Convergence Means New Ways of Buying

John Wyeth Griggs

he energy market has been significantly T affected by the recent moves to restructure the electric utility industry. No longer the exclu- sive province of vertically integrated monopo- lies, a host of suppliers now competes in the electricity generation market. Integrated electric utilities have been joined by “qualified facilities” (cogenerators and small power producers), single asset independent power producers (IPPs), and exempt wholesale generators (EWGs). The new participants, and traditional utilities that can demonstrate a lack of market dominance, can qualify to sell power in the wholesale market at unregulated market-based rates. This, in turn, has led to the development of a futures market for electricity contracts. In both the cash and futures markets, energy commodities are freely traded and in some circumstances may be fungible.

Market Structure In Order 888, issued in April 1996, FERC

required all public utilities to file open access transmission tariffs. By so doing, FERC imposed common carrier obligations on transmission sys- tem owners. With open access to markets now assured, generators are free to compete for sales. At the same time, in March 1996, the New York Mercantile Exchange (NYMEX) began listing elec- tricity futures for sale on the exchange, recogniz- ing that a free, competitive market for electricity has emerged. Price reporting services now pub- lish prices for cash sales and futures contracts, creating a free market for electricity.

A Regulated Market The electricity market is not unregulated.

Rather, certain transactions in parts of the in- dustry are allowed to occur at unregulated prices, but the players in the market and certain

segments of the industry remain regulated. The entire transmission market is regulated by FERC to ensure that open access is afforded, while, at the same time, the owners of the transmission systems are allowed a fair return on their invest- ment. Under Order 888, each public utility that owns a transmission system must offer it for use by anyone under the terms of FERC’sprofoma open access tariff. The terms and conditions under which transmission service is available are therefore the same throughout the country.

At the retail distribution level, for the most part retail sales remain in the control of inte- grated public utilities. However, that is chang- ing. Seven states have moved to require that distribution systems be operated on an open access basis, and other states are considering steps in this direction.

It is in the generation segment that market forces have had their greatest impact, and it is in this segment that electricity futures are being sold. However, even here the players remain regulated. In order to sell electricity for resale, a power marketer must have filed its rates with FERC and must have obtained FERC approval of those rates. While marketers are exempted from many of the more onerous of FERC’s regula- tions, they must still file their rates, file quarterly and annual reports detailing their sales, and notify the Commission if they change their name, their rates, or cancel their rate schedules. Prior to approving a marketer’s rates, FERC determines whether the marketer exercises market power. Once approved, however, a power marketer can sell (or buy) electricity without further prior notice or approval and at prices that are not regulated.

John Wyeth Griggs is a partner in fhe Washington, DC, law firm of Griggs & Adler.

16 NATURAL G A S JULY 1997 0 1997 John Wiley & Sons, Inc.

The Players As of April 1997, FERC had approved some

300 power marketers to sell power at unregu- lated, market-based rates. A list of these market- ers provided by FERC is attached as Appendix 1. What is most readily apparent is that the list contains a large number of entities that are experienced marketers of natural gas and oil.

In determining whether to approve an ap- plicant to sell electricity at market-based rates, FERC explained in Louisville Gas & Electric Company that it assesses whether the marketer can dominate the relevant generation market, block buyers from reaching sellers, or otherwise erect or control market carriers. In Enron Power Marketing, Inc., FERC stated that an affiliation with an interstate natural gas company will not disqualify an applicant on market power grounds. Neither will the fact that the marketer is affiliated

with an integrated electric utility if the electric utility does not exercise dominance in the generation market and has on file an open access transmission tariff. A generation market share of 20 percent or more must be shown to establish market dominance, as in Public Ser- vice Company of Indiana, Inc.

Appendix 1 does not identify all of the players in the generation market. The Commis- sion has made it clear that brokers and aggregators who do not actually take title to power to resell it do not need to file rate schedules with FERC. Nevertheless, the 314 market participants listed in Appendix 1 include nearly all of the participants in the electricity market.

Sales by marketers have grown substantially since 1795. In the first quarter of 1795, power marketers sold 2.6 million megawatt hours of

electricity. By the fourth quar- ter of 1996, sales had grown to 95 million megawatt hours. Moreover, FERC reports that the market remains concen- trated with 73 percent of all sales made by only ten mar- keters, Enron Power Market- ing alone accounting for 26 percent of sales.

