Evolution of the U.S. Natural Gas Industry in Response to Changes in Transaction Costs

The U.S. natural gas industry traditionally had producers, interstate pipelines, and distributors linked together via bilateral, long-term contracts. Recently the Federal Energy Regulatory Commission has encouraged buyers and sellers to deal directly with each other, leading first to a spot market and marketers, then to market hubs and a slight trend back to longer-term contracts. Marketers and pipelines have consolidated to take advantage of economies of scope and systems effects which larger networks provide. We use transaction cost economics to explain the evolution of exchange relationships with open access to transportation and the unbundling of transportation and storage from sales.