Open access transportation, network competition, and market integration in the natural gas pipeline industry

Until recently, federal regulation required natural gas pipelines to bundle the sale of natural gas with its transportation. Gas fields connected to city markets through merchant carrier pipelines who bought and sold gas through long-term contracts. Gas buyers were unable to transact directly with gas producers; they were able to deal only through merchant pipelines. This structure nearly precluded gas markets; there were only a few spot markets and there was no futures market.;Relaxed pipeline regulation has changed this; natural gas pipelines were permitted to unbundle gas from transportation and to offer pure transportation service. As more pipelines declared themselves to be "open access" pipelines, spot markets emerged and a futures market opened. Soon pipelines transported far more gas on behalf of their customers than they sold to them. By using and trading transportation on several pipelines, brokers and customers developed the ability to buy and sell gas at many points in the dense transmission grid. When enough pipelines opened themselves to transportation, the connected topology of the network could and did support geographic and intertemporal arbitrage.;Monthly and daily spot gas field and citygate prices are examined to determine the extent to which these markets have become integrated. The empirical results show that prices converged and became more cointegrated across the network. The results of a vector autoregression model support the conclusion that by 1990, trading and arbitrage under the new market institutions enforced an equilibrium free of arbitrage opportunities at the field level. At the city market level, the no-arbitrage condition does not yet hold as strongly due to the restrictions placed on transferable transportation rights by state and local authorities.;There are still limitations preventing full development of markets and competition in the pipeline network. In light of the dramatic increase in the efficiency of the natural gas market, there is no evidence to support the need for the Federal Energy Regulatory Commission or regulation. Regulation caused the price disparities and allocative inefficiency that markets eliminated.