Terms of Sale To make sales at un-

regulated market-based rates, a power marketer can list in its tariff that rates will be “as agreed by seller and pur- chaser.” FERC’s example uses a fictitious entity (Exhibit 1).

In quarterly and annual reports, however, power mar- keters must report dates, type of sale, quantity, and price for all transactions that occurred in the period for which the report is filed.

Because the country’s electric transmission grid is intertied, NYMEX recognizes three broad geographical markets: the eastern United States, the western United States, and Texas. However, only two futures contracts are

JULY 1997 NATURAL GAS 0 1997 John Wiley & Sons, Inc.

17

currently traded: contracts for delivery at the California/Oregon border (COB), and at the Palo Verde switchyard in Arizona (PV). Al- though NYMEX does not include an eastern market or a Texas contract, Dow Jones Telerate, Inc., Bloomberg, and other price reporting services regularly quote prices for cash sales of electricity delivered to locations other than COB and PV, such as the Pennsylvania, New Jersey, Maryland Intertie (PJM).

Convergence of Gas and Electric Markets The gas and electric markets are different,

yet the trend is toward greater interdependence. Gas marketers do not need to obtain authoriza- tion from FERC to be gas marketers, and gas prices have been free of regulatory controls longer than have electric prices. There is an active NYMEX futures market for natural gas that predates the electric futures market. As in the electric market, gas futures account for only a small percentage of physical deliveries but perform the jobs of sending clear price signals and allowing marketers to hedge their sales and purchases. Because paper transactions in fu- tures constitute the bulk of futures market activity, marketers have the opportunity to cover gas transactions with electric and vice versa. In this respect, the markets for gas and electricity are moving toward increasing fungibility.

Appendix 1 ELECTRIC POWER MARKETERS

Rates Approved: 300 Pending: 14

Revised: April 17, 1997

Source: FERC Office of Electric Power Regulation

Docket No EK- 94-1530 96-2495 94-890 94- 169 1 96-1818 95-1381 97-512 96-1 145 97-2153 97-360 97-144 94-1578 97-1428 95-1359 97-464

Name ACME Power Marketing, Inc. AEP Power Marketing, Inc. AES Power, Inc. AIG Trading Corporation Alliance Power Marketing, Inc. Alliance Strategies A'Lones Group, Inc. Alternate Power Source Inc. Amerada Hess Corporation American Energy Solutions, Inc. American Hunter Energy Inc. American Power Exchange, Inc. American Power Reserves Marketing Co. Arnoco Energy Trading Corporation AMVEST Coal Sales, Inc.

18

97-2045 97-1643 96-1195 95-216 94-1246 97-2132 96-2251 95-878 96-2408

97-1676 96-659 95-1572 97-1630

96-2673

96-1283 96-31 12 94-1545 94-1 181 94-1402

96-2640

94-1685

90-225

93-730

89-401 95-892 96-2652 96-2350 95-964 96-3068 94-1554 97-1845 94- 1450 96- 1040 95-1739 97-1968 97-1621 97- 1932 95-1751 97-2261 96-2083 97-319 96-1410 96-25 96-1798 96-1348 96-2624 91-435 95-940 94- 16 1 2

