Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best

We address investment in regulated natural gas pipelines when investment is lumpy and the demand for gas is stochastic. This is a problem that can be solved in theory as a dynamic program, but a practical solution depends on functions and parameters that are either subjective or cannot be estimated....

Full description

Saved in:
Bibliographic Details
Published in:Networks and spatial economics 2011-09, Vol.11 (3), p.533-553
Main Authors: Brito, Dagobert L., Rosellón, Juan
Format: Article
Language:English
Subjects:
Capital costs
Civil Engineering
Congestion management
Consumers
Demand
Economic models
Economic theory
Economics
Economics and Finance
Energy policy
Financing
Gas pipelines
Investment
Marketing
Natural gas
Natural gas industry
Natural-gas regulation
Operations Research/Decision Theory
Pipelines
Regional/Spatial Science
Regulation
Second-best theory
Studies
Tariffs
Transmission investment
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We address investment in regulated natural gas pipelines when investment is lumpy and the demand for gas is stochastic. This is a problem that can be solved in theory as a dynamic program, but a practical solution depends on functions and parameters that are either subjective or cannot be estimated. We then reformulate the problem from the standpoint of consumers that face incomplete markets. It is shown that for reasonable parameter values consumers prefer to pay for excess capacity rather than bear the risk of congestion. These strategies can be implemented with reasonably straightforward policies. Since the demand for gas is very inelastic, the welfare losses associated from small deviations from a first best optimum are minimal. This implies that the gas pipeline system can be regulated with a relatively simple set of transparent rules without any significant loss of welfare.
ISSN:1566-113X
1572-9427
DOI:10.1007/s11067-009-9125-8