gas pipelines.
The pipelines tried to delay the deregulation for as long as possible using litigation, but the author seemed to suggest that this did little more than extend existing problems.
After deregulation, prices of natural gas seem to have fallen steadily, and market hubs have been put in place for the sale of natural gas. Additionally, many of the initially separate pipelines are now interconnected.
The Natural Gas Policy Act of 1978: Gradual Price Decontrol
The reading suggests that the NGPA of 1978 was put in place to encourage sale of natural gas on the interstate market, to regulate the pipelines under a unified national policy, and to eventually deregulate gas prices eventually.
I found it interesting that one of the other goals was to keep producers from gaining excess profits on old wells. In some ways, if you are still producing oil from an old well, it seems like that should be encouraged to prevent further drilling; however, that is not the view Congress took.
Take-or-Pay Contracts, the NGPA, Rate Design and Market Forces
The take or pay provisions in contracts seemed initially like an odd thing to encourage. It seemed that they required Buyers to pay for gas that they did not necessarily plan on using. However, if the goal is to ensure a constant supply of gas without huge price spikes, perhaps higher general prices are acceptable.
In general, the higher prices seemed to have generally negative effects. They caused additionally, unnecessary drilling given the demand. Further, they enticed natural gas users to switch to other, cheaper fuel sources, including coal and oil.
Federal Preemption: the NGPA and State Conservation Laws
In Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Board of Mississippi, the Supreme Court held that the State Board’s attempt at controlling natural gas in the state undermined Congress’s intent in passing the NGPA. The Court found that while the Act did take away some power from FERC, it did so to allow the market to take control, not the states. The Court seemed to particularly look at the problems the NGPA was put in place to address and how the State Board’s order might affect the goals of the Act. The Court also seemed concern about the possibility of a lack of uniformity between local and federal laws as well as increasing prices to consumers.

SECTION E

Assessment of Restructured Gas Markets: The California Energy Crisis and Beyond
The Pre-2000 Assessment
The transition to deregulation was expected to hit the general consumer much harder than the larger consumers of natural gas. This is because single consumers did not have the option of switching between suppliers to obtain a better price. Perhaps greater competition would have been present if consumers had possessed the option of switching between natural gas suppliers.
Convergence of Gas and Electric Markets
Convergence describes the idea that natural gas markets and electricity markets are linked because of restructuring in both markets.
The new gas fired power plants are particularly vulnerable because their contracts allow for them to be “bumped” from the pipeline system if there is not enough pipeline capacity. Additionally, many of the new plants do not have the ability to use more than one fuel source. The author suggests that while this may not be best for the public at large in times of high gas demand, it is probably the most economical model.
Commodity Markets, Price Volatility and Manipulation
The Government Accounting Office has suggested that gas utilities should better prepare for changes in natural gas demand, and this can be accomplished through: gas storage, fixed price contracts, futures trading, options contracts, and swaps.
It seems like all of these options are not necessarily always required, but it would be helpful if each of the plants used some combination of these mechanisms.
Further, the goal of these hedging mechanisms is not to get low prices, but to mitigate price volatility.
In California, some of the electricity price manipulation was accomplished through manipulation of the natural gas spot market.
Natural gas was passed between two traders to raise the prices. Additionally, natural gas prices were falsely reported to increase the price at which contract obligations were settled.
FERC has since created a new oversight and investigation department to try to deal with some of this volatility and manipulation.
Affiliate Abuse and Transparency
One of the concerns in functionally unbundling pipelines and natural gas production and sale is that some of these functions will still be present within a given company. While FERC is not supposed to stop vertical integration, it has expanded the definition of affiliate in an attempt to try to ensure that unbundling occurs.
Has Restructuring Succeeded? EPAct 2005 and Beyond
The author seems to suggest that there are mixed messages on whether or not restructuring has succeeded. It cites to high and increasing gas prices as evidence of a problem along with price manipulation.
However, there were bright sides with increased infrastructure, new natural gas recovery, and more careful hedging.