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Case Study: Pipelines Move to Adopt Electronic Data Standards (Again)
Jon T. Brock, Chief Operating Officer
I have long been an advocate of businesses making use of electronic data standards to transact business among market participants in any given market. I thought that the adoption of transacting business electronically was done 10 years ago. That is why I was surprised to see movement recently in the pipeline industry towards automation of nominations and passing data to/from various market participants. Wasn't this done in the 90s? What has happened?
If we take a step back and look at the history of the industry, we will find that FERC more or less deregulated wholesale natural gas in 1992, which in effect began to create trading organizations.
Figure 1
After a few years of minimal activity, FERC 888 deregulated wholesale electricity in 1996. In 1998, California quickly opened its market to retail electric competition. I was working in a deregulated unit of a utility participating in California and eventually in Pennsylvania. We were struggling with data standards for electric power in both of those states and the gas industry was already done. They had built standards and were using them via the Gas Industry Standards Board or GISB. In fact, GISB has transformed itself into the North American Energy Standards Board (NAESB) to coordinate standards and communication between the electric and gas industries.
I recently spent time with UtiliPoint client EC-Power in Houston. EC-Power provides electronic transaction management services to market participants in the utility and energy industries. They actually turned me on to this analysis because they have seen a tremendous up-tick in pipeline activity recently. In fact, they have added nine new interstate pipelines in the last 12 months alone. In addition, gas scheduling software solution providers are being asked by producers/marketers to interface their solution to EC-Power's pipeline clearinghouse. Why?
 PIPELINES IN THE UNITED STATES
According to the U.S. Energy Information Administration, expansion of the U.S. natural gas transmission network slowed in 2004, both in terms of added transportation capacity and new pipeline mileage. Only about 1,450 miles of pipeline and 7.7 billion cubic feet per day (Bcf/d) of natural gas pipeline capacity were added to the national gas transmission grid during 2004 compared with 2,243 miles and 10.4 Bcf/d of capacity in 2003.
The amount of incremental capacity in 2004 was the least since 1999 when only 6.5 Bcf/d was added. During 2004, at least 41 natural gas pipeline projects, of varying sizes, were completed in 32 States and the Gulf of Mexico (Figure 1, Table 2). Of those, 16 were expansions on existing pipeline systems or segments. The other 25 included 16 system extensions or laterals associated with existing pipelines, 8 new pipeline systems, and 1 oil pipeline conversion.
Expenditures for natural gas pipeline development amounted to less than $2.2 billion in 2004, well below the $3.6 billion spent in 2003 and the $4.4 billion spent in 2002. But 2004 appears to have been a temporary low in the development cycle for the natural gas pipeline grid, which has grown significantly over the past decade. The current inventory of proposed pipeline projects indicates that capacity additions will increase again in 2005, although fewer miles of new pipe will be installed than in 2004. Beyond 2005, however, proposed capacity additions in 2006-07 could result in record additions in those years, as numerous projects are planned in conjunction with proposed U.S. liquefied natural gas (LNG) facilities.
It appears that pipeline activity specifically (and U.S. infrastructure generally) are seeing capacity additions due to the demand increases and incentives put in place by the Energy Policy Act of 2005.
ELECTRONIC STANDARDS
The GISB Electronic Delivery Mechanism Related Standard (EDM) was developed in 1996 by the wholesale gas industry for an April 1, 1997 implementation mandated by the Federal Energy Regulatory Commission (FERC). Its purpose was to provide for a quick & reliable exchange of natural gas sales & transportation related Electronic Data Interchange (EDI) transactions. The GISB EDM standard utilizes a HTTP & HTTPS protocol along with PGP Encryption of data. It also provides sufficient information for identification of the sender and tracking of transactions from originator to final destination with proof of receipt being provided to the originator of the transaction. Pipelines use it to transact business with suppliers (Exploration and Production companies) and with end users (utilities, industrial customers, etc.).
The published versions of the GISB Standards are 1.0 through 1.5. The North American Energy Standards Board (NAESB) version 1.6 was published in 2002 and implemented by the Wholesale Gas Quadrant in July 2003. The NAESB 1.7 was published in December 2003. Many pipelines have implemented version 1.7 and those that have not have imminent plans to do so.
Although most states involved in the deregulated electric industry are using the GISB 1.4 version, there are exceptions. The Texas electric market implemented NAESB 1.6 on April 3, 2004. A complete list of NAESB standards being used by states can be found at www.NAESB.org.
WHY?
So why the industry action now? The standards have been out for years. One of the major benefits of using a transaction management services company is to isolate market participants from NAESB changes to the standards. I can testify to this since I actually have used such a company for transaction management in Pennsylvania. Whenever the standard changes, market participants must make changes to their systems and interfaces, or have the service provider do so.
The FERC historically has given extensions or even waivers to meeting mandated electronic transaction standards. The need for quicker and more reliable communication between gas pipelines and electric generators is making FERC less tolerate of companies not meeting their standards. The Gas-Electric Interdependency Report (http://www.naesb.org/pdf2/geic020306w1.pdf) filed with the FERC illustrates the need for stronger electronic communication between the market participants.
I also interviewed UtiliPoint's Vice President of ETRM, Andrew Bruce, in Houston who has a past life as the CEO of TradeWell Systems. Andrew surmised that the E&Ps (producers) are standardizing and informing their transporters (pipeline companies) that they are doing so. Hence, the pipelines are jumping on board with service providers in order to transact business with the E&Ps.
Producers have been busy integrating deal capture, risk management, gas scheduling over the last few years with products existing in the market or customized solutions. They are not to the point of integrating with the pipelines. Historically, Enron or Dynegy had integrated with the pipelines, but the producers had not done so or depended on a marketing firm to do so.
Fred Puetz, IT Director of Application Technology for Northern Border, owned by Tulsa-based ONEOK commented as more acquisitions occur by the larger players such as Kinder Morgan, ONEOK-NBP, etc. I would expect more emphasis placed on EDI to reduce pressure on O&M costs.
Whatever the reason, the pipeline industry is beginning to make moves to the service provider market of transaction management. Aligning with a good service provider will be key to meeting standards set by NAESB and transacting business with other market participants in a timely and cost-effective fashion.
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