How Standards Enhance Energy Competition

Birth of the GISB

The creation of this new, cooperative organization not only made good
business sense, but it also addressed concerns raised by the Federal Energy
Regulatory Commission (FERC), which regulates interstate pipelines. FERC
had made it clear that if the industry was unable to reach agreement on
voluntary electronic commerce standards on its own, the regulatory agency
was fully prepared to impose them on the industry.

The standards organization that resulted from these industry efforts,
the Gas Industry Standards Board (GISB), was viewed at first with skepticism
by some market participants who feared that standards would delay and
discourage innovation and hamper competition. They reasoned that standards
would lead to a cookie-cutter approach to business decisions, limiting
choice for both buyers and sellers. But GISB’s accomplishments since its
founding in 1994 demonstrate that standards, if created within the proper
framework, can actually enhance competition, spur creativity, and even
lead to the development of new markets.

Decisions about Governance

GISB’s success is not an accident but the direct result of a series of
decisions made when the organization’s governance was being determined.
Mindful of the industry’s history of internecine squabbling, a careful
set of rules was painstakingly crafted by GISB’s founders. Five membership
segments were established: the traditional four of producers, distributors,
pipelines, and end users, and a fifth – service providers – to include
such new industry participants as brokers, marketers, financial services
companies, consultants, law firms, computer firms, and other businesses.
Chosen to govern the new organization were two 25-member governing boards
with five members from each segment: the Board of Directors, with responsibility
for administrative and financial matters; and the Executive Committee,
which was given the responsibility of developing the standards themselves.
(Later, numerous working groups and task forces were formed to assist
the Executive Committee.)

GISB’s voting rules were devised to promote “inclusivity,” protect the
interests of even the smallest segments of the industry from the “tyranny
of the majority,” and ensure that all decisions were the result of a genuine
industry consensus. Prospective standards must get at least 17 affirmative
votes in the Executive Committee, and there must be at least two affirmative
votes from each segment. Standards must then be ratified by the GISB membership;
a 67 percent affirmative vote of those submitting ballots is required
for a standard to get final approval. On the Board of Directors, changes
in bylaws or articles of incorporation need at least 19 affirmative votes,
with at least two affirmative votes from each segment.

The new organization also made an early commitment to openness and the
broadest possible industry participation. All meetings are open to the
public, and while GISB’s dues have been intentionally kept at a reasonable
level to encourage companies to join, even non-members are welcome to
propose and comment on prospective standards and to vote on all but Board
of Directors, Executive Committee, and standards-ratification initiatives.
GISB maintains a small staff in Houston, but the organization’s work is
principally carried out by a large cadre of volunteers from member companies.

GISB’s governance made sense on paper to most members of the gas industry,
but there was real doubt during the first months after the organization’s
incorporation in 1994 as to whether its goal of achieving a voluntary,
industry-driven standards regime would ever be realized. There were fears
that the intricate voting mechanism wouldn’t work in practice or that
federal regulators would attempt to second-guess GISB or even take over
the standards-setting function altogether.

In 1995, FERC issued an advanced notice of proposed rulemaking setting
a March 15, 1996, deadline for comments “containing detailed proposals
for the standard set of information that the commission should require
all pipelines to use” in conducting business electronically, “as well
as for standard nomenclature and standards for any associated business
practices and procedures.” While the commission said it expected GISB
“may become a forum through which these industry efforts may be coordinated,”
FERC made it clear that it was ready to step in if the industry couldn’t
accomplish the task itself. As the result of a substantial effort involving
hundreds of volunteers, GISB managed to meet FERC’s deadline, and on March
15, 1996, the organization submitted 140 proposed standards to the commission.

The fears that GISB would die a premature death were largely laid to
rest on April 24, 1996, when FERC issued its notice of proposed rulemaking
(NOPR) on business practices standards for the natural gas industry. The
NOPR proposed that interstate pipelines adopt the 140 standards that GISB
had submitted to the commission and commended the gas industry and GISB
for the work they put into developing the standards “and the significant
progress they have made toward standardization.” The commission said GISB’s
standards “regularize the means by which the entire industry will conduct
business across the interstate pipeline grid.” Declaring that GISB’s standards
“represent a formidable step towards improved efficiency and competitiveness
in the gas industry,” FERC proposed that interstate pipelines comply with
the GISB definitions, standards, and data sets by January 1, 1997.

Since that time, the pace of work at GISB has not slowed. FERC and GISB
have maintained a collegial relationship that has enabled the two organizations
to create a unique public-private partnership. In a six-year period, GISB
for its part has created a body of over 400 standards. Most recently,
the organization has concentrated on standards designed to ease the inevitable
move of electronic commerce in natural gas to the Internet.

GISB has also been considering, at the request of another industry organization,
whether to change its governing documents to enable it to develop wholesale
and retail standards for the electric industry. The extensive discussions
that GISB has conducted with the electric industry have produced one near-consensus:
that whether GISB changes so that it develops electricity standards itself
or some other organization is entrusted with this task, the standards-setting
process would be well served by following the GISB model, which has proved
to be both fair and effective.

A Seamless Marketplace

What has been the effect on the natural gas industry of five years of
GISB standards? A former board chairman declared that GISB’s goal is to
create a “seamless natural gas marketplace,” and there is every indication
that this is becoming a reality. Standardization, coupled with the use
of electronic commerce, has improved communication between multiple trading
partners, made information necessary for business transactions less ambiguous,
allowed transactions to be completed more quickly, and provided more accountability.
It has also facilitated tighter coordination between trading partners
and automated the business process. As an example of the tangible benefits
of this process, the Commodity Futures Trading Commission has attributed
to GISB standards the reduction in the New York Mercantile Exchange trading
cycle for gas futures from five days to three days. This is Economics
101: more information in the marketplace leads to less uncertainty and
ambiguity, thus reducing arbitrage.

