Social costs of natural gas market rigidities

To the extent that there are market imperfections and other constraints limiting consumption of gas to levels significantly below those dictated by underlying economic factors of cost and producibility, society bears the cost resulting from misallocation of resources and avoidable environmental deterioration. Given the regulatory and institutional setting within which the natural gas industry has been forced to operate, there is a strong presumption that such inhibitions on gas use may in fact exist. Some rigidities stem undoubtedly from characteristics unique to gas as a natural-resource commodity. This report presents a framework for reviewing potential sources of constraints, rigidities, and distortions in the functioning of natural gas markets under the Natural Gas Policy Act of 1978 (NGPA) and other legislation. The organizing principle and primary focus of the paper are the sequence of transactions between wellhead and point of consumption, with major attention to industrial and power plant use. The transactions in question are between: producers and pipelines; pipelines and distributors; distributors and end users; and pipelines and industrial end users (mainline sales). In addition to these vertical transactions, there are horizontal transactions between pipelines (off-system sales) and between distributors. 22 references, 1 figure, 1 table.