Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market – A Proposed Merchant-Regulatory Mechanism
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DIW Berlin Discussion Paper; 2011/1145; [Florence School of Regulation]; [Gas]
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NEUMANN, Anne, ROSELLÓN, Juan, WEIGT, Hannes, Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market – A Proposed Merchant-Regulatory Mechanism, DIW Berlin Discussion Paper, 2011/1145, [Florence School of Regulation], [Gas] - https://hdl.handle.net/1814/20103
Abstract
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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This publication is based on research carried out in the frame work of the Florence School of Regulation of the Robert Schuman Centre for Advanced Studies, European University Institute.