Three essays on regulatory economics of U.S. natural gas markets and midstream assets

Abstract

This thesis comprises three research papers about regulatory economics of U.S. natural gas markets and midstream assets. Each research paper is a standalone chapter in this document. An abstract for each chapter follows. Chapter 1 develops four metrics to diagnose the adequate development of efficient-market base-load natural gas storage capacity. These diagnostic metrics are developed using the market equilibrium of base-load natural gas storage operations under perfect competition and monopoly environments. The market-equilibrium solutions are obtained from intertemporal choice models. The four diagnostic metrics are (1) market equilibrium of storage capacity investment, (2) price fluctuation, (3) correlation between price and consumption, and (4) correlation between price and inventories. The last two metrics complement the diagnosis from the first two metrics. These metrics are adapted to address seasonal uncertainty, which can be magnified by climate change. FERC can use these metrics to monitor potential and unintended deterrent effects of their own regulatory policies on midstream infrastructure development. Chapter 2 shows that the cost-based approach of regulating capital-intensive services in natural monopoly environments does not address the congestion originated by the delayed investment of lumpy assets. Addressing this issue, this research evaluates the economic efficiency of the cost-based approach to regulation and identifies an enhanced ratemaking policy that can deliver greater economic efficiency. In particular, a deterministic asset investment model is built to characterize a regulated pipeline company that chooses scale and timing of a natural gas pipeline investment to maximize the return on the asset (ROA). In this model, transportation rates can either be endogenous or exogenous to the firm decisions. The model is used to contrast welfare under the cost-based approach against welfare under the enhanced ratemaking policy. The research finds that the cost-based approach can achieve greater economic efficiency when the "fair" ROA requirement is relaxed. The enhanced ratemaking policy builds up from the relaxed ROA requirement and introduces a transfer payment to induce the regulated firm towards a Pareto improvement. Chapter 2 refers to a few results from Chapter 3 and vice versa. Chapter 3 provides a comprehensive methodical analysis of the structural economic effects on U.S. natural gas prices resulting from open access to pipelines. The analysis is motivated by the changes introduced by Order 636 (the open-access rule) and the ensuing evolvement of the U.S. natural gas industry. To conduct the analysis, the U.S. natural gas market structure before and after Order 636 is contrasted using models formulated as linear complementarity problems. Using my framework of analysis, I synthesize the literature encompassing econometric and structural studies with a focus on the open-access rule. Assuming the effects of a larger pool of suppliers dominate, the market impact on a region after open access can be diagnosed based on observed changes in price and exchange categorization of the region.