Dogs and Cats Living Together... FERC Coordination of the Electric and Natural Gas Industries

During 2012 the FERC jumped into the ring to involve itself in the long running debate to improve coordination between the gas and electric power industries. The FERC is motivated by concerns about reliability and the trend to increase power generation from natural gas at the expense of coal and oil. The commission held 5 regional conferences to identify the industry’s concerns and the role of regulation in any solutions. Today we examine progress on this important initiative.

In February 2012 the Federal Energy Regulatory Commission (FERC) initiated a proceeding to investigate issues related to gas/electric interdependencies. In a letter requesting comments on the coordination between the two industries FERC Commissioner Moeller stated that recent problems suggest that more resources need to be allocated to planning for the increased use of natural gas to generate electricity. The “problems” that FERC referred to occurred during a February 2011 cold weather event in the southwest. That event triggered outages, curtailments and rolling blackouts by both gas and electric utilities. An examination of the causes by federal, state and industry bodies led to the spotlight being turned on gas-electric interdependency (see the FERC Report on the Southwest event here).

The FERC request for comments also pointed to the trend of more natural gas being used in power generation. That trend accelerated during 2012 when there was a major increase in the volume of natural gas burned for power generation due to fuel switching from coal (see Switching on a Dime). While electric service was not threatened, the question of electric reliability was raised in the context of the adequacy of existing pipeline infrastructure and gas-electric interdependency should the trend continue. We discussed this in Feeding the Power Burn.

The gas and power industries have tried for decades to understand each other’s needs and practices and find common ground to improve their operational interaction but this has not been fruitful.  It has been like trying to put a square peg in a round hole.  The North American Energy Standards Board was created to, among other things, facilitate the development of standards that would improve the interface between gas and electric industries, and while there have been some notable accomplishments, most would conclude that progress toward the overall goal has been frustrating.   The groups could not even agree on the definition of a “day”.  FERC has a role in regulating both gas and power industries and in theory is in a unique position to facilitate better coordination between them. However part of the challenge is that FERC does not have complete jurisdiction over the operational interaction between the power and gas industries. The Independent System Operators (ISOs) that coordinate the electrical grid and generation dispatch are organized on a regional basis with different market structures outside much of FERC regulatory control. The FERC has regulatory control over Interstate gas pipelines but not all the smaller intrastate pipelines.  

Nevertheless given the unsuccessful efforts of the industries to come together on their own over an extended period of time, the FERC launched its initiative into gas electric interdependency. In July 2012 in response to stakeholder feedback on its February request for comments the FERC convened 5 regional technical conferences. These conferences were held around the country during August 2012 and involved over 1200 industry participants.  FERC’s goal at these conferences was to determine if further action on its part is necessary to create tools, rules or regulations on a generic basis that will improve the efficiency and reliability of power generation from natural gas. FERC focused on three areas of inquiry 1) Scheduling and market structures/rules; 2) Communications, coordination and information sharing; and 3) Reliability.

Aside from the inevitable report (more on that in a future episode in this series) the main outcome of the regional conferences was a FERC Order (copy here) scheduling follow up national Technical Conferences in 2013. These will discuss two of the FERC’s areas of inquiry  - information sharing and scheduling - that participants identified as being common to all regions and in need of improvement. In addition each electric power Regional Transmission Operator (RTO) and ISO is required to appear before the Commission in March and October of 2013 to discuss progress in resolving interdependency issues. They will report specific experiences from the previous season including generator outages that were fuel related, and gas transportation concerns related to high winter heating demand. The regional electric power system operators were singled out because of their unique perspective on wholesale electric markets. And those wholesale markets appear to have needs most often at odds with the gas industry.  Some of the issues raised by participants at the technical conferences although critical, were judged to be more regional in nature and work will continue on those items within the appropriate bodies. FERC staff was also ordered to stay engaged with both industries to monitor progress on the regional efforts and issue quarterly reports through 2014.

To be successful the FERC national technical conferences scheduled for later this year (2013) will need to address a number of challenges in their respective areas of concern – information sharing and scheduling.  Information Sharing on the surface doesn’t sound like a big deal and should be a pretty logical step in solving problems. However in the regulated world of FERC there are restrictions that may prevent open communication and the commission wants to identify these.  The Commission must balance the needs of the industry against any harm that may result from an inappropriate disclosure of sensitive information. In both the Natural Gas Act and Federal Power Act (two precursors of modern FERC regulatory authority) there are provisions against an interstate natural gas pipeline or public utility providing an undue preference for any customer or customer class in the provision of interstate services. These provisions can potentially create a barrier to the flow of information or services.  Additionally Standards of Conduct issued by FERC govern communications between interstate natural gas pipelines and their affiliates that engage in marketing functions, and public utilities that own or operate electric transmission facilities and their affiliates that engage in marketing functions. These Standards of Conduct restrict information sharing except in emergency situations where compliance with reliability standards or outages are involved.  FERC expressed a willingness to work with industry to provide guidance as to how these provisions apply to information sharing. 

The FERC technical conference to discuss scheduling will also have no lack of challenges. The rapid swings in gas demand that gas turbine generation plants require do not lend themselves to responsiveness by the pipelines without additional facilities and/or approved tariff services that barely meet those needs today.  There has been much discussion about better scheduling over the years. This is the interface issue that gets down to the nitty-gritty of how the two industries interact on a daily basis. As we said earlier the industries could not even agree on the definition of a standard energy day. Some improvements in scheduling flexibility in the nomination cycles has occurred but not nearly enough.  Infrastructure is probably needed, but even this varies by locale. The debate is whether the scheduling practices of the natural gas or electric industries need to be changed further and, if so, what changes are warranted. Gas pipelines already provide enhanced nomination flexibility but the needs of the power industry are unique.  The current regional practices do not address broader questions of whether industry-wide changes to scheduling practices and service offerings are necessary or appropriate to achieve long-term gas-electric compatibility or whether regional approaches should be allowed to evolve. 

Overall during the FERC regional conferences the range of positions in the industry varied considerably depending on the region. Local differences in the operation of electric markets, density of pipelines and fuel mix diversity make a big difference to the interface between gas and power markets.  These differences will be the subject a future post about the areas that FERC staff will monitor within regions rather that address on a national geographic basis.

We have previously pointed out how important the power generation sector is to the natural gas industry and identified issues that must be addressed if the nation is to increase the amount of power generated from natural gas (see Feeding the Power Burn). Both industries are complex and have operated independently in an uncoordinated manner that inhibits growth opportunities for gas-fired generation. Increased power burn and concerns about the reliability of winter gas supplies over the past two years have put the electric-gas interface under a microscope. The need to manage that interface more effectively has become more urgent as power burn has increased and solutions in a regulated business typically take time, especially if infrastructure is needed.  Overlaying that, there are rules and regulatory principles, and regional differences that complicate the ability of the two industries to work together to improve their interaction. After many years, in fact decades, there has been little progress in this area.   

It is significant that FERC chose to throw itself into the middle of this debate.  Once FERC gets involved in a process like this it is likely that changes will result.  Whether the electric industry adjusts to align with the gas industry, vice-versa, or the two meet in the middle, changes are difficult and usually not made unless forced.  FERC’s regulatory power gives it the authority to make changes happen.  Better coordination between gas and electric utilities is complicated by the tangle of existing regulations. Plentiful, low priced, clean burning gas has accelerated the discussion. If we don’t get this fixed, it will be as bad as Dr. Peter Venkman’s warning in Ghost Busters -  “Human sacrifice, dogs and cats living together... mass hysteria!”

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