A Cost Function for the Natural Gas Transmission Industry: Further Considerations

2018

Utilities Policy

Self Cite

This note details a complete microeconomic characterization of the physical relationships between input use and the level of output of a simple point-to-point gas pipeline system and uses it to contribute to the public policy discussions pertaining to the economic regulation of natural gas pipelines. We show that the engineering equations governing the design and operations of that infrastructure can be approximated by a single production equation of the Cobb-Douglas type. We use that result to inform three public policy debates. First, we prove that the long-run cost function of the infrastructure formally verifies the condition for a natural monopoly, thereby justifying the need of regulatory intervention in that industry. Second, we examine the conditions for cost-recovery in the short-run and contribute to the emerging European discussions on the implementation of short-run marginal cost pricing on interconnector pipelines. Lastly, we analyze the performance of rate-of-return regulation in that industry and inform the regulatory policy debates on the selection of an appropriate authorized rate of return. We highlight that, contrary to popular belief, the socially desirable rate of return can be larger than the market price of capital for that industry.

Section: Long-run Costsupporting

confidence: 77%

“…Yet, because of its sophistication and its numerical nature, it is seldom considered in regulatory policy debates (Massol, 2011). The second approach involves the econometric estimation of a flexible functional form -usually a translog specification -to obtain an approximate cost function.…”

Section: Introductionmentioning

confidence: 99%

The technology and cost structure of a natural gas pipeline: Insights for costs and rate-of-return regulation

Perrotton

2018

Utilities Policy

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“…According to the Interconnector operator, the nominal transportation capacity from the UK to pipeline is a time-varying parameter that depends on a series of exogenous factors (e.g., the operating pressures of the adjacent national pipeline systems, the flow temperature, the chemical composition of the natural gas (Yépez, 2008;Massol, 2011). Hence, the historical maximum daily flow cannot necessarily be attained.…”

Section: Datamentioning

confidence: 99%

Market Power and Spatial Arbitrage between Interconnected Gas Hubs

Banal‐Estañol

2016

SSRN Journal

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This paper examines the performance of the spatial arbitrages carried out between two regional markets for wholesale natural gas linked by a pipeline system. We develop a new empirical methodology to (i) detect if these markets are integrated, i.e., if all the spatial arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a new test for the presence of market power and it is thus able to distinguish between physical and strategic behavior constraints on marginal cost pricing. We use the case of the "Interconnector" pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power.

“…These cost simulations consistently indicate that the technology at hand exhibits very marked increasing returns to scale over a large range of output in the long run (IPCC, 2005;McCoy and Rubin, 2008;McCoy, 2009 (André and Bonnans, 2011;Massol, 2011), and (ii) the numerous applications of mathematical programming to model meshed networks (e.g., De Wolf and Smeers, 1996;André et al, 2009). 6 There exists some technological differences between natural gas and CO 2 pipelines systems as methane is typically piped in a gaseous state whereas CO 2 is piped in supercritical state (McCoy and Rubin, 2008).…”

Section: Economies Of Scale In Co 2 Pipeline Systemsmentioning

confidence: 90%

Joining the CCS club! The economics of CO 2 pipeline projects

European Journal of Operational Research

Tchung-Ming

Banal‐Estañol

2015

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The large-scale diffusion of Carbon Capture, transport and Storage (CCS) imposes the construction of a sizeable CO 2 pipeline infrastructure. This paper examines the economics of a CO 2 pipeline project and analyzes the conditions for a widespread adoption of CCS by a group of emitters that can be connected to that infrastructure. It details a modeling framework aimed at assessing the break-even value for joint CCS adoption, that is the critical value in the charge for CO 2 emissions that is required for each of the emitters to decide to implement capture capabilities. This model can be used to analyze how the tariff structure and the regulatory constraints imposed on the CO 2 pipeline operator modify the overall cost of CO 2 abatement via CCS. This framework is applied to the case of a real European CO 2 pipeline project. We find that the obligation to use cross-subsidy-free pipeline tariffs has a minor impact on the minimum CO 2 price required to adopt the CCS. In contrast, the obligation to charge non-discriminatory prices can either impede the adoption of CCS or significantly raises that price. Besides, we compared two alternative regulatory frameworks for CCS pipelines: a common European organization as opposed to a collection of national regulations. The results indicate that the institutional scope of that regulation has a limited impact on the adoption of CCS compared to the detailed design of the tariff structure imposed to pipeline operators.