Economics of Natural Gas Transportation
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This report demonstrates that the existence of significant economies of scale and scope in the European gas industry make many transmission and local distribution companies natural monopolies in the markets in which they operate. Often, this gives them a strong market power and little competitive pressure. Substantial parts of the rent in the gas chain are accrued in the transportation segment rather than in production and/or to the benefit of consumers. This gives reason for public interventions into the functioning of the market, as seen under the initiatives taken by the European Commission, such as the “Gas Directive”. The report discusses gas transport regulations; arrangements that goes beyond the present EU initiatives. No schedule seems to secure any first-best outcome. However, different types of multipart tariffs and price discrimination under Ramsey principles may bring about social acceptable second-best results. The complexity of regulations and the huge interests at stake make it doubtful that such regulations are attainable throughout Europe in the coming decade. The report discusses a game between a public authority and the transporters where various level of conflict and cooperation will influence how far regulations will go and how they will be designed. Changing property rights (nationalization) and the use of market forces is discussed as alternatives to regulation.