Basics of the Spot Market

A whole new method of contracting has emerged in the natural gas industry through the spot market. The market has developed because the Natural Gas Policy Act of 1978 (NGPA) guaranteed some rights for end-users and marketers in the purchasing and transporting of natural gas. It also put natural gas supplies into a more competitive position with deregulation of several categories.

The Federal Energy Regulatory Commission (FERC) provided additional rulings that facilitated the growth of the spot market. These rulings included provisions for the Special Marketing Programs in 1983 (Order 2346) and Order 436 in 1985, which encouraged the natural gas pipelines to transport gas for end-users through blanket certificates.

The change in the structure of markets in the natural gas industry has been immense in terms of both volumes and the participants in the market. By year-end 1986, almost 40% of the interstate gas supply was being transported on a carriage basis. Not only were end-users participating in contract carriage, but local distribution companies (LDCs) were accounting for about one half of the spot volumes on interstate pipelines.

The "spot market" or "direct purchase" market refers to the purchase of gas supplies directly from the producer by a marketer, end-user or LDC. (The term "spot gas" is often used synonymously with "best efforts gas," "interruptible gas," "direct purchase gas" and "self-help gas.") This type of arrangement cannot be called new because the pipelines have always sold some supplies directly to end-users.

The new market differs from the past arrangements in terms of the frequency in contracting and the volumes involved in such contracts. Another characteristic of the spot market is that contracts are short-term, usually only 30 days, and on an interruptible basis. The interruptible nature of spot market supplies is an important key to understanding the operation of the spot market and the costs of dealing in it. On both the production and transportation sides, all activities in transportation or purchasing supplies are on a "best efforts" basis. This means that when a cold snap comes the direct purchaser may not get delivery on his contracts because of producer shutdowns, pipeline capacity and operational problems or a combination of these problems. The "best efforts" approach to dealing can also lead to problems in transporting supplies when demand is high and capacity limited.

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