The Financial Impact of Outdated Capacity Release Models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Keeping capacity models up-to-date is challenging for energy retailers, and relying on outdated models to estimate prices and make trading decisions dramatically increases their risk.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To quantify the aggregated risk involved for a fictional supplier, let’s look at an example of an outdated asset allocation computation for the Brooklyn Union Gas Company (BUG) utility for a single contract month in October 2014 with realistic volume: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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