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How Commodity Markets Drive Gas Pipeline Values
Has rate regulation become obsolete for natural gas pipelines?
are likely to arise in the allocation of pipeline services among shippers.
Figures 6 and 7 illustrate the discrepancy between cost-of-service rates and the value of service, as reflected in basis differentials for the Henry-to-New York and Katy-to-Chicago routes, respectively. In these figures, the basis differentials reflect spot prices published in Natural Gas Week from Jan. 8, 1996, through March 10, 1997. Pipeline rates for firm transportation were calculated from the rate schedules in pipeline tariffs (maximum allowed rates) and were converted to a volumetric measurement assuming a 100-percent load factor. (For most pipelines, the maximum firm transport rate at a 100-percent load factor is equivalent to the maximum interruptible rate.) All rates were adjusted to include the value of gas retained by the pipeline, according to the fuel retention rates specified in rate schedules. Rates for pipelines serving a given corridor were combined into a single average rate.
These comparisons serve to illustrate the nature of the discrepancy between rate and value. (They are not designed to estimate the actual extent of the discrepancy. Thus, the rates shown may be greater than or less than the actual prices paid.)
On the Henry Hub-New York corridor, from January through March 1996, extremely cold weather often pushed the weekly average value of pipeline services from Louisiana (measured by the basis differential) above $3.00/MMBtu, and as high as $6.00 in late February. Since then, weekly transportation values have remained less than $1.00, except the first week of January 1997. Average pipeline rates on this corridor were much lower than their market value in the first three months of 1996. Rates exceeded value throughout the non-heating season but were roughly in line with market value for most of the 1996-97 heating season. (See Figure 6.)
As noted earlier (see Figure 5), the value of transportation services into Chicago is generally lower than it is into New York. However, as in the New York example, transportation values into Chicago show considerable seasonal variability, and pipeline rates fail to conform to value. Rates consistently exceed value in the off-peak season and may be much lower than value in the heating season. (See Figure 7.)
Up until now, long-term contracts for firm transportation have cushioned a large part of the pipeline industry from short-term market impacts. The examples shown here in large part have affected only short-term markets, such as markets for released capacity, and for interruptible and short-term firm transportation, which compose more than 30 percent of pipeline transportation volumes. %n6%n However, as long-term firm transportation contracts expire in the next few years, an even greater portion of the industry will be exposed to market forces. The conflict between competition and cost-of-service regulation could become untenable.
1. Conference on the Financial Outlook of the Natural Gas Pipeline Industry, Docket No. pl98-2-000 (notice of public conference, issued Dec. 17, 1997).
2. The FERC has asked conference participants to address a host of questions, such as: (1) How have changes in the competitive structure of the natural gas industry affected the risks faced by pipelines? (2) How