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Rate-of-return regulation to unlock natural gas pipeline deployment: insights from a Mozambican project

Perrotton, F. and Massol, O. (2018). Rate-of-return regulation to unlock natural gas pipeline deployment: insights from a Mozambican project (18/05). London, UK: Department of Economics, City, University of London.

Abstract

This paper examines the deployment of a natural gas pipeline in a developing region where the rate-of-return (RoR) regulation has been implemented to attract investment. We assume that the pipeline firm considers the proven demand emanating from a few large industrial sites but ignores the eventual rise of other domestic-oriented uses. We first assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect). We then analyze the ex-post situation when the enlarged domestic demand materializes. We prove that the allowable rate of return can be set to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a costefficient manner. We finally discuss whether RoR regulation can fulfill two public policy objectives: optimally building ahead of proven demand and protecting society from monopoly prices.

Publication Type: Monograph (Discussion Paper)
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics > Discussion Paper Series
Date Deposited: 16 Aug 2018 13:13
URI: https://openaccess.city.ac.uk/id/eprint/20240
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