Network Connectivity and Price Convergency: Gas Pipeline Deregulation

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.