University of Southern California Dissertations and Theses

Regulation of the United States natural gas industry

(USC Thesis Other)

Regulation of the United States natural gas industry

PDF

Download

Open document

Flip pages

Download a page range

Download transcript

Copy asset link

Request this asset

Transcript (if available)

Content REGULATION OF THE UNITED STATES NATURAL GAS INDUSTRY by Sami Khedhiri A Thesis Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree MASTER OF ARTS (Economics) August 1989 UMI Number: EP44926 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Dissertation Publishing UMI EP44926 Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 U N IV E R SITY O F S O U T H E R N C A L IF O R N IA THE GRADUATE S C H O O L U N IV ER SITY PARK LO S A N G ELE S, C A L IF O R N IA 9 0 0 0 7 Ec *6$ K 4 S This thesis, written by S. AM I K H EbMlR.1........... under the direction of h l.S Thesis Committee, and approved by all its members, has been pre sented to and accepted by the Dean of The Graduate School, in partial fulfillment of the requirements for the degree of Master of Arts Dean Date. July 10, 1989 THESIS COMMITTEE Chairman Contents , C ontents I List of Tables i ■ List of Figures j 1 IN T R O D U C T IO N ■ 1.1 Statement of the P ro b le m ..................................................................... | I 1.2 Objective of the Study and Method of A p p ro a c h .......................... 1.3 Organization of the S tu d y ...................................................................... 2 H ISTO R Y A N D R A TIO NALE FO R N A T U R A L GAS R EG U - ! LATION j 2.1 History of Natural Gas R e g u la tio n ..................................................... i 2.1.1 Pre- 1954 ........................................ .............................................. ' 2.1.2 Producer regulation : 1954 - 1960 ......................................... I | 2.1.3 Area rate regulation and natural gas shortage: 1960-1978 2.1.4 Field market deregulation: Post-1978 ................................. 2.2 Rationale for Natural Gas Regulation ............................................... ! ! 3 ST R U C T U R E OF TH E N A T U R A L G AS M A R K E T S j ' 3.1 Structure of the Field M a r k e ts ............................................................ i i 3.2 Effects of the Price R e g u la tio n ............................................................ 3.2.1 The M o d e l.................................................................................. 3.2.2 Interpretation of the M o d e l..................................................... ii iv v 1 1 4 5 6 6 6 8 10 15 15 18 20 24 27 28 4 D E R EG U LA TIO N OF TH E N A T U R A L G AS IN D U S T R Y 31 i j 4.1 Vertical Integration in the Natural Gas Industry 33 > 4.2 The Problem of U ncertainty 35 j 5 C O N C LU SIO N S 39 i R eferences 41 i iii List of Tables 2.1 Demand for natural gas in the different areas; (source: U.S. Bu reau of Mines) ..................................................................................... 2.2 Gas production and reserves : 1963 - 1974 (in trillion cubic feet); (source: U.S. Bureau of M in e s ) ........................................................ 3.1 Natural Gas Overview; 1949-1969 ...................................................... 3.2 Natural Gas Overview: 1970-1987, source: American Gas Asso ciation ...................................................................................................... 3.3 Market clearing price pattern ............................................... j List of Figures 1.1 Energy consumption of the United States (1981); (source: U.S. Department of Energy) ..................................................................... 1.2 Energy production of the United States (1981); (source: U.S. Department of Energy) ..................................................................... 2.1 Average wellhead price and new contract price of natural gas; (source: U.S. Bureau of M in e s )........................................................ 2.2 Effects of the price control on the supply and demand for natural g a s ............................................................................................................ 3.1 Natural Gas Reserve Additions and Production (in trillion cubic feet); (source: American Gas A sso ciatio n ).................................... Chapter 1 I IN T R O D U C T IO N 1.1 S ta tem en t o f th e P rob lem Natural gas accounts for about one-third of the total energy consumed and represents the largest domestic source of energy in the United States(Figures 1.1, i 1.2). It has thus attracted political attention toward the question of whether the federal government ought to be given the right to control the field price or should the natural gas price be left to the market mechanism of supply and demand. This issue was approached with conflicting positions. On the one hand, the gas producers argue that the field markets are competitive because of the existence in each production area of a large number of gas sellers and few pipelines that can induce the producers to lower the price. On the other hand, the public utility consumers urged the federal government to regulate the natural gas industry so that a part of their surplus will not be captured as excess returns by the producers who will have the market power and will, consequently, behave as monopolists. Natural gas was viewed as a public utility. Thus, the political choice was to control the gas price at the fields by establishing a price ceiling that takes into account the opportunity cost of drilling wells to which a return on capital investment was added. On the side of the pipelines, the Federal Power Commission (FPC) requires that only a fair markup should be added to the price of gathering gas from the fields. Up until the 1970’s, the FPC regulatory policies resulted in a shortage of nat- 1 i i Oil 43.4% Gas 26.8% Hydropower 4% Nuclear 3.9% Other 2% Coal 21.7% Figure 1.1: Energy consumption of the United States (1981); (source: U.S. De- ; partm ent of Energy) 2 I I I I 1 Gas 34.1% Coal 29.2% Oil 27.9% Hydropower 4.2% Nuclear 4.4% Other 0.2% | Figure 1.2: Energy production of the United States (1981); (source: U.S. Depart- | ment of Energy) I I i i I < ural gas [6] since the producers did not have the economic incentive to undertake I additional capital investments to discover new reserves of gas because of the low i | level of the price ceiling which in some cases did not enable the producers to j ! have a positive cash-flow out of their sales. The excess demand, in turn, resulted J in the elimination of a number of gas consumers who had to look for other fuel j substitutes which were more expensive. I It turns out that by regulating the natural gas industry, the FPC did not ! succeed in achieving its objective of transferring income from the producer to the consumer without creating gas shortages. Indeed, new sellers and gas distribu tion pipelines were hampered in entering the gas markets and thus a competitive gas industry that possibly could have been operating without regulation was not encouraged. j 1.2 O b jectiv e o f th e S tu d y and M eth o d o f A p p roach j The scope of this study is to interpret and evaluate the federal regulatory , policies of the natural gas industry and to analyze the structure of gas markets ■ and the response of supply and demand. It will be proved that efficient gas allocations require that the price be set at the market clearing level. A model is constructed and it will be shown that the market clearing price would be higher than the regulated price. As a result of regulation, consumers to whom there was income transfer would be better off and ' consumers whose demand for gas was not satisfied because of the shortage would not benefit from regulation of the gas field prices. The model is based on data provided by the American Gas Association. It ■ covers the period between 1966 and 1980 and shows what the price level should I | have been during the period of largest shortage in order to m atch the supply and demand for gas. 4 ! 