Marginal Costs with Wings a Ball and Chain Pipelines and Institutional Foundations for the U.S. Gas Market

The United States has highly competitive gas markets (spot and futures), showing prices in recent years that have definitively diverged from world oil prices. Those gas markets were not “built” in the manner of administered electricity markets. Rather, they were the result of a revolution in federal pipeline regulation designed purposely to free the gas market from administrative agencies. The keys to that revolution in pipeline regulation were the definitive split of pipeline transport markets from gas markets and the juxtaposition of traditional cost-based pipeline regulation alongside an unregulated “Coasian” market for the trade in well-defined intangible shipper contract rights to physical transport capacity. The new pipeline regulations permit infrastructure capital to flow freely into the pipeline sector by allowing investors to deal effectively with asset specificity without impairing competitive pipeline entry or impeding the trade in gas.