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This report, examines in detail the structure, operation and regulatory background of four natural gas system operators in those countries that have introduced a competitive and unbundled gas market.
The USA, was the first to initiate this process, when in 1995, the Government introduced an order that was designed to produce the separation of gas transportation from all other gas related marketing activities. However, with over 100 pipelines in the USA, the speed of change was not fast enough and the Government subsequently made ‘unbundling’ a mandatory requirement.
The UK followed soon after, with the privatisation of British Gas and the Gas Act of 1986 that established competition, firstly in the domestic market and then for the industrial and commercial market. Unlike the USA, the UK had a single, fully integrated gas monopoly, namely the British Gas Corporation (BGC). In the UK, the emphasis has been firstly on reducing gas prices, followed by the break-up and the unbundling of the BGC structure.
By comparison, Australia’s utilities, including natural gas, were a mixture, with many being Government owned and in some cases vertically integrated monopolies. The Government decided, where possible, to promote competition through the structural reform of public monopolies and by legislative reform. A wholesale gas market was introduced, commencing operation in March 1999, with the establishment of an independent transmission system and market operator.
With these backgrounds, and the establishment of Regulators to enforce the legislation, the four system operators of the natural gas pipelines conduct their business. Whereas the day-to-day operation of the gas transmission system has many similarities – e.g. gas allocation, nominations, balancing, gas trading - the size, structure, geographical areas and the role of the Regulator lead to differences in the framework under which the companies have to operate.
The study demonstrated that all the balancing systems considered exacted some form of penalty on shippers for trading out of balance. The US systems exact penalties, which are based generally on the product of a predetermined penalty rate and a volume imbalance i.e. fixed / sliding rates. The Australian and UK systems considered tended to depend on ‘market driven’ penalty costs i.e. variable rates.
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The European Council is preparing a proposal to amend the European Gas Directive. In this proposal, there will be an obligation for every European Union member state to introduce a System Operator (SO) for its natural gas transportation network. The Dutch government is exploring the possibility of introducing a SO in the Netherlands, and is investigating the role of system operators in other countries as part of that process. This project examines four system operators responsible for important transmission networks in three countries with liberalized natural gas markets – two in the United States (US), and one each in the United Kingdom (UK) and Australia.
The four system operators are as follows:
• Alliance Pipeline L.P. (USA) • Nicor Gas (USA)
• Transco (UK)
• VENCorp (Australia)
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The driving force behind the regulation of the gas industry in the USA, which began some fifteen years ago and was, based on the conclusion that separating or ‘unbundling’ the gas commodity from interstate transportation was an essential element of vibrant competition. The regulatory body that was set up is Federal Energy Regulatory Commission (FERC), which is an independent regulatory agency of the U.S. government.
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• A U.S. Government Agency
• Independent Executive Branch Agency • Decisions subject to review by U.S. Courts
• 5 Voting Commissioners, appointed by the President, confirmed by the Senate, five-Year Terms
• Around 1250 Employees
o Engineers, Technical Specialists o Lawyers
o Economists
FERC regulates rates, terms and conditions of service for over 100 interstate natural gas pipelines and it also approves the siting and construction of pipeline facilities, including the environmental review.
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The restructuring process began in 1985 with a transitional program that allowed and encouraged unbundled transportation, but did not require it. Prior to 1985:
• Natural gas producers sold gas to interstate pipelines
• Pipelines sold bundled product (natural gas and transportation capacity) to Local Distribution Companies (LDCs)
In 1992, the Commission adopted Order No. 636, based on our conclusion that a more aggressive regulatory framework was needed to achieve a truly open and competitive market for natural gas. The cornerstone of this Order was its requirement that all interstate pipelines eliminate their bundled sales services and allow third-party access without discrimination.
In the United States, the jurisdictional split between the federal and state governments makes it difficult to develop a coherent and consistent regulatory policy. The FERC has jurisdiction over wholesale transactions and interstate transportation. Each of the 50 states has a regulatory commission with jurisdiction over local distribution and end use transactions. They are not subject to FERC authority.
In the era of unbundled services, natural gas marketers have emerged as important participants in the market. In fact, gas marketers are replacing the local distribution companies as the primary owners of firm pipeline capacity. The marketers also provide a variety of hedging and other portfolio management services that make them key strategic players.
of pipeline marketing affiliates raised the question as to how could the FERC ensure that the pipeline would not use its monopoly control over the physical pipeline system to discriminate in favor of its affiliated marketer. Ultimately, the FERC chose to adopt rules that seek to prevent potentially abusive behavior by pipelines and their marketing affiliates rather than tougher remedies, such as complete divestiture. The FERC considers that, although there have been a few complaints of favoritism; this system has proven to be a reasonable balancing of all interests involved.
The restructuring of the natural gas industry in the USA has achieved: • Robust competition for natural gas supply
• Increases in natural gas use • Financially healthy pipelines
• Availability of innovative and non-discriminatory pipeline services • Reliable and reasonably priced natural gas and pipeline services • Development of scores of market hubs and pooling points • Commoditisation of natural gas
• Integration of North American natural gas market • Electronic communication via Internet
Recently however, the FERC has been criticized for its failure to protect consumers when markets spiraled out of control in the Western United States. This, together with the debacle over the Enron trading strategies has called into question the integrity of energy marketing and trading. Critics in Congress have denounced power suppliers for market manipulation, and the Commission for ineffective monitoring and intervention, and for failing to uncover such activity until now. Two General Accounting Office reports published in June questioned the Commission’s readiness to deal effectively with market dysfunctions.
In February 2002 the FERC initiated a thorough investigation of Western market manipulation. The Commission has also embarked upon a multi-pronged strategy to restore necessary confidence. Refunds have been ordered for customers who suffered from the out of control prices in western markets.
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The Alliance Pipeline system is a new natural gas pipeline system designed to initially offer 37.5 X 106 cubic meters per day of firm delivery service from the gas-producing areas of northeastern British Columbia and northwestern Alberta to markets in the mid-western United States and eastern Canada.
Alliance LP Inc. is a partnership of Duke Energy Corp, El Paso Corp., Enbridge Inc., Fort Chicago Energy Partners LP. Alliance own and operate their pipeline and are responsible for its physical maintenance.
Alliance Pipeline L.P. (Alliance USA) is a US limited partnership formed under the laws of the State of Delaware. It is the owner and system operator of the US portion of Alliance Pipeline’s transmission system, extending from an interconnection with Alliance Pipeline Limited Partnership (Canada) at the Canadian-United States border to various points of delivery in the Chicago, Illinois area. In 2001, Alliance USA delivered 2.5% of U.S. gas consumption.
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A timeline of the development of the Alliance Pipeline system and commencement of Alliance-USA’s functions as system operator is given below.
