An American model for the EU gas market?

Abstract:

It is generally believed that the American model is not suitable for Europe, yet North America is the only large and working competitive gas market in the world.

The paper shows how its model could be adapted as a target for market design within the European institutional framework. It starts from analysis of the main peculiar economic features of the gas transportation industry, which should underpin any efficient model. After the Third Package is properly implemented the EU will share several building blocks of the American model: effective unbundling of transportation and supply; regulated tariffs which, for long distance transportation, are in fact largely related to capacity and distance; investments based mostly on industry’s initiative and resources, and the related decisions are increasingly made after open and public processes.

Yet Europe needs to harmonize tariff regulation criteria, which could be achieved through a monitoring process. National separation of main investment decisions should be overcome, possibly by organising a common platform where market forces and public authorities interact with private suppliers to require existing and develop new capacity, whereas industry competitively offers its solutions. Such platform would allow for long term capacity reservation, subject to caps and congestion management provisions. Auctions and possibly market coupling would play an important role in the allocation of short term capacity but a limited one in long term. Market architecture and the organisation of hubs would also be developed mostly by market forces under regulatory oversight. The continental nature of the market suggests a likely concentration of trading in a very limited number of main markets, whereas minor markets would have a limited role and would be connected to major ones, with price differences reflecting transportation costs and market conditions. Excessive interference or pursuit of political goals in less than transparent ways involves the risk of slower liquidity development and higher market fragmentation.

With this view as a background, regulatory work aimed at completing the European market should be based on ensuring the viability of interconnections between current markets and on the establishment of common platforms and co-ordinated tariff systems, fostering the conditions for upstream and transportation capacity development.