A surplus and welfare analysis of asymmetric regulation

Some European regulators have decided to force competition in their national markets. They have decided to go beyond the second directive and apply asymmetric regulation. Gas release programs and market shares constraints are the two asymmetric decisions imposed to incumbents. When a regulator imposes a gas release program to an incumbent, this operator is compelled to release quantities of its long term contracts to its competitor. In this paper, we will focus on gas release and its impact on welfare, consumer surplus and on the level of released quantities set by regulators. The aim of a gas release program is to give access to natural gas to competitors. They become actives on the market and are in competition with the incumbent. These programs are time limited. They only help competitors in expecting the development of hubs or new investments in importation infrastructures. If competitors want to stay active after the program, they may find others supply sources to increase security of supply. The gas release can induce Raising Rival’s Costs or “Self-Sabotage” strategies. We use a Cournot model with capacity constraints to answer two questions. First, we will study the impact of these strategies on consumer surplus and welfare. We will show that there are no impact on consumer surplus but the welfare decreases. The gas release program introduces a transfer of profit between competitor and incumbent, reduces welfare because of the increase in costs of supply, but has no impact on total consumed quantities. Then, we will suppose that the regulator is setting released quantities maximising welfare. Gas release price is often based on costs plus a bid or a fixed premium. Quantities are set with a less obvious process. We will demonstrate that the regulator must set released quantities : that would not be so high if incumbent’s supplies are small to avoid SelfSabotage or RRC strategies; as a function of incumbent’s supplies if they are in intermediate values to avoid strategies seen above and to optimise quantities sold on the market;