The Financial Impact of Outdated Capacity Release Models

  • Posted by Brian Fino

Natural gas capacity release programs were enacted by the Federal Energy Regulatory Commission (FERC) in 2007 to allow for a more fluid and stable market. Since that time, utilities have been quick to publish tariffs that enable marketers to participate in the exchange of natural gas capacity. Energy marketers rely on capacity release models to estimate fixed and variable gas prices and volume distribution for a given utility along a given pipeline and path segment. These models need to account for market prices and tariff cost structures. That means that as tariffs and programs are changed, models must be maintained in order to keep estimates accurate and minimize risk.

The Challenge for Energy Retailers

Keeping capacity models up-to-date is challenging for energy retailers, and relying on outdated models to estimate prices and make trading decisions dramatically increases their risk. Historically, utilities’ capacity programs change on a fairly frequent basis, ranging from every month to once a year, depending on the nature of the changes. For example, Gas Supply Charges typically change on a monthly basis, while utilities often change pathways and publish cost structures in their annual tariffs. This complexity is multiplied by the fact all utilities have unique exceptions to their capacity programs that give them additional discretion for delivering gas and the associated costs provided weather forecasts and other factors.

Impact on the Bottom Line

These fluctuating conditions, combined with the lack of standardization, demand constant monitoring and response by any energy marketer wishing to minimize risk and maximize profits. Failing to quickly adapt to changes means energy marketers could be hedging ineffectively, generating poorly priced customer contracts, and missing out on profitable trading opportunities.

To quantify the aggregated risk involved for a fictional supplier, let’s look at an example of an outdated asset allocation computation for the Brooklyn Union Gas Company (BUG) utility for a single contract month in October 2014 with realistic volume:

Name Start Date Total MDQ Point Daily Volume Type
Transco Bug 10/1/2014 20,939 1000007 3,560 R
Transco Bug 10/1/2014 20,939 1000026 5,235 R
Transco Bug 10/1/2014 20,939 1000040 3,978 R
Transco Bug 10/1/2014 20,939 1000762 8,166 R
Transco Bug 10/1/2014 20,939 1006558 20,939 D
Tetco Bug 10/1/2014 6,079 79501 912 R
Tetco Bug 10/1/2014 6,079 79504 608 R
Tetco Bug 10/1/2014 6,079 79503 2,857 R
Tetco Bug 10/1/2014 6,079 79502 1,702 R
Tetco Bug 10/1/2014 6,079 79816 6,079 D
IRQ Bug 10/1/2014 6,754 Brookfield 6,754 R
IRQ Bug 10/1/2014 6,754 S – South Comack 6,754 D

Compare this with the values produced using the current asset allocation model, which results in different values for both the total maximum daily quantities (MDQ) and the daily volumes for each pipeline segment. The proper computation also identifies new assets along additional path segments, highlighted below (Waddington -> South Comack and Leidy-National Fuel -> Brooklyn Union):

Name Start Date Total MDQ Point Daily Volume Type
Transco Bug 10/1/2014 17,223 1000007 2,526 R
Transco Bug 10/1/2014 17,223 1000026 3,715 R
Transco Bug 10/1/2014 17,223 1000040 2,823 R
Transco Bug 10/1/2014 17,223 1000762 5,795 R
Transco Bug 10/1/2014 17,223 1007065 2,364 R
Transco Bug 10/1/2014 17,223 1006558 17,223 D
Tetco Bug 10/1/2014 3,378 79501 507 R
Tetco Bug 10/1/2014 3,378 79504 338 R
Tetco Bug 10/1/2014 3,378 79503 1,587 R
Tetco Bug 10/1/2014 3,378 79502 946 R
Tetco Bug 10/1/2014 3,378 79816 3,378 D
IRQ Bug 10/1/2014 13,171 Brookfield 7,430 R
IRQ Bug 10/1/2014 13,171 Waddington 5,741 R
IRQ Bug 10/1/2014 13,171 S – South Comack 13,171 D

Based on a simulated average of basis differentials from September 2014 along the individual path segments shown above, the total value of these capacity purchases would be as follows:

  • New Model: $700,903
  • Old Model: $1,046,907

As the data shows, failing to update the model for one pipeline configuration over the course of one month would result in a discrepancy of nearly $350,000 between the old value and the new, up-to-date value. When factoring in additional pipelines and greater time periods, the dangers of relying on outdated capacity release models for pricing and trading are clear.

Learn More

Tariff and program changes directly impact a supplier’s ability to price contracts competitively, manage financial risk, and meet regulatory compliance. Learn more about how to create and manage accurate capacity models in real time and accurately produce up-to-the-second contract prices and positions.

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