 Regulation and deregulation of the natural gas industry occurred after the crude oil industry and is a lot more complicated because natural gas pipelines were considered to be utilities early on. So we'll move from regulation to deregulation. Local distribution companies and pipeline companies were given a utility status under the Natural Gas Act of 1938. They were given protected territories or what are known as franchises. They also were designated as acting in the public interest because they're going to provide natural gas and important heating fuel to the public. But they were required to file just and reasonable rates of service. They were also given the right of eminent domain. That means that they wish to build a pipeline and a particular landowner says that they don't want the pipeline coming through their property. Believe it or not, they can have the property condemned, pay the landowner whatever the prevailing rate is in the area, and go ahead and build through their property. They were providing bundled services. That means they were the exclusive buyer of natural gas. They transported it. They stored it and they sold the natural gas. So if you were dealing with the pipeline as a producer, they were the only entity to sell to. And if you needed to buy natural gas, they were the only entity to be able to buy gas from. There was absolutely no competition. The Natural Gas Policy Act of 1978 established the current regulatory body that is the Federal Energy Regulatory Commission. They went ahead and set minimum price controls on natural gas. In other words, the lowest price that could be paid for natural gas. This would lead to the gas bubble in the early 1980s. In January of 1985, these price controls finally expired. You now had a more market responsive pricing environment. And pipeline companies and gas companies in January of 1985 lost their merchant function. That is they were no longer the exclusive sellers of natural gas. These excess supplies that occurred in the bubble led to both affiliated and independent marketing companies. Affiliated marketing companies were those that were established by the pipelines with the specific purpose of marketing excess natural gas supplies and making a profit for the pipeline companies. Evolution of the spot market basically occurred in January 1985 as a result of these various events that had occurred. FERC subsequently had their infamous Order 436, which was known as the open access rule. This required pipelines to offer all of their services on a non-discriminatory basis. They could no longer be the sole supplier of these services, nor could they specifically grant the use of the pipelines towards facilities to their affiliated marketing companies. So now they have to file the various levels of services and the rates they're going to charge. They had to establish what are known as nomination and allocation procedures. And nomination is the schedule of business that a third-party entity intends to do with the pipeline. In other words, they'll have to delineate where all their gas supplies coming from and where all their gas is to be delivered to and they must do this on a daily basis. So we now have what we call the third-party shippers. That is, shippers who are not an affiliated marketer of gas with the pipeline themselves. Later on, FERC would further clarify the relationship between the pipeline companies and their marketing affiliates under FERC Order 497. Interstate pipeline companies had to separate themselves from the affiliated marketing companies with the intention or the sole purpose of making sure there were no private deals that went on between the pipeline and their own marketing companies. Services that pipeline companies now perform, primary service is transportation and it's done under two levels. The first level is FT or firm transportation. This is guaranteed capacity in the pipeline, but the shipper is going to have to pay a demand or reservation fee for this. So in other words, in order to guarantee that the space is there when the shipper needs it, they will pay the pipeline a set fee. And this is paid on what's known as the maximum daily quantity. Regardless of whether they use it or not, this is the fee that they pay. It might be similar to if you have a mini storage facility and during the school year, most of what you have is on campus, but in the summer months, you want it to be there when you return and so you have to pay for the storage facility year round regardless of whether you use it all the time or not. So the same is with the shippers who utilize pipeline capacity. The maximum daily quantity is the space that you are going to need when you're actually moving natural gas. Say for instance, you're going to buy some supplies in the Gulf Coast and you want to ship them to Chicago. Your market is 100,000 MMBTUs in the city of Chicago. You're going to need that type of space on a day in, day out basis. That will be your maximum daily quantity or MDQ and you will pay the pipeline fee based on that volume and it is paid once a month. Now when you actually start to ship the gas, you'll pay the pipeline what's known as a commodity fee. It's usually a very nominal fee, only a fraction of the demand fee. So this will be paid on actual usage. They will measure the gas that you supplied them in the Gulf Coast versus the gas that you delivered into Chicago and they will charge you this little added fee known as a commodity fee on that actual volume. Pipelines