Investigation of market power in natural gas system

Since the beginning of deregulation, natural gas markets have been opened up to competition, with the creation of open access to pipeline transportation and storage and unbundling of sales from pipeline transportation. However, although there is strong evidence that replacing regulation with competition has provided substantial benefits, some problems still exist. The exercise of market power by LDCs is one of the major issues that is of great concern among regulators. Although competition in the natural gas market has been modeled to some extent, there have been no reports of studies that investigate the impact of market power on market performance under system uncertainty, considering that market power is not only exercised in the gas markets on the sale side of the industry but also in the capacity markets on the purchase side of the industry. The proposed equilibrium model used to examine the opportunity for the firms to exercise market power is characterized by a game-theoretic framework problem with Cournot behavior assumed. It takes into account the system uncertainty that is formulated as a two-stage problem, which employs the recourse method. Market power can be exercised in the downstream gas markets if firms, who face a downward sloping demand curve, attempt to increase prices above the competitive levels, leading to lower outputs supplied to the market. Market power in the capacity purchase markets in this study refers to blocking competition in the spot markets in which firms, who have adequate resources and control of system operation, are able to enter the capacity reservation markets and therefore benefit from a first mover advantage over the rivals who are unable to do so. The problem is firms overreserve capacity, purposely exploit it by withholding capacity from the markets, driving prices of capacity that reflect its scarcity values for the remaining capacity in the system, and reselling it at a profit to the competitors. The base case with a sample network and calibrated data is used to validate the model. The results show that the firm who is capable of exercising market power in the gas sale markets, benefits from an exclusive accessibility to the reservation markets and then places the competitor who does not have market accessibility into a disadvantageous position. Therefore, the restricted market access leads to higher profits for the firm with market accessibility and lower profits for the competitor who cannot enter the reservation markets. However, the restricted market access does not have a significant impact on both customers and competing firms as long as the firms are governed by effective regulation. Sensitivity analysis is also performed on various sets of selective, critical parameters to determine the impact of different sources of variation on the extent of market power and social welfare