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Electronic Trading: Toward an Hourly Market in Natural Gas

Fortnightly Magazine - November 15 1997

(and associated methane) to find their own price level. Would that mean four gas "days" per calendar day? At some locations, yes, but not all. Separate day-part allocations to recognize ownership might not be required, for instance, at production locations that show no significant variation in flow.

At a minimum, however, a day-part market should reflect the allocated flows during the ownership period. In other words, absent parking and loaning arrangements, a 50,000 Dth/day well or supply source could not sell all 50,000 Dth to parties nominating flows only from 6 a.m. to 6 p.m. In fact, aggregators would fill the gaps by purchasing gas all day and then subdividing up the markets, and margins. Aggregators or producers who acquire capacity assets that enable time differentiation of gas will capture the margins it generates.

Imagine a stock market without financial reporting data to gauge the value of stocks. Or one in which traders could not discover what are the class, voting rights or sales options for all outstanding shares. The corollary in the capacity market is the real-time capacity availability listings that provide a liquid information underpinning to a daily and hourly trading system. The postings of short-term firm transportation, plus discounts and delivery and receipt points, should provide price and quantity transparency. Adding the points lists to the FERC-mandated index of customer postings creates a primary point exchange inventory and increases fungibility of capacity.

Solutions: Convincing the Naysayers

Here is an interim solution that might support the acquisition and transfer of market facilitating information:

1. Start with three or four intra-day nominations and grid-wide synchronization times.

2. Set procedures to bring allocations to the same level of granularity.

3. Establish standardized, nationwide rules allowing capacity to be released and used in either two, three or four parts per day.

Some pipelines say they cannot deal with hourly changes. That is nonsense. They already do that today, but with two qualifications. First, pipelines adjust the flow rates but do not tie it to whom the flow is for, other than on a daily basis. Second, pipelines are not paid to track whose gas is moving during that quarter day, or eventually, quarter hour.

Hourly adjustments are the name of the game and have always been. The dirty little secret is that quite often there is no match-up between flows on anything other than a daily or sometimes weekly (and often monthly) basis. Pipelines have always provided just-in-time gas. Now we are seeing marketers and traders spying the arbitrage opportunities to layer just-in-time pricing of gas (and capacity) on top of just-in-time physical gas. Increasing intra-day nominations and allocations capabilities provides precisely this opportunity.

Others think scheduling and rescheduling several times per day would be burdensome. Yes (em if it's done by phone. And that would prove nearly impossible without nationally recognized and supported confirmations procedures. Routinizing nomination and confirmation rules means the process can be automated. The increasing velocity of transactions attendant to hourly transacting means that there would have to be a contemporaneous increase in the velocity and certainty of the