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Rethinking the Secondary Market for Natural Gas Transportation

Fortnightly Magazine - April 1 1995

This year the Federal Energy Regulatory Commission (FERC) plans to examine the resale of firm natural gas transportation rights, often referred to as the secondary market. The current regulatory structure, which provides for "capacity release" through an electronic bulletin board (EBB), was born in November 1993. How would this secondary market behave under different regulatory or market assumptions? How would that affect economic efficiency and public policy?

Under FERC Order 636, holders of firm transportation service rights may "release" their unused capacity. To release capacity for a period greater than 29 days, the firm capacity holder (also called the releasing shipper) must inform the pipeline and set out the terms governing the capacity to be released: the time period of the release, right to recall if allowed, the amount of capacity, and so on. The pipeline must immediately post this information on its EBB and then resell the capacity to the applicant who meets the shipper's terms and offers the highest price. The resale price cannot exceed the firm transportation rate. The pipeline must post the capacity release on the EBB even if the releasing shipper brings the pipeline a prearranged deal with another party seeking the capacity. The revenues from capacity-release sales go to the releasing shipper.

Several issues arise:

s Should the FERC allow selective discounts by pipelines on transportation rates?

s Should the FERC force releasing shippers to post secondary transportation sales on an EBB?

s Should the FERC impose a ceiling on the price for natural gas transportation in the secondary market?

s If the FERC maintains a ceiling, what is the appropriate level?

Selective Discounting (em

Still Valid?

Back in 1985, in a rulemaking that culminated in Order 436, the FERC first proposed to allow pipelines to engage in selective discounting. It predicted efficiency benefits and countered charges of rate discrimination.

FERC's Rationale. The FERC policy allowed gas pipelines to discount firm and interruptible transportation rates selectively between a maximum rate based on fully allocated cost and a rate based on variable cost. The FERC gave three reasons to fight off charges of undue discrimination.

First, all floor rates would not fall below the average variable cost of providing transportation service, which would keep pipelines from engaging in predatory pricing. Second, all ceiling rates would be fully allocated, cost justified, just, and reasonable. Under FERC regulations, the pipeline would project transportation units it expected to sell at the full tariff rate.1 This projection would help determine the tariff rate that would meet the pipeline's revenue requirements. If the pipeline could not sell as many units at the ceiling price as it projected, it would not meet its revenue requirements. Consequently, the pipeline would only discount when it could gain additional revenue. Third, the FERC argued, a pipeline might decide to discount to one customer to collect some contribution to the costs allocated to the transportation service, rather than lose the customer and receive no contribution to fixed costs. Although pipelines would assume the risk of meeting revenue requirements at the full rate, their full-tariff customers would gain