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Title:Lumpy investment in regulated natural gas pipelines: An application of the theory of the second best PDF Logo
Authors:Brito, Dagobert L.
Rosellón, Juan
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 1024
Abstract: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.
Subjects:Transmission investment
Natural-gas regulation
Congestion management
Gas pipelines
Second-best theory
JEL:L51
L95
Document Type:Working Paper
Appears in Collections:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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