Optimal Capacity and Two-Part Pricing for Natural Gas Pipelines under Alternative Regulatory Constraints

摘要

The market for natural gas pipeline transportation is comprised of two distinct tiers. Theprimary market, in which pipelines sell ‘firm’ capacity contracts using a two-part tariffstructure, is subject to rate-of-return regulation. In the secondary market fortransportation services, owners of firm contracts may either utilize or release theircontracted capacity. Both activities are transacted at decentralized market-based prices,potentially earning firm contract owners scarcity rents. This paper extends a richliterature on optimal capacity and pricing to account for these features of the natural gaspipeline market, deriving optimization rules for pipeline pricing and capacity whendemand for the shipping service is stochastic and stationary. For comparison, theanalytical model presents three alternative regulatory regimes – unregulated monopoly, aRamsey second-best solution, and rate-of-return. As the optimality conditions for eachcase are too complex to solve analytically, we parameterize and numerically solve eachset of conditions for different distributional scenarios. Results indicate that optimalcapacity under rate-of-return regulation is less than what would occur under a Ramseysecond-best solution. An important aspect of the problem is that the latter accounts forthe external effect of capacity on the consumer and producer surpluses at the marketsconnected by the pipeline, whereas the former does not. Furthermore, when uncertaintyin the secondary market is high, the pipeline’s optimal capacity is scarcely greater than inthe unregulated monopoly optimum. Our results are consistent with the classic Averch-Johnson hypothesis that a rate-of-return regulated firm will employ a greater capital stockrelative to the unregulated optimum. However, the result that the pipeline’s optimalcapacity under ROR is less than the Ramsey second-best socially optimal level impliesthat under-investment in pipeline capacity may exacerbate congestion issues.Calculations of social welfare under each regulatory regime show that overall economicwelfare is sub-optimal under rate-of-return regulation in each distributional scenario.