The California ISO is going its own way with its proposal for transmission planning, virtually ignoring FERC’s proposed rules on transmission planning and cost allocation. California wants to...
How Commodity Markets Drive Gas Pipeline Values
Has rate regulation become obsolete for natural gas pipelines?
have moved together ever since. Prices for the San Juan Basin and Opal Hub, which supply the California market, were much lower in early 1996, reflecting the softer western market conditions. In June, San Juan prices began to move toward those of the other production areas. Opal prices lagged; they did not begin to rise until October. Since October 1996, however, production area prices across the country have moved together.
A correlation analysis shows that both market areas and supply areas became highly correlated, with pair-wise correlations exceeding 0.96 in market areas and 0.93 in supply areas from August 1996 through August 1997.
If we stipulate that gas wellhead markets are competitive, it follows that pipelines connecting wellhead markets (e.g., a line between the Henry Hub and the Katy Hub) would have no market power. But suppose a pipeline delivering gas from the Katy Hub to the Henry Hub does possess market power and can set an above-market price for its services. Then the price of gas delivered to the Henry Hub will exceed a competitive price. If this price can be sustained at the Henry Hub (em i.e., if the pipeline can exercise market power there (em then the Henry Hub is not a competitive market, contrary to our original assumption.
If the Katy and Henry hubs are competitive, then no entity, not even a pipeline, can exert market power. Pipeline routes between competitive hubs are, therefore, prime candidates for market-based rates.
The competitiveness of various city-gate markets is not so well established. Often, a single large purchaser (such as an LDC) dominates a city-gate that only one or two pipelines serve. Such market configurations are hardly competitive. However, competition is evident in other areas, both from greater access to pipeline services and in the development of market centers. This analysis examines three such consuming areas: (1) New York and New Jersey, (2) Chicago and (3) Los Angeles.
Pipelines from several supply areas serve the New York-New Jersey market area. Consumers in and around New York can receive Appalachian gas on the CNG and Columbia Gas transmission systems; Louisiana gas on Columbia Gulf/Columbia Gas, Tennessee, Texas Eastern or Transco pipelines; or Canadian gas on the Iroquois and Tennessee pipeline systems.
Consumers in the Chicago area have access to Canadian gas via Northern Border Pipeline and Natural Gas Pipeline of America, or the Great Lakes/ANR system; to Permian Basin gas via NGPL and Panhandle Eastern pipelines; to Rocky Mountain gas via Colorado Interstate Gas and ANR pipelines; to Louisiana gas via ANR, NGPL, Tennessee/Midwestern and Trunkline; and to South Texas gas via NGPL, Tennessee/Midwestern and Trunkline.
Los Angeles consumers have access to Rocky Mountain gas via the Kern River Pipeline; Canadian gas via the PGT and SoCal pipelines; gas from the San Juan and Permian Basins via Transwestern and El Paso pipelines; and gas from the Anadarko Basin via El Paso Pipeline.
It is difficult to argue that any individual pipeline serving these markets can exert any market power. These pipeline routes also may be good candidates for market-based rates.