31 October 2017

Institutions, to Property Rights, to High-Technology Gas Markets1

By Dr. Jeff D. Makholm It is no overstatement to say that the high-technology natural gas market in the United States is one of the best examples of where institutions and new property rights have led to new and efficient markets. Competitively produced and transported natural gas has collectively displaced imports and boosted energy security, reduced coal-fired generation, helped consumers lower energy bills, and helped to meet climate change remediation targets. But it is also an example of extreme path-dependence, showing how hard it is to translate successfully such institutions and property rights to similar energy problems in other parts of the world that do not share the century-old US institutional foundation. Europe in particular has shown stubborn resistance to embracing the institutions that support unregulated energy markets based on property rights. The results of such varied institutional foundations is an uncompetitive gas industry with prices two to three times those in North America, pulling gas out of the generation merit order (relative to coal) and effectively eliminating any entry of unconventional gas production.

Introduction

A competitive gas market on a continental scale depends on its pipelines—steel tubes through which gas flows no faster than the speed of a galloping horse. The gas pipeline industry, in which technology has changed very little in many decades, is the backbone of gas markets. The political and regulatory treatment of that industry determines whether gas consumers pay competitive prices and gas producers have the investor funding to support the latest technology in finding the fuel.

The world’s gas industry is centered in North America—which claims the oldest widespread use of natural gas as a fuel and feedstock and, by a large fraction, the world’s largest network of gas pipelines, as shown in Table 1. Table 1. The North American Dominance of the World’s Gas Pipeline Industry Gas Pipelines Percent of World Pipelines Miles per First Major Gas Continent (Miles) Gas Pipelines 100 Sq Miles Pipeline North America 1,245,250 72.4% 16.33 1904 Europe 255,901 14.9% 3.97 Early 1970s Asia 91,364 5.3% 1.49 1969 South America 42,654 2.5% 1.07 1949 Middle East 38,408 2.2% 2.77 1997 Africa 25,634 1.5% 0.51 1964 Australia/NZ 19,878 1.2% 0.73 1969

Total 1,719,088 100.0%

Note: gas pipelines account for 80.2% of the world’s pipeline mileage, oil and refined products pipelines 19.8%.

Source for pipeline mileage: CIA World Factbook - Field Listing: Pipelines, Available at https://www.cia.gov/library/publications/the world-factbook/fields/2117.html

Examples of both competitive and uncompetitive outcomes for continent-sized gas industries are in plain sight. Through wise regulation of its pipeline industry—worked out over a very long time with great contention and effort—North America created robust spot and futures markets for gas, mirroring the competitive markets in other bulk commodities. Those moves promoted a technological revolution in unconventional natural gas production—dramatically lowering the price of gas for consumers and businesses, displacing high-carbon coal with low-carbon gas for power generation, and re-invigorating its domestic petrochemical industry. The European Union, through legislative protectionism of Member State gas companies, among other political and institutional problems unique to the EU, has no such gas markets. It produces no unconventional gas, builds new pipelines at 1/6th the rate as in North America and imports US coal (to fuel power generation) at record rates. Overall, as Figure 1 and Table 1 show, North American gas consumers paid competitive gas prices that summed to more than $500 billion less, since the start of 2009 when competitive US gas and oil prices diverged, than EU consumers paid for the gas flowing through European pipelines (where gas prices remain generally linked to oil).2

Figure 1. Relative Gas and Oil Prices in the United States

$18 Henry Hub UK NBP Brent $160

$16 $140

$14 $120

$12 USDbarrel $100 $10 $80

USDMMtu $8 $60 $6

$40 $4

$2 $20

$0 $0 2007 2008 2009 2011 2012 2013 2015 2016 Notes: The Henry Hub (in Erath, Louisiana), and West Texas Intermediate (WTI) hub (in Cushing, Oklahoma) are the principal trading points for US natural gas and crude oil. Source: Bloomberg (NG1 Comdty, CL1 Comdty, EUCRBRDT Index, NBPG1MON BBSW Index.

Source: Bloomberg (NG1 Comdty, CL1 Comdty, EUCRBRDT Index, NBPG1MON BBSW Index). www.nera.com 2 Table 2. Relative Gas and Oil Prices in the United States and Europe

Average Price* European Union Average Cost Cost Cumulative per MMBtu Consumption Differential per Unit Differential (Since 2007)

Year US European Union (Million MMBtu) (US$/MMBtu) (Billion US$) (Billion US$)

[1] [2] [3] [4] [5] = [3] - [2] [6] = [5] * [4] [7]

2007 $7.11 $6.15 17,188 $(0.97) $(16.66) $(16.66) 2008 $8.90 $11.56 17,850 $2.66 $46.78 $30.12 2009 $4.16 $4.94 16,489 $0.79 $12.95 $43.06 2010 $4.38 $6.42 17,734 $2.04 $36.11 $79.17 2011 $4.03 $9.34 16,015 $5.32 $85.13 $164.30 2012 $2.83 $9.38 15,587 $6.55 $102.15 $266.45 2013 $3.73 $10.48 15,379 $6.75 $103.80 $370.25 2014 $4.26 $8.37 13,656 $4.11 $56.15 $426.40 2015 $2.63 $6.51 14,323 $3.88 $55.25 $481.66 2016 $2.55 $4.73 15,253 $2.18 $33.22 $514.87

*For the United States, annual average price at Henry Hub; for Europe, annual average price at UK NBP

Notes: The National Balancing Point (NBP) is the UK gas trading hub, and Brent is a major benchmark for worldwide oil prices, taking its name from the Brent Field in the North Sea. We use the NBP for comparison because it reflects generally the lowest of the European gas prices.

