Gas-Electric Coordination: Industry Joint Fact Finding and Negotiation

BACKGROUND AND CHALLENGES

The growing demand for natural gas to fuel electricity generation is putting increasing pressure on the gas and electricity industries to synchronize their markets. In September 2013, CBI facilitated negotiations between natural gas producers, pipelines, and distribution companies on possible changes to the long-standing protocols for scheduling the flow of gas to customers, including electricity generators. The larger goal was increased predictability of gas deliveries, and in turn, increased reliability of gas-fired generation.

In the United States, the natural gas industry sells gas to power plants on the day-ahead energy market. In this system, power companies in many parts of the country must make commitments to buy gas and arrange pipeline flows in advance of knowing how much electricity they will need to generate the next day. This discrepancy in the gas and electricity’ market rules resulted in uncertainty for both sectors, but any change in the gas day-ahead markets had differing impacts on each region and each segment of the gas industry.

Concern that increased demand coupled with the mismatched market schedules and constraints in pipeline capacity could result in gas shortages along with volatile prices and electricity outages in some parts of the country provided the impetus for the natural gas industry to work together to find changes to their long-established system that they could live with and the would benefit the electricity industry.

In the background was the knowledge that the Federal Energy Regulatory Commission (FERC) had the authority to propose a solution if the sectors failed to agree on a new approach themselves, and that past attempts to reach agreement with the electricity industry had failed. CBI took the lead to align the three segments in negotiation of a shared gas sector proposal to be presented to the electricity industry, while keeping FERC informed of their progress.

THE CBI APPROACH

CBI manages a complex mediation by carefully organizing a collaborative process and efficiently sharing information among stakeholders.

CBI worked with the natural gas producers, pipelines, and local distribution companies to create a steering committee (SC) of high-level representatives from each segment to guide the process and decide on the final recommendation to the Natural Gas Council. CBI worked with a larger technical working group (TWG) that was charged with the task of evaluating the cost, safety, and reliability impacts for both the gas and electricity sectors and customers of various proposed modifications to the gas delivery system. CBI facilitated weekly meetings of the TWG both in person and via webinar to generate alternatives and data to support the impacts. The representatives of the TWG met periodically with the SC throughout the three months to report on their progress and get feedback.

The groups faced several challenges, including:

  • The lack of information regarding FERC’s possible solution made it difficult for the group to definitively agree on taking action since the best alternative to negotiated agreement (BATNA) was an unknown.
  • There was a mismatch between the analytical charge of the TWG and its data collection capability: the group needed new information but had no mechanism for collecting or verifying much of this data.
  • The stakeholders were spread across the country, which complicated interactions, brought in different regional perspectives, and made it more difficult to build the relationships and trust between the different segments and regions.
  • The TWG had to explore, define, and prioritize among an expansive number of options over a short time.
  • The entire process required expediency and efficiency due to the tight timeframe imposed by possibility of FERC’s unilateral action.

CBI guided the industry through these hurdles by working with the SC to clarify the importance of coming to an agreement in the face of an uncertain BATNA. CBI also acted as the aggregation and synthesis point for data, empowering the TWG to conduct the research and sharing the results with all stakeholders. This entailed establishing an efficient system for protecting confidential information to advance the process and ensuring compliance with antitrust laws. In addition, CBI facilitated information sharing and proposal prioritization among dispersed parties by using a variety of collaborative technologies, including online surveys, video conferencing, and cell phone polling.

RESULTS

CBI facilitates mutual understanding through joint fact finding, resulting in a unified proposal.

By methodically looking at the detailed impacts of various proposals on all three segments, CBI helped the group come to an understanding about the different and common challenges they faced. Through this joint learning, the group established a basis of trust, which allowed them to define the parameters for solutions that would be acceptable to them as an entire industry.

The TWG analyzed and proposed six packaged proposals to the SC, which then agreed upon a final approach which would make modest changes to the gas day ahead scheduling process. The Natural Gas Council voted in favor of the final proposal, which was presented to representatives of the electricity industry for consideration. As negotiations were beginning in early 2014, FERC released its proposal for more dramatic changes to the gas day-ahead market schedule, which became the new starting place for negotiations. The proposal that emerged from the gas industry’s expedited negotiations was overtaken, but the segments of the industry now had a better understanding of their internal differences and were in a better position to negotiate with the electricity sector with a united front.