The effects of rate of return regulation on the transmission sector of the US interstate natural gas industry
The purpose of the dissertation is to examine the impact of rate-of-return regulation on the cost of transporting natural gas in interstate commerce. Of particular interest is the effect of the regulation on the input choice of a firm. Does regulation induce a regulated firm to produce its selected level of output at greater than minimum cost The theoretical model is based on the work of Rolf Faere and James Logan who investigate the duality relationship between the cost and production functions of a rate-of-return regulated firm. Faere and Logan derive the cost function for a regulated firm as the minimum cost of producing the firm's selected level of output, subject to the regulatory constraint. The regulated cost function is used to recover the unregulated cost function. A firm's unregulated cost function is the minimum cost of producing its selected level of output. Characteristics of the production technology are obtained from duality between the production and unregulated cost functions. Using data on 20 pipeline companies from 1977 to 1987, the author estimates a random effects model that consists of a regulated cost function and its associated input share equations. The model is estimated as a set of seemingly unrelated regressions. The empirical results are used to test the Faere and Logan theory and the traditional Averch-Johnson hypothesis of overcapitalization. Parameter estimates are used to recover the unregulated cost function and to calculate the amount by which transportation costs are increased by the regulation of the industry. Empirical results show that a firm's transportation cost decreases as the allowed rate of return increases and the regulatory constraint becomes less tight. Elimination of the regulatory constraint would lead to a reduction in costs on average of 5.278%. There is evidence that firms overcapitalize on pipeline capital. There is inconclusive evidence on whether firms overcapitalized on compressor station capital.
- Research Organization:
- North Carolina State Univ., Raleigh, NC (United States)
- OSTI ID:
- 7169798
- Country of Publication:
- United States
- Language:
- English
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Related Subjects
030600 -- Natural Gas-- Economic
Industrial
& Business Aspects
29 ENERGY PLANNING, POLICY, AND ECONOMY
294003* -- Energy Planning & Policy-- Natural Gas
COST BENEFIT ANALYSIS
ECONOMIC ANALYSIS
ECONOMICS
FINANCIAL INCENTIVES
INDUSTRY
NATURAL GAS INDUSTRY
RATE STRUCTURE
TRANSPORT