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Rethinking the Secondary Market for Natural Gas Transportation

Fortnightly Magazine - April 1 1995

$2.55 (that is, $3.20 - $ 0.65).

Other arrangements can also circumvent price ceilings. For example, a buyer can simply purchase gas at a market center.2 Since the buyer only cares about the delivered price, sellers with lower-cost transportation capacity can make up the difference in the commodity price of gas. Bundling gas supply and transportation re-quires the owner of transportation capacity to buy and resell gas supply, which may prove less efficient than direct negotiations between the producer and consumer. These efforts to avoid the capacity-release mechanism can produce inefficiencies because transactions are often structured to satisfy legal implications. In the example shown above, the purchaser could have negotiated separately for transportation services and gas volumes.

To prevent such machinations, the FERC will have to impose onerous restrictions such as the en-forced bundling of natural gas and pipeline capacity sales and other inefficient market transactions.

Rather than go to all that trouble, the FERC should instead lift the ceiling on the price of capacity in the secondary market and eliminate the requirement for posting of these transactions on EBBs.

If a Ceiling (em How High?

If the FERC should insist on a price ceiling for released capacity in the secondary market, finding the appropriate level involves two steps: 1) setting the annual average ceiling needed to recovery the pipeline's revenue requirement, and 2) allocating that amount throughout the year, across different seasons.

Revenue Requirement. A secondary market for capacity release affects the firm tariff rate that a pipeline needs to meet its revenue requirement. But under current FERC regulations, any revenues from the secondary market go directly to the releasing shipper. Thus, to cover cost of service, pipelines must look to firm-capacity tariffs and sales of interruptible capacity. But if the capacity-release market is efficient, it will depress sales revenues for interruptible capacity. Moreover, an efficient release market plus excess capacity should lower the combined revenues from capacity release and interruptible transport in the secondary market (em all the way down to variable cost.3 This effect arises in many markets during the nonheating season.

If firm rates had to cover the entire cost of the service, they would substantially exceed existing rates. For example, interruptible and released firm transportation accounted for 35 percent of total transportation capacity in 1993.4 If this capacity was being sold presently at 100 percent of the firm tariff (as occurs for some pipelines), then a shift of the sale to the secondary market would force a 53-percent increase in firm transportation rates to offset the revenue loss to the pipeline, assuming no loss of load through the higher tariff. If interruptible transportation is sold at half the firm rate, firm transport rates would need to rise by 21 percent. Thus, the natural tendency of the system would increase the ceiling through rate shifting toward holders of firm capacity.

Data through the middle of 1994 shows interruptible transportation accounting for 20 percent of total transportation, and released firm capacity accounting for 8 percent. The 20-percent figure compares to a previous low of 32 percent in 1986 for