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Rethinking the Secondary Market for Natural Gas Transportation

Fortnightly Magazine - April 1 1995

affected the overall demand for pipeline capacity. Rather, he has only increased his portion of the market served by that pipeline. Consequently, this attempted monopoly behavior should not affect the price of transportation capacity.

This analysis suggests that the FERC should allow selective discounting only in markets with few competitors. Unfortunately, the matter is not so simple. Capacity release introduces a complex array of potential new services, diminishing the power of pipelines to control prices. Which is why the FERC devised notice rules for EBBs.

Secondary Offers (em

Why a Bulletin Board?

Two major arguments support a rule to force releasing shippers to post proposed secondary sales of transportation services on an EBB. One argument says that posting improves market transparency. Participants would find it easier to "discover" the market price. The other argument concerns fairness: Posting would expose any local distribution company (LDC) seeking to protect its own distribution customer, and would ease the FERC's concern that state regulators might influence LDCs to keep control of pipeline capacity serving their state.

Market Transparency. Transparency will likely develop without the requirement to post transactions on an EBB. After all, price transparency has developed in commodity markets without formal exchanges. For example, trade publications provide indices of gas price transactions in most active markets, and marketers and brokers act as effective intermediaries to facilitate exchange. These publications are now quoting prices on the capacity-release market. Nevertheless, there is some validity to the second argument: FERC's concern that public utility commissions (PUCs) might influence LDC behavior. But attempts to limit this influence are likely to come at a high cost.

PUC Influence. For example, PUCs could treat revenues differently for sales of released capacity versus distribution capacity. This difference could cause the LDC to sell its spare transmission capacity to existing customers to make sure it obtains revenues on its distribution system. For this reason, the LDC may offer to sell transmission capacity at a price below the market-clearing level. This action would make interstate capacity available to customers of an LDC when other customers would value it more highly. The requirement to post capacity on an EBB should prevent an LDC from selling its capacity below this level. But several strong arguments work against this posting requirement.

Alternatives. First, under the current system, pipelines have an incentive to market interruptible capacity themselves, where they can accrue the revenues, rather than through the posting mechanism for capacity release, where they cannot. Second, the posting requirement may force LDCs to deal with unknown customers. Third, posting encumbers the negotiation of complex arrangements where there is give and take on the part of both parties. Fourth, there is a more attractive alternative to pipeline EBBs (em independent developers offering EBB services. Fifth, great efforts will be made and costs incurred to avoid the posting requirement because of the reasons listed above and the desire to avoid additional regulation. Most transactions have taken the form of rolling 29-day and one-day deals, which avoid the EBB requirement. Also, buy/sell arrangements will continue to be used to avoid the