94-1161 96-2601

96-924

96-1121 96-108 96-109 95-1441 94-964 96-1 503 94-1099 96-2150 95-1399

AMVEST Power, Jnc. Apra Energy Group Inc. ANP Energy Direct Company Aquila Power Corporation Ashton Energy Corporation Atlantic Energy, Inc. Atmos Energy Services, Inc. Audit Pro Incorporated Avista Energy, Inc. AYP Energy, Inc. Black Brook Energy Company Bonneville Fuels Management Corp. Boyd Rosene and Associates, Inc. Brennan Power Inc. Btu Power Corporation Burlington Resources Trading, Inc. Calpine Power Services Company C.C. Pace Energy Services Cenerprise, Jnc. Chicago Energy Exch. of Chicago, Inc. CHI Power Marketing, Jnc. Cinergy Capital & Trading, Inc. Citizens Lehman Power Sales Citizens Power & Light Corporation CL Power Sales (1-51, L.L.C. CL Power Sales (6-101, L.L.C. CMS Electric Marketing Company CNB/Olympic Gas Services CNG Energy Services Corporation CNG Power Services Corporation CNG Retail Services Corporation Coastal Electric Services Company CoEnergy Trading Company Cogentrk Energy Power Marketing, Inc. Colonial Energy, Inc. Columbia Energy Services Corp. Competitive Utility Services Corp. ConAgra Energy Services, Inc. Constellation Power Sources, Inc. Conti Metals, Inc. Continental Energy Services LLC Cook Inlet Energy Supply Limited Partnrshp Coral Power, L.L.C. CPS Capital, Ltd. CSW Power Marketing Cumberland Power, Inc. DC Tie, Inc. Delhi Energy Services, Inc. Destec Power Services, Inc. Direct Access Management, LP Direct Electric Inc. DPL Energy, Inc. Duke/Louis Dreyfus Engy Svcs (NE) LLC Duke/Louis Dreyfus L.L.C. Duke Energy Marketing Corporation DuPont Power Marketing Inc. Eastern Power Distribution, Inc. Eagle Gas Marketing Company Eclipse Energy, Inc. Edison Source Electech, Inc.

NATURAL GAS JULY 1997 0 1997 John Wiley & Sons, Inc.

94-1478 Electrade Corporation 94-968 Electric Clearinghouse, Inc. 96-118 96-2320 EMC Gas Transmission Company 96-1424 EnerConnect, Inc. 96-827 EnergyChoice, L.L.C. 96-734 Energy Marketing Services, Inc. 96-138 Energyonline, Inc. 96-358 Energy Resource Management Corp. 94-1580 Energy Resource Marketing, Inc. 95-1021 Energy Services, Inc. 97-542 The Energy Spring, Inc. 96-1781 EnergyTek, Inc. 96-280 Energy Transfer Group, L.L.C. 96-392 96-3086 Energy2, Inc. 96-182 Enerserve, L.C. 96-3064 EnerZ Corporation 97-654 Engage Energy US, L.P. 96-1731 Engineered Energy Systems Corp. 94-1690 Englehard Power Marketing, Inc. 96-2372 Enova Energy, Inc. 95-1752 Enpower, Inc. 94-24 Enron Power Marketing, Inc. 96-2964 Enserco Energy Inc. 95-1615 Entergy Power Marketing Corporation 95-428 EPEM Marketing Company 95-1269 e prime, inc. 94-1539 Equitable Power Services Company 97-382 Exact Power Co., Inc. 94-1488 Excel Energy Services, Inc. 96-1631 Family Fiber Connection 96-918 Federal Energy Sales 97-2413 Fina Energy Services Company 95-1049 Gateway Energy, Inc. 96-795 Gateway Energy Marketing 96-1735 GDK Corporation 95-1583 GED Gas Services, L.L.C. 96-1933 Gelber Group, Inc. 97-1177 Global Energy Services, L.L.C. 96-359 Global Petroleum Corporation 96-116 Greenwich Energy Partners L.P. 96-1774 Growth Unlimited Investments, Inc. 96-2958 Grumman Aerospace Corporation 94-1597 Gulfstream Energy, LLC 95-393 Hartford Power Sales, L.L.C. 94-108 Heartland Energy Services, Inc. 96-381 Heath Petra Resources, Inc. 95-1314 Hinson Power Company 95-252 Howard Energy Marketing, Inc. 94-178 Howell Power Systems, Inc. 96-2583 Hubhard Power & Light, Inc. 96-1819 ICC Energy Corporation 95-640 ICPM, Inc. 95-802 IEP Power Marketing, LLC 95-1034 IGI Resources, Inc. 95-1439 IGM, Inc. 94-1475 Illinova Power Marketing, Inc. 95-1465 Industrial Energy Applications, Inc. 95-257 96-2144 Inland Pacific Energy Services Corp.

El Paso Energy Marketing Company

Energy West Power Company, LLC

Industrial Gas & Electric Services Co.

