Relative Prices on Regulated Transactions of the Natural Gas Pipelines

Paul W. MacAvoy and Roger Noll

Bell Journal of Economics, 1973, vol. 4, issue 1, 212-234

Abstract: As in many regulated industries, jurisdiction of the commission regulating the natural gas pipelines does not encompass all transactions of the regulated companies. The Federal Power Commission does not regulate direct sales of the pipelines to industry, while it does set profit limits on sales to retail gas utilities companies. If regulation is effective, the prices on the regulated sales should be different from those on the unregulated industrial transactions, all else being equal. A model is constructed here of the behavior of the firm with split regulated-unregulated sales. Thenceforth, the model is tested against a sample of paired transactions. Thenceforth, the model is tested against a sample of paired transactions in the late 1960s. The findings are that price levels on regulated sales would not appear to have been different from those on unregulated sales, after account has been taken of cost and demand differences. The effects of regulation, while in the expected direction, were insubstantial. Moreover, the differences in the institution of price setting under regulation -- in particular, the widespread use of two-part tariffs -- if anything, enhanced the ability of the pipelines to charge identical regulated and unregulated prices.

Date: 1973
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