Pipeline Access and Market Integration in the Natural Gas Industry: Evidence from Cointegration Tests

Abstract

This research seeks to determine the extent to which the Federal Energy Regulatory Commission’s policy of “Open Access” to natural gas pipelines has created competition in natural gas markets. We argue that recently developed cointegration techniques are the natural way to evaluate competition between natural gas spot markets at dispersed points in the national transmission network. We test daily spot prices between 190 market-pairs located in 20 producing fields and pipeline interconnections and find that the price series are not stationary and that most field markets were not cointegrated during 1987. By 1991, more than 65% of the markets had become cointegrated. The increased cointegration of prices is evidence that open access has made gas markets more competitive.

The Future of Long-term LNG Contracts

“…As noted by De Vany and Walls (1993), for example, prior to FERC Order 436 the requirement that pipelines buy and sell gas through long-term contracts precluded the development of spot markets for natural gas. De Vany and Walls noted that there were many reasons why deregulation might not have allowed arbitrage to lead to a convergence of natural gas prices: "bottleneck monopolies in the grid; poor coordination between gas purchases and transportation; risk averse buyers reluctant to rely on the spot market, creating a lack of depth and liquidity; excessively volatile prices; distributor city gates that are closed or difficult for buyers to get through; a lack of knowledge and experience on the part of gas producers and buyers long accustomed to regulated prices and long-term contracts; and questions about the incentives of regulated distributors to seek out lower cost gas."…”

Global LNG Pricing Terms and Revisions: An Empirical Analysis

“…De Vany and Walls (1993) pioneered the literature on gas market integration. The authors use cointegration analysis to show how unbundling pipeline ownership and capacity rights increased integration of regional spot prices in the United States.…”

The value of underground storage in today`s natural gas industry

“…PG is represented by the price of gas at the Henry Hub in Louisiana, which is the reference price for gas exchanges in the United States and Canada. This price Iargely represents exchanges of gas negotiated at the close of the previous month during a period called bid week when contracts for guaranteed deliveries of gas for the month are signed (for a discussion of spot and futures prices see [3][4][5][6][7]). An appealing characteristic of EIA storage or inventory data is that it represents inventories at the end of the month.…”