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

23 Pages Posted: 29 Jul 2011

See all articles by Anne Neumann

Anne Neumann

German Institute for Economic Research (DIW Berlin)

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel

Date Written: July 2011

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.

Keywords: regulation, transportation network, investment

Suggested Citation

Neumann, Anne and Rosellon, Juan and Weigt, Hannes, Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism (July 2011). DIW Berlin Discussion Paper No. 1145, Available at SSRN: https://ssrn.com/abstract=1898562 or http://dx.doi.org/10.2139/ssrn.1898562

Anne Neumann (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Juan Rosellon

Centro de Investigacion y Docencia Economicas ( email )

Carretera Mexico Toluca 3655
01210 Mexico, D.F.
Mexico

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel ( email )

Basel, 4051
Switzerland

HOME PAGE: http://fonew.unibas.ch/

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