Management Science in Energy Policy---A Case History And Success Story

A policy setting decision in 1967 on the pricing of Canadian natural gas exports to the Pacific Northwest offers a good case history about successful integration of management science in national policy formulation and decision making. The opportunity cost of exported gas was determined using dynamic programming and showed that the minimum cost alternative to supply the U.S. Pacific Northwest was markedly higher than the “in line price” of Canadian gas exports imposed by the U.S. Federal Power Commission. System simulations confirmed this finding and led to rejection of gas exports on FPC's terms and substitution of opportunity cost pricing to “in line” pricing.The abandoned policy decreed that U.S. imports of Canadian gas be priced no higher than the price at the point of export in Canada, in this case 31.6¢/Mcf in the Vancouver region. The gas exporting company accepted the FPC ruling because it had no other choice, having already invested about fifty million dollars in facilities, in anticipation of this export. Canada's National Energy Board objected to “in line pricing”, particularly since the same gas exporter was already selling a far larger amount of gas to the Pacific Northwest at 23.3¢/Mcf which was far below the 31.6¢/Mcf price in Vancouver. Yet NEB was under extreme pressure to grant the application considering the disastrous effect of a denial of the export on the applicant, which was one of its regulated public utilities.The management science contribution was to show through optimal pipeline expansion studies that the minimum cost of alternate U.S. sources of gas supply was far above 31.6¢/Mcf, and, hence, that rejection of the application would force abandonment of FPC's policy and lift the ceiling on gas export prices. The application was rejected, but the FPC backed down and allowed this gas and subsequent imports at higher prices.