1.3 O rgan ization o f th e S tu d y The different regulatory policies of the FPC and the rationale for the gas ; industry regulation are analyzed in Chapter 2. It will be shown that the FPC | attem pted to find the appropriate procedure in order to control the gas price, but ! . i , it failed to find reasonable and adequate ceilings that would allow the industry to I operate more efficiently. ! In Chapter 3, an economic analysis about the market structure will prove that : in most of the gas production areas the producers are not organized in a way that | l i would enable them to behave as monopolists and to possess the market power | 1 | ; thereafter. I Chapter 4 covers the issues of the new regulatory policies that were undertaken after the establishment of the Natural Gas Policy Act(NGPA, 1978). Presumably, ■ the federal government noticed that the only way to reduce the large shortage that has occurred in particular during the 1970’s is to deregulate the prices of gas at the fields. The impact of the natural gas deregulation on the supply and demand : will be discussed in Chapter 4. The issues of vertical integration and uncertainty are of great importance in . this study. It will be shown to what extent each of them should be conceivably ; ■ operating and how vertical integration and uncertainty would be associated with > i ; I deregulation in the case of natural gas. • I I 5 i Chapter 2 HISTO RY A N D RATIO NALE FO R j N A TU R A L GAS REG ULATIO N i i During the last fifty years there was deep concern about the natural gas in- | dustry and whether or not it should be subject to government intervention via its | regulatory policy. The methods of regulation adopted by the F P C were criticized. | Indeed, the idea of regulating the natural gas markets has involved debates between economists and politicians and a number of alternatives were given. In order to understand and analyze these alternatives, it is necessary to know how the natural gas markets were being regulated by the F P C which has at- ' tempted to use different regulatory policies. The F P C searched for an appropriate j price ceiling that brings about income distribution from the producers to the con- | sumers of natural gas without discouraging the production and the discoveries of new reserves which could ultimately result in a gas shortage. One can distinguish j four periods in each of which a different regulatory policy was undertaken. i j 2.1 H isto ry o f N a tu ra l G as R eg u la tio n 2.1.1 Pre- 1954 I In the 1930’s, the natural gas industry was characterized mainly by an oversup- 1 ply in the southwest and a noticeable shortage in other areas. This was explained by the existence of a large number of gas producers and only a few interstate , pipelines to distribute gas to the consumers who were far away from the gas j fields. In particular, consumers in the north and east suffered from gas shortage I and from the monopolistic behavior of their local natural gas producers [13]. This i j inefficiency of the organization of the markets in the natural gas industry led to i i j the Act of 1938 by which the pipelines were subject to the F P C ’s jurisdiction J | and their sales and organization were regulated. This Act was a reaction to the ' i ' waste in production and to the inequitable system of distribution of natural gas ' from the large scale producing fields to the areas where there was shortage and 1 : where unregulated local producers were forcing the consumers to pay increasing * 1 ( prices in the wholesale markets. Hence, the regulation of the natural gas pipelines I j was thought to be the best way to protect the public interest. This idea is illus- j trated in the following section of the 1938 Natural Gas Act [13] as stated in the j ' Congressional Record (Senate, August 19, 1937): As disclosed in reports of the Federal Trade Commission made pur suant to the authority of Congress, it is hereby declared that the busi ness of transporting and selling natural for ultimate distribution to the I ; public is affected with a public interest, and that the federal regulation j in matters relating to the transportation of natural gas and the sale 1 thereof in interstate and foreign commerce is necessary in the public interest. ; Although the purpose of the above section of the act was to find an appropriate . 1 organization of the natural gas industry that best served the public interest, the Act itself focused only on the distribution and sales of the pipelines. It did not, at least unambiguously, set rules for the natural gas producers and the wellhead pricing system in order to prevent the consumers from being price discriminated. Also the long-distance interstate pipelines were very costly and did not contribute ! toward stabilizing the natural gas prices in the wholesale market where the con sumers still paid high prices due to high costs of transportation and uncontrolled producer monopoly power in the market. As a result, the FPC attem pted to evaluate and regulate the operating costs associated with gas transportation, so , I ^ that the companies would get reasonable return on their capital investments. j In 1954, the United States Supreme Court gave the FPC the right to control the j ; field market prices of natural gas after studying the case of the Phillips Petroleum j Company which raised the price sharply, and this increase in the wellhead price j was passed on to the wholesale market price through the pipeline costs. In order j to determine fair rates of return, the FPC started regulating the gas sellers based ] i on their operating costs of production. j I ; I I 2.1.2 Producer regulation : 1954 — 1960 I After discussing the Phillips case, it was argued that the FPC had to control ’ not only the pipelines but also the independent producers of natural gas, since i ' I I ; it was concluded that the unfair excess returns were the outcome of an increased ; | wellhead pricing system set by a few uncontrolled producers who dominated the ■ natural gas field market. j . The FPC procedure of regulation was to evaluate the individual cost of pro- ■ 1 duction and then set a price ceiling that took into account the cost of service ! of each individual producer by calculating the appropriate rate of return of the ‘ capital invested in drilling wells. But this procedure was very complex, and the ] FPC faced many problems, such as: I Firstly, the cases of individual producers were so many that the FPC could i * | not handle all of them in a short time. ! \ t j 1 Secondly, the procedure of regulating gas producers based on their cost of i service requires the evaluation of drilling costs for gas, but this was not obvious J because of the joint costs of oil and gas exploration and hence the method of j marginal cost pricing would be irrelevant. Because of this, the F P C tried to solve \ this joint cost problem by using one of the following methods : 1. Calculate Cl = C(Qi)jQ\ = cost of producing one barrel of oil separately, | and C 2 = C(Q 2)/Q 2 = cost of producing one thousand cubic feet of gas, then determine the stand-alone cost for gas from the joint cost function ■ C(Qi ,Q2) according to the ratio (71/(72 . 2. Let iVi, N2 denote respectively the number of heating units contained in oil i and gas produced, then the allocation of joint costs would follow according j ; i to the ratio N i/N 2. ] , 3. Gas and oil are allocated according to their respective market values. : ■ i i '■ These methods did not seem to solve the problem because, by applying them, the FPC did not succeed in setting a field price that brought about the incentive for I producers to produce more and to take the risk to drill wells, because they were : not sure that the prevailing price system would allow them to cover their long-run | i costs of production. : In addition, in many cases the gas producers drilled wells without being able ; f to get gas out of them, and there was no clear answer as to how the FPC would ■ I 1 : take in account the cost of this uncertain investment in order to determine rates ; of return that include the opportunity cost of the producers. Although the FPC adopted the regulation procedure for setting prices accord- j ing to the producer costs by evaluating the individual historical costs of providing , gas and then determining reasonable rates of return that allow systematic in- , creases of the new contract prices, it did not succeed in lessening the persistent shortage. This is because the cost of service regulation techniques required a deep j and complex analysis of the production conditions that differ from one individual t producer to another. Furthermore, this method did not consider the condition of ‘ demand which is necessary to establish regulatory price system [7]. 2.1.3 A rea rate regulation and natural gas shortage: 1960-1978 j In the early 1960’s, the FPC started looking for a natural gas ceiling price that j would be based on the historical average cost of production. This procedure of 1 j regulating the field market price was easier because the FPC would not have to deal with all the cases of individual producers; it just had to handle the cases where , the actual price was beyond the legal ceiling price. Such cases might happen when i i the producers thought that their operating costs were increasing and this increase ' I 1 should be taken into consideration in the establishment of the new contract prices . since the average costs would also increase. ‘ Based on the historical cost of production, the FPC set a tem porary wellhead , I price. This would enable the FPC to determine the current average costs. i Meanwhile the FPC noticed that the temporary ceiling price and the average : cost of production by the companies were very close and it was decided th at the temporary pricing system would be the permanent one, and thereafter no price ; increase would be allowed. Paul MacAvoy analyzed this problem and pointed out: “ When the commission set permanent ceilings, it used estimates of regional costs from a period when temporary ceilings were in effect. In that period producing companies took on only those drilling projects with prospective costs below the forecast prices, and the result was that companies in fact showed average costs less than or equal to the level of temporary ceiling