Economies of Scale in the South Korean Natural Gas Industry

Abstract

The South Korean natural gas (NG) import volume in 2017 was 33.7 million tonnes per annum (13.1%), making it the second-largest NG-importing country in the world after Japan. Nevertheless, the NG wholesale market in South Korea has remained monopolistic since the Korea Gas Corporation (KOGAS) was established in 1983. Thus, the purpose of this study is to determine whether the NG wholesale market in South Korea has economies of scale by estimating the translog cost function and estimating the minimum efficient scale (MES) using robust linear regression. We used quarterly business reports of KOGAS from the first quarter of 2000 to the second quarter of 2018 to construct the data. The results showed that diseconomies of scale existed in all the years in the first and fourth quarters, and the second quarter showed the same result during 2010–2014. From 2011, the production quantity of all the quarters has exceeded the MES (5.81 million tons). The reason for these results is that the demand for NG power generation and city gas has surged since 2000, while the monopolistic structure of the past has been maintained. This study implies that it would be more efficient to allocate some of KOGAS’s additional import volume to the existing private NG companies and mitigate the regulation on resale.

Economies of Scale in City Gas Sector in Seoul, South Korea: Evidence from an Empirical Investigation

“…Ref. [13] investigated the data from the wholesale NG market monopolized by KOGAS. They confirmed that economies of scale have already been lost since 2000 in terms of the first and fourth quarters when production is high, but that the second and third quarters with low production were located at the boundary of economies of scale after 2010.…”

“…There are many studies that estimate variable cost functions instead of total cost functions to estimate economies of scale of network industry (e.g., [13,38,39]). The cost function is theoretically the function of input prices and output.…”

“…In the city gas business, technological change through the introduction of geographic information system and supervisory control and data acquisition improves the efficiency of safety management and modernizes safety management for supply facilities, resulting in the change of variable cost. The effect of technological change was controlled by defining the T variable in a way that started with 1 in 2008 and increased by 1 every year following the method of the previous studies [13,40,43,44]. Alternatively, R&D investment can be a proxy, but time lag effect of R&D investment is hard to be reflected clearly.…”

“…Economies of scale have been mainly analyzed in the water utilities [2][3][4] and electricity utilities [5,6]. Wholesale market of NG sector has also been one of the main research areas [7][8][9][10][11][12][13]. However, there are only a few case studies conducted on the structure of the city gas sector.…”