Exotic electricity options and the valuation of electricity generation and transmission assets
Decision Support Systems
Options in the Real World: Lessons Learned in Evaluating Oil and Gas Investments
Operations Research
Option Methods for Incorporating Risk into Linear Capacity Planning Models
Manufacturing & Service Operations Management
Exotic Options for Interruptible Electricity Supply Contracts
Operations Research
Competition and Structure in Serial Supply Chains with Deterministic Demand
Management Science
Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments
Manufacturing & Service Operations Management
Valuation of Commodity-Based Swing Options
Management Science
Hedging Inventory Risk Through Market Instruments
Manufacturing & Service Operations Management
Optimal Control and Hedging of Operations in the Presence of Financial Markets
Mathematics of Operations Research
Applications of Empirical Science in Manufacturing and Service Operations
Manufacturing & Service Operations Management
Strengthening the Empirical Base of Operations Management
Manufacturing & Service Operations Management
Multiechelon Procurement and Distribution Policies for Traded Commodities
Management Science
Integrated Optimization of Procurement, Processing, and Trade of Commodities
Operations Research
Manufacturing & Service Operations Management
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Pipelines play a critical role in matching the supply and demand of natural gas. The pricing of their capacity is an important problem in practice for pipeline companies and the users of this capacity, which include shippers such as natural gas merchants, producers, and local distribution companies. This paper conducts a normative analysis of how pipeline capacity should be priced by each of these players. Although the trading value of this capacity should be relevant to merchants and its substitution and congestion values to shippers and pipelines, respectively, this analysis shows that all of these are equivalent values. Thus pipeline capacity should be priced at its trading value, a prediction that can be empirically investigated. This paper also conducts an empirical analysis of this prediction based on transacted prices of transport contracts for the capacity of the Tennessee Gas Pipeline, a major interstate pipeline in the United States, and finds support for it. This analysis suggests that the uncertainty in the evolution of natural gas prices is an important driver of operational performance in the pricing of pipeline capacity. The results of this paper have potential relevance for the pricing of the capacity of other commodity conversion assets.