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

Perrotton, F. and Massol, O. (2018). The technology and cost structure of a natural gas pipeline: Insights for costs and rate-of-return regulation. Utilities Policy, 53, pp. 32-37. doi: 10.1016/j.jup.2018.05.004

Abstract

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.

Publication Type: Article
Additional Information: © Elsevier 2018. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Production function; Natural gas pipeline; Regulation
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Departments: School of Arts & Social Sciences > Economics
Date Deposited: 20 May 2019 09:35
URI: https://openaccess.city.ac.uk/id/eprint/22213
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