Understanding The Colonial Pipeline Trade: It’s Like Subletting (Wall Street Journal)

Imagine you have a rent-controlled apartment, and your landlord cannot raise the rent without getting government approval. But no rules prevent you from subletting out the apartment and charging three or four times the rent that you pay.

That’s the situation on the Colonial Pipeline, the nation’s largest refined-fuel pipeline, where energy companies and traders are buying and selling rights to ship fuel from Houston to the East Coast. Shippers will pay more than 20 cents a gallon, on top of the government-approved shipping fees, for access to space on the pipeline.

[RELATED:The Hottest Energy Trade: A Ride Aboard the Colonial Pipeline]

Now imagine that no rules prevent you from selling your lease to this apartment for millions of dollars – even though the landlord is still only earning the government-approved monthly rent.

Colonial allocates space to shippers based on their ​“shipping history,” a record of how reliably they have shipped in the past. In a twist on the practice of line-space trading, some shippers have bought other companies’ histories to permanently increase the amount they can put through. Companies will pay $500 a barrel, according to pricing service Platts, which can add up to millions of dollars.

Colonial Pipeline Co. earlier this month filed a proposal with the Federal Energy Regulatory Commission to institute new rules that would effectively prevent the trading of shipping history. A number of pipelines already have a similar rule.

“We don’t think it’s a commodity you can sell,” said Dave Doudna, Colonial’s chief financial officer. ​“We believe that any transfer of shipper history should be associated with a real business purpose, such as the sale of a business.” Colonial filed a similar proposal in February but withdrew it after four companies filed protests.

No one has filed a protest to the new proposal yet, though two parties have filed requests with FERC for permission to intervene: trading house Castleton Commodities, and Rolympus, the physical oil business formerly owned by Morgan Stanley that Castleton recently acquired. Castleton declined to comment.

Companies have started buying and selling shipping history more actively in recent months, market participants say, because they are worried that history will lose its value if the proposed rules are approved