Rethinking the Secondary Market for Natural Gas Transportation

Fortnightly Magazine - April 1 1995
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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?

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