andydee

The Realities of Natural Gas

"Probably the most important observation on the ambitions of natural gas deregulators was rendered by Professor David Teece of the University of California (1990). According to him, market liberalization in the U.S. has already “jeopardized long-term supply security and created certain inefficiencies.” He also notes
that “While more flexible, a series of end-to-end, short-term contracts are not a substitute for vertical integration, since the incentives of the parties are different and contract terms can be renegotiated at the time of contract renewable. There is no guarantee that contracting parties will be dealing with each
other over the long term, and that specialized irreversible investments can be efficiently and competitively utilized.”

For this reason I never miss an opportunity to remind my students that as far as I am concerned, large and complex gas systems operating in a climate of uncertainty are most efficiently run on an integrated basis that emphasises long-term contracting. This kind of arrangement promotes optimally dimensioned installations, and although it may not be mentioned in your economics textbook, if pipeline-compressor-pr... systems which fully exploit increasing returns to scale in order to obtain minimum costs are to be readily financed and expediently constructed, then – as I interpret the evidence – the kind of uncertainties associated with short to medium term arrangements should be kept to a minimum. Failing to do so could cause a reduction in physical investment, and in the long run lead to higher rather than lower prices."

Garbage dressed up in unintelligible English.

Let me try to summarize.

In the first paragraph he cites a "scholar" that believes de-regulation energy was a bad idea, and is citing one reason for his belief. I worked for two regulated entities - one in energy and one in telecommunications. Regulation simply doesn't work - regulated industries are inefficient and are focused on perpetuating themselves. "Creative Destruction" is a foreign concept to a regulated entity - and necessary if we are to deal with a changing environment.

In the second paragraph our good professor eschews regulation, (good for him!), in favor of long-term commitments. I also believe in long-term commitments. My wife and I have been married almost 50 years. Good for the kids, and good for each of us. I wish our author had taken a course in expository writing while he was a freshman. It could have helped.