Rate-of-return regulation to unlock natural gas pipeline deployment: Insights from a Mozambican project

Florian Perrotton and Olivier Massol
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Florian Perrotton: IFPEN - IFP Energies nouvelles, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: In poor developing countries, the discovery of large gas deposits often stimulates the public authorities' appetite for ambitious development strategies requiring the construction of a large national pipeline system. However, the foreign private investors financing its installation usually prefer smaller infrastructure designs that are solely intended to supply a few creditworthy industrial sites. Focusing on the situation in Mozambique, we examine whether the adoption of rate-of-return (RoR) regulation can reconcile these conflicting objectives. As a first step, we assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect) to the investors. Then, analyzing the ex post situation when the enlarged domestic demand materializes, we prove that the allowable rate of return can be set by the regulator to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a cost-efficient manner. We finally discuss whether RoR regulation can still protect society from monopoly prices when it is tuned to prompt an optimal degree of building ahead of proven demand.

Keywords: Natural gas; Pipeline; Regulatory economics; Developing countries; Mozambique; Building- ahead of demand; Overcapitalization (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-ene and nep-reg
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Published in Energy Economics, 2020, 85, pp.104537. ⟨10.1016/j.eneco.2019.104537⟩

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Related works:
Journal Article: Rate-of-return regulation to unlock natural gas pipeline deployment: Insights from a Mozambican project (2020)
Working Paper: Rate of Return Regulation to Unlock Natural Gas Pipeline Deployment: insights from a Mozambican project (2019)
Working Paper: Rate-of-return regulation to unlock natural gas pipeline deployment: insights from a Mozambican project (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02418234

DOI: 10.1016/j.eneco.2019.104537

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