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

  • Anne Neumann
  • Juan Rosellón
  • Hannes Weigt

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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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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  1. Fthenakis, Vasilis & Mason, James E. & Zweibel, Ken, 2009. "The technical, geographical, and economic feasibility for solar energy to supply the energy needs of the US," Energy Policy, Elsevier, vol. 37(2), pages 387-399, February.
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  3. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
  4. Ruud Egging & Franziska Holz & Christian von Hirschhausen & Steven A. Gabriel, 2008. "Representing GASPEC with the World Gas Model," Discussion Papers of DIW Berlin 845, DIW Berlin, German Institute for Economic Research.
  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. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  7. Jan Abrell & Hannes Weigt, 2012. "Combining Energy Networks," Networks and Spatial Economics, Springer, vol. 12(3), pages 377-401, September.
  8. Juan Rosell�n & Hannes Weigt, 2011. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 119-148.
  9. Dagobert L. Brito & Juan Rosellón, 2010. "Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best," Discussion Papers of DIW Berlin 1024, DIW Berlin, German Institute for Economic Research.
  10. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1998. "Increased Competition on the Supply Side of the Western European Natural Gas Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-18.
  11. Neu, Werner, 1993. "Allocative Inefficiency Properties of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 5(2), pages 159-82, June.
  12. 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.
  13. 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.
  14. 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.
  15. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
  16. 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.
  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.
  18. 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, June.
  19. Vogelsang, Ingo, 1989. "Two-part tariffs as regulatory constraints," Journal of Public Economics, Elsevier, vol. 39(1), pages 45-66, June.
  20. 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.
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