Essays on the economics of natural gas pipelines

The natural gas pipeline transportation industry is comprised of a primary market and a secondary market. In the primary market, pipelines sell 'firm' transport capacity contracts to gas traders, local distribution companies, and other parties. The (per unit) secondary market value of transport is rarely comparable to the regulated primary market two-part tariff. When and where available capacity in the secondary market is scarce, its value can far exceed the primary market tariffs paid by firm contract holders, generating scarcity rents. The following essays demonstrate that this phenomenon has predictable effects on natural gas spot prices, firm capacity reservations, the pipeline's capacity construction and expansion decisions, and the economic welfare of producers and consumers at the market hubs connected by the pipeline.;Chapter 1 provides a theoretical framework for understanding how pipeline congestion affects natural gas spot prices within the context of the current regulatory environment, and empirically quantifies this effect over a specific regional pipeline network. As available pipeline capacity over a given route connecting two hubs becomes scarce, the spot prices for gas at the hubs are driven apart---a phenomenon indicative of some market friction that inhibits the ability of spot price arbitrage to fully integrate the two prices, undermining economic efficiency. The theoretical component of Chapter 1 illuminates a potential source of this friction: the deregulated structure of the secondary market for gas transportation services. To support and quantify the predictions of the theoretical model, the empirical component demonstrates that the effect of congestion on the secondary market value of transport---the key factor in driving apart spot prices---can be quite strong. Coefficient estimates indicate that dramatic increases in transport costs are likely to result from marginal increases in congestion. This result has important implications because upward pressure on the demand for pipeline transport is imminent, owing to the recent surge in available natural gas reserve estimates and the expected growth in consumption demand over the foreseeable future.;Chapter 2 derives optimality conditions for capacity and two-part tariff structure in the primary market, when demand for the shipping service in the secondary market is stochastic but stationary. Based on their individual demand distributions, the overall demand distribution, and the two-part tariff structure, natural gas traders reserve firm capacity contracts over a given transportation route served by a single pipeline. The traders' individual demands sum to the aggregate demand for primary market capacity reservations over the route. The aggregate capacity reservation demand function then feeds into the pipeline's profit-maximization problem, which for comparison is analyzed under three alternative regulatory regimes: unregulated monopoly, Ramsey second-best solution, and rate-of-return regulation. For each case, the optimality conditions are parameterized and solved numerically. Results demonstrate that optimal capacity under rate-of-return regulation is lower than what would occur under a Ramsey second-best solution, exacerbating the congestion issue discussed in Chapter 1, and ultimately reducing overall social welfare.;Chapter 3 examines a natural gas trader's willingness to contract expanded capacity over a given pipeline route, when demand in the secondary market is stochastic and increasing over time. A discrete time and scale framework provides the template for analyzing the trader's behavior and solving for his optimal expansion contracting strategy through time. Willingness to contract in any period hinges on the trade-off between the value of the option to contract expanded capacity (now or in a future period), and the 'spread option' value of utilizing contracted capacity to ship gas. The rate-of-return regulated primary market two-part tariff and the unregulated secondary market value of transport each affect these option values, but the latter provides a strong incentive to the trader to both delay and suppress his willingness to contract expanded capacity relative to the demand for gas shipping services. As a result, the pipeline is chronically congested. Relating this to the results of Chapters 1 and 2, there are likely to be strong welfare effects associated with this behavior. (Abstract shortened by UMI.).