Early returns from the first month of short-term firm pipeline capacity trading in the secondary market under the new FERC Order 712 no-cap rules show the market ginned up an additional $5.7 million in payments above the maximum capacity rate, a small start to what could become a billion dollar business, according to projections by market monitor CapacityCenter.com.
While only a small fraction of the capacity trades captured in August on its Capacity Center trade monitoring system were at prices above the maximum rate, "we believe the markets are just beginning to feel the impact on secondary capacity market values that Order 712 will bring," said Greg Lander, president of Capacity Center.
The data show that in the usually slow August market the above maximum rate deals comprised 3% of the deals, 12% of the market quantity and nearly 21% of the total market value. The volume and value numbers are significant, Lander said. Capacity Center figures show an annualized market increase of $200 million, reflecting $800 million over the long term.
In the first 36 days the main markets where capacity traded above maximum rates were from the Rockies to the northwest and the Rockies to the East. "This is due to excess supply in relationship to available pipeline capacity," Lander said. Other markets where capacity is trading above maximum rates are Canadian to Chicago and the East, San Juan to California, Gulf Coast to Leidy (market area storage) and Gulf Coast to Transco Zone 6, both New York and non-NY. The above maximum rate deals are expected to increase, particularly along some of these lines in the forward market for winter deliveries.
Lander said Capacity Center had expected to see an uptick in the Florida market but it didn't materialize, possibly because capacity additions there are matching market demand. Also, the Florida market is almost exclusively given over to retail aggregators, with industrials and commercials owning their own capacity and turning it over to asset managers, while in the Northeast the LDCs own most of the capacity.
"The new rules in capacity trading markets have some market participants expecting the capacity relationship to the financial basis markets to finally reach a predictable and tradable correlation," Lander said. "To date there have been a number of Nov-Mar and 12-month strip deals above max rates that are showing evidence of the physical capacity market converging with the financial basis market." CapacityCenter currently is working on a study of the current and projected correlation.
The new rules established by the Federal Energy Regulatory Commission (FERC) are pulling business out of the gray market (where blended gas and transportation could avoid the rate caps) "into deals reported and transacted in broad daylight that everyone can see. Before Order 712, once the market price of capacity in a supply or market area reached max rates that market would 'go dark,' meaning that normal trading stopped and any deals done moved to the gray market to effectively achieve a higher than max price rate. With Order 712, this should no longer happen and the transparent market will grow as a result."
For instance if the market basis into New York was at $2.50, but the maximum transportation rate was 55 cents, that capacity market would "go dark" as traders used various means to capture the greater value.
Order 712, finalized in June, permanently removes the rate cap on capacity-release transactions of one year or less. But it does not lift the rate ceiling on long-term capacity releases of more than one year or on primary sales of capacity by pipelines (see NGI, June 23).
Following up on the new capacity release rules executive committee of the North American Energy Standards Board's (NAESB) Wholesale Gas Quadrant voted out a protocol for using the differentials between natural gas commodity price index points to price short-term released capacity. The proposed standards set the formula for how bids and offers using price index calculations for the capacity to be released may be posted on a pipeline electronic bulletin board and how the results may be calculated. NAESB President Rae McQuade said she expected that the FERC filing of the standards would be made by the end of the year (see NGI, June 30).
Order 712 also exempts capacity releases made as part of asset management arrangements (AMAs) from the agency's prohibition on tying deals to extraneous conditions. It also exempts these transactions from the from certain bidding requirements and clarifies the definition of AMAs to relax the delivery and purchase obligations of the replacement shipper and to permit supply-side AMAs.
An AMA is a prearranged capacity release where a capacity holder, such as a local distribution company, releases some of its capacity to an asset manager who then agrees to either purchase from or supply the gas needs of the capacity holder. AMAs represent a relatively new development in the natural gas industry. These arrangements are contractual relationships where a party agrees to manage gas supply and delivery arrangements, including transportation and storage capacity, for another entity.
And to advance retail open-access programs, the FERC order exempts capacity releases made under state-approved retail access programs from the prohibition against tying and from the bidding requirements in Section 284.8 of agency regulations.
The Capacity Center data shows that for the first 36 days under the new rules 79.1 Bcf or 1.4 Bcf/d was traded at above maximum rates, out of a total capacity market of 678 Bcf or 11.2 Bcf/d. Capacity Center calculates the total value of the secondary capacity market for the period was $78 million, of which $16.1 million was collected above maximum rates.
Capacity Center operates a 24/7/365 natural gas interstate pipeline data center sweeping data from 54 U.S. pipelines. Its automated services monitor capacity release offers, system notices and deal awards information and streams transaction details as they occur to its customers via email. The company has an historical database of capacity transactions going back to 1993. Capacity Center is owned and operated by Boston-based Skipping Stone.
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