• May 10, 1996: Alliance Pipeline Limited Partnership and Alliance L.P. agreements signed • June 10, 1996: Formal announcement of project
• December 24, 1996: Application filed with the U.S. Federal Energy Regulatory Commission (FERC)
• July 3, 1997: Application filed with the Canadian National Energy Board (NEB) • September 16, 1998: Regulatory approval from FERC
• December 3, 1998: Regulatory approval from NEB • May 15, 1999: Mainline construction begins - U.S. side • June 15, 1999: Mainline construction begins - Canadian side • November 29, 1999: Canada-U.S. tie-in merged at border • August 26, 2000: Mainline construction completed
• September 6, 2000: First ‘test’ gas flows through system into Chicago area • December 1, 2000: Commercial service begins
4.2.1. Corporate Structure
The Alliance Pipeline corporate structure is made up of two components:
• Alliance Pipeline LP (an American entity) also known as Alliance USA, through its Managing General Partner, Alliance Pipeline Inc., owns and operates about 1,405km of pipeline
(mainline and delivery) and appurtenant facilities in the U.S.
As operator of the system in the US, Alliance USA’s functions are carried out by three groups who collectively oversee the transportation of gas from northeastern British Columbia and northwestern Alberta to the Chicago area. They are:
• Customer Service Group • Gas Control Group • Technical Support Group
The responsibilities of each group are as follows:
• The Customer Service Group acts as the liaison between the shippers and Alliance
Pipeline to ensure their shipping requirements and obligations to the pipeline company are met.
• The Gas Control Group oversees the actual physical transportation of gas from the point at which it enters the Alliance Pipeline system (receipt point) to the terminus (delivery point) near Chicago.
• The Technical Support Group has the task of ensuring that all the state-of-the-art equipment installed throughout the system is maintained and operating effectively at all times.
4.2.2. Autonomy
As a company engaged in the business of transporting natural gas for shippers in interstate commerce, Alliance USA is under the jurisdiction of the Federal Energy Regulatory Commission.
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4.3.1. Geographical Service Territory
)RXW2QEHNHQGHVFKDNHORSWLHLQVWUXFWLHThe US portion of the Alliance Pipeline transmission system operated by Alliance USA has the following characteristics:
• 1,429 km of high-pressure pipeline in the US
• Receipt point at interconnection with Alliance Pipeline Limited Partnership in Renville County, North Dakota
• 7 compressor stations spaced about 193 km apart
• Firm capacity of 37.5 X 106 cubic meters plus additional interruptible capacity
• 5 downstream interconnection delivery points to: ANR Pipeline Company, Midwestern Gas Transmission Company, Natural Gas Pipeline Company of America, Northern Illinois Gas Company and People’s Gas Light and Coke Company - located in Grundy and Will Counties, Illinois
• One interconnection delivery point at the Aux Sable Liquid Products L.P. gas processing plant
4.3.2. System Operation
Alliance USA offers capacity on the Alliance Pipeline system under the following agreements:
• Firm Transportation: Most of Alliance USA’s transportation activities arise from
obligations associated with firm transportation contracts. Alliance USA has a certificated design capacity of 42.8 X 106 cubic meters per day, but commenced operations on December 1, 2000 with contracted firm capacity of 37.5 X 106 cubic meters per day.
o Firm contracts are 15-year ‘Ship or Pay’ contracts. Shippers are charged regardless of utilization.
o Regulated tariff allows for 100% recovery of demand costs and has a component subject to negotiations between the shipper and the system operator. Negotiated rates may apply to all or a portion of the capacity and/or the entire or some portion of the term.
• Interruptible Transportation: Shippers may contract with Alliance USA for daily quantities of gas up to a Maximum Daily Transportation Quantity (MDTQ), which is specified in the agreement.
• Authorized Overrun Service (AOS): From time to time, Alliance USA offers unsubscribed transportation capacity, the amounts of which will vary depending upon system
availability and shipper nominations for firm service at that time. AOS quantities are offered to holders of firm capacity prorated according to their share of contracted capacity. They are charged only the incremental cost of the fuel.
• Capacity Release: A secondary market for capacity is created by the release of contracted capacity held by shippers under Firm Transportation Agreements. The release capacity can be sold under private agreement between parties or awarded to bidders through an auction process.
4.3.3. Market Parties
4.3.4. Obligations and Interdependence of Market Parties
3ULPDU\0DUNHWShippers are bound by the terms of either a Firm Transportation Agreement or an Interruptible Transportation Agreement signed with the system operator.
Secondary Market Participants
• In order to participate in the secondary gas market for released capacity, a prospective market participant must be listed on Alliance USA’s Approved Bidders List. To be added to the Approved Bidders List, the party’s corporate and credit information must meet with the approval of the system operator, who will also establish the financial limits for that entity’s transactions
• The approved bidder must then sign a Master Capacity Release Agreement whereby the replacement shipper agrees to be bound by the terms of its winning bid or the terms of any Pre-Arranged Capacity Release. The replacement shipper’s rights however cannot exceed those of the releasing shipper
• For each award of capacity, Alliance USA electronically submits a Capacity Release Schedule to the replacement shipper, with all the terms of the transaction
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4.4.1. Capacity Booking
Alliance USA allows shippers who have signed a Firm Transportation Agreement, Interruptible Transportation Agreement, or Master Capacity Release Agreement, to receive service through a nomination process. Via the internet, potential shippers can initially determine the available capacity on the Alliance Pipeline system and then nominate and confirm next-day transportation of specified quantities of gas. These nominations are carried out on a daily basis.
Specifics of the process are as follows:
• All nominations are made on Alliance USA’s EDM system (see Section 4.5.1) according to fixed formats and protocol requirements.
• To receive service, a shipper can submit daily nominations specifying desired beginning and end dates for transportation of specified quantities of gas to be delivered:
o From specified receipt point(s) to specified delivery point(s) on the Alliance Pipeline system
o To the processing delivery point, if desired
o From the shipper's U.S. Receipt Pool to the U.S. Receipt Pools of other parties and vice versa (title transfer)
o From the shipper's U.S. Delivery Pool to the U.S. Delivery Pools of other parties and vice versa (title transfer)
• Shippers can make changes to nomination designations on the EDM
4.4.2. Scheduling Service
As system operator, Alliance USA is responsible for effectively scheduling transportation capacity to maximize throughput (the volume of gas being transported) while maintaining the safety of the system at all times. The scheduling responsibilities are undertaken by Alliance’s Customer Service Group (CSG) whose responsibilities are as follows:
• To implement and monitor all day-to-day aspects of the actual transportation of gas • To provide monthly reporting and invoicing for the transportation service provided • To build and maintain relationships with the Receipt Point Operator1 as well as
downstream pipeline operators2.
• To maintain the interests of the shipper by serving as a single point of contact for the shipper from the receipt point to the delivery point
The functions of the CSG are as follows:
• Customer Service representatives (CSR) use GMS (Gas Management System) software to monitor and implement the daily transportation flow of gas on the Alliance Pipeline system and to schedule the quantities of gas being shipped.
• When a nomination is received, the CSR confers with members of the Gas Control Group to determine whether there is sufficient capacity to transport the quantity of gas nominated by the shipper.
• Working with Gas Control Group, the CSR will determine whether all or only part of the nomination can be transported the next day.
• Customer Service then confirms with upstream and downstream pipeline operators to ensure the gas can move on their pipelines.