Sources: Bloomberg (NG1 Comdty, CL1 Comdty, EUCRBRDT Index, NBPG1MON BBSW Index, downloaded February 26, 2014), BP Statistical Review of World Energy 2017.

There is a lot going on behind the prices of US and European gas—where competition drives one and traditional oil-linked indexes drive the other. There is no single test for competitive commodity markets. But a principal feature of such markets is the existence of private forward/ futures markets that permit competitive trade in pricing risk by the financial industry. A high volume of trade in a futures market for a given commodity is indicative of a competitive market for any hard (mined or fossil fuel) or soft (agricultural) commodity. The futures market serves as a price discovery tool for buyers and sellers and lowers transaction costs in the market. The lack of a competitive market for gas, defined this way, is evident in Table 3, which compares natural gas futures traded at US, European and Australian gas “hubs” (with the competitive markets for US oil and corn listed simply for comparison). The table shows that gas futures trading outside the United States is virtually non-existent.

Table 3. Volume of Commodities Consumed and Traded in Futures

Futures Volume Ratio of Futures Volume Market Unit Consumption Traded Traded to Consumption

Victorian gas mmcf/day 731 0 0 European gas mmcf/day 43,853 822 0 Us gas mmcf/day 93,120 2,494,349 27 Brent crude oil barrels/day 2,700,000 587,924,864 218 US corn metric tons/day 8,955,000 27,808,604 3

Notes: Futures contract volumes are measured using generic 1st 2014 data futures or one-month base futures. Europe natural gas futures include data for NBP, Gaspool, NCG, and the Dutch TTF.

Sources: Bloomberg, L.P., Bureau of Resources and Energy Economics, International Energy Agency, Australian Stock Exchange.

www.nera.com 3 Besides low prices and liquid gas markets, competitive gas supply drives new technology—shale gas is a huge industry in North American and nowhere else. Its production is a function of advanced technology applied to a century-old business. In 2013, Ernest Moniz—then Director of the MIT Energy Initiative—spoke about shale gas as a “game changer” and a “bridge to a lower carbon planet.”3 Shale gas has indeed had a heavy impact on the market for gas in America—driving down its price to the lowest level in decades, tilting the competitive electricity generating mix away from coal, and leading to a sharp interest in American exports of liquefied natural gas (LNG). Because of shale, the United States will be the largest gas producer in the world until at least 2040 (and probably far beyond).4

But shale gas production is as yet only a North American phenomenon despite a world that seems to have abundant shale gas resources (Figure 2).5 The paradox of shale gas development is that it coutinues strongly in a regional market with the world’s lowest natural gas prices: one-third to one-half of those in Europe. Furthermore, when the world considers shale gas, it seems not to look underground locally, but only to North America.6 North American development of shale is partly a result of the laws regarding rights to subsurface minerals (the farmer owns the gas in the United States as opposed to most other countries) and the existence of a highly-competitive oil/gas field service sector.

But key to the successful development of North American shale resources is that the trip to market for such unconventional fuels ends at the nearest connection to an interstate pipeline—where an unregulated and liquid gas and pipeline spot and futures market takes over.7 The existence of those markets along the reach of the North American interstate (and interprovincial) pipeline system are the results of uniquely North American institutions and the property rights endowments those institutions support. With markets supported by such institutions, along with a highly-competitive oil field service sector and private ownership of subsurface fuels, billions of dollars of invested capital flow into competitive shale gas development in North America. Without them, interest dries up and investors go home, as in Poland, which has some of Europe’s most promising shale resources but where early exploratory efforts have yielded nothing.8

Figure 2. Global Shale Oil and Natural Gas Resources in 2015

Source: US Energy Information Administration, 2015.

www.nera.com 4 Institutions and the Protection of Private Property in North American Regulation Generally

Institutions are the key to why US gas markets are so different than those in the rest of the world. Those US institutions developed long ago both to motivate the competitive capital markets to invest in regulated businesses and to ensure that such capital is protected from marauding by regulators. When it comes to those institutions, US regulators and the industries they cover speak a different dialect than the financial world. The split came so long ago that that few, but institutional historians or legal scholars, know when it occurred. Indeed, even my late colleague Professor Alfred Kahn was too young himself to have witnessed when that dialect changed for North American energy utilities.

