This paper authored by EPIcenter affiliate Matt Oliver dicusses how pipeline congestion in the U.S. Rocky Mountain region creates sizable price wedges, or “basis differentials,” between closely linked hubs—Opal, WY, and Cheyenne, CO. As demand for transport approaches capacity on the 325-mile corridor (via CIG, WIC, and REX), secondary market scarcity rents drive the Cheyenne spot price above Opal’s. A two-hub network model augmented with Clay Basin storage shows theoretically that higher flows relative to capacity raise the scarcity premium, while upstream storage injections mitigate it. Empirically, daily IntraDay2 data (May 2007–Oct 2010) confirm that when Cheyenne’s price exceeds Opal’s (Cohort 1), a mere 3.5% flow increase inflates the basis by 23%, implying ~$315k/month extra transport cost. Two major capacity additions—686 MMcf/day (Jan 2 2008) and 262.7 MMcf/day (Jun 1 2009)—substantially stabilized basis volatility. Storage at Clay Basin also reduces peak basis by enabling intertemporal shifting, highlighting its role in preserving market efficiency. Under FERC’s rate-of-return primary market, investment signals have shifted to firm contract holders, who may delay capacity expansions to capture rents. These findings underscore the need for policymakers to revisit tariff structures, encourage targeted storage additions, and plan ahead for ever-rising transport demand to prevent welfare losses from future bottlenecks.
This summary was written with the assistance of Microsoft Copilot on July 5th, 2025. Its content was edited and verified by EPIcenter staff and affiliates.
Read the full paper: https://link.springer.com/article/10.1007/s11149-014-9256-9