prices.” When the FPC tried to estimate the costs of regional producers the prevail- I ! ing price was the temporary ceiling based on which the producers did not have . I i the incentive to increase their capacity of production and to look for discoveries j ! I of new gas reserves by drilling more wells and hence offset the increased addi- 1 j « , tional demand for natural gas. In fact this required more capital investment and j i j would bring about a higher average cost level which could be undertaken by the producing companies only if the prevailing market price was higher. During the 1960’s the FPC fixed a ceiling price for natural gas at the field markets and denied any increase even for newly discovered gas. Since the average j cost of production was increasing and the price could not increase in step with j this, discoveries and exploration of new reserves did not increase substantially and i I also the demand for gas increased due to the unregulated high prices of oil and I coal, resulting in a large shortage of gas. This was explained b y the fact th at if J i producers expect inflation, their expected future costs will be higher meaning th at i they would not seek costly discoveries of new reserves because their expected profit stream would be decreasing. The reduction in reserves along with an increase in | demand yields larger shortage from one year to the next. 1 The consumers, at first, did not perceive the gas shortage because their demand at that time was satisfied. However the reserve-to-production ratio (R /P ) was , decreasing, a result explained by the low rate at which there were additional reserves. When the pipeline faced an additional demand, it had to choose between i refusing new contracts and selling gas to new customers based on reserves existing for the old customers. The second policy was in fact the one most frequently applied by the interstate pipelines and this explains why the additional demand ' was temporarily satisfied. But during the last years of their contracts the pipelines could not meet the demand of the old customers and a severe shortage resulted. In the early 1970’s, the FPC became aware that it should change its price ceiling strategy since it found out that the level of excess demand for natural gas could not be offset by additional supply unless the area rates were allowed to increase significantly. In 1971, the FPC started setting new area rates which were higher than the previous ceiling prices. The area price increase was up to 40% in some areas such as South Louisiana and the Texas Gulf Coast, and up to 30% in Oklahoma and 11 ’ cents/Tcf New contract price Average wellhead price 1 940 1950 1960 19 7 0 years j i I : Figure 2.1: Average wellhead price and new contract price of natural gas; (source: [ I U.S. Bureau of Mines) ' j ! . . . . 1 I Kansas. In Permian Basin the increase was higher, up to 110%. In addition, the producers were encouraged to explore and discover new re- . serves of natural gas since they were allowed to include the costs of research and ( | development in their costs of service. Also, the gas producers were given the right ; ! to increase the new contract prices for incremental gas according to the cost-based . pricing formula. , These area rate increases did not solve the problem of shortage [4] because the l resulting additional reserves were still declining and hence the sales of gas by the interstate pipelines could not respond totally to the consumer increasing demand. ] Tables 2.1 and 2.2 illustrate these results. It can be shown that there was a 56% shortage increase from 1967 to 1972. 1 Price i Shortage i Quantity i i j Figure 2.2: Effects of the price control on the supply and demand for natural gas j i Northeast North central West Southeast South central Total 1967 3.3 3.5 3.2 1.3 7.2 17.2 1968 3.5 3.8 3.4 1.4 7.6 19.8 1969 3.6 4.0 3.4 1.5 7.9 20.4 1970 3.7 4.2 3.6 1.6 8.1 21.2 1971 3.9 4.4 3.6 1.7 8.4 22 1972 4.0 4.6 3.7 1.7 8.6 22.6 Table 2.1: Demand for natural gas in the different areas; (source: U.S. Bureau of Mines) 1 3 J Annual Production Gas Reserves (interstate) Reserves-to-Production Ratio 1963 9.4 188.5 20.2 1964 10.0 189.2 18.9 1965 10.3 192.1 18.5 1966 11.1 195.1 17.5 1967 11.8 198.0 16.8 1968 12.6 195.0 15.5 1969 13.4 187.6 14.0 1970 14.1 173.6 12.3 1971 14.2 163.1 11.5 1972 14.2 146.9 10.3 1973 13.7 134.3 9.8 1974 12.9 120.4 9.3 Table 2.2: Gas production and reserves : 1963 - 1974 (in trillion cubic feet); (source: U.S. Bureau of Mines) 14 j 2.1.4 Field m arket deregulation: P ost-1978 ! j The low price ceiling set in the field market of natural gas led to an excess demand that resulted in the elimination of a number of consumers because of I the shortage. These consumers who sought gas substitutes had to pay higher ; j | prices [6]. Therefore the public interest was compromised and it was believed, j I in 1978, that the only way to solve the serious problem of gas shortage was to j | deregulate the wellhead prices and thus clear the markets. j j W ith the Natural Gas Policy Act of 1978, the producers were allowed to supply j gas under no price constraints, that is, to let supply respond to the additional : i demand. j , The price increase was thought to be explained by higher costs of new gas ' 1 discoveries, but it turns out that the extent to which the consumers paid high I ’ i prices was critical, and paradoxically there was still gas shortage in some areas. i The results of field market deregulation were not very satisfactory despite the j partial success in generating additional supply. The regulated interstate pipelines ' ■ passively passed the high field price through to the consumers and did not have | the incentive to lower their costs or to bargain with the gas producers in order to j set competitive and reasonable wellhead prices. In fact the partial deregulation | brought about field market prices that were above the market clearing levels and ! j it turns out that the problem of production efficiency not only requires a price , system that is free of ceiling but also depends upon the structure of the industry. I I i 2.2 R a tio n a le for N a tu ra l G as R eg u la tio n - i The idea of government regulation of public utilities, such as natural gas, is to protect the consumer from the producer’ s monopoly power to increase the price and reduce the output. Regulating the natural gas industry by setting the field j market price at the level of average cost would prevent the misallocation of gas resources inherent in the difference between the actual price and the marginal cost j I j of production. ! Since competitive conditions did not exist in the markets of natural gas, it was ' I 1 generally argued, but not unambiguously proved, that the gas producers exhibit 1 i monopoly power that differed in degree from one area to another depending on the concentration of the market and the availability of substitutes at relatively cheaper prices, and depending also on the price elasticity of demand which determines the extent to which the consumers are price discriminated. : The question whether the gas producers present monopolistic behavior or ' i _ . . . ! | they are competitors led to many debates and different points of view. Those t | economists who believed that the industry has some features of monopoly sug- ; | gested that the rationale for regulation was to prevent the market imperfec- j I tions [12] that yield unstable prices resulting from either random shifts of demand ■ so that the market power would be in the hands of the consumers, or major change in reserve discoveries giving the producers the opportunity to control the natural gas markets. As Milton Russel and Laurence Toenjes claimed: i “The existence of these dislocations has given rise to the market im perfections rationale for regulation, and with a policy prescription of I regulation to dampen major shifts in prices and to assure the industry that it will not be subject to permanent price shifts due to transitory submarket conditions.” ■ W ith the assumption that gas producers are monopolists, there are two possible ; ways to avoid the problem of inefficiency in the production process. The first ; choice is to keep the market structure unchanged and regulate the field price. The ■ second choice is to eliminate the barriers to entry and ensure that the conditions | of perfect competition hold. In order to compare these two solutions, one can ! observe that regulation might be a more appropriate solution than the second ' choice because it can be seen that a competitive industry exhibits externalities which could create inefficiency, and also because the cost of production for the natural monopoly is significantly less than the production cost of gas by many producers because of economics of scale [16]. : The rationale for natural gas regulation was thought to be the search for pro- ; I ; duction efficiency and the creation of opportunities for new reserve discoveries; 1 as well as the protection of the consumers who had to pay high prices due to j ; the existence of monopoly. However, from the industry structure analysis, the ( monopolistic behavior of the industry is not well established and it can not be | concluded that the natural gas regulation is explained by the need to lower the , ■ monopoly power of gas producers. In fact, P. MacAvoy emphasized that the FPC 1 need not regulate the gas industry since it is already competitive, and that the price control would only bring about gas shortage inherent in an excess demand and reduced incentives to produce more and discover new reserves. In such com petitive markets, regulation is explained by the need to redistribute income from producers to consumers. MacAvoy noticed that the gas producers can sell, at the competitive market price, intramarginal units that are far less costly to produce due to special skills and knowledge about the production techniques. This allows the producers to realize excess returns or rents which are subject to regulation by virtue of the price control. The purpose of gas regulation is then closely related to the structure of the market. It would be to transfer rents to the consumers rather than control the market power under the assumption that the natural gas industry exhibits perfect competitive conditions. 