UK gas regulator: supply could be hurt if reforms don’t happen

Kate Thomas
OGJ Online

HOUSTON, Feb. 11, 2002 — In a problem reminiscent of California’s electricity difficulties, UK energy regulators proposed reforms to the wholesale gas markets after the national pipeline operator sustained losses in the daily balancing market.

Nick Fincham, director of gas trading at the Office of the Gas and Electricity Markets, warned supply could be threatened, if the reforms are not adopted.

Under current arrangements, shippers or companies who trade gas and capacity on the gas network, have commercial incentives to ensure that the amount of gas they put on to the system over each day is the same as the amount they take off.

However, since summer 2000, pipeline operator Transco has reported increasing examples of some shippers not putting enough gas on the system at the start of the day. This means Transco has to buy gas to keep the system in balance, increasing gas prices for the day, according to Ofgem.

Towards the end of the day, too much gas is put on the system. This means Transco has to sell gas to balance the system, reducing prices and resulting in Transco taking a loss over the day.

While the costs of these actions are passed back to shippers, they are spread across all companies. Therefore, they do not fall directly on the companies who cause the actions which means some shippers benefit financially from this sort of behavior, regulators said.

A similar market design helped contribute to California’s electricity crisis, and led to high wholesale prices in the Electric Reliability Council of Texas power market in the fall. Some Texas wholesale market participants complained bitterly they were being unfairly penalized and that the system encouraged gaming the market. The grid operator has since proposed reforms.

The UK’s Fincham said future developments in the gas and electricity markets make it imperative to make changes that “improve security of supply, increase competition in the wholesale gas markets, and better protect customers’ interests.”

The proposed reforms recommend shorter balancing periods than 1 day, the sale of gas stored in the system, and improving information given to Transco. Ofgem said these changes will improve commercial incentives for shippers to balance the gas they put on, and take off, the system.

It also will expose shippers to the full costs of any behavior which forces Transco to take balancing action, Ofgem said, and will provide Transco with reliable, accurate information, about what gas is being put on, and taken off, to allow to balance the system more efficiently.

Fincham said Ofgem recognized the concerns expressed by some participants to its proposals but, he added, “at no time since they were first announced have any detail cost analysis, nor alternative proposals, been put forward by any one in the industry.”

He said the latest proposals take into account concern about costs. “We recognize that there is concern and uncertainty about the implications of these proposed reforms and we will be discussing these proposals in full with shippers, gas producers, and all other interested parties,” Fincham said.

The regulator said companies will only face transitional costs for changes to information technology systems. Ofgem has proposed implementing the reforms between October 2002 and October 2003. Meanwhile, Transco has proposed modifications to address concerns about current gas balancing arrangements in the interim.

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