OPEN ACCESS AND THE EMERGENCE OF A COMPETITIVE NATURAL GAS MARKET

Recent regulatory changes permitted natural gas pipelines to become "open access" transporters. This change in pipeline carrier status dissolved regulatory barriers to markets. This paper describes the institutions that were developed to support exchange in gas markets and observes and evaluates their emergence, evolution, and performance. The institutional and empirical evidence reveals that gas markets rapidly emerged with the dissolution of regulatory barriers. Spot gas prices converged and became highly correlated. A national market for natural gas developed within four years.     

A Retrospective Look at Wholesale Gas: Industry Restructuring

The purpose of this paper is to identify lessons learned from the restructuring of the natural gas industry. We draw a number of conclusions including that the billions of dollars of savings typically attributed to gas industry restructuring resulted not from competition but because restructuring stranded billions of dollars in contractual purchase obligations, costs that were absorbed by producers and pipelines. The replacement of regulated wholesale merchants by new entrants did not occur because of competitive efficiencies. Competition in wholesale gas marketing has produced consumer benefits in the form of innovation, new product development, broader choices and possibly reduced costs. Bi-lateral contracting led to the development of gas markets, which in turn, produced market-wide diffusion and integration of pricing information.     

Fuel inventory and price relationships in the U.S. electric power sector under regulatory and market change

Long-run relationships among coal inventories at U.S. electric power plants, corporate bond rates and coal, natural gas, and electricity prices are estimated over the period July 1976 to October 2014. Tests for constancy of the long-run relationships show periods of instability which coincide with major regulatory events in the electric power sector. Deregulation of the natural gas and electricity markets are likely sources of instability for the period mid-1994 to mid-2001. Additionally, inventory behavior may have had a smoothing effect over instability caused by natural gas prices during the recent U.S. shale boom. Policy makers should be aware that altering the regulatory environment can result in considerable fluctuations in how firms’ inventory decisions interact with input and output markets and opportunity costs in the long run.     

SOCIAL CONTRACTS AND PIPE DREAMS

Economists' debate over the public utility "regulatory contract" has increasingly focused on three issues created by sunk costs: (i) Protection of sunk capital, (ii) Division of "windfalls" in a world of uncertainty, and (Hi) Mechanisms to control the regulator who administers long-term agreements. This article uses these three criteria to evaluate regulatory alternatives in the natural gas industry. Facing similar problems under criteria 1 and 2 are: government regulation of pipelines as integrated gas merchants, government regulation of pipelines as gas transporters, and private regulation through competitive contracting. Private contracting, however, offers superior control over the contract administrator, because it removes the Federal Energy Regulatory Commission's monopoly on contract administration.     

Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment

When a commodity market relies upon a regulated network service industry—e.g., telecommunications, electricity, or natural gas transmission—economic efficiency in that commodity market is a crucial consideration for regulatory design. This is because insufficient infrastructure investment relative to network demand results in congestion. The extraction of associated rents has distortionary effects on commodity spot market prices. Greater regulatory flexibility in network pricing can alleviate such issues by cultivating the incentives needed for stakeholders to invest in transmission capacity. To illustrate this effect I derive and numerically solve stylized optimality conditions for access and usage prices for a gas pipeline operator under alternative regulatory models. My results have general implications for regulation in network infrastructure industries, as energy and telecommunications markets are expected to expand considerably over the coming decades.     

Regulatory arbitrage and the FERC rate settlement process

We demonstrate that the Federal Energy Regulatory Commission’s (FERC) regulatory procedures for natural gas pipelines, specifically its rate-refund policy, induces regulatory arbitrage that leads to economic distortions. Specifically, we demonstrate that the rate refund policy causes pipelines effectively to “extort” ratepayers through the addition of economically inefficient capital investment, akin to “gold-plating” investments. We estimate the potential magnitude of this arbitrage impact on ratepayers to be between $400 and $700 million annually. Counterintuitively, however, we demonstrate that the presence of this arbitrage opportunity leads to underinvestment in pipeline capacity, thus negating one of the principal purposes of rate regulation. We further demonstrate that FERC could easily eliminate this regulatory arbitrage by setting the refund interest rate to the pipeline’s as-filed weighted average cost of capital.     

