Pipeline Interconnection, Tolling Competition, and Transmission Capacity

by Walls, W. D. and Yuan, Lasheng

We analyze in this paper the strategic implications of pipeline interconnections on tolling competition, pipeline industry profitability and transmission capacity. Pipelines are increasingly important in energy markets, both within geographically large countries such as the U.S.A. and China, and also within the context of international trade in energy such as between Russia and Europe. The strategic analysis of pipeline competition in this paper is fundamentally different than previous analyses of pipeline tolling competition. We set out the analytics of competition and solve for market equilibria under interconnection structures that vary with the number of separate end-to-end pipeline companies along competing routes. The analytics show that pipeline operators often have an incentive to subfranchise pipelines to independent firms because doing so increases firm profitability as well as overall pipeline industry profitability. Competitive subfranchising has the effect of expanding aggregate pipeline transmission capacity and the number of alternate pipeline routes.

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