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Rethinking the Secondary Market for Natural Gas Transportation

Fortnightly Magazine - April 1 1995

mid-year data, the first year that INGAA (Interstate Natural Gas Association of America) began tracking interruptible transportation. So reallocation of revenues to holders of firm-contract capacity is already taking place. As pipelines submit new tariffs, this reallocation will force higher firm transportation rates.

Seasonal Factors. The FERC's current approach to imposing a price ceiling on the secondary market for transportation services involves using the monthly billing rates for firm service. But monthly billing rates have no relationship to the value of firm capacity each month and force firm capacity holders to carry a greater share of the pipeline cost than would be determined by an unregulated secondary market. The allocation of this ceiling over the year should consider the seasonal value of capacity. There are many ways to improve the current approach. The FERC could encourage a move to seasonal rates or impose a ceiling that would apply a 52-week moving average of capacity-release transactions. While Order 436 encouraged seasonal rates, FERC staff did not. In fact, seasonal rates filed by pipelines were rejected when initially proposed. However, Order 436 did not involve capacity release or brokering; as a result, seasonal rates altered the monthly billing of the capacity but not the annual cost to the customer. Thus, seasonal rate design is more important now under Order 636.

Fairness. Considerations of equity may support rate ceilings on transportation services, but current policies impose these ceilings at a high cost. Current policy has encouraged development of excess pipeline capacity, but not enough storage, peak shaving, or interruptible loads (em other factors that could lessen seasonal demand on the pipeline system. By raising the ceiling on the release of firm capacity to the level that would occur if there were no offsetting revenues and allowing the ceiling to change on a seasonal basis,

the FERC could encourage more efficiency. t

Ronald C. Denhardt is a principal at Jensen Associates, Inc., a Boston-based energy consulting firm. Mr. Denhardt has over 15 years' experience in the energy industry, focusing on natural gas and electric utility markets. His experience in the natural gas area includes gas-supply contracting, acquisition analysis, risk mitigation, regulatory analysis, and strategic planning. Mr. Denhardt has a BS in Finance from the University of Maryland and an MS in Economics from the University of Wisconsin.

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