Gas release and transport capacity investment as instruments to foster competition in gas markets

Motivated by policy events experienced during the last two decades by the European natural gas industry, this paper develops a simple model for analyzing the interaction between gas release and capacity investment programs as tools to improve the performance of imperfectly competitive markets. We consider a regional market in which a measure that has an incumbent release part of its gas to a marketer complements a program of investment in transport capacity dedicated to imports by the marketer, at a regulated transport charge, of competitively-priced gas. First, we examine the case where transport capacity is regulated while gas release is not, i.e., the volume of gas released is determined by the incumbent. We then analyze the effect of the "artificial" duopoly created by the regulator when the latter regulates both gas release and transport capacity. Finally, using information on the French industry, we calibrate the basic demand and cost elements of the model and perform some simulations of these two scenarios. Besides allowing us to analyze the economic properties of these scenarios, a policy implication that comes out of the empirical analysis is that, when combined with network expansion investments, gas-release measures applied under regulatory control are indeed effective short-term policies for promoting gas-to-gas competition. (C) 2012 Elsevier B.V. All rights reserved.