94-6 Intercoast Power Marketing Company 96-594 International Utility Consultants Inc. 95-784 J. Anthony & Associates Ltd. 95-34 J. Aron & Company 96-2435 J.D. Enterprises 95-1826 J.D. Loock & Associates 94-1432 JEB Corporation 95-1261 J. L. Walker & Associates 95-1421 JPower Inc. 95-295 Kaztex Energy Ventures, Inc. 95-208 KCS Power Marketing, Inc. 96-2985 Keyspan Energy Services, Inc. 96-1119 Kibler Energy Ltd. 95-232 Kimhall Power Company 96-1139 KinEr-G Power Marketing, Inc. 95-869 KN Marketing, Inc. 95-218 Koch Energy Trading, Inc. 95-1018 Kohler Co. 95-792 K Power Company, Inc. 94-1672 Lamda Energy Marketing Corp. 94-1188 LG&E Power Marketing Inc. 96-1406 Lisco, Inc. 92-850 96-1947 LS Power Marketing, LLC 96-2919 Lykes-Duke/Louis Dreyfus, Ltd. 97-135 Manner Technologies, L.L.C. 95-1295 Market Responsive Energy, Inc. 93-839 MG Electric Power, Inc. 95-1423 Mid American Natural Resources, Inc. 96-1858 Mid-American Power LLC 95-78 Mid-American Resources, Inc. 94-1329 MidCon Power Services Corporation 95-300 Mock Energy Services, Inc. 96-2143 Monterey Consulting Associates, Inc. 94-1384 Morgan Stanley Capital Group Inc. 97-399 MP Energy, Inc. 96-203 Multi-Energies U.S.A. Inc. 97-610 Murphy Oil USA 95-1278 NAP Trading and Marketing, Inc. 95-1374 National Fuel Resources, Inc. 90-168 National Gas & Electric L.P. 94-1593 National Power Exchange Corporation 95-192 National Power Management Co. 96-2942 National Power Marketing Company, L.L.C. 96-1387 New Energy Ventures, Inc. 96-2627 New Jersey Natural Energy Company 96-1122 NFR Power, Inc. 96-2892 NGTS Energy Services 97-1414 Niagara Energy & Steam Co., Inc. 97-1816 NICOR Energy Mgmt. Services Company 96-1431 NIPSCO Energy Services, Inc. 94-1247 NorAm Energy Services, Inc. 96-127 Nordic Electric, L.L.C. 96-10 NORSTAR Energy, L.P. 94-152 North American Energy Conservation. Inc. 96-1156 North American Power Brokers, Inc. 97-1716 North Atlantic Utilities, Inc. 96-2523 Northeast Energy Services, Inc. 96-2957 Northrop Grumman Corporation 97-683 Northwest Natural Gas Company 96-688

Louis Dreyfus Electric Power Inc.

Northwest Power Marketing Co., L.L.P.

JULY 1997 NATURAL GAS 0 1997 John Wiley & Sons, Inc.

19

97-1315 NP Energy Inc. 96-2580 NU1 Energy Brokers, Inc.