• Once the quantity of gas to be shipped has been determined, the CSR advises the shipper of the arrangements.
• The CSR then uses The EFM (Electronic Flow Measurement) system to record the actual amount of gas moved at each location. This information is used to monitor shipper transactions and to prepare and issue invoices for the cost of shipping the agreed-upon quantity of gas during a particular month.
Transportation capacity is then scheduled in the following order of priority:
1. Firm Transportation quantities within shippers' contracted capacities
2. Authorized Overrun Service quantities for shippers under Firm Transportation Agreements
3. Interruptible Transportation quantities allocated on the basis of rate paid, from highest to lowest, with pro rata allocation when the rate paid is equal
In the event of curtailment, the reverse order of priorities is followed.
1
A company that operates the production plant immediately upstream of where the shipper’s gas enters the Alliance Pipeline system
4.4.3. Balancing Service
As system operator, Alliance USA’s major functions include gas balancing and pipeline monitoring and control. As part of the nomination procedure, Alliance USA communicates to all shippers the current acceptable level of tolerance for imbalances. In general, tolerance of periodic imbalances up to 4% of the quantity scheduled by the system operator is allowed.
On any one-day, energy imbalances on shipper accounts can occur. Shippers who incur imbalances are subject to the following actions:
• When imbalances occur, Alliance USA may adjust new or standing nominations to bring a shipper's account within the specified tolerance levels and the shipper may be asked to take action to eliminate the imbalance.
• In the event the energy imbalance exceeds the tolerance specified by Alliance USA on any day, the shipper will be subject to an Energy Imbalance Penalty.
Alliance USA balances gas flow on a daily basis by fluctuating line-pack levels (the amount of gas in the line at any point in time) and manipulating operational balancing agreements with interconnecting facilities. The Gas Control Group (GCG), from its control center located in Calgary, Alberta, is able to remotely monitor and control the pipeline at any point along the route using state-of-the-art equipment. Operators are on duty 24 hours a day, seven days a week, 52 weeks a year. The system operator executes its balancing, monitoring, and controlling functions in the following way:
• The SCADA (Supervisory Control and Data Acquisition) computer program is used to monitor pressure, temperature, flow and other key operational information every few seconds, via satellite. SCADA provides a continuous real-time view of the condition of the entire pipeline system3.
• Each gas day, the GCG can issue SCADA commands to open or close valves, start, stop, speed up, or slow down compressors to manage the line-pack on the system to ensure gas is received and delivered reliably and safely.
• Real Time Model (RTM), a computer software package that simulates hydraulic operation of the pipeline, is used to further ensure safe operation of the pipeline. Its primary purpose is to detect leaks, track the composition and dew point of the gas, and continually
calculate the line-pack of the pipeline.
• Using the RTM and SCADA systems, GCG is also able to accurately predict the composition of the gas as it arrives at the compressor stations and monitor the quality of gas entering the pipeline at any entry point in the system all the way to Chicago.
4.4.4. Capacity Trading Service
A shipper who has signed a Firm or Interruptible contract with Alliance USA may release unwanted capacity to be auctioned among bidders who have been pre approved by system operator. This creates a secondary market for natural gas transportation on the Alliance Pipeline system. There are two exceptions to the bidding process:
• Pre-Arranged Releases: For capacity available for a period of thirty-one days or less, a shipper may release the capacity without subjecting it to bidding. Alliance USA must be notified via the EDM of such release.
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• Permanent Releases: A shipper with an existing Firm Transportation Agreement with Alliance USA may release its entire capacity to a third party for the remaining term of the contract. The third party must execute a new Assignment Novation Agreement with Alliance USA.
The logistics of the capacity trading process are as follows:
• The releasing shipper may specify the starting and ending dates and times for the bidding period.
• On any day, a prospective replacement shipper may make multiple simultaneous bids for capacity. The aggregate of these bids may exceed the shipper’s bid limit.
• If the replacement shipper receives multiple capacity awards that in aggregate exceed its bid limit:
o The replacement shipper’s bid limit will be reduced to $0.00 and the shipper must post a Letter of Credit or cash deposit within 7 days in an amount equal to or greater than the difference between the original bid limit and the financial obligation of the awarded capacity.
o If the replacement shipper fails to comply, the awarded capacity in invalidated and reverts back to the releasing shipper
4.4.5. Storage, Parking, and Loaning Services
Alliance USA does not offer any gas storage, parking, or loaning services.
4.4.6. Risk Management Service
Alliance USA does not provide risk management services and has not developed the infrastructure for market parties to engage in any risk management activities.
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4.5.1. Informational Services
Alliance USA has established a proprietary information dissemination tool called the Electronic Delivery Mechanism (EDM) that is accessible only to contractors and subscribers. The EDM is available twenty-four hours per day, and is used for a variety of purposes including gas nomination and electronic execution of contractual agreements. It is also the medium by which Alliance USA provides a very broad range of information including (but not restricted to) the following:
• Information or services required by the FERC
• Vital information related to Alliance USA operations such as: • Total contracted capacity under all Firm Transportation Agreements • Availability of AOS capacity
• Notices of any restrictions of interruptible capacity • Capacity releases
• Completed capacity release transactions • Operational reports
4.5.2. Transactional Services
On or before the 9th day of each month, Alliance USA’s Customer Service Group issues invoices to shippers for amounts payable for the preceding delivery month under applicable rate schedules(s) plus any additional charges, penalties, or credits due. All payments by shippers have to be made in US funds by electronic funds transfer to a depository designated by the system operator.
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The Chicago Hub has emerged as a major natural gas supply hub feeding the industrial Midwest and Eastern United States with supplies from the Gulf Coast, Southwestern US, the Rocky Mountains, and Western Canada. The most recent project to increase gas supplies to the Hub is the Alliance Pipeline, which began delivering gas into Chicago in 2000.
5.1.1. Nicor Hub Services
Nicor Hub Services operates two divisions within Nicor Enerchange LLC, Nicor Enerchange Trading and Nicor Enerchange Hub Administration.
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Was created in 1998, and is a wholesale natural gas marketing company that offers customized energy management solutions for its customers.
As one of the largest natural gas providers in the Midwest with customers in Illinois, Wisconsin, Indiana, Iowa and Michigan, its success is a direct result of wholesale trading expertise and market knowledge of the Midwest.
Nicor Enerchange Trading works with large volume gas end-users and utility companies helping them in the areas of energy management, asset optimization and risk management. It claims that its strength lies in buying and selling natural gas on multiple gas pipelines at multiple locations. 1LFRU(QHUFKDQJH+XE$GPLQLVWUDWLRQ
Nicor Enerchange Hub Administration operates as a center for gas transportation solutions, Nicor Enerchange Hub Administration, commonly referred to as the "Chicago Hub", offers customers new alternatives in natural gas transportation services.
