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Network Connectivity and Price Convergency: Gas Pipeline Deregulation

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  • De Vany, Arthur
  • Walls, W. David

Abstract

We use graph theoretic methods to model arbitrage on the evolving topology of the natural gas pipeline network following pipeline deregulation. We estimate models of spot prices over the network and show that the emergence, evolution and performance of natural gas pipelines brought about by the Federal Energy Regulatory Commission's policy of "Open Access". Under open access, the balkanized and disconnected network of gas markets created by regulation became more strongly connected, transportation markets developed, and natural gas spot prices converged. The pace of these changes can be linked to the degree of openness and connectedness of the pipeline network; it took four years for the network to reach a critical level of connectivity to bring convergence to prices. By 1990, gas markets had become thick enough to dampen the effect of demand and supply shocks on prices at each point in the network.

Suggested Citation

  • De Vany, Arthur & Walls, W. David, 1993. "Network Connectivity and Price Convergency: Gas Pipeline Deregulation," University of California Transportation Center, Working Papers qt9n876133, University of California Transportation Center.
  • Handle: RePEc:cdl:uctcwp:qt9n876133
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    References listed on IDEAS

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    1. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, August.
    2. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
    3. Arthur De Vany & W. David Walls, 1993. "Pipeline Access and Market Integration in the Natural Gas Industry: Evidence from Cointegration Tests," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-20.
    4. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-1093, December.
    5. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Paper 1227, Economics Department, Queen's University.
    6. Hubbard, R Glenn & Weiner, Robert J, 1991. "Efficient Contracting and Market Power: Evidence from the U.S. Natural Gas Industry," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 25-67, April.
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    Cited by:

    1. De Vany, A. & Walls, W.D., 1994. "The Law of One Price in a Network: Arbitrage and Price Dynamics in Natural Gas City Gate Markets," Papers 93-94-17, California Irvine - School of Social Sciences.

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