17 Chapter 3 | ST R U C T U R E OF THE N A TU R A L GAS i M A R K ETS I I I ! In the gas industry, one can distinguish three activities: production, trans- ' portation, and distribution. These involve the gas producers, the transmission companies, and the domestic and industrial end-use customers. The transactions I , j between these economic agents are made in the field markets and in the wholesale ; ' markets. Transactions in the field markets involve the gas producers who have ( | drilled wells and found volumes of discovered reserves, and the pipeline compa- t ! nies which make long-term contracts (from 15 to 20 years) with these producers . in order to have the right to obtain the quantities produced of gas and distribute , j them to the consumers. The amount of the quantity demanded of new discovered ! gas depends on the field market price that these pipeline companies are willing to J pay. It depends also on the evaluation of available reserves and their locations. I In addition, the companies estimate the demand for gas by final consumers and I this contributes in determining their demand for reserve holdings. I | Higher price paid by the pipelines will encourage the local producers to increase I j their investment spending and more new reserves of gas would be produced by drilling wells based on extensive margins. This will result in an increasing average discovery size and then the marginal cost of production will decrease because the reserve levels relative to the production rise, j Transactions in the wholesale markets involve the pipelines which deliver nat- | ural gas to the consumers and to retail public utility companies. The wholesale i s I i 1 i 18 30 25 20 15 10 5 0 1 — 1955 1975 1970 1965 1960 Years. | Figure 3.1: Natural Gas Reserve Additions and Production (in trillion cubic feet); ! (source: American Gas Association) contract price of gas and the prices of other fuel substitutes consumed by the final j t buyers determine the quantity demanded of gas . ' t The contract price of gas at the field and the producer incentive to seek addi- | tional reserves are related. Higher prices would encourage the producers to invest i > i | in drilling wells. Indeed, the field price would influence the quantity demanded \ because the wholesale price is just the producer price to which a markup received J by the pipeline is added. But even in the event of increasing the field gas price ; substantially so that the supply curve moves to the right because of the decreas- ■ , ing marginal cost, this would not be sufficient to clear the market. In fact since I | the field market is not perfectly competitive, an increase in the price makes the j | producers better off if they do not respond by an increase in their supply; other- I wise the market prices will go down via the price adjustment mechanism between | supply and demand. ! ] In order to avoid an expected increasing shortage of gas, the alternative solu tion which consists of deregulating the market price would only work if the gas ; markets were perfectly competitive. If this is not the case then the shortage will ! persist and might increase with higher wellhead prices of gas. I 1 3.1 S tru ctu re o f th e F ield M ark ets The natural gas supply side in West Texas and New Mexico was characterized i by a monopsonistic behavior due to the existence of a major pipeline (El Paso ■ ■ Natural Gas) which dominated the demand for the field market production. This i explained the prevalence of a stable price during the early 50’s. But with the , ; entry of another pipeline in the market, providing a potential additional demand 1 . . 1 j for gas, the price has increased. In the late 50’s, the entry of the Permian Basin j ■ pipeline changed the structure of the local market and drove the gas price up, l thereby allowing the gas producers to behave non-competitively. j In the Gulf Coast area, there were two kinds of gas markets. The first was in the South Louisiana and Delta Region and was characterized by a number of pipelines demanding natural gas and unable to agree on a common purchase policy, and hence there was a lack of power for the pipelines to control the price. Furthermore, the concentration of the gas field market was high and the main source of supply i i : was provided by a limited number of producers so that the resulting price was relatively high. In the fields of North Louisiana area, long-distance pipelines were not con- j structed yet, and hence the gas market was divided into a number of submarkets \ : i in each of which the gas demanding pipeline was separated from the others. In j i spite of the existence of several sources of demand for gas, the pipelines presented a i | monopsony power by virtue of their small number and their separation in different i i | submarkets. This yielded a lower price than in the South Louisiana area. From these results, it could be shown that the price formation in the field market of gas depends basically upon the concentration of the markets viewed from the supply and the demand sides [5]. This means that the number of gas producers | in the different areas and the number and power of the pipelines demanding gas j would determine the price level. The existence of one pipeline dominating the ! market demand will lead to a monopsony pattern pricing since the consumers will make gas delivery contracts only with pipelines that assure continuous gas i provision during the contract period. These pipelines would be the ones with I | higher quantities of natural gas in their reservoirs. Thus, when a pipeline enters 1 the market, the more quantities it demands the better chances it will have of I making new contracts with the end-use customers. The existing pipelines can \ ! deter entry by increasing their capacity of demanding gas from the producers, j i j j and then they would be able to set the gas field price at the competitive level. ' • j In the late 50’s, the field markets of most of the gas producing areas were ! competitive on both the supply and the demand sides. Therefore the FPC did 21 | not need to intervene by setting price ceilings. Indeed, it is im portant to notice j | that an increasing price pattern could be a feature of competitive markets if it is j , explained by the natural limits of the gas supply and the high cost of discovering ! new reserves [11]. In this case the field market supply curve will be above the long-run marginal cost and hence the producers will have excess profit returns I explained by the resource scarcity rather than by the existence of monopoly in the markets. When gas producers have the market power to set the price, they cannot control the quantity supplied because each producer wants to act individually : and sell more gas so that his profit will be maximized. W ith such behavior, it 1 turns out that in the long run the producers lose their control over the price which might fall even below the ceiling. . In order for this procedure to be successful the incumbents must agree on the 1 I j price, the quantity supplied and how to deter entry. But in the long run each producer will feel better off if he sells extra marginal units or if he produces at a j lower fixed cost schedule. Although these choices are more advantageous to the j sellers individually, their outcome would be failure to control the price. ! The field markets of natural gas were characterized by monopsonistic com- j j petition and hence the attem pt by a single producer or a group of producers to ; behave monopolistically does not represent a dominant strategy. Therefore the | monopoly price cannot persist, and entry to the gas market by other producers J is possible [9]. Nevertheless this would not imply that these markets are purely ! competitive since it was shown that the field price of gas was set higher than the 1 competitive level to a degree that depends on the conditions of demand and sup- ' > ; ply and the availability of close substitutes at cheaper prices. In order to see to I | what extent the market conditions, by virtue of the producer power to dominate ; the gas markets, influence the price determination, one can