Regulating the Abuse of the Natural Monopoly of Pipelines in the Gas Industry vis-à-vis the Provision of Third Party Access

Abstract

The existence of a competitive gas supply industry requires the participation of numerous suppliers. However, the easiest and most economical means of transporting gas, the pipeline, is characterized by high fixed costs and long lead time, which makes its duplication uneconomical, thereby creating a wide barrier to entry for potential participants. This endows the incumbent with enormous market power, which is often abused through charging excessive tariffs for the grant-of-access right, and in some cases denial of access to potential competitors. This creates the need for effective and credible regulation of the pipeline business in order to ensure non-discriminatory access to market participants. However, for the regulation to be effective, it must be properly designed and implemented. This article analyzes the different types of regulations that can be used to avoid the potential for abuse of the natural monopoly of pipelines in the gas supply industry. In exploring the various options open to the regulator, the article offers suggestions on how each could be properly implemented, and concludes that whichever type of regulation is adopted, an in-depth analysis by the regulator is required to ensure that the pipeline operators who are in control of the infrastructure can be compelled to achieve optimum efficiency in providing access to third parties in order to promote competition.

TOPICS: Legal and regulatory issues for structured finance, fixed income and structured finance