Welfare Effects of Price Integration in Local Public Transport

Abstract ** :  In metropolitan areas collective transport is often supplied by many firms and in many modes. The paper focusses on the merging of decisions about prices in two market regimes: monopoly and benevolent regulation through Ramsey pricing. The results confirm that centralization entails efficiency gains under monopoly whenever a unique supplier substitutes many firms serving each link of a network. Under benevolent regulation, instead, centralization entails efficiency gains only under certain conditions. Moreover, efficiency improvements under Ramsey pricing involve the introduction of cross subsidies among previous regulatory jurisdictions. Hence some users gain while others lose. Both the theoretical and empirical literature suggest that periphery residents are the main beneficiaries of centralization .     

REGULATORY REFORM OF INTERSTATE NATURAL GAS PIPELINES

This paper assesses the historic nature of regulation of the interstate natural gas pipeline industry and examines two recently proposed reforms, "mandatory" contract carriage and open entry. Empirical evidence that bears on the desirability of each of these reforms is cited or developed. It is argued that the reforms increase competition in gas transportation, thereby diminishing the need for traditional regulation, and that they increase economic efficiency in the transport of natural gas.     

Economic determinants of deregulation in the gas distribution market

Many state public commissions have deregulated their utility markets. However, evidence of welfare or efficiency improvements under deregulation is ambiguous. It is also unclear why different states adopt consumer choice, price caps, sliding-scale plans, or retain rate-of-return regulation. This study evaluates several economic factors behind deregulation in gas distribution markets using a survey of state commissions. Logistic and hazard models show that utilities’ prices and capacity, and states’ stock of own gas wells, prices of competing fuels and the regulatory climate, help explain the pattern of deregulation. Demonstration effects from surrounding markets also contribute. These factors make the propensity to use price caps versus restructuring vary regionally.     

Market-based regulation of natural gas pipelines

We argue that some forms of market-based regulation allowed within current statutory constraints can outperform traditional rate-setting regulation now used for interstate natural gas pipelines. In particular, a resale market for pipeline capacity rights can yield efficient choices in the short term, even for a natural monopoly pipeline. We also propose applying market mechanisms to setting the pipeline's original rates. The paper reviews experimental evidence on the performance of some of the proposed rate-setting institutions and describes some specific proposals made by pipelines that are consistent with those described here.     

Spot and forward markets for natural gas: The effects of state regulation

Since the emergence of a spot market in natural gas in 1984, state regulators have been concerned that regulated utilities would fail to choose between contracts and spot purchases in a way that minimizes costs. Grounds for this concern are shown, under two alternative rate structures, in a model where regulation produces ex post profit and loss restrictions. Two policy resolutions to the problem are suggested, one that uses an alternative mechanism for triggering rate reviews, allowing the substitution of ex ante for ex post profit and loss restrictions, and one that exploits the special structure of gas markets within the context of traditional regulatory practice.     

Valuing Options in Water Markets: A Laboratory Investigation

Risk and reliability dominate water supply discussions in the arid western United States due to increasing demand and finite, weather-dependent supply. Water markets have evolved in this region so agencies could meet this growing demand. In a few instances, water agencies turned to contractual mechanisms such as options to manage supply. As demand continues to grow option markets and other novel approaches to allocating water may become increasingly popular. We utilize experimental economics to analyze the effect of annual options on water markets in the absence of sufficient real-world data for conventional econometric analysis. We find gains from trade are higher when options can be traded. Additionally, gains are more evenly distributed, particularly with a dominant buyer and many sellers. Findings suggest option markets may be a viable choice as policymakers prepare for future droughts.     

Regulatory Contracts and Stakeholder Regulation

Abstract **: This paper examines the application of the concept of a regulatory contract in the analysis of UK utilities regulation. It argues that there are serious problems in conceiving of regulatory relations as analogous to contracts, though particular contracts may be a useful tool in the regulatory armoury. This is partly due to problems with principal/agent theory, which has been conceived in different ways by economists and lawyers, and partly due to the essentially political nature of regulatory relations, which make it difficult to tie down regulatory discretion in ways which resemble contractual relations. There is also ambiguity as to who is principal and who is agent, with the danger of adopting a single theoretical category for relationships which are radically different. The early legal structures adopted for UK utility regulation did have elements of a regulatory contract, but with the growth of competition and social regulation, a different model, that of a network of stakeholders, has largely replaced it. This offers the opportunity to develop more sophisticated regulatory procedures, but does not replace the need for substantive values drawn from economics but also from public service values as guides for regulatory decisions .     