observe that the cost of gas production differs from one area to another. If the producers drill wells at ; 22 an extensive margin, they will have a highly costly production process because the ] gas reserves newly discovered are isolated and require a large capital investment j ; and a large cost of transportation in order to be sold in the wholesale markets. , i ! Another producer might sell gas at a cheaper price because he can produce at an ! intensive margin at lower costs, and then he can dominate the supply side of the i local market by setting the price above his marginal cost but below the marginal cost of the first producer. In this case he can earn short run monopolistic returns j depending on the degree of the market concentration in his gas production area. The increased price of gas could not be attributed systematically to a monop- : j olistic power, and other factors might also explain the price change. As Edward 1 ! Neuner noticed: ; i _ ' j “..confusion has arisen from the error of ascribing to monopoly those ; ! price effects which are the product of either field market imperfections j ■ or inherent natural limitations upon gas supplies. Both conditions can 1 exist independently of monopolistic seller behavior or structure; both ' can conceivably be used to justify field price regulation.” Empirical results showed that before 1950 there was a steady increase in the I , demand pattern for natural gas, while the wellhead price was also increasing at ; I the same rate. This would not be the case had the prices been influenced by only the producer power, and then it can be considered that the field market presented a competitive structure during that period. Indeed this supports Neuner’s point I r of view that the gas price increases were not attributed solely to monopoly power; instead some other factors such as the natural conditions of supply might be more ' i relevant in explaining this. i ! After the early 1950’s, competition in the field markets was operating with ’ I a lesser degree and a sharp price increase occurred. This could be explained by the rise in the demand for gas rather than by the monopolistic position of the i 23 sellers. The fact is that after 1950, gas was widely used in other sectors and new costumers were willing to pay higher prices, because they could use natural gas as a substitute for coal and oil and pay a cheaper price. ! As a result, in each area the increase of the number of the gas distribution i I I j pipelines brought about a potential additional demand that made the field gas i i j prices go up. The persistence of the increasing gas price would be seen as a response of the i producers to the market conditions characterized by the price flexibility of the long-term purchase contracts. However, the critical issue in this analysis is that ' i these contracts, allowing price flexibility, create constraints for the buyers to exit from the field market and then an induced seller power could be significant enough to give rise to a monopolistic potential. In fact, the cost of exit for a pipeline is quite high. This would hamper all pipelines seeking other gas producers and would imply that the competitive structure was not fully operating. Regulation of the natural gas markets based on the unequivocal assumption of the existence of producer monopoly power could not be exclusively justified because there are other factors that plausibly explain the increasing price pattern and the excess returns. Among those factors, the market imperfections and the natural limits of the gas supply and reserve holdings could possibly explain, in dependently of the existence of monopoly, the prevalence of gas prices above the marginal cost of production. The difference between the prevailing and the com petitive prices varies from one field market to another depending on the market conditions of demand and supply. I I 3.2 E ffects o f th e P rice R eg u la tio n The following natural gas data will be used to establish a numerical evaluation of natural gas price control. I 24 Current Price ($/iooo cubic feet) Supply (trillion cubic feet =tcf) Demand (tcf) Excess Demand (tcf) Gross Domestic (billion dollars) GNP Deflator (Base year 1980) 1949 0.06 5.20 4.97 -0.23 1950 0.07 6.02 5.77 -0.25 1951 0.07 7.16 6.81 -0.35 1952 0.08 7.69 7.29 -0.40 1953 0.09 8.06 7.64 -0.42 1954 0.10 8.39 8.05 -0.34 1955 0.10 9.03 8.69 -0.34 1956 0.11 9.66 9.29 -0.37 1957 0.11 10.25 9.85 -0.40 1958 0.12 10.57 10.30 -0.27 286.7 27.9 1959 0.13 11.55 11.32 -0.23 403.3 31.7 1960 0.14 12.23 11.97 -0.26 511.9 36.1 1961 0.15 12.66 12.49 -0.17 530.0 36.4 1962 0.16 13.25 13.27 0.02 570.2 37.3 1963 0.16 14.08 13.97 -0.11 602.0 37.8 1964 0.15 14.82 14.81 -0.01 644.4 38.4 1965 0.16 15.29 15.28 -0.01 699.3 39.4 1966 0.16 16.47 16.45 -0.02 766.4 40.8 1967 0.16 17.39 17.39 0.00 810.5 41.9 1968 0.16 18.49 18.63 0.14 885.9 44.0 1969 0.17 19.83 20.06 0.23 957.1 46.4 Table 3.1: Natural Gas Overview; 1949-1969 Current Price (S/1000 cubic feet) Supply (trillion cubic feet) Demand (tcf) Excess Demand (tcf) Gross Domestic (billion dollars) GNP Deflator (Base year 1980) 1970 0.17 21.01 21.14 0.13 1008.3 49.0 1971 0.18 21.61 21.79 0.18 1093.4 51.8 1972 0.19 21.62 22.10 0.48 1201.6 54.2 1973 0.22 21.73 22.05 0.32 1343.1 57.8 1974 0.30 20.71 21.22 0.51 1453.4 63.0 1975 0.45 19.24 19.54 0.30 1580.9 69.2 1976 0.58 19.10 19.95 0.85 1761.7 73.6 1977 0.79 19.16 19.52 0.36 1965.1 78.5 1978 0.91 19.12 19.63 0.51 2219.2 84.3 1979 1.18 19.66 20.24 0.58 2464.4 91.7 1980 1.59 19.40 19.88 0.48 2684.4 100.0 1981 1.98 19.18 19.40 0.22 3000.5 109.6 1982 2.46 17.76 18.00 0.24 3114.8 116.7 1983 2.59 16.03 16.83 0.80 3355.9 121.2 1984 2.66 17.39 17.95 0.56 3724.8 125.9 1985 2.51 16.38 17.28 0.90 3970.5 129.6 1986 1.94 15.99 16.22 0.23 4194.5 133.1 1987 1.71 16.35 17.14 0.79 4461.2 137.1 Table 3.2: Natural Gas Overview: 1970-1987, source: American Gas Association 26 3.2.1 The M odel The following model includes 3 equations. The first is a regression of the gas j supply on the current price and the GNP deflator. The second is a regression ! of the gas demand by the pipelines on the current price and the Gross Domestic I i Product. The third equation implies the field market clearing conditions. LSUPi = O.ULPRIi + 0M LG N D i] fori = 1966, • • •, 1980 (3.1) ^ 2 D W R 2 8.899 38.030 1.816 0.94 I D E Mi = -0.39 + 0.24L P R h + 0A8LGDPi (3.2) (3.3) (3.4) (3.5) (3.6) tl ^ 2 ^ 3 D W R 2 -0.349 8.451 58.699 1.411 0.95 (3.7) (3.8) (3.9) (3.10) (3.11) The market clearing condition is, LSUPi = L D E M i (3.12) which implies, LP R R = -1.95 + IM LG D P i - A.SLGNDi (3.13) where, 27 LDEM is the logarithm of the demand for gas; LSUP is the logarithm of the supply of gas; LPRI is the logarithm of the current gas price; LGDP is the logarithm of the gross domestic product; LGND is the logarithm of the GNP deflator. This model was applied to the period 1966-1980 when the shortage of gas explained by the Federal Power Commission’s regulatory policy reached its peak. Table 3.3 illustrates the results of the model. 3.2.2 Interpretation of the Model The particular focus on the period (1966-1980) is explained by the low price ceilings which induced shortage. This shortage was not perceived by the consumers during that period because the producers withdrew gas from old reserves in order to meet the new additional demand. The econometric properties of the model show significance of the estimates of the parameters as indicated by the t statistics. The D W test statistics lie above the boundary of the critical area implying the absence of first order autocorrela tion. Consequently, the least squares estimation of the model yields efficiency and ’ consistency of the estimators. Table 3.3 shows what the price pattern would be if the gas industry was not regulated. It can be seen from the table that the market clearing prices are much higher than the actual prices. An important question might then arise: Would the producers react to the price increase by supplying more gas so that there is no excess demand. The answer to this question depends basically upon the shape of the supply curve. If the producers expect the prices of other fuel substitutes to be higher, then a gas price increase will only generate a very small additional supply. This means that the supply curve would be almost vertical and therefore the idea of 28 ' Current Prices ($ per thousand cubic feet) Decontrolled Prices ($ per thousand cubic feet) Price Difference 1966 0.16 0.16 0.00 1967 0.16 0.16 0.00 1968 0.16 0.25 0.09 1969 0.17 0.37 0.20 1970 0.17 0.43 0.26 1971 0.18 0.51 0.33 1972 0.19 0.64 0.45 1973 0.22 0.75 0.53 1974 0.30 0.88 0.58 1975 0.45 0.98 0.53 1976 0.58 1.23 0.75 1977 0.79 1.37 0.58 1978 0.91 1.57 0.66 1979 1.18 1.81 0.63 1980 1.59 2.16 0.67 Table 3.3: Market clearing price pattern setting ceilings on the price levels would seem relevant. Chapter 4 D ER EG U LA TIO N OF TH E N A T U R A L GAS i I I IN D U ST R Y 1 i i i I Until 1978, price control of the natural gas markets was thought to be the j appropriate way to provide a more efficient resource allocation and to set fair I returns for the gas producers so that the income transfer from the producers to ( the consumers could be