Nicor Organogram
Nicor Enerchange Trading Nicor Enerchange Hub Administration Nicor Hub Services
The Chicago Hub is the link to a vast network of natural gas resources. Nicor has direct connections with six major interstate pipelines including ANR Pipeline Company (ANR), Natural Gas Pipeline Company of America (NGPL), Northern Border Pipe Line (NBPL), Northern Natural Gas Company (NNG), Midwestern Gas Transmission Company (TGP/Midwestern) and Panhandle Eastern Pipeline Company.
Excess storage capacity is managed on behalf of Nicor Gas, maximizing the value of its assets. Nicor’s services are provided at negotiated rates based on current market conditions.
Nicor Gas has seven underground storage facilities.
Nicor claims to be exceptional in the Midwest in terms of its offering - pipeline connectivity and storage capability. Nicor claims to be able to eliminate pipeline imbalance penalties and offer efficient transactions.
5.1.2. History
Nicor Gas (hereafter referred to as ‘Nicor’) serves nearly 5.7 million customers in the northern third of Illinois (excluding the city of Chicago) and the metropolitan area surrounding the city of Chicago. Since its formation in 1954, it has grown to become the largest natural gas distribution company in Illinois and one of the largest in the nation. It also transports and stores natural gas for nearly 129,000 commercial, industrial and residential customers in the state who purchase gas from other suppliers. Nicor Gas is the owner and system operator of the Chicago Hub.
5.1.3. Corporate Structure
Nicor’s operation of the Chicago Hub is conducted by its division Nicor Hub Services, which consists of two affiliates:
• Nicor Enerchange Trading: This is a wholesale natural gas marketing company created by Nicor Gas in 1998. It offers large-volume gas end-users and utility companies energy management, asset optimization, and risk management services.
• Nicor Enerchange Hub Administration: System administrator of the Chicago Hub
5.1.4. Autonomy
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5.2.1. Geographical Service Territory
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Nicor Gas owns and operates a 17,500 km natural gas distribution system, which has more than 90 interconnections with 7 interstate natural gas pipelines. It is also the owner and operator of the Chicago Hub. The Hub has direct connections with five major interstate pipelines (additional pipelines are also being proposed):
• ANR Pipeline Company (ANR)
• Natural Gas Pipeline Company of America (NGPL) • North Border Pipe Line (NBPL)
• Northern Natural Gas Company (NNG)
• Midwestern Gas Transmission Company (TGP/Midwestern)
In addition to access to multiple pipelines, Nicor also has large underground storage aquifers that lie beneath northern Illinois’ farmland. Its storage system of approximately 4.6 X 109 cubic meters is one of the largest in the industry. Nicor can meet about 50-60% of its peak-day needs and about one-third of its annual deliveries with natural gas from storage.
5.2.2. System Operation
As system operator of the Chicago Hub, Nicor oversees services that include short-term interruptible gas transportation4 and wheeling5, storage, and park-and-loan transactions. In addition to interruptible services, Nicor may from time to time, have limited storage and transportation capacity that it offers to shippers on a firm basis, but only for defined periods of time.
4
Transportation is the movement of gas from one point to another on a pipeline where either the receipt or delivery point is not an interconnected pipeline.
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Major services offered by Nicor are as follows:
• Gas moving: The Hub has access to gas supplies from Canada and the Mid-Continent, Gulf Coast, and Midwestern United States. Gas going through the Hub can be routed to other markets as well as back to the producing areas.
• Gas parking: For customers who have extra gas at Nicor’s entry points, the Hub offers the possibility of temporary storage in one of Nicor’s seven underground storage facilities. • Gas loaning: The Hub offers short-term interruptible gas loans that can help customers
take advantage of market situations.
The rates for transportation/wheeling and storage are subject to negotiations between Nicor and the shippers, but they cannot exceed the limits established by the FERC and the Illinois Commerce Commission.
All transportation/wheeling and storage gas received by Nicor at the Hub is accounted for on a daily basis. If a customer’s demand for gas exceeds its supply and the imbalance cannot be adequately met by the customer’s withdrawal rights from storage, Nicor will supply the difference. This ‘Authorized Use’ gas will be billed to the customer at the system operator’s cost of gas6. Beyond these quantities, any Nicor-owned gas required to correct further imbalances is classified as ‘Unauthorized Use’ gas, and is subject an additional charge of US $0.26/kWhr.
In order to maintain the operational integrity of the company's system, Nicor Gas may declare certain days as ‘Critical Days’:
• Nicor Gas will post a notice on the company's electronic bulletin board and on a recorded dial-in message at least 28 hours before the start of the Critical Day.
• When a Critical Day occurs, shippers can change their nominations until four hours before the start of the Critical Day.
• Storage withdrawals will be limited on a Critical Day.
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In the USA TSO’s are allowed by FERC to declare critical days. These critical days impose restrictions on the shippers. The Nicor definition of a critical day is as follows:
A Critical Day can be declared whenever it is necessary to maintain the operational integrity of the system. Nicor Gas may declare a Critical Day when any of the following five conditions occurs or is anticipated to occur:
• Nicor experience failure of transmission, distribution, gas storage or gas manufacturing facilities.
• Transmission system pressures or other unusual conditions jeopardize the operation of the system.
• Transmission, storage and supply resources are being used at or near their maximum rated deliverability.
• Transporters or suppliers call the equivalent of a Critical Day.
6
• Nicor is unable to fulfill its firm contractual obligations or it is necessary to maintain the overall operational integrity of all or a portion of the system
Critical days can only be called from November 1st. to April 30th.
5.2.3. Market Parties
Market participants of the Chicago Hub are shippers who contract with Nicor to move gas between any of the pipelines that are interconnected with the company.
5.2.4. Obligations and Interdependence of Market Parties
FERC rules dictate that Nicor’s responsibilities as system operator of the Chicago Hub are subordinate to its obligations as a natural gas distribution company within the State of Illinois. As such, firm distribution and storage services provided within the state take first priority, and transportation/wheeling and storage services offered by the Hub to shippers must predominantly be of an interruptible nature. From time to time, however, firm transportation/wheeling and storage services may be offered if Nicor determines that it is able to provide these services without impairing its ability to fulfill its intrastate firm obligations.
Shippers are responsible for making necessary arrangements to move their gas away from the Hub. Daily volumes that are not moved away from the Hub are put into the Hub’s storage facilities and will be considered part of the shippers’ storage capacity.
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5.3.1. Capacity Booking
Hub customers must sign a Hub Service Agreement with Nicor prior to receiving service. They can then proceed to schedule service with Nicor on a day-by-day or advance-day basis. Shippers may nominate to inject, withdraw, move, or transfer gas. Each nomination is considered to be a separate transaction and requires signing of a Hub Transaction Request and Agreement Form. Nominations may be made through the following media:
• Electronic system: Requests may be made on Nicor’s Gas Exchange (see Section 5.4.1) • E-mail: Requests may be submitted and responses guaranteed within one business day • Telephone: Transportation customer service call center (630-983-4040, Option 1) is open
Monday-Friday 8:00-4:30 to take requests • Fax: Contracts may be sent and received via fax
5.3.2. Scheduling Service
All transportation/wheeling and storage gas received by Nicor is accounted for on a daily basis and rescheduled for eventual redelivery to a designated delivery point. Nicor schedules transportation/wheeling and storage services according to the following order of priority:
1. Firm transportation/wheeling and storage services
2. Priority interruptible transportation/wheeling and storage services7 3. Interruptible transportation/wheeling and storage services
Interruptions and curtailments are executed in the reverse priority order followed for gas scheduling.
