Interpreting concentration indices in the secondary market for natural gas transportation: The implication of pipeline residual rights

In 1992, the U.S. Federal Energy Regulatory Commission created a secondary market for natural gas transportation whereby shippers holding firm transportation capacity on interstate natural gas pipelines can compete with the pipeline in the provision of transportation services. However, if a shipper does not use some of its contracted firm transportation capacity, the pipeline can resell that capacity as interruptible transportation. That is, the pipeline has residual rights with respect to firm transportation capacity contracted for by shippers. We demonstrate that these residual rights can have a significant effect on the competitiveness of the secondary market for natural gas transportation. A consequence of these residual rights is that the secondary market for natural gas transportation may be considerably more competitive than indicated by measures of concentration like the widely used Herfindahl-Hirschman Index.