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On the Pricing of Natural Gas Pipeline Capacity

Author

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  • Nicola Secomandi

    () (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Pipelines play a critical role in matching the supply and demand of natural gas. The pricing of their capacity is an important problem in practice for pipeline companies and the users of this capacity, which include shippers such as natural gas merchants, producers, and local distribution companies. This paper conducts a normative analysis of how pipeline capacity should be priced by each of these players. Although the trading value of this capacity should be relevant to merchants and its substitution and congestion values to shippers and pipelines, respectively, this analysis shows that all of these are equivalent values. Thus pipeline capacity should be priced at its trading value, a prediction that can be empirically investigated. This paper also conducts an empirical analysis of this prediction based on transacted prices of transport contracts for the capacity of the Tennessee Gas Pipeline, a major interstate pipeline in the United States, and finds support for it. This analysis suggests that the uncertainty in the evolution of natural gas prices is an important driver of operational performance in the pricing of pipeline capacity. The results of this paper have potential relevance for the pricing of the capacity of other commodity conversion assets.

Suggested Citation

  • Nicola Secomandi, 2010. "On the Pricing of Natural Gas Pipeline Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 393-408, October.
  • Handle: RePEc:inm:ormsom:v:12:y:2010:i:3:p:393-408
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    File URL: http://dx.doi.org/10.1287/msom.1090.0273
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," CORE Discussion Papers 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Gong, Chengzhu & Tang, Kai & Zhu, Kejun & Hailu, Atakelty, 2016. "An optimal time-of-use pricing for urban gas: A study with a multi-agent evolutionary game-theoretic perspective," Applied Energy, Elsevier, vol. 163(C), pages 283-294.
    3. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.
    4. Ankur Goel & Genaro J. Gutierrez, 2011. "Multiechelon Procurement and Distribution Policies for Traded Commodities," Management Science, INFORMS, vol. 57(12), pages 2228-2244, December.
    5. Arvesen, Ø. & Medbø, V. & Fleten, S.-E. & Tomasgard, A. & Westgaard, S., 2013. "Linepack storage valuation under price uncertainty," Energy, Elsevier, vol. 52(C), pages 155-164.
    6. Fleten, Stein-Erik & Linnerud, Kristin & Molnár, Peter & Tandberg Nygaard, Maria, 2016. "Green electricity investment timing in practice: Real options or net present value?," Energy, Elsevier, vol. 116(P1), pages 498-506.
    7. Secomandi, Nicola, 2016. "A tutorial on portfolio-based control algorithms for merchant energy trading operations," Journal of Commodity Markets, Elsevier, vol. 4(1), pages 1-13.
    8. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    9. Bunn, Derek W. & Oliveira, Fernando S., 2016. "Dynamic capacity planning using strategic slack valuation," European Journal of Operational Research, Elsevier, vol. 253(1), pages 40-50.

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