Besides enhancing efficiency, electronic commerce and standardization
are leading to increased competition. The more relevant information that
is made available to market participants in a timely manner, the better
the marketplace functions. And standards for electronic communication
make doing business in the gas marketplace considerably simpler. This
helps to level the playing field for smaller players, who previously did
not have the staff to devote to learning each pipeline’s way of doing
business, as well as to improve efficiency for larger firms. A recent
FERC order incorporating into the commission’s regulations the latest
version of GISB’s standards declared, “GISB’s ability to reach consensus
regarding contentious issues such as multi-tiered allocations and title
transfer tracking demonstrates that industry self-regulation can successfully
bridge gaps between industry members in order to implement policies that
improve the efficiency and competitiveness of the gas industry.”

The current movement toward the Internet is destined to continue these
trends. FERC has mandated that pipeline websites have a “common look and
feel,” further increasing their ease of use. State public utility commissions,
which have jurisdiction over retail natural gas and electricity restructuring
in their states, have increasingly been recognizing the need for standards
for electronic transactions. GISB standards are being specified in a growing
number of states, even for electricity-only open access programs.

Security concerns are being addressed at the same time the Internet standards
are being developed. The U.S. Department of Energy (DOE) was one of GISB’s
first members, and its close relationship with DOE has enabled GISB to
work with the Sandia and Lawrence Livermore National Laboratories to ensure
that the Internet remains a secure and reliable communications medium
for the gas industry.

The transformation of the gas market from its traditional way of doing
business – with its mounds of paper and faxes and countless phone calls
– to an almost instantaneous Web-based process has happened in a relatively
short period of time, and naturally it has not been an easy transition
for all market participants. Smaller companies in particular have had
difficulty finding sufficient in-house resources to prepare to buy and
sell gas on the Internet. But as so frequently happens when industries
undergo major changes, some companies’ problems become other companies’
opportunities. Dozens of firms, some of them start-ups and others veteran
players in the business of electronic commerce, have emerged to offer
products and services to help small – and large – gas companies meet GISB’s
standards and FERC’s deadlines. What has occurred is nothing less than
the birth of a new industry, an event that has made GISB’s services segment,
to which these new companies belong, the fastest-growing part of the organization.

An Industry Forum

It is possible that this gas market evolution would have taken place
if GISB had never been created, but the chances that this would actually
have happened seem very small. FERC would certainly have tried to write
electronic standards on its own, but the historical divisions in the gas
industry would in all likelihood have reasserted themselves. Without GISB’s
ability to function as a forum for working out differences before standards
are even proposed, the commission’s rulemakings would have been greeted
with objections, rehearing petitions, and lawsuits by companies and trade
associations that felt they had been disadvantaged by the proposed rules.

Eventually, some standards might have made it through the legal process
and achieved implementation. But they would likely have been too little
and too late for the gas industry to take advantage of an expanding economy
and a growing need for new electric generation capacity. Competing fuels
like coal, unconstrained by regulation, would undoubtedly have moved to
take away many promising markets. Because some of the FERC-imposed standards
would have been diluted because of the need for compromises either at
the regulatory or the judicial level, there are no assurances that the
standards would have functioned properly once they were imposed. And because
the prospects for future new electronic standards or changes in existing
standards would have been cloudy at best, many companies that had been
poised to serve the new natural gas market would have decided that the
risks were just too great. The industry would have been left with fewer
choices, and far less satisfactory ones.

Far from harming the natural gas industry by impeding competitiveness
and causing delays in the development of needed standards, GISB has led
the industry toward a highly competitive and highly efficient future.
It has, in fact, gone faster than some market participants would prefer,
but by setting a level of expectation that is reasonably congruent with
the state of available technology, it has shown companies what it takes
to compete successfully in the new natural gas industry. And by stressing
that its standards represent only minimum levels of performance, it has
allowed truly innovative companies to take full advantage of their creativity.

As for the argument that standards hurt creativity and innovation, GISB’s
experience demonstrates that quite the opposite is true. In the words
of the American National Standards Institute (ANSI), the nation’s most
prestigious standards organization, “Far from impeding business, standards
actually break down barriers to trade, provide industry stability, and
encourage commerce. Standards are the foundation for innovation, so they
hasten the rate of implementation of new technology.”

One way to approach this issue is to consider whether a novelist would
be likely to complain that his creativity is hampered by the existence
of standardized spelling in the form of a dictionary. Like words, GISB’s
technical standards are building blocks to be used by creators and innovators
to advance an industry that has been renewed and invigorated by technological
change.

Conclusion

GISB’s experience in creating electronic commerce standards for the natural
gas industry demonstrates that standards organizations, properly constituted,
can enhance industry competitiveness and encourage innovation. GISB’s
success is attributable to its carefully balanced structure, with its
complex but highly effective voting procedure, its two distinct governing
boards, and its other attempts to ensure that the interests of all market
participants are given the proper weight. With its ability to create and
maintain public-private partnerships and its success in achieving consensus
on often divisive and controversial industry issues, GISB is uniquely
positioned to help facilitate the transformation of the natural gas industry
through electronic commerce and the Internet.