achieved. But when an increasing pattern of gas shortage j ( was noticed due to the mismatch between the supply and demand firstly in the ■ field markets and consequently in the wholesale markets, the federal and state regulatory agencies adopted new policies that allowed the gas prices to be at least : partially decontrolled. This would enable the producers to have more economic incentives to discover and to provide new reserves in order to eliminate the supply shortfalls. Under the Natural Gas Policy Act(NGPA, 1978), the wellhead gas prices of the interstate pipelines were free from ceilings. But there was a distinction between old gas which was in operation before 1977 and new gas which has recently been discovered. In order to encourage the development and discoveries of new reserves, the new gas prices were set higher than those of old gas. This could be explained by the fact that discoveries for new reserves were more costly because the remuneration for capital and labor, which are the necessary gas production factors, was increasing due to the increase of the inflation rate. It turns out that the pipeline costs vary ■ with respect to the purchases of old and new gas and this would also determine 31 ; the wholesale price paid by the residential and the industrial consumers. j Since the old gas is being depleted, the ratio of old to new reserve holdings of | the interstate pipelines decreases and therefore the average wellhead prices rise. This result is illustrated in Table 3.2 which shows an increase of the gas price from ' i 0.91 dollars per thousand cubic feet in 1978 to 2.46 dollars in 1982. i The gas purchases of the pipelines depend essentially upon two factors. Firstly, i I i the geographic location of the available categories of gas determines whether the i purchases are intensive in old or new high costly gas, and therefore the price levels differ between the pipelines according to the proportion of gas categories in their i reserve holdings. Secondly, it is in the advantage of the pipelines to reduce their ’ purchases of the old low-priced gas and to buy more new high-priced gas. This | is because the price of old gas was still regulated. However, the price of new gas ' \ was free from ceilings and subject only to the market conditions. ' The pipelines will have the opportunity to bid up the price of the deregulated gas in the wholesale market. The average price, which takes into account the prices of both kinds of gas, will be higher than the pipeline marginal cost if more , new reserve holdings are substituted for old reserves of gas. This would generate an economic incentive for the producers to discover and supply additional quantities of new gas. The resulting price could be higher than the market clearing level which might lead to a higher level of cost of production than the minimum efficiency of scale. This situation could lead also to supply glut. In this case, then,the partial deregulation of the gas field market turns out to be not the appropriate method to achieve production efficiency at levels where the gas supply matches the demand without developing excess returns for the producers. Despite the partial elimination of the gas shortage via this regulatory policy, the outcome was not consistent with the objectives of the regulators. Instead, what happened was a transfer of income not from producers to consumers (this , 32 , l was amongst the purposes of government regulation of the natural gas industry : during 40 years) hut from the low-cost gas producers to the independent sellers I of high-costly gas. j ' Presumably this specific policy of field price decontrol did not take into ac- ] | count the implied results of the past regulation. One might suggest an alternative • i regulatory policy that could play a more im portant role and would yield better j ! | results. This requires preliminary steps before the total decontrol of the gas price, j I 1 j First, this policy should make the gas industry operate in a free market environ- 1 ment by eliminating the barriers to entry. Second, the price of old gas needs to ' t be set at a reasonably higher level so that the pipelines will have an incentive to , | keep old gas in their reserve holdings. The third step is to ask each pipeline to j j hold a specific ratio of old to new gas in their reserve holdings. The decrease of ; ' this ratio is allowed only if it is proportional to the rate of depletion of old gas. ' Consequently, in the first two steps the producers will not be willing to take , the risk of drilling wells at an extensive margin. But as low-priced gas is depleted I the average price of gas goes up substantially enough to bring about incentives 1 for the producers to discover new reserves. The wellhead price that results from , ' ' this dynamic procedure will be relatively close to the competitive market clearing price. However the problem is that in the first step (before the total depletion of the old gas) pipelines which are located far away from the fields where old gas j | ! reserves are available might exit. Therefore, the existing pipelines might have a 1 potential market power. J ' i 1 : i 4.1 V ertica l In teg ra tio n in th e N a tu ra l G as In d u stry ! ! ; | I Deregulation of the gas field price might cause changes in the structure and ! j state of competition in the markets. These changes could be in the degree of ■ I i | vertical integration. ' i 33 | It is im portant to study vertical integration in the natural gas industry be- j | cause it provides insights into the relationship between economic performance and i ! market structure. ^ Brodman and Montogomery (1983) defined vertical integration as the joining . i of potentially separate successive stages of production under common ownership. In order to see the effects of the vertical integration on the performance of the gas ' f industry and on social welfare, there are two concepts that need to be analyzed: i i I i) the horizontal dominance of an operating firm in the gas market; this means ; to what extent does the firm have a large share of market sales or purchases. | ii) the degree of concentration in the markets; this involves the market struc- j ture (as described in Chapter 3). \ Mullholland(1979) carried out an empirical study about the market structure and the price elasticities in the gas industry [10]. He showed that the seller j ; i concentration levels are below the ones identified with monopolistic behavior. In ■ contrast, Schwartz and Wilson [14] found that there is a significant market power realized by the gas producers who might engage in a web of joint ventures that are i anticompetitive [15] and hence the gas producers would be more likely considered as oligopolists. If this is the case, then the market concentration is relatively high and vertical integration would reduce economic welfare because the firms would choose an organized strategy that enables them to react cooperatively and the gas i price would be above the competitive level. Nevertheless from the point of view of the supply side, vertical integration avoids the inefficiency and waste observed in the case of monopoly. W ith dereg ulated markets, such integration would have significant results if the producers ! possess a certain degree of market power. However it should be noticed that the effects of integration are strongly positive even in the case where the markets are characterized by perfect competition among the gas sellers. As Brodman and Montgomery asserted: 34 i “...it is not necessary to assume that field markets are imperfectly j I j | competitive in order to conclude that deregulation will create a trend . t [ I to greater integration. The incentives for integration would come j from problems of information and coordination in market-mediated j exchanges. In this case integration might serve a beneficial economic function.” I ' In a deregulated environment vertical integration could be associated with effi ciency of the production process [18] and, presumably in the natural gas industry, ! integrated firms would produce more at lower average costs but then the gas price ; will go up depending on the bargaining power of the pipelines and on the structure ' ^ of the markets. This explains why the integration of the gas sellers cannot be the 1 source of making the consumers better off if the conditions of perfect competition do not hold. However, integration would surely generate better allocations of gas. According to several economists (Wu, 1964 ; Green, 1974 ; Arrow, 1975) in- . tegration of firms is related to the problem of uncertainty that these firms might face in their investment decisions. The authors suggested that vertical integration ' will reduce the impact of fluctuations on the input prices when there is symmetric . information between the gas producers and the pipelines buying gas from the field market [1]. Theoretical models were presented describing the behavior of the sell- | ers in the presence of uncertainty and how vertical integration would make each r seller better off by reallocating the risk between the gas producers who, thereafter, ! will have strong incentives to make new contracts with the gas buyers. i I 4.2 T h e P ro b