Pipeline constraints in wholesale natural gas markets : effects on regional pricing and market integration

Abstract

Natural gas markets in the United States depend on an extensive network of pipelines to transport gas from production fields to end users. While these pipelines are essential for the operation of natural gas markets, their capacity sets a physical limit on the quantity of gas that can be moved between regions. Taking advantage of a rich data set of daily pipeline capacities and flows, this thesis tests the effects of binding pipeline constraints directly. It is found that these constraints affect the citygate prices for the Florida and Southern California markets. The Law of One Price is tested using cointegration techniques and found to hold when pipeline flows are not constrained, and break down during constrained periods. It is also shown that cointegration techniques may not identify bottlenecks between regions when bottlenecks are not severe, or when they only occur for limited periods of time. Contrary to earlier results, Southern California markets are found to be integrated with the national market. Cointegration tests using data from 14 market points suggest that regional wholesale natural gas markets in the United States are generally integrated into a national market.