Capacity release (also called capacity brokering) is the act of reselling firm pipeline rights to a new entity. The market where capacity is released is sometimes called the secondary market (as opposed to the primary market of contracting directly with the pipeline company).
For example, suppose a shipper holds a long-term firm transportation agreement on a pipeline. Due to market developments, the shipper determines it no longer needs the firm capacity for the following year. The shipper can then find a new party that wants firm capacity and can transfer the contractual rights to the new party in return for a negotiated price.
Federal Energy Regulatory Commission (FERC) Order 636, issued in 1992, authorized the capacity release of transportation capacity. This enabled a firm capacity holder to assign on either a temporary or long-term basis any unused firm capacity. The effect of Order 636 was to establish rates more in line with the market value of capacity. Initially the price paid for released capacity could not exceed the maximum rate specified in the pipeline tariffs. But in 2008, FERC revised the rules to allow more flexibility in negotiating rates for released capacity.
Under the current rules the releasing and replacement shipper agree upon the reservation rate in a capacity release transaction. The parties can negotiate any reservation rate, up to the maximum tariff rate, for a capacity release with a term greater than one year. There is no rate limitation for a capacity release with a term of one year or less. However, FERC policy prohibits parties from executing a series of short-term sequential releases in order to obtain greater than the maximum tariff rate for periods exceeding one year. Rights to capacity may be transferred as a temporary release with rights for the original holder to recall the capacity or may be permanent with no rights of recall.
Capacity available for release as well as details on completed transactions are posted on each pipeline’s electronic bulletin board (EBB). All transactions are subject to certain rules and regulations. Primary among these are requirements that capacity offerings be non-discriminatory, meaning that they are offered to any party willing and able to pay for them. Posting of available transportation also allows for price transparency, which is crucial for a true commodity marketplace. Once a transaction has been completed and the buyer has fulfilled the pipeline’s creditworthiness requirements, the buyer is entitled to all the rights and privileges of the original owner of the capacity and the capacity is treated no differently than capacity acquired directly from the pipeline.