Pipeline congestion and basis differentials
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In the U.S., natural gas pipeline transport has undergone a wave of deregulatory actions over the past several decades. The underlying motive has been the presumption that removing regulatory frictions would facilitate spot price arbitrage, helping to integrate prices across geographic locations and improve efficiency. Yet certain frictions, specifically the effect of congestion on transportation costs, inhibit positive deregulatory impacts on efficiency. With the increase in domestic production and consumption of natural gas over the coming decades, upward pressure on the demand for transport will likely result in an increased occurrence of persistently congested pipeline routes. In this paper we explore the relationship between congestion and spot prices using a simple network model, paying particular attention to the influence of storage. We find that as congestion between two hubs increases, the scarcity value of transmission capacity rises, driving a wedge between spot prices. We empirically quantify this effect over a specific pipeline route in the Rocky Mountain region that closely resembles our structural design. Although our results paint a stark picture of the impact that congestion can have on efficiency, we also find evidence that the availability of storage mitigates the price effects of congestion through the intertemporal substitution of transmission services.
KeywordsNatural gas pipelines Congestion Storage Spot prices Secondary markets
JEL ClassificationQ41 Q48 R41
This article has greatly benefited from the help and insights of David Aadland, Brian Jeffries, Erik Johnson, Gregory Lander, Jason Shogren, Alexandre Skiba, Brian Towler, and Aaron Wood. Two anonymous referees provided useful input, and pressed us to clarify our arguments and contribution. Earlier versions were presented at the 13th Annual CU Environmental and Resource Economics Workshop, Vail, CO (Oct. 7–8, 2011), the 2012 Occasional Workshop in Environmental and Resource Economics, Santa Barbara, CA (Feb. 24–25, 2012), and the 2012 Association of Environmental and Resource Economists (AERE) Summer Conference, Asheville, NC (June 4–5, 2012). We thank the participants of those events for helpful comments and observations. The School of Energy Resources at the University of Wyoming provided financial support for this research.
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