Privatization and Utility Regulation in Developing Countries: the Lessons So Far

The privatization of utilities has grown in developing countries in recent years. Privatization transactions for the utilities sector have accounted for over a third of all sales in developing countries since 1988. The introduction of privatization has not necessarily meant more competition. Consequently, utility privatization has led in many cases to the creation of regulatory structures that aim to protect consumers from monopoly abuse and to provide incentives to firms to maintain efficiency. Case studies drawing on examples from the telecommunications, electricity and water sectors indicate that creating effective regulation and a competitive environment is a difficult and slow process. The cases have shown that regulation rather than privatization achieved the largest gains. Similarly, although the variety of regulatory measures that have been introduced have made a difference, the most tangible benefits, particularly to consumers, result from the establishment of competition. The case studies have shown that privatization has preceded the development of effective regulation and competition. The development of regulatory structures is constrained by the capacity of governments to enforce regulatory rules and monitor contracts. Fostering conditions that encourage competition and lessen anti-competitive behaviour by incumbents is a beneficial but slow process.     

CROSS-CONTRACT CREDITING UNDER FERC ORDER 500

In remanding Federal Energy Regulatory Commission (FERC) Order 436, the US. Court of Appeals for the District of Columbia Circuit did not require the FERC to issue a new policy on "take-or-pay" contracts between interstate pipelines and natural gas producers. The court asked only that the FERC meet the standard of "reasoned decision making." FERC Order 500, in proposing the mechanism of cross-contract crediting to reformulate take-or-pay contracts, went far beyond the court's decision.
Take-or-pay contracts are but one component of an interrelated set of long-run commitments by both pipelines and gas producers upstream and downstream. The FERC's abrogating take-or-pay contracts would reverberate beyond the immediate consequences for pipelines and producers. Implementing Order 500 would change the conditions under which gas producers explore, develop, and extract. It would influence the terms of future lease and royalty contracts with owners of mineral rights, and it would have adverse consequences for end users of gas. Evidence exists that promulgating Order 500 increased spot gas prices. Most take-or-pay problems have been resolved through voluntary renegotiation by the parties. Nullifying the remaining contracts through regulation will not accomplish the pro-competitive goals that have guided the FERC's natural gas policy during the 1980s.     

Environmental regulation and safety outcomes: Evidence from energy pipelines in Canada

This paper investigates the effects of more stringent environmental regulation—specifically, paying amortized abandonment fees as accrued and absolute liability for adverse events—on the safety performance of Canadian oil and gas pipelines. We construct a comprehensive dataset that includes pipeline adverse events, throughput, and regulatory intensiveness for fourteen federally-regulated energy pipelines in Canada. We find that abandonment fees are significantly and positively associated with pipeline events. On average, a 1% increase in abandonment fees is associated with 1.3 more events per month. In contrast, establishing absolute liability is associated with significant decreases in the number of pipeline events: on average, absolute liability is responsible for eliminating 80% of quarterly events for Canadian major oil pipelines and 20% for smaller pipelines.     

SYNCHRONISING DEREGULATION IN PRODUCT AND LABOUR MARKETS

Deregulation typically comes with redistribution of rents and thus with opposition from the losing interest groups. We show that, by exploiting complementarities, synchronising deregulation across markets makes this opposition lower. Indeed, a particular deregulation may reduce rents for one interest group, but may result in gains for another interest group. Synchronising reforms can therefore offer a way out of the ‘sclerosis’ of especially European markets. For this effect, we build a microeconomic model based on two assumptions: Cournot competition à la Vives in the product markets and firms hiring workers in accordance with an efficiency wage in the labour markets. As being particularly relevant for European economies, we focus on product market regulation that determines the degree of market integration and labour market regulation that determines the degree of employment protection.     

Welfare change and the elimination of the shortage economy in Russia: some representative-household results1

The welfare consequences of eliminating the shortage economy for the representative Russian household are quantitatively assessed. Before price liberalization, households either bought goods and services at state prices and paid searching and queuing costs, or they bought on parallel markets at higher monetary prices. An equation is derived that permits empirical evaluation of the extent to which welfare gains from eliminating searching and queuing costs offset welfare losses from falling real consumption. Available data suggest that when regime change was initiated in Russia in 1992, welfare gains from eliminating shortage were substantial and may have completely offset welfare losses from falling real consumption.     

Renewable energy and low-carbon policy spillover effects on natural gas demand

Recent legislation intended to increase the use of renewable energy sources and lower the amount of carbon dioxide emissions from energy has changed the structure of energy markets. The effect of these policies on carbon-intensive fuel sources is rather obvious. For natural gas, though, the effect is not immediately clear. This letter uses a structural model of natural gas demand to uncover whether these policies have led to increased demand because natural gas is a relatively clean source of energy that couples well with renewables or if these policies have crowded out natural gas on net.