Evaluating and Enhancing Competition in the Interstate Natural Gas Transportation Industry

In 1996, the Federal Energy Regulatory Commission (FERC) established criteria it uses when evaluating proposals for marketbased rates by natural gas pipelines. Since that time, a number of significant developments have occurred, both in markets for natural gas transportation and in economic tools for marketpower assessment. This article will review the current approach for measuring interstate pipeline market power presented in the 1996 Policy Statement of the FERC and will critically evaluate that framework in light of these recent developments. We show that fundamental changes in the operation of natural gas transportation markets and new developments in the economic analysis of market power suggest that the Commission’s methodology for assessing market power actually or potentially exercisable by pipelines seeking market-based rates is, as it currently stands, inappropriate and should be updated in light of new developments. As we discuss below, the Commission’s approach fails to account for a number of important factors potentially influencing a determination of market power. Consequently, the goals of this article are (1) to apply economically appropriate criteria to current natural gas transportation markets in order to illustrate how to evaluate their competitiveness and (2) to demonstrate that improving the competitive assessment of pipelines competing in those markets could enhance consumer welfare.