5.3.3. Balancing Service
Customers selecting unbundled transportation/wheeling services will have their use and nominations balanced daily through the use of recording devices installed by Nicor. The recording device requires a telephone line, which must be provided by the customer.
On any non-critical day, if a customer demand exceeds its supply, Nicor corrects the imbalance by obtained using gas from the following sources, in the order of priority listed:
1. Customer-owned gas withdrawn from storage
2. Company supplies under for firm customers’ FBS only (see Section 5.3.5) 3. ‘Authorized Use’ gas (Nicor-owned gas)
4. ‘Unauthorized Use’ gas (Nicor-owned gas)
On a Critical Day, gas is balanced in the same manner, but with the following restrictions:
• Only 2.3% of a customer’s SBS capacity can be withdrawn from storage
• ‘Authorized Use’ gas is limited to Nicor supplies up to the remainder of unused SBS withdrawal rights
5.3.4. Capacity Trading Service
Buyers and sellers can trade gas and capacity and/or facilitate direct negotiations for legally-binding transactions on Nicor Gas’ electronic-based Gas Exchange system.
5.3.5. Storage, Parking, and Loaning Services
Storage Banking Service (SBS)Nicor assists shippers in balancing their daily needs by providing gas storage services, which are available under different agreements:
7
• Shippers can contract for SBS capacity and select the levels of storage desired. A minimum of one MDCQ-day is required and a maximum of 26 MDCQ-days is available to all customers8. On Critical Days, withdrawals will be limited to 2.3% of the customer’s SBS capacity. • Firm customers can sign up for Firm Backup Service (FBS). This entitles them to specific
contracted amounts of Nicor-supplied gas on any day. On a Critical Day, Nicor will supply the FBS in addition to the 2.3% of the customer’s SBS capacity.
A shipper’s daily net balance in storage is the difference between receipts of gas from the shipper delivered to the storage facility and Nicor’s delivery to the shipper that is withdrawn from storage on that particular day.
Excess Storage
When a customer’s storage capacity is 5% or more of the SBS capacity in any monthly billing period, Nicor charges an excess storage fee of US $0.003/kWhr. This fee is applied to the maximum amount of gas over the customer’s bank capacity in that billing period.
Storage Balance Transfer
A gas owner may request to transfer excess storage balance at the end of a billing month to another party. The request may be submitted up to 20 days after the bill (with the excess storage charge) is issued. The transferring party will be assessed a US $35 transaction fee.
Parking and Loaning Services
As system operator, Nicor offers parking and loaning services to shippers, subject to available capacity. Any shipper requesting such service must sign a Hub Service Agreement and each
transaction is executed by filling in a Hub Transaction Request Form specifying the following information:
• Day(s) on which shipper wishes to park gas on Nicor’s system or re-deliver gas previously loaned by Nicor
• Day(s) on which shipper wishes to take delivery of gas previously parked on Nicor’s system or take delivery of gas being loaned by Nicor
• Delivery and receipt points for each transaction
• Quantities of gas to be parked, loaned, or redelivered on each day
5.3.6. Risk Management Service
As system operator, Nicor does not provide risk management services. Nicor Gas’ wholesale gas marketing affiliate, Nicor Enerchange Trading, offers services that relate to reducing the risk of price changes to gas buyers and sellers (such as futures, options, and exchange of futures for physicals).
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5.4.1. Information Services
Nicor Gas has established a number of electronic-based tools that both facilitate customer transactions and disseminate information.
Gas Exchange
This is a web-based site that allows customers to electronically schedule and nominate service as well as trade and transfer gas and capacity.
The Gas Exchange Bulletin Board
This is an electronic information service that provides details on:
• General information about Nicor • Critical day information
• Gas advisories
• Firm pipeline capacity • Curtailment notices
Open Access Informational Database
This is an electronic information service that includes the following:
• Transportation Customer Information Database (TCIDB): This password-protected web site allows customers to access statement and billing information of current and perspective customer’s (with written customer authorization).
o Customers’ contract and summary billing information including complete history of customer usage, utility charges by billing period, bill amounts, payments and account balances
o Detailed information on billing charges and summary of usage, nominations and storage activity by billing period
• Daily Balancing Status (DBS) Reports - daily usage, nomination and storage balance information
• Electronic Billing (E-Bill) Reports - detailed billing information that appears on paper bills
Gas Transportation Customer Service
This is an electronic information service that provides details on:
5.4.2. Transactional Services
Nicor accommodates title transfers for gas on the Chicago Hub and handles the necessary paperwork to account for such ownership changes occurring while gas is being transported/wheeled and/or stored for shippers. Title may transfer several times for some gas before it leaves the center. In other cases, the service is simply an accounting or documentation of title transfers that may be done electronically, by hard copy, or both.
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Transco owns, operates and physically maintains the virtually whole of the UK transmission and gas distribution system. There are Independent Public Gas Transporters (IPGTs) who own operate and maintain generally, either specific point to point pipe lines or small infill networks but this represents a very small proportion of the UK gas network.
The UK gas industry was nationalized in 1948 and the British Gas Corporation was established in 1973. In April 1986 British Gas was incorporated as a public limited company and in December 1986 the UK Government sold, substantially all its shareholdings in British Gas to the public.
Since the privatization of British Gas in 1986, the physical infrastructure in the UK, which provides for the safe and efficient transport of gas from the beach terminals to the consumer has seen steady development. However the same is not true in the way in which the whole gas industry is managed and operated. There has been a radical change in the monopoly position of British Gas, the gas market has been opened up to competition and a whole new gas trading market has been established. At first, following privatization, the rate of change was relatively slow, but since 1990, the changes have been increasing more frequent and more fundamental.
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The history of the British gas industry from the days of the British Gas Corporation to the present day is long and complex – a detailed chronology has been included as an appendix.
With effect from 17 February 1997, Centrica plc demerged from British Gas plc which changed its name to BG plc. Following the Centrica demerger, BG plc retained the gas transportation and storage businesses, the majority of the exploration and production business, the international downstream business, the research and technology business and the property division of British Gas plc.
In connection with the Centrica demerger, British Gas plc’s gas sales, services and retail businesses, together with the gas production business of the North and South Morecambe gas fields and its direct interest in Accord Energy Limited were transferred to Centrica plc. With effect from 1 May 1999, BG plc combined its exploration and production and international downstream businesses, which are principally engaged in gas and oil exploration and production and the integrated development and supply of gas markets.
With effect from 13 December 1999, BG was restructured so that a newly incorporated company, BG Group plc, became the new parent company of BG plc indirectly holding the Transco business in a separate sub-group, with BG Transco plc being ring-fenced for regulatory purposes from the sub-group containing the other BG businesses.