96-588 Ocean Energy Services, Inc. 97-181 Oceanside Energy, Inc. 96-3090 ONEOK Power Marketing Company 96-1196 Oxbow Power Marketing, Inc. 95-1096 PacifiCorp Power Marketing, Inc. 96-1599 Pacific Power Solutions, LLC 95-7 PanEnergy Power Services, Inc. 96-2921 PanEnergy Trading and Mkt Services, LLC 96-380 Paragon Gas Marketing 95-379 Peak Energy, Inc. 95-1511 PennUnion Energy Services, L.L.C. 95-266 Petroleum Source & Systems Grp, Inc. 95-430 Phibro Inc. 96-2525 Plum Street Energy Marketing, Inc. 97-2197 Poco Petroleum, Inc. 97-2198 Poco Marketing LTD 97-1084 Power Access Management 95-914 Power Clearinghouse Inc. 95-111 96-1754 Powerline Controls, Inc. 95-72 Power Exchange Corporation 96-1930 Power Fuels, Inc. 97-1548 Power Marketing Coal Services, Inc. 96-332 PowerMark, LLC 94-931 PowerNet Corporation 96-2303 Power Providers, Inc. 96-1 PowerTec International, L.L.C. 95-1234 Prairie Winds Energy, Inc. 96-2141 Preferred Energy Services, Inc. 95-1123 Premier Enterprises, LLC 95-968 Progas Power, Inc. 97-420 ProLiance Energy, LLC 97-705 ProMark Energy, Inc. 96-1618 Progress Power Marketing, Inc. 95-473 Proven Alternatives Inc. 97-18 P&T Power Company 96-553 QST Energy Trading Inc. 96-947 Quantum Energy Resources, Inc. 97-2374 Quark Power, L.L.C. 96-404 Questar Energy Trading Company 94-1061 Rainbow Energy Marketing Corporation 97-828 Resource Energy Services Company 97-765 Revelation Energy Resources Corp. 94-1352 K.J. Dahnke & Associates 95-1047 Ruffin Energy Services, Inc. 96-2882 Russell Energy Sales Company 96-2538 Sandia Energy Resources Company 96-1086 SCANA Energy Marketing, Inc. 96-1724 SIX Petroleum Products, Inc. 96-342 Seagull Power Services Inc. 96-1516 SEMCOR, Inc. 95-1050 Sonat Power Marketing Inc. 96-2343 Sonat Power Marketing L.P. 95-385 SouthEastern Energy Resources, Inc. 95-976

97-778 NXIS, LLC

The Power Company of America, L.P.

Southern Energy Trading & Marketing, Inc

97-1397 South Jersey Energy Company 97-2529 Southwestern Power Marketers, Inc. 95-1334 Stalwart Power Company 95-362 Stand Energy Corporation 96-3107 Strategic Energy Ltd. 96-2591 Strategic Power Management, Inc. 97-870 Sunoco Power Marketing, L.L.C. 95-1747 Superior Electric Power Corporation 96-906 SuperSystems, Inc. 96-2524 Symmetry Device Research, Inc. 97-1117 TC Power Solutions 96-1563 TECO EnergySource, Inc. 94-389 Tenaska Power Services Co. 95-581 Tennessee Power Co. 95-1787 Texaco Natural Gas Inc. 94-1676 Texas-Ohio Power Marketing, Inc. 94-1362 Texican Energy Ventures, Inc. 95-62 TexPar Energy, inc. 96-2241 Thicksten Grimm Burgum, Inc. 92-429 Torco Energy Marketing, Inc. 96-2635 Tosco Power Inc. 94-142 Tractebel Energy Marketing, Inc. 96-1316 TransAlta Enterprises Corp. 95-692 TransCanada Energy Ltd. 96-2715 UGI Power Supply, Inc. 96-3092 United American Energy C o p 97-122 United Power Technologies, Inc. 97-262 Unocal Corporation 96-2879 US Energy, Inc. 95-1625 USGen Power Services, L.P. 96-105 97-2426 UtiliSys Corporation 96-525 96-1 144 Utility Management Corp. 95-1382 The Utility-Trade Corp. 95-187 Utility-2000 Energy Corp. 94-1 394 Valero Power Services Company 96-552 Vanpower, Inc. 95-1614 Vantus Power Services 95-1685 Vastar Power Marketing, Inc. 94-155 Vitol Gas and Electric, L.L.C. 95-1855 VTEC Energy Inc. 97-1248 Wasatch Energy Corporation 96-3019 Wascana Energy Marketing (US.) Inc. 96-2830 Washington Gas Energy Services, Inc. 96-458 Westar Electric Marketing, Inc. 95-378 Westcoast Power Marketing Inc. 95-748 Western Power Services, Inc. 95-1459 Western States Power Providers, Inc. 96-1 150 Wheeled Electric Power Company 95-1415 Wickford Energy Marketing, L.C. 96-34 Wicor Energy Services, Inc. 95-305 Williams Energy Services Company 95-751 96-2914 Working Assets Green Power, Inc. 96-1088 WPS Energy Services, Inc. 96-1088 WPS Power Development, Inc. 96-146 Yankee Energy Marketing Company

U S . Power & Light, Inc.

Utility Management and Consulting Inc

Wilson Power 8 Gas Smart, Inc.

20 NATURAL GAS JULY 1997 0 1997 John Wiley & Sons, Inc.