© UH Institute for Energy, Law & Enterprise 1 Energy, Inc. Natural Gas/Electric Power Overview U.S./Canada Case

© UH Institute for Energy, Law & Enterprise 2 Natural Gas Value Chain Oil and Gas Field Production Processing (If Needed) Pipeline Transportation Local Distribution Liquefaction (LNG) LNG Tanker Shipment to Markets Re-gasification Liquids Transportation (pipeline, truck, tanker or petrochem stream for butanes+) Marketing and Distribution (propane, butane) Gas Separation, Gathering Residential Commercial Industrial (Direct Use) Electric Power Generation (Utilities, IPP, Industrial) Electric Power Transmission Electric Power Distribution Direct Use (eg., vehicle transport)* Oil Refining Gas Liquids Extraction Liquids (LPG) stream (propane, butanes, etc.) Power stream Methane stream *Note that compressed methane and LPG are also used for vehicle transport.

© UH Institute for Energy, Law & Enterprise 3 U.S. Natural Gas Restructuring Competitive LDC Industry State Public Utility Regulatory Commissions, 1800s-1927 Development of Interstate Transportation Federal Regulation of Interstate Transportation (PUHCA/FPA ‘35) Federal Regulation of Wellhead Prices (Phillips Decision ‘54) Decontrol of Wellhead Prices (NGPA ‘78) First Stage Open Access for Pipelines (Order 436 ‘85) Final Stage of Open Access (Order 636 ‘92) LDC Unbundling Era?

© UH Institute for Energy, Law & Enterprise 4 What Is a Public Utility? Old Concepts: –Technical economies of scale –Essential services –Capital intensive –Lack of storage –Variable costs and load factors –Exclusive franchise New Concepts: –Technology is not static –Essential services provided by competition –Changing ratio of capital to labor –New storage technologies –Pricing for specific customer needs –Borderless service areas “Public utilities are public only by law, with limited property rights endowed by their creator (Bonbright, p. 8)”

© UH Institute for Energy, Law & Enterprise 5 Summary: A History of Ideas, 1800s-Today “Regulated monopoly” as a substitute for competition Emerging ideas about competition –Minimize monopoly component –“Contestability” (potential competition) as substitute for pure competition Initiation of the “Deregulation Movement”-- Fred Kahn and the “Saturday night stay” for airlines

© UH Institute for Energy, Law & Enterprise 6 Principles of Deregulation for Energy Utilities Separate the commodities--natural gas and electricity--from the infrastructure (“pipes and wire”): unbundling Contract carriage and nondiscriminatory open access Third party marketing Risk management to hedge against commodity price volatility

© UH Institute for Energy, Law & Enterprise 7 Based on Comparative Research - Market Design: What Is the Role of Regulation? Can regulators act as “market facilitators”? Can regulators design markets? Should the U.S. have regional regulatory authorities (“how many regulators do we need?”) Is harmonization good or bad? Should there be a “uniform code” for North America? How does Mexico fit in to the North American regulatory scheme? – Stage of development