The restructuring was accompanied by a refinancing under which BG Transco Holdings plc (now Transco Holdings plc) issued approximately US $2.3X109 of bonds which were transferred together with new shares in BG Group plc to BG plc shareholders in exchange for their existing shares in BG plc. The UK Secretary of State for Trade and Industry held a special rights redeemable preference share in BG Group plc. BG plc was then renamed BG Transco plc.
Transco plc is a company incorporated in England and Wales on 1 April 1986 under the Companies Act of 1985.
On 16 October 2000, BG Group’s Shareholders approved the demerger of certain businesses (principally Transco) to Lattice plc, effective on 23 October 2000. This demerger created a new listed company, Lattice plc, whose principal business, Transco plc, owns, operates and develops the substantial majority of the gas transportation system and all of the LNG storage facilities in Great Britain.
On 22 April 2002, the directors of National Grid and Lattice announced that they had unanimously agreed the terms of a recommended merger of equals to create a leading international energy delivery company. Upon completion of the merger, National Grid, which is the holding company of the merged Group, was renamed National Grid Transco. Prior to the merger Lattice was the ultimate holding company of Transco, the owner operator and developer of the substantial majority of Britain's natural gas transportation system.
The terms of the merger were based on the relative equity market capitalisations of the two companies in the period immediately preceding the announcement of the merger. The merger was implemented by way of a scheme of arrangement between Lattice and its shareholders under section 425 of the Companies Act and completed on 21 October 2002.
National Grid has performed well in terms of return to shareholder. Its telecom company was started, grew well and was floated off successfully before the telecoms ‘crash’. National Grid has been aggressive in expanding in the USA.
Significant projected operating savings were identified by merging the two organisations. A major reorganisation is currently underway including closing both operating bases and moving to a new location.
The combined National Grid – Transco group is less subject to takeover by predator companies by virtue of its larger market capitalisation.
The combined balance sheet strength of National Grid and Transco should enable them to expand by acquisition more aggressively.
6.2.1. The UK Experience
Prior to the introduction of the Over The Counter Market (OCM), Transco operated a flexibility mechanism whereby shippers bid to buy or offered to sell gas to Transco for balancing purposes. The system was robust in operation, but lacked many of the features and advantages of a traded market.
In particular, participants were only able to trade with a single counter-party (i.e. Transco) and were unable to trade with other shippers for balancing purposes.
These features of the flexibility mechanism resulted in a number of problems. In particular, the flexibility mechanism was seen as:
• Relatively illiquid with bid-offer spreads typically greater than those witnessed in competitive exchange based markets. This often led to cash-out prices that were not reflective of
underlying market conditions but of individual company bidding strategies.
• A mechanism where Transco, as the sole counter-party, was often a distressed buyer / seller and benefited from little competitive re-pricing.
• Only open to shippers that could ensure a physical change to their gas flows during the day. • Excluding shipper to shipper trades for balancing purposes.
These features of the flexibility mechanism contributed to the exposure of industry participants to higher costs than necessary on a number of occasions, most notably an incident on 16th and 17th December 1997, which provides a good example of the difficulties in the old mechanism. On the 16 December 1997 the so called the 'dual action effect' occurred, whereby Transco accepted System Buy bids when the system was back in balance or already over supplied with gas. It arose because of the discrepancy between changing demand forecast information used by Transco, and the restrictions placed on shippers regarding adjustments they could make to their nominations to reflect this. This specific example resulted in balancing costs of £8m, and a knock-on impact on the spot market, that was estimated by Ofgas to cost shippers an additional £4m.
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For the system to be physically in balance, inputs and offtakes must match to the extent that any differences can be accommodated by variations in line-pack.
A target linepack volume is set which varies from day to day depending on demand and other operational requirements (such as temperature changes). A bandwidth is defined around this target, also varying with operational requirements. The balancing actions that Transco took via flexibility mechanism buys and sells, were based on the forecast of line pack at the end of the gas day, compared to these target and bandwidth volumes.
Linepack will change during the day. Transco makes its balancing decisions based on forecasts of the volumes of gas delivered to, and taken off, the system during the course of each gas day. Transco uses its own total system demand forecast, together with offtake nominations, to estimate offtakes. For its forecast of deliveries it has two primary sources. These are nominations from shippers on AT-Link, and estimates from terminal operators known as Daily Flow Notifications (DFNs). (There were no commercial incentives on Transco to minimise balancing costs.
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Before the gas day, each shipper was required under the network code to inform Transco how much gas it would input to the pipeline system, and how much its customers would off take via AT-Link. Prior to the gas day, there was no requirement that inputs and off takes should match, although, under Standard Condition 2.3 of the Gas Shipper’s Licence, there was a requirement not to act in a manner likely to give a false impression to the PGT as to the amount of inputs or off takes of gas from its system. Renominations could be made at certain periods throughout the course of the gas day although the net difference between input and off take nominations could not be changed.
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Any shipper could place a bid on the flexibility mechanism, either to provide gas to the system (a System Buy bid), or to take gas off the system (a System Sell bid). Bids were specific to a certain gas day, and could be placed or withdrawn at any time, but could not be changed once posted. If Transco took a balancing action, it would accept bids in price order (lowest price bids for a System Buy, and highest price bids for a System Sell) to fill its volume requirement. If a shipper had a bid accepted, it would receive the bid price for the gas. Delivery of the bids was expected to take place by the end of the gas day. Because of the lack of real time data, bids that were not delivered could not always be identified, particularly if the volume was small. There was no direct penalty for failing to honour the flexibility bid, and payment for the bid was received regardless. Failure to deliver simply added to a shipper’s imbalance position, and could also lead to scheduling charges. As well as price and volume, bids had to specify the entry or exit point at which they were to be delivered, the flow rate and a lead-time. Sources for flexibility bids included varying deliveries at terminals, injections or withdrawals from storage facilities, and interruption of customers.
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Shippers had a commercial incentive to balance their portfolios since any imbalances were exposed to cash-out prices.
under-delivered would pay a higher price, the System Marginal Buy Price (SMP Buy) which was the price of the highest System Buy bid selected on-the-day, for any part of its imbalance outside the tolerance level. Similarly, if a System Sell action had been taken, a shipper that had over-delivered would be paid the lower System Marginal Sell Price (SMP Sell), the price of the lowest System Sell bid selected on-the-day, for any imbalance outside of its tolerance.
If no System Buy bid or System Sell bid was selected on a day, the corresponding SMP Buy and SMP Sell prices were set equal to SAP. On days when no balancing action is taken, SAP (and hence SMP Buy and SMP Sell) were set to the average of the SAP on each of the previous 7 days.
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If actual inputs or offtakes differed from final nominations, a shipper might have to pay a ‘scheduling’ charge if this difference was greater than the amount of their scheduling tolerance (a deadband within which shippers were not exposed to scheduling charges). The scheduling charge was calculated as a small percentage of the SAP on each day, and hence was generally very low. (For example, entry scheduling charges during November 1998 averaged less than 0.007p/therm.)
