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# **Box 4 The Development of Hubs and Market Centers: The Henry Hub**

The Henry Hub is a major natural gas interchange center near Erath, Louisianai, operated by Sabine Pipe Line Company, a subsidiary of Texaco. Marketers and traders at the Henry Hub have access to large consumer markets in the Midwest, Northeast, Southeast, and Gulf Coast area through nine interstate and three intrastate interconnecting pipelines.

The Henry Hub became operational in 1988 as the first hub of its kind in North America. The volume transported through the Hub increased from 230 million cubic feet of gas a day in 1989 to 550 in 1995, and Sabine has the capability to transport more than 1 billion cubic feet of gas a day across the hub. Natural gas trading at the Henry Hub began in 1988 and has developed over time into a large and liquid spot market. The Henry Hub became the pricing point for the New York Mercantile Exchange (NYMEX) natural gas futures contracts in April 1990 and the NYMEX options contracts in 1992.

The Henry Hub has attracted major natural gas traders thanks to Sabine's ability to offer shippers the flexibility to change supply sources and markets through interconnecting pipelines. Sabine's pipeline system is relatively small, with only 189 miles of pipeline, but it can move gas in both directions in response to gas prices and has interconnections with 14 interstate and 22 intrastate pipelines. Sabine was the first pipeline operator in the U.S. gas - industry to use operational balance agreements agreements among the interconnected pipeline companies to resolve monthly imbalances among shippers so that individual shippers do not incur an imbalance penalty. Sabine signed such an agreement with the Natural Gas Pipeline Company in 1989, and by now has operational balance agreements with all interconnecting pipelines. These agreements have contributed to the popularity of the Henry Hub among gas traders and the high satisfaction of shippers with Sabine's services.

# _Source:_ Interstate Natural Gas Pipeline Association of America

Spot markets have been organized at almost all major market centers and hubs in the United States as well as at major city gates.<sup>6</sup> Today there are more than 50 spot markets in the United States. The most important is at the Henry Hub, where natural gas has been traded since 1988.

The most important role of spot markets is to generate efficient price signals about the market value of natural gas. In a competitive spot market prices reflect the short-run - marginal cost of gas at the location of the market that is, the spot price is equal to the value of a marginal unit of gas traded in the spot market at a particular time and thus reflects the market value of gas at that time. In practice, spot prices are derived from the prices of a large number of gas contracts traded in a spot market.

Market participants use spot prices to evaluate their gas contract portfolios. They also use spot prices for pricing natural gas traded under bilateral supply contracts, particularly long-term supply contracts. Thus the pricing of most natural gas deliveries is linked to spot market prices, and as a result, most participants in the gas market face efficient prices as long as spot markets are competitive and well functioning.

> **6** City gates are delivery points on interstate pipelines where local distribution companies and large end users receive interstate gas deliveries. Transportation beyond a city gate takes place on interstate or distribution pipelines. City gates are located near large consuming areas. In the United States the largest city gate is in Chicago (U.S. Department of Energy 1995a).