Research On The Evolution Of Natural Monopoly Industry Market Structure

Ever since the beginning of the century, natural gas consumption has been growing fastest among all the primary energy in China. However, the market oriented reform of gas industry is just got on gear. In December2011, Chinese gas market took the first step and switched from cost-plus pricing to netback pricing in two pilot provinces. Under this new scheme, gas-to-gas competition is encouraged to determine city-gate wholesale prices. Though vigorous, the initiatives indicate no vision how the future market organization would evolve. Therefore, this paper probes into the problem with theoretical analysis and numerical modeling.The natural gas industry is considered as typical natural monopoly industry traditionally. Though it includes competitive business such as gas supply and trade, as well as natural monopolistic business such as transmission, distribution, storage and exploiting, the traditional Chinese gas market is characterized by a few integrated firms, which are in charge of both the competitive business and natural monopolistic business, in this case, supply and the transmission of the gas from fields to cities. The experiences from liberalized market show that third party access (TPA) to the infrastructure, vertical separation and restructuring are essential to build a competitive and liberalized market. Meanwhile in US and European countries, several regulative directives and packages forces TPA and restructuring in natural monopoly industries like electricity and natural gas. However, China has traditionally viewed gas resource as public property. Public property orientation has guided regulators to pay great attention on the interest of integrated gas supply firms. Deintegration by force couldn’t be plausible in Chinese context. Thus, few studies have brought up the topic of vertical separation and restructuring in China’s natural monopoly industy, let alone using the tool of numeracal modeling.This thesis first compares pipeline to pipeline competition pattern of Chinese gas market with gas to gas competition pattern in European countries. Then, it analyzes the potential driving forces behind the restructuring, namely the improvement in market mechanism design and liquidity increase in gas trade. The following theoretical models show that integrated firm would reap rivals’profit margin by internalizing the congestion rent or foreclose rivals’access to infrastructure by strategically manipulating and hoarding transmission right. Therefore, this paper proposes compensation mechanism. To compensate the integrated firm to allow third party access and vertical separation, instead of having fixed transmission tariff, they are reallocated with rent reflecting congestion. Numerical simulation with multiple complementarity modeling is built based on Chinese gas market to test the feasibility of above propositions. The simulation result shows that third party access to the infrastructure and vertical separation do improve the social payoff as a whole. What’s more important that the congestion rent collected by an independent network operator is sufficient to transfer payment to cover the payoff loss of the integrated firm under ownership separation. This indicates that third party access to the infrastructure and vertical separation are theoretically feasible with Pareto improvement under Chinese context.