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Under the old flexibility mechanism, the costs incurred by Transco in its balancing and system operator roles were channeled into neutrality charges. Neutrality charges comprised three separate sources of costs and revenues:
• Flexibility gas – purchases and sales of gas by Transco to meet requirements for both national supply/demand matching, and locational needs;
• Imbalance gas – purchases and sales of shipper imbalances by Transco through the cash-out mechanism;
• Scheduling charges – payments made by shippers when nominated flows were different from allocated flows at entry and exit points.
The table below shows neutrality costs for a full gas year, 1 October 1997 to 31 March 1998 and for the period 1 October 1998 to 31 December 1998.
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1 October 1997-31 March 1998 1 October 1998 - 31 December 1998
Flexibility gas £15.8m £0.7m
Imbalance gas £4.0m £12.8m
Scheduling (£2.0m) (£1.3m)
Of these three components, the costs of imbalance gas and revenues associated with scheduling may be viewed as largely outside the direct control of Transco, although Transco’s actions in the flexibility mechanism would determine the cash-out price and hence have an influence over imbalance costs. Further, the costs of flexibility gas needed to be split into those costs associated with national supply/demand balancing and those associated with locational requirements (also referred to as constraints gas). For winter 1997/98 Transco estimated that costs associated with constraints totalled £2.1 million whilst for the period 1 October 1998 to 31 December 1998 the estimated cost amounts to £5.8 million.
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Although the flexibility mechanism had worked reasonably well and the delivery of bids had been generally good, there were several issues to be addressed. Accordingly, in March 1997, Ofgas, now Ofgem, began a two part review of the gas balancing regime. The first stage of this review comprised a detailed investigation of the operation of the daily balancing regime during the 1996/1997 winter. The second stage, covered an in depth analysis of the regime which was designed to indicate possible ways in which the balancing regime might be developed in the longer term. The first stage of the review was undertaken by Transco, Ofgas and consultants.
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The results of the review were the presented to gas shippers and other interested parties at a seminar on 7 May 1997. At this seminar a series of possible short term changes were proposed and options for longer term development were outlined. The consultants commented that it had become increasingly clear that the current regime was neither an operational balancing market nor a commodity market.
It was considered that the future of the balancing regime could involve a more formal move to create an operational balancing market or, alternatively, a fully liquid and transparent on-the-day commodity market. The point was made that an on-the-day commodity market could see the development of prices in real-time through the day, with markets being established at terminals and possibly across network constraints. For such a market to be established, the consultants thought that there would need to be considerable improvement in the information flows across the whole of the gas chain There would also be a need to encourage as broad a participation as possible in the on-the-day market. In particular, shippers, producers, traders, brokers and customers would all need to have an active role to ensure the efficiency of such a market.
Following the seminar, Ofgas published a conclusions document which presented its preferred options for short term changes and gave details of its longer term vision. In the consultation which followed, a consensus emerged for a regime based on an on the day commodity market (OCM). Following these responses, Ofgas indicated that its initial preference was to proceed with an OCM. In November 1997, Ofgas began to explore in more detail the feasibility of an OCM.
In May 1998, Ofgas published its consultation document on the development of an OCM. An industry seminar was held to discuss the document on 3 June 1998 and after this seminar, 32 written responses were received from interested parties. In addition, Ofgas held a number of meetings with small groups of shippers and individual companies to discuss the OCM.
which requires locational specific actions. Transco had indicated its commitment to this project, and outlined a plan to achieve this objective.
Ofgas’s conclusions document proposed the establishment of Workgroups to review each of the key issues. These were to include nominations and information, cash-out, Transco incentives, and balancing tools for supply/demand balancing and constraints. These Workgroups would report their findings by the end 1998. Resulting network code modifications would be drawn up early in 1999, for implementation before the summer. Other groups were to focus on issues associated with the introduction of the market operator, including the appropriate form of governance and regulation. 7KH0DUNHW2SHUDWRU (Q02
EnMO is a joint venture company between National Grid and Altra, the new company being part of National Grid Holdings (NGH). It was created specifically to operate the OCM. EnMO has personnel seconded from ESIS Ltd, a subsidiary of National Grid, and Altra, with newly recruited employees and with arms-length out-sourcing contracts with ESIS and Altra.
The OCM is a 24-hour, screen based, anonymous market operated by the independent market operator, EnMO, that allows participants to trade gas in three different markets. It is fully cleared, thus mitigating the risk of counterparty default. The OCM allows shippers’ to fine tune their within-day gas positions to ensure that they balance their off-takes with inputs at the end of the gas day. The OCM also allows Transco to buy and sell gas to ensure the residual balance of the transportation system. Three products are traded on the OCM (these are considered in more detail below:
• Title gas - the title market allows participants to trade gas at the National Balancing Point (NBP) a notional balancing point for the purposes of trading title to gas. Completion of an NBP trade may or may not lead to more gas being brought onto the National Transmission System(NTS) by a counterparty to the trade.
• Physical gas - the physical market is designed to allow Transco to purchase gas from any point on the system for immediate physical delivery.
• Locational gas - the locational market is designed to allow Transco to purchase gas at a specific location, to address local transmission constraints.
Following the introduction of the new arrangements, trading on the OCM sets the cash-out prices that are used to provide commercial incentives for shippers to balance their own intakes and off takes by the end of the gas day.
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The OCM is designed to allow shipper to shipper and shipper to Transco trades. Each trade consists of a matched pair of bid to buy and offer to sell. The market is, however, a fully cleared market, so that whenever a market participant accepts an order on the OCM, two equal and opposite trades will occur. One trade will be between the accepting bidder and EnMO, while the other will be between the originating bidder and EnMO. In this way, EnMO assumes the risk of counterparty default that each participant would face alone if trading directly. EnMO has taken out insurance to cover the risk against counterparty default of up to £25 million.
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The National Grid Transco Board has overall responsibility for matters of corporate responsibility and has established a Committee chaired by the Deputy Chairman to ensure that these areas are reviewed in appropriate depth.
The Risk and Responsibility Committee has responsibility for reviewing the non-financial risks, strategies, policies, management, targets and performance of the Company, and where appropriate our suppliers and contractors, in the following areas:
• Occupational and public safety • Environment
• Equality and diversity • Human rights
• Business ethics
• Role of company in society
The Committee is chaired by the Deputy Chairman and comprises the Chief Executive Officer, the Chief Financial Officer, two Non-Executive Directors and the Group Head of Safety, Environment and Corporate Responsibility. The Committee also has two external specialist advisors on safety and environmental affairs to provide a further level of assurance that these important areas are being managed appropriately.
The Committee works closely with the Audit Committee to enable the latter to provide assurance to the Board that all risks to the Company have been thoroughly assessed and managed through sound systems of internal control. The Committee is also responsible for reviewing the extent and effectiveness of our external reporting of corporate responsibility performance and its participation in relevant external benchmarks.
practice. Progress in implementing these policies will be assessed through the company’s audit programme, as well as the compliance framework established by the General Counsel.
