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Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism

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  • Anne Neumann
  • Juan Rosellón
  • Hannes Weigt

Abstract

We propose a merchant-regulatory framework to promote investment in the European natural gas network infrastructure based on a price cap over two-part tariffs. As suggested by Vogelsang (2001) and Hogan et al. (2010), a profit maximizing network operator facing this regulatory constraint will intertemporally rebalance the variable and fixed part of its two-part tariff so as to expand the congested pipelines, and converge to the Ramsey-Boiteaux equilibrium. We confirm this with actual data from the European natural gas market by comparing the bi-level price-cap model with a base case, a no-regulation case, and a welfare benchmark case, and by performing sensitivity analyses. In all cases, the incentive model is the best decentralized regulatory alternative that efficiently develops the European pipeline system.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.376700.de/dp1145.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1145.

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Length: 20 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diwwpp:dp1145

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Keywords: regulation; transportation network; investment;

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References

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  1. Dagobert Brito & Juan Rosellón, 2011. "Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best," Networks and Spatial Economics, Springer, vol. 11(3), pages 533-553, September.
  2. Juan Rosellón & Hannes Weigt, 2010. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application," Discussion Papers of DIW Berlin 1019, DIW Berlin, German Institute for Economic Research.
  3. Neu, Werner, 1993. "Allocative Inefficiency Properties of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 5(2), pages 159-82, June.
  4. Vogelsang, Ingo, 1989. "Two-part tariffs as regulatory constraints," Journal of Public Economics, Elsevier, vol. 39(1), pages 45-66, June.
  5. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, vol. 38(2), pages 113-143, October.
  6. Golombec, R. & Gjelsvik, E. & Knut, E. & Rosendahl, E., 1996. "Increased Competition on the Supply Side on the Western European Natural Gas Merket," Memorandum 11/1996, Oslo University, Department of Economics.
  7. Fraser, Rob, 1995. "The Relationship between the Costs and Prices of a Multi-product Monopoly: The Role of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 23-31, July.
  8. Ruud Egging, Franziska Holz, Christian von Hirschhausen and Steven A. Gabriel, 2009. "Representing GASPEC with the World Gas Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 97-118.
  9. Jan Abrell & Hannes Weigt, 2012. "Combining Energy Networks," Networks and Spatial Economics, Springer, vol. 12(3), pages 377-401, September.
  10. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  11. Perner, J. & Seeliger, A., 2004. "Prospects of gas supplies to the European market until 2030--results from the simulation model EUGAS," Utilities Policy, Elsevier, vol. 12(4), pages 291-302, December.
  12. Bertoletti, Paolo & Poletti, Clara, 1997. "Welfare effects of discriminatory two-part tariffs constrained by price caps," Economics Letters, Elsevier, vol. 56(3), pages 293-298, November.
  13. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1995. "Effects of Liberalizing the Natural Gas Markets in Western Europe," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-112.
  14. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  15. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  16. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
  17. David Sibley, 1989. "Asymmetric Information, Incentives and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 392-404, Autumn.
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Cited by:
  1. Mulder, M. & Kuper, G.H., 2013. "Cross-border constraints,institutional changes and integration of the Dutch – German gas market," Research Report 13004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  2. Kuper, Gerard & Mulder, Machiel, 2013. "Cross-border infrastructure constraints, regulatory measures and economic integration of the Dutch - German gas market," Research Report 13001-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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