Towards a Better Integration of European Gas Markets : 10th Session of Seminars on Research in Energy Economics at Paris-Sciences-Lettres
Paris, Frankreich, 12.03.2014

Removing Cross-Border Capacity Bottlenecks in the Network of European Natural Gas Market : The Need of an Incentive Regulation
Hannes Weigt, Anne Neumann, Juan Rosellón

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The paper proposes 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.