have to file with the Federal Energy Regulatory Commission the lowest and the highest rates that they're going to charge their shippers. They also have to have what's known as a capacity release plan. Say for instance, you don't utilize the entire amount of space that you're contracted for. You can actually sub-lease that space it's known as capacity release. The pipeline has to have a system which that can be done above board and on a public type of auction system. Under your firm transportation contract for the pipeline, you need to make sure that you have the source of supplies covered as well as your markets covered. In other words, you would designate what is known as a primary path. You want to make sure that the wells that you're buying gas from in the Gulf Coast contract, that gives you the right to bring that gas into the pipeline and then correspondingly, you want to make sure that your markets in Chicago are delineated on your contract. Thereby guaranteeing that path, your supply on the Gulf Coast will come into the pipe and will be delivered for you to your markets in Chicago. Some pipelines allow a secondary path, other receipt and delivery points depending on whether or not they have the capacity. The next level of transportation service the pipelines have is what's known as interruptible and I purposely put that word in all caps because it is interruptible at any point in time. The pipeline can take the space back from you. There is no guarantee. Of course, as a result of that, you're not paying a reservation or demand fee. You are strictly paying that commodity fee. When you move the gas, they will measure it and charge you on actual volumes used. A word of caution here. If you become a trader or marketer, you don't want to subscribe to interruptible space. If you have made obligations either to a producer to take their gas or to a market to deliver gas because you could lose that space at any time. It generally represents a capacity level above all the firm capacity that the pipeline has and so they wish to get something for that extra space. Here is a map of rate zones. Natural Gas Pipeline Company of America was the U.S.'s first long-haul carrier. The first segment of their pipeline ran from the Texas Panhandle to the city of Chicago. They are owned by Kinder Morgan Pipeline Partners. You can see they have deeply arranged their rate zones into areas of receipt and delivery. Receipts being in the southwest, the mid-con and the Gulf Coast and deliveries up into Iowa and Illinois area. Here is what their tariff sheet looks like. It's what we refer to as regional or postage stamp types of rates. Again, looking at their map, we'll back up one second here. If you look at the mid-con and receipt and delivery zone, it's in that magenta type of color. We'll jump over here to the rates and so if we look at the mid-continent on the left, that's the receipt zone, one, two, three, four levels down and then we look at the delivery zone, which are the column headings at the top. We want to go to the market area, which is the first column. If we want to move the gas from Oklahoma, let's say, or Texas Panhandle, to the market area, Natural Gas Pipeline Company of America is going to charge us a reservation fee of $7.98 per month on the maximum daily quantity that we choose. In addition, when we actually ship the gas, they're going to charge us $0.0034 as a commodity fee. Another level of cost involved in shipping natural gas is that of fuel. When we spoke about transmission pipelines, we mentioned that they use compressors to push the gas along. These compressors consume natural gas as their fuel source. In addition, when pipelines have a rupture, the type that was illustrated in those photos, that gas is obviously was burned or just flowed into the atmosphere. Any time pipelines do maintenance, they generally have to take down a section of pipeline and they vent the natural gas to remove it from the pipeline before working on it. All of this is known as lost and unaccounted for gas or pipeline fuel. This is charged to the shipper. They actually get to retain an amount of gas for their own usage. The amount that they do get to retain is filed with the Federal Energy Regulatory Commission and is based on calculations that the pipelines perform in terms of how much natural gas is lost during the course of a year. For example, if you were to, in fact, subscribe for 100,000 MMBTUs a day of space with Natural Gas Pipeline Company and you put your supplies in and let's say, for instance, their percentage of fuel retention was approximately 3%. You put the gas in, 100,000 MMBTUs in the Gulf Coast, they're only going to deliver 97% of that to Chicago. They have the right to and they will retain a percentage for the fuel charges. This is their matrix for fuel charges. Again, looking on the left, the four lines down is the mid-condit area. The top of the first column is the market area. So if you transport gas from the mid-condit region to the city of Chicago, for example, the natural gas pipeline company in America is going to retain 3.16% of the volumes that you give them as fuel and so you will receive 3.16% less volumes in Chicago to give to your markets. Here's an example of some storage rates that pipelines will charge. This is Centerpoint Energy Gas Transmission. They will charge deliverability fees, capacity fees, storage fees. Again, just an example of their federally filed tariff. We will talk about storage rates here in the next lesson.