The role of excess capacity in determining market power in natural gas transportation markets

The approval by FERC of a regulated natural gas pipeline’s market-based rate application depends upon the availability of substitute pipelines with sufficient capacity to maintain the current transport price. But how much alternate capacity is enough? Clearly, the price will not increase when alternate pipelines have unsubscribed capacity equal to the capacity of the applicant pipeline, since the applicant’s capacity is then perfectly substitutable. And indeed, FERC has approved market-based rates when this “complete-replacement” criterion has been met. However, complete-replacement is too stringent a condition and we determine precisely how much alternate capacity suffices to keep the price from rising.