Welfare effects of unbundling under different regulatory regimes in natural gas markets
- 225 Downloads
In this paper, we develop a theoretical model that enriches the literature on the pros and cons of ownership unbundling vis-à-vis lighter unbundling frameworks in the natural gas markets. For each regulatory framework, we compute equilibrium outcomes when an incumbent firm and a new entrant compete à la Cournot in the final gas market. We find that the entrant’s contracting conditions in the upstream market and the transmission tariff are key determinants of the market structure in the downstream gas market (both with ownership and with legal unbundling). We also study how the regulator must optimally set transmission tariffs in each of the two unbundling regimes. We conclude that welfare maximizing tariffs often require free access to the transmission network (in both regulatoy regimes). However, when the regulator aims at promoting the break-even of the regulated transmission system operator, the first-best tariff is unfeasible in both regimes. Hence, we study a more realistic set-up, in which the regulator’s action is constrained by the break-even of the regulated firm (the transmission system operator). In this set-up, we find that, for a given transmission tariff, final prices in the downstream market are always higher with ownership unbundling than with legal unbundling.
KeywordsOwnership unbundling Legal unbundling Access price regulation Natural gas market Transmission tariffs
JEL ClassificationL50 L43 L95
Joana Pinho acknowledges financial support from University of Porto, Fundação para a Ciência e Tecnologia and FEDER (SFRH/BPD/79535/2011). The authors acknowledge financial support from CEF.UP University of Porto and FCT.
This work was financed by FEDER, through the Operational Program for Competitiveness Factors (COMPETE), and by National Funds, through Fundação para a Ciência e Tecnologia, through projects PTDC/IIM-ECO/ The authors thank the Editor, Prof. Odd Rune Straume and two anonymous referees for their suggestions and insights on a previous version of the paper.
- Ascari S (2011) An american model for the EU gas market?, EUI working papers No. 2011/39 Robert schuman centre for advanced stidies. Florence School of Regulation, FlorenceGoogle Scholar
- Cavaliere A (2007) The liberalization of natural gas markets: regulatory reform and competition failures in Italy. Oxford Institute for Energy StudiesGoogle Scholar
- European Commission (2010) Interpretative note on directive 2009/72/ec concerning common rules for the internal market in electricity and directive 2009/73/ec concerning common rules for the internal market in natural gas -the unbundling regime. Commission Staff Working Paper, BrusselsGoogle Scholar
- Glanchard J-M, Hallack M, Vasquez M (2014) Gas network and market diversity in the US, the EU and Australia: A story of network access rights, EUI working papers No. 2011/33 Robert schuman centre for advanced stidies. Florence School of Regulation, FlorenceGoogle Scholar
- Gasmi F, Laffont J-J, Oviedo J (2004) Impact of regional market power on natural gas transport network size, working paperGoogle Scholar
- Gasmi F, Oviedo JD (2005) Regulation of regional monopolies in natural gas markets, mimeo, Toulouse School of Economics (IDEI)Google Scholar
- Lapuerta C, Moselle B (2002) Convergence of non-discriminatory tariff and congestion management systems in the European gas sector. Technical Report. The Brattle GroupGoogle Scholar
- Lowe P, Pucinskaite I, Webster W, Lindberg P (2007) Effective unbundling of energy transmission networks: lessons from the Energy Sector Inquiry. Competition Policy Newsletter 1:23–34Google Scholar
- Newbery DM (2000) Privatization, restructuring, and regulation of network utilities. MIT, LondonGoogle Scholar
- Rey P, Tirole J (2007) A primer on foreclosure. In: Armstrong M, Porter P (eds) Handbook of Industrial Organization, vol III, North Holland, pp 2145–2220Google Scholar
- Soares I, Magalhaes S (2012) Regulation and investment in the EU natural gas sector: a panel data analysis. In: 9th International Conference on the European Energy Market (EEM) Proceedings, 1-8Google Scholar
- Stronzik M (2012) The european natural gas sector – between regulation and competition. PhD Thesis, Jacobs University, BremenGoogle Scholar