lem o f U n certa in ty ! Risk and uncertainty have a great impact on the determination of sales and ! prices [2] because the producers and the pipelines alter respectively their supply and demand plans according to the degree of uncertainty that they perceive in i 35 the production and delivery processes. Furthermore, deregulation of the gas field l prices makes the producer and pipeline income change more randomly because the | determination of the prices and the quantities is subject to uncertainty But under j the price control of natural gas, only the quantities are subject to uncertainty and I consequently the income risks will be more moderate. | A model is established describing how the consumer and the producer behav- j S iors are affected by uncertainty and what decision will make them better off. | ! The optimal choice of the sellers and buyers will be referred to an equilibrium j i 1 1 j choice. This in fact depends upon the market structure which is assumed in this ’ j model to be competitive. It depends also upon the kind of contract made before ; , gas delivery. ! The scope of this model is to show under what conditions does the equilibrium i between producers and buyers seem to be achievable and what are the effects of ; contingent and spot market pricing system on the incomes of the gas producers and the pipelines. Let T be the period of time during which the contracts will be made. [1,T] be the length of the contract period, where t = 1, • • • ,s t lies in [1, 71 ]. Given: i • i = 1, • • • ,m pipelines asking for gas, and j = 1, • • • ,n sellers of gas. We : I j have, I • Dl = the quantity demanded by pipeline i 1 l I j • S° — the quantity supplied by producer j l • W % — the initial endowment of gas for consumer i i i 36 j A contingent market equilibrium is defined by: I (D, S, P) = ( D l - d \, D ? , - . P . ) , I (4-1) ! such that: 1. TT is preferred by consumer i than D% G B {P , W % ) V * = 1, ■ • ■ ,m such that: \ ' ■ 1 | B (P ,W i) = [D i £ K ‘ +-,Y<P‘(D \ - W ' t ) = 0} (4.2) , J t = 1 I _ _ . ' 2. There exists a unique production plan S that makes the producer j better j ! off: P S d > PSj, VS3 < e Y j (4.3) i t . . . . . : : 3. The equilibrium condition holds: | [ 771 J2CD1 - W ) = sum?=1yi (4.4) , i This assumption implies a complete price decontrol in the field markets, so I that at the aggregate level there is no excess demand. The equilibrium choice is a contingent or a spot equilibrium depending on the contract. In the case of contingent market, the pipeline makes the payment to the producers in the first year of the contract at a fixed price and for a specific quantity. Then, independently of the state of nature that occurs, the pipelines do ; not have any burden of income risks inherent in the uncertain future state of the i * : economy. When contracts between the pipeline companies and the gas producers are ! made on the basis of spot market pricing system the price will vary according to the state of nature that is probable. The relation between spot and contingent prices would be such that there exists a unique k = (Jb1 ? • • • , ks) for which: P t - ktpt (4.5) , 37 where P t is the contingent price, and pt is the spot market price. kt = df/dx, the ratio of marginal utility of income in state t to the marginal utility of income in the first year of the contract. One can notice that in this case the incomes of the pipelines and of the sellers : are related to the gas transactions and they depend on a random element kt \ I that changes accordingly to the state of nature. This random element makes the I income risks very im portant for the investment plan decisions. The degree of risk 1 that the producers perceive influences the amount of investments devoted for the discoveries of new reserves of gas. 38 j Chapter 5 i CO NCLUSIO NS i The experience of the Federal Power Commission field price regulation has shown inevitable results of gas shortage and distortions in economic growth. These J results could be explained by the reluctance of the producers to seek new reserves ! of gas and expand their production plans because the price ceilings were not i allowed to increase proportionally with respect to the cost increases and the degree of uncertainty in the production process. ! | Since the distributing end of the gas industry is a public utility, the existence j of a competitive market structure on the production side is very im portant. Nev- ' ertheless, it was believed that the gas industry was characterized by monopolistic | imperfection and therefore it ought to be regulated. As a result of regulation, ■ there was an income distribution from the gas producers to the consumers. How- i ever, while the aim of regulation was to achieve this result, a mismatch between 1 supply and demand was created by virtue of the price control. Consequently, the I ' consumers whose demand was not satisfied were obliged to seek other substitutes ! and pay higher prices. | The different regulatory policies that the FPC has attem pted to use did not seem to solve the problem. Indeed, the rates of return were not determined very carefully because their determination required a knowledge about the production I conditions of each producer. It need also detailed information about how the gas j industry was organized. I The FPC was unable to use the techniques required for the determination of j the cost-based prices. In addition, the choice of regulation was critical because it ' j was not obvious that the gas industry presented monopoly power which was in i J the advantage of the producers. In some production areas, it was proved that the degree of concentration was far from being the one that could show the existence ! | of monopoly. I 1 . . i In 1978, the political choice was to deregulate the natural gas field prices and 1 1 give opportunity for the producers to explore more reserves of gas. This partial I [ deregulation of the industry did not help much, during the first years, in solving the problem of the gas shortage because the consequences of the past regulation still influenced the mechanisms and the structure of the industry. In this study, it was shown that regulation of the natural gas industry was 1 beneficial to the consumers whose demand was satisfied. This result is illustrated ' in table 3.1 which shows the difference between the regulated price of gas and the : decontrolled price. However, it is im portant to notice that consumers whose gas demand was not satisfied because of the shortage induced by regulation, were not better off by virtue of the price control policy. 40 References [1] Arrow, Kenneth J. 1975 “Vertical Integration and Communication,” Bell Journal, Vol 6, pp 173-183. i [2] Broadman, harry G., and Montgomery, David W. 1983 “Natural Gas Markets | after Deregulation,” Baltimore, Maryland: The Johns Hopkins University j Press. ; I [3] Brown, Keith C. 1970 “Regulation of the Natural Gas Producing Industry,” j Baltimore: The Johns Hopkins University Press. i [4] Helms, Robert B. 1974 “Natural Gas Regulation: An Evaluation of FPC Price Controls,” Washington, D.C.: American Enterprise Institute for Public Policy Research. [5] MacAvoy, Paul W. 1953 “Price Formation in Natural Gas Fields,” New Haven: Yale University Press. [6] MacAvoy, Paul W., and Pindyck, Robert S. 1975 “Price Controls and the Natural Gas Shortage,” Washington, D.C.: American Enterprise Institute for Public Policy Research. [7] MacAvoy, Paul W., and Pindyck, Robert S. 1973 “The Economics of Natural Gas Shortage(1960-1980),” Amsterdam: North Holland Publishing Company, : and New York: American Elsevier Publishing Company. ; ( I [8] MacAvoy, Paul W., and Pindyck, Robert S. 1973 “Alternative Regulatory Policies for Dealing with Natural Gas Shortage,” Bell Journal, Vol4, pp454- j 498. I I [9] Mckie, James W. 1957 “The Regulation of Natural Gas,” Washington, D.C.: ! American Enterprise Association Inc. ^ [10] Mullholland, Joseph P. 1979 “Economic Structure and Behavior in the Natu- ! ral Gas Production Industry,” Washington, D.C.: Federal Trade Commission. ' [11] Neuner, Edward J. 1960 “The Natural Gas Industry, Monopoly and Compe tition in the Field Markets,” Norman: University of Oklahoma Press. [12] Russell, Milton , and Toenjes, Laurence. 1971 “Natural Gas Producer Reg ulation and Taxation,” East Lansing, Michigan: Michigan State University. [13] Sanders, Elizabeth M. 1981 “The Regulation of Natural Gas, Policy and Politics: 1938-1978,” Philadelphia: Temple University Press. [14] Schwartz, David A., and, Wilson, John W. 1974 “Hearings on the Natural Gas Industry,” Washington, D.C.: Government Printing Office. [15] Starrat, Patricia E. 1974 “The Natural Gas Shortage and the Congress,” Washington, D.C.: American Enterprise Institute for Public Research. [16] Tussing, Arlon R., and Barlow, Connie C. 1984 “The Natural Gas Industry: Evolution, Structure, and Economics,” Cambridge, Massachusetts: Ballinger Publishing Company. [17] Williams, Stephen F. 1985 “The Natural Gas Revolution of 1985,” Washing ton, D.C.: American Enterprise Institute for Public Policy Research. [18] Wu, S. Y. 1964 “The Effects of Vertical Integration on Price and O utput,” Western Economic Journal, Vol2, ppll7-133. 42

