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

  • Juan Rosellón

    ()

    (Division of Economics, CIDE)

  • Anne Neumann
  • 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 (NO) 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, and performing various sensitivity analyses. In all cases, the incentive model is the best decentralized regulatory alternative to efficiently develop the entire pipeline system in Europe.

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Paper provided by CIDE, División de Economía in its series Working papers with number DTE 506.

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Length: 24 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:emc:wpaper:dte506
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