SECTION ONE: INTRODUCTION 1

Today’s Gas Marketplace 1
A Brief History of Natural Gas 2

SECTION TWO: WHAT IS NATURAL GAS AND WHERE DOES IT COME FROM? 7

How Did Natural Gas Develop? 7
Resources 8
Reserves 9
Gas Supply Regions 9
Gas Supply in the United States 10
Exploration, Drilling and Completion, and Production 12
Exploration 12
Drilling and Completion 13
Production 15

SECTION THREE: END USERS 17

Residential Customers 18
Commercial Customers 21
Industrial Customers 24
Electric Generation Customers 26

SECTION FOUR: THE PHYSICAL SYSTEM 31

Gathering and Processing 31
Transmission 33
Distribution 36
Storage 37

SECTION FIVE: GAS SYSTEM OPERATIONS 41

Gas Planning 41
Pipeline Operations 42
Gas Scheduling – Pipeline 42
Pipeline Allocation 43
LDCOperations 43
Gas Scheduling – LDC 44
Curtailments and Flow Orders 44
Gas Control 45
Pipeline Maintenance 46
Balancing 47
The Evolving Role of Operations 48

SECTION SIX: MARKET PARTICIPANTS IN THE DELIVERY CHAIN 51

Upstream Participants 51
Producers 51
Gathering Pipelines 52
Aggregators 52
Financial Services Companies 52
Midstream Participants 53
Marketers 53
Shippers 53
Interstate Pipelines 54
Storage Providers 54
Hub Operators 54
Financial Services Companies 55
Electronic Trading Exchanges 55
Downstream Participants 56
Local Distribution Companies (LDCs) 56
Retail Marketers 56
End Users 57

SECTION SEVEN: SERVICE OPTIONS 59

Upstream Services 59
Gathering 59
Processing 60
Supply 60
Risk Management 61
Midstream Services 61
Supply 62
Transportation 62
Service Options 62
Rates 63
Secondary Markets 63
Storage 63
Hub Services and Market Centers 64
Wheeling 64
Exchanges and Title Transfers 64
Electronic Trading and Price Discovery 65
Parking 65
Lending 65
Risk Management 66
Downstream 66
Supply 66
Distribution 67
Storage and Hub Services 67
Risk Management 67
Behind-the-Meter Services 67
Contracts 68
Supply Contracts 68
Transportation Contracts 69

SECTION EIGHT: REGULATION IN THE GAS INDUSTRY 71

Why Regulate the Gas Industry? 71
The Historical Basis for Regulation 72
Who Regulates What? 73
The Federal Power Commission and the Federal Energy Regulatory Commission 74
State Regulation of the Gas Industry 74
The Regulatory Process 75
The Initial Filing 76
Preliminary Procedures 76
Hearings 76
The Draft Decision 77
The Final Decision 77
Review of Decisions 77
Tariffs 78
Setting Rates through a Traditional Ratecase 79
Determining the Authorized Rate of Return 79
Forecasting Usage 79
Determining a Revenue Requirement 79
Allocating Revenue to Customer Classes 80
Determining Rate Design 81
Allocating Revenue to Charge Types 81
Determining the Rate 81
Incentive Regulation 81
Performance-based 82
Benchmarking 82
Rate Caps 82
Market-based 82
Service Standards 83
The Future of Regulation 83

SECTION NINE: DEREGULATION 85

Recent Evolution of Gas Regulation 85
Federal Deregulation 85
State Deregulation 86
Market Evolution under Deregulation 88
Regulation 89
Deregulation 90
Commoditization 90
Value-Added Services 91
The Regulated and Competitive Delivery Chain 91

SECTION TEN: MARKET DYNAMICS 97

Supply and Demand 97
Pricing 98
Indexes 99
Price Volatility 99
Netback and Netforward Calculations 100
The Wholesale Market 100
The Retail Market 101

SECTION ELEVEN: MAKING MONEY &MANAGING RISK 105

How Market Participants Create Profits 106
How a Utility/Pipeline Makes Money ­– Traditional Method 106
How a Utility/Pipeline Makes Money – Non-traditional Methods 107
How Unregulated Market Participants Make Money 108               
Risk Management 108
Choices for Managing Risks 109
Physical Risk Management 110
Financial Risk Management 110
Speculation versus Hedging 111
Hedging Techniques 112
Value at Risk 113

SECTION TWELVE: THE FUTURE OF THE GAS BUSINESS 117

A Review of Market Changes 117
The Future of the Upstream Sector 118
The Future of the Midstream Sector 119
The Future of the Downstream Sector 119
A Sustainable Energy Future? 120

APPENDIX A: GLOSSARY 125
APPENDIX B: UNITS AND CONVERSIONS 137
APPENDIX C: ACRONYMS 139
APPENDIX D: INDEX 143