Regulatory reform options to revitalize the US natural gas value chain

Ruud Weijermars

doi:10.1016/j.jup.2011.12.003

Regulatory reform options to revitalize the US natural gas value chain

Ruud Weijermars^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

4 Scopus citations

Abstract

The key question addressed here is whether US utilities can sustain their current natural gas deliveries, and fund growth, as strategically required for the clean energy transition. A case is made here for adjusting regulatory policy, as past and current policies have led to a steady profit decline for mid- and downstream US energy companies. Capital markets have rated several major energy companies as 'junk bonds', which means default risk is substantial from an investor perspective. Arguably, overly tight price regulation and declining credit ratings have pushed the industry into a decade-long downward business cycle, which started even before the Great Recession provided additional challenges. Recommendations are formulated for improving the US energy regulation of the mid and downstream natural gas segments in order to revitalize these key pillars of the energy transition program. Insights developed here based on the regulatory development and business performance of energy utilities in the US may provide a useful reference for liberalized and liberalizing energy markets elsewhere in the world.

Original language	English
Pages (from-to)	50-58
Number of pages	9
Journal	Utilities Policy
Volume	21
DOIs	https://doi.org/10.1016/j.jup.2011.12.003
State	Published - Jun 2012
Externally published	Yes

Bibliographical note

Funding Information:
The BBB + credit rating of Sempra Energy, is partly supported by the 51% ownership by the Royal Bank of Schotland (RBS), which acquired the equity stake in 2007. The joint venture is held in a holding company RBS Sempra Commodities (RSC), with the aim to positively alter Sempra’s risk profile by removing the liquidity, capital, and credit support requirements of Sempra’s commodity trading business from the company’s balance sheet, because RBS will fully guarantee all of these obligations. Furthermore, the terms of the RSC partnership agreement allow Sempra to earn a 15% preferred return on its $1.3 billion initial equity investment, followed by a sharing mechanism that entitles Sempra to retain 70% of the joint venture’s first $500 million in after-tax earnings and 30% of all earnings thereafter. This earnings structure is aimed at dampening the cash flow volatility associated with the commodities business by converting lower-quality earnings that reflect mark-to-market gains and losses into annuity-like cash distributions.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 7 Affordable and Clean Energy
SDG 9 Industry, Innovation, and Infrastructure
SDG 13 Climate Action

Keywords

Natural gas
Rate cases
Regulation reform
Regulatory reform

ASJC Scopus subject areas

Business and International Management
Development
Sociology and Political Science
Management, Monitoring, Policy and Law

Access to Document

10.1016/j.jup.2011.12.003

Cite this

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title = "Regulatory reform options to revitalize the US natural gas value chain",

abstract = "The key question addressed here is whether US utilities can sustain their current natural gas deliveries, and fund growth, as strategically required for the clean energy transition. A case is made here for adjusting regulatory policy, as past and current policies have led to a steady profit decline for mid- and downstream US energy companies. Capital markets have rated several major energy companies as 'junk bonds', which means default risk is substantial from an investor perspective. Arguably, overly tight price regulation and declining credit ratings have pushed the industry into a decade-long downward business cycle, which started even before the Great Recession provided additional challenges. Recommendations are formulated for improving the US energy regulation of the mid and downstream natural gas segments in order to revitalize these key pillars of the energy transition program. Insights developed here based on the regulatory development and business performance of energy utilities in the US may provide a useful reference for liberalized and liberalizing energy markets elsewhere in the world.",

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author = "Ruud Weijermars",

note = "Funding Information: The BBB + credit rating of Sempra Energy, is partly supported by the 51\% ownership by the Royal Bank of Schotland (RBS), which acquired the equity stake in 2007. The joint venture is held in a holding company RBS Sempra Commodities (RSC), with the aim to positively alter Sempra{\textquoteright}s risk profile by removing the liquidity, capital, and credit support requirements of Sempra{\textquoteright}s commodity trading business from the company{\textquoteright}s balance sheet, because RBS will fully guarantee all of these obligations. Furthermore, the terms of the RSC partnership agreement allow Sempra to earn a 15\% preferred return on its \$1.3 billion initial equity investment, followed by a sharing mechanism that entitles Sempra to retain 70\% of the joint venture{\textquoteright}s first \$500 million in after-tax earnings and 30\% of all earnings thereafter. This earnings structure is aimed at dampening the cash flow volatility associated with the commodities business by converting lower-quality earnings that reflect mark-to-market gains and losses into annuity-like cash distributions. ",

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N2 - The key question addressed here is whether US utilities can sustain their current natural gas deliveries, and fund growth, as strategically required for the clean energy transition. A case is made here for adjusting regulatory policy, as past and current policies have led to a steady profit decline for mid- and downstream US energy companies. Capital markets have rated several major energy companies as 'junk bonds', which means default risk is substantial from an investor perspective. Arguably, overly tight price regulation and declining credit ratings have pushed the industry into a decade-long downward business cycle, which started even before the Great Recession provided additional challenges. Recommendations are formulated for improving the US energy regulation of the mid and downstream natural gas segments in order to revitalize these key pillars of the energy transition program. Insights developed here based on the regulatory development and business performance of energy utilities in the US may provide a useful reference for liberalized and liberalizing energy markets elsewhere in the world.

AB - The key question addressed here is whether US utilities can sustain their current natural gas deliveries, and fund growth, as strategically required for the clean energy transition. A case is made here for adjusting regulatory policy, as past and current policies have led to a steady profit decline for mid- and downstream US energy companies. Capital markets have rated several major energy companies as 'junk bonds', which means default risk is substantial from an investor perspective. Arguably, overly tight price regulation and declining credit ratings have pushed the industry into a decade-long downward business cycle, which started even before the Great Recession provided additional challenges. Recommendations are formulated for improving the US energy regulation of the mid and downstream natural gas segments in order to revitalize these key pillars of the energy transition program. Insights developed here based on the regulatory development and business performance of energy utilities in the US may provide a useful reference for liberalized and liberalizing energy markets elsewhere in the world.

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Regulatory reform options to revitalize the US natural gas value chain

Abstract

Bibliographical note

UN SDGs

Keywords

ASJC Scopus subject areas

Access to Document

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Cite this