Price Regulation and Pipeline Transmission Capacity

Abstract

A considerable literature has extolled the virtues of transitioning away from rate-of-return regulation for infrastructure-intensive industries. I find that for a large-scale transmission network like the U.S. natural gas pipeline system, transmission capacity under rate-of-return regulation may be suppressed relative to that which occurs under a more flexible price cap regime. My results have specific implications for the U.S. natural gas market, as well as more general implications for the regulation of transmission network infrastructure, which emanate from the well-known effects of congestion on the economic efficiency of markets served by such networks.