Linked assets

University of Southern California Dissertations and Theses

Conceptually similar

PDF

Capital formation and investment decision in Nigeria: An analysis

PDF

United States versus Soviet Union aid to Afghanistan (1950-1961)

PDF

State strategy and policy choice in economic development: A game theory approach

PDF

The management and design of economic development projects: A case study of World Bank electricity projects in Egypt

PDF

The Interventionist State Revisited: The Political Economy Of State-Business Relations In India

PDF

Perestroika: An inquiry into its historical, ideological and intellectual roots

PDF

An appraisal of current prospects for a United States shale oil industry

PDF

The advisability of trade between the United States and Czechoslovakia

PDF

Government and the economy in former French West Africa

PDF

Key factors in appraising development project in Egypt

PDF

The utilization of an exponential equation to describe and predict the production cost curves in the aerospace industry

PDF

The impact of exports upon Korean economic growth during the decade 1962-1972

PDF

Economic growth and energy use

PDF

Reexamination of Schumpeterian growth and business cycle theories with Taiwan as a case study

PDF

Calculating economic damages in litigation matters

PDF

The role of religion in the economic development of India

PDF

The village in the Indian economy

PDF

Business cycles in the United States: A comparison of interwar and postwar experiences

PDF

Lawyer profusion and transcontinental per capita income growth

PDF

An application of economic growth models to the experience of Turkey

Asset Metadata

Creator Khedhiri, Sami (author)

Core Title Regulation of the United States natural gas industry

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,Energy,OAI-PMH Harvest,political science, public administration

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Kamrany, Nake M. (committee chair), Elliott, John E. (committee member), Kalaba, Robert E. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-469059

Unique identifier UC11266335

Identifier EP44926.pdf (filename),usctheses-c20-469059 (legacy record id)

Legacy Identifier EP44926.pdf

Dmrecord 469059

Document Type Thesis

Rights Khedhiri, Sami

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA