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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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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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