6.3.1. Autonomy
National Grid Transco owns and operates both the gas and electricity transmission networks, together with the gas distribution network in Great Britain. As such the company operates in a highly regulated market. The effects of the merger were therefore considered by the Secretary of State who cleared the merger on 2 July 2002. Subsequently, Ofgem published a paper setting out the statutory proposals for modification to the licences of NGC and Transco and the standard licence conditions of electricity transmission licences.
Ofgem proposes to modify these licences so that they provide that:
None of NGC, Transco nor any of their affiliated or related undertakings can be involved in the purchase or sale of electricity, other than with the consent of Ofgem or, as permitted by their respective licences for system operator (SO) balancing purposes. Ofgem intends to issue consents to allow NGT to retain all of Lattice’s existing generation interests (on certain terms) and to allow for Compressed Natural Gas and Liquid Petroleum Gas to be provided to certain parties;
To prevent the transfer of information from EnMo Limited (the operator of the on-the-day commodity market in gas) to NGC and/or Transco;
To remove, where appropriate, any differences between the two companies’ financial ring-fencing provisions and to update the ring-ring-fencing provisions for both NGC and Transco, bringing them into line with the obligations for electricity distribution licensees which were revised in October 2001.
The strong message that comes through about the benefits of the merger is that it creates a platform for growth that will allow the company to realize significant value for shareholders. In other words, the merger is a way of realizing further expansion abroad.
In the UK, the regulator, as in most cases, will have an interest in the potential exploitation of market power by the merged entity and the implications of the announced plans for long-term expansion.
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6.4.1. Geographical Service Territory
Gas is delivered to the seven reception points (called bead, terminals) by gas producers operating rigs in about 100 fields beneath the sea around the British Isles. Alter treatment, which includes checking the quality, adjusting the calorific value - it is transported through 275,000 km of iron, steel and polyethylene mains pipeline.
For management purposes, the 12 LDZs are within 8 Distribution Networks: • Scotland
• North of England (North & Yorkshire) • North West
• East of England (East Midlands & East Anglia) • West Midlands
• Wales and the West (Wales & South West) • South of England (South & South East) • London
6.4.2. System Operation
The set of rules governing the transportation of gas through a gas network is the Network Code. The Gas Act 1995 made provision for the introduction of a Network Code to cover the transportation of gas. The Transco Network Code is the operating system, which Transco uses in conjunction with other parties, to transportation nearly all the gas supplied in the UK. Established in March 1996, it was created after long and detailed discussions with all parties involved in the gas industry, the main players being Transco, The Regulator, producers, shippers and suppliers. The formulation of the Network Code required costly and extensive work, especially by Transco. This is because such a complex operational and legal system was put in place in the very short time of two years.
Aims of the network code
The documentation of the Network Code defines the rights and responsibilities for all who use the Transco gas transportation system.
The principle aims of the Network code are:
• Gas transportation services should meet market requirements on a non-discriminatory basis.
• System security and safety should not be affected.
• Pricing should reflect the real costs of the services concerned. • Robust systems are developed and maintained.
• Daily energy balancing should be operated.
Transco’s System Control Centre manages the flow of the gas from the beach to the end consumer. It uses telemetry to collect metered data from all the operational sites to monitor the system. The National Control Centre operates and balances the high pressure National Transmission System (NTS) while the Area Control Centres are responsible for the next level down in the gas supply network - they ensure sufficient gas is available at the right place and the right time to meet consumer needs.
To support the principal Network Code documentation, there is a series of other documents which record the agreements between the parties and which define the various operations. These are:
• 1HWZRUN &RGH )UDPHZRUN $JUHHPHQW A document signed by the shipper and Transco, which covers the main elements of operating under the Code.
• $QFLOODU\ $JUHHPHQW An agreement, which covers any particular transportation arrangements between Transco and users.
• 1HWZRUN([LW$JUHHPHQWThis is the agreement between Transco and other parties, covering the provisions for taking gas off the system.
• 1HWZRUN3ULQFLSDO'RFXPHQWThe essential part of the Network Code to which the parties have signed up to.
• 1HWZRUN &RGH 7UDQVLWLRQ 'RFXPHQW This document covers any interim arrangements agreed to prior to the introduction of the Code.
• 0RGLILFDWLRQ5XOHVThese are the set of rules, which apply when the Code requires modification.
• 8.OLQN0DQXDOThis is a series of documents, which describe the communication system (The UK Link), developed by Transco and used by Transco and the other system operators.
6.4.3. Market Parties
The major players participating in the Network Code are:
• The Regulator: Although not active in an operational sense, the independent regulator Ofgem, ensures that the Network Code and those who operate under the Code, do so in a way which satisfies the terms of the licences granted to the parties
• Producers: The companies, mainly offshore, who extract the gas from the ground and pipe it to delivery operators
• Delivery Facility Operators: The operators of the gas processing terminals
• Public Gas Transporters (PGTs): The operators of the network which transports the gas from the terminals to the consumers
• Storage Operators: Organizations operating the facilities where gas can be stored • Shippers: A company buying gas from producers, selling it to a supplier and
employing the PGT to transport the gas to the consumer
• Suppliers: The company having a contact with a shipper to buy gas and then selling it directly to consumers
• Market Operators: A market operator provides the mechanism for trading the gas. There are currently three electronic gas trading systems in the UK. The On-the–Day Commodity Market (OCM) is provided and operated by ENMO, whilst the
International Petroleum Exchange’s NBP Natural Gas Futures contact and the broker EES’s Zuma 2000 cater for over-the-counter electronic trading
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Ofgem regulates every aspect of the UK gas market closely and in detail.
Ofgem’s responsibilities are set out in the Gas Act 1986, the Electricity Act 1989, as amended by the Utilities Act 2000 and related legislation. In fulfilling its obligations Ofgem works closely with the Department of Trade and Industry (DTI) and Energywatch, a consumer protection organization.
The management committee of Ofgem divides responsibility for the regulation of all electricity and gas regulation into three principal areas:
• Customers and supply
• Competition and Trading Arrangements • Regulation and Financial Affairs
Notably safety is absent from this list and this is overseen by the Health and Safety Commission (HSC), which in turn reports to DTI. There is close liaison between Ofgem and HSC.
Transco is responsible for every aspect of the NTS. Ensuring that the NTS operates safely, reliably and that it enables a fully competitive gas market to operate.
Transco also has social and environmental obligations. Transco’s social responsibilities relate to the Energy Efficiency Commitment (EEC) clauses in Transco’s operating license. The EEC is developed by the Department of the Environment, Food and Rural Affairs (DEFRA) and Ofgem. The EEC relates mainly to providing services to the UK fuel poor (those whose energy bill exceeds 10% of their net income).
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6.6.1. Capacity Booking
Capacity booking enables shippers to book the transportation capacity they require from Transco. A shipper who has signed the framework agreement of the Network Code can book trade capacity.Transco is allowed by Ofgem to earn a specified level of return on its assets. The large cost of building and extending these assets relates to the capacity they provide. Transco therefore aims to raise a significant percentage of its revenue from capacity charges. Transportation capacity is booked by shippers or assigned by Transco in three places:
• At entry to the National Transmission system (NTS) from a sub-terminal or on-shore field (entry capacity),