The reason for these different dialects stems from the huge problems in managing the expanding footprint of investor-owned North American energy utilities during the first half or the 20th century—a period considered both a “public scandal” to some scholars and to others spelling perhaps the death knell for investor-owned utilities.9 But the institution of investor-owned North American utilities got through that period—albeit with a slightly different language.

Defining Regulated Private Property The great institutional economist of the first half of the twentieth century, John R. Commons, of the University of Wisconsin, wrote America’s first state regulatory statute (for Wisconsin) and also taught the world’s first college course on regulation (both in 1907). He and his progressive-era friends, including Justice Louis Brandeis and Samuel Insull, among others, were responsible for much of the development and regulation of America’s investor owned energy utilities during first decades of the 20th century—when major energy utilities in the rest of the world were generally government owned. Commons’ prominence in regulatory matters came from his uniquely insightful study of the legal foundations for defining property during the changes produced by the industrial revolution.10 Commons saw that “[i]n modern capitalism, the most important stabilized economic relations are those of private property.”11

For most of the first half of the 20th century, the issue of how to value regulated private property was a muddle before the courts in the United States. The muddle ended when, in 1944, the Supreme Court ruled in Federal Power Commission et al. v. Hope Natural Gas Co.12 With the Hope ruling, the US Supreme Court set a new standard: a utility’s profit (resting on invested capital as reflected in accurate bookkeeping) would be measured by potential earnings on that invested capital for investors based on other enterprises of similar risk.

Both in the use of invested capital (as reflected in the books) and in requiring measures of profitability in similarly risky ventures (as reflected by the capital markets), the Hope decision sharply limited regulatory discretion and protected utility companies’ investments from “taking” by regulators.13 James Bonbright—the scholar who prophesized doom for investor- owned utilities—rightly called it “one of the most important economic pronouncements in the history of American law.”14

www.nera.com 5 Part of the limit of regulatory discretion had to do with matters of accounting already settled. In 1912, the US Supreme Court had decided that if a company provides public services, the public effectively “owns” that company’s operational and financial books and records.15 The next year, the Court confirmed that the regulation of accounts by a commission was lawful.16 These decisions were the legal precursors to the US Uniform System of Accounts (which also mirrors regulatory accounting practices in Canada).17

Getting property listed in the recorded books is not automatic—such investments must meet the “prudence standard” before achieving such status. For North American utilities, the prudence standard is a big deal, with important judicial precedent. In a 1923 dissenting US Supreme Court opinion, Brandeis (generally also responsible for the judicial philosophy that produced the Hope decision by his Supreme Court successors) explained that a prudent investment test would be “applied for the purpose of excluding what might be found to be dishonest or obviously wasteful or imprudent expenditures.”18 The prudent investment standard, as defined by Brandeis, limits what regulators will accept into the accounts that track the property of regulated enterprises. Once in property accounts, however, the property is reasonably safe from regulatory seizure—the law sets a high evidentiary bar for disallowances of utility costs, and significant “imprudence” disallowances of costs are uncommon.

Institutional Foundations for the Deregulated Gas Pipeline Capacity Market US gas pipelines, which had escaped regulation at the federal level early in the 20th century, grew quickly enough to displace manufactured gas in numerous US cities by the late 1920s. As it did so, however, the gas pipeline industry acquired and absorbed those distribution companies—forming major multi-state, vertically-integrated holding companies that dominated the US gas industry. Those multi-state holding companies engaged in a number of newsworthy financial abuses, including writing up subsidiary property values and charging excessive service fees through affiliates—and otherwise attempting to evade the jurisdiction of state regulators in various ways.

Figure 3. Global Shale Oil and Natural Gas Resources in 2015

Source: Youngberg, Natural Gas, America’s Fastest Growing Industry, p. 58.

www.nera.com 6 The US Congress opened an investigation into the problem in 1928, directing the US Federal Trade Commission to investigate the holding company abuses. Two legislative initiatives came directly out of that investigation:

• The Public Utility Holding Company Act of 1935. This act was severe and almost punitive: it directed the interstate pipeline companies to divest their state-regulated distributors from their operations in what was described as “the most stringent, corrective legislation that ever was enacted against an American industry.”19 The Act survived the inevitable constitutional challenge by the pipeline industry and the dissolutions happened by the late 1940s. • The Natural Gas Act of 1938. This act took longer, as it represented a wide-ranging compromise of interests. It limited federal jurisdiction over interstate pipelines (to satisfy the states), it rejected principles of “third-party access” in favor of long-term contract carriage (to satisfy distributors’ demand for privileged—essentially permanent—pipeline access on behalf of their millions of customers), it limited pipeline entry through federal licensing (to protect existing pipeline companies from “destructive competition”), and it invoked accounting regulation (to satisfy Congress that its new industry regulator would have effective powers).

These two legislative actions are relevant here because they created an institutional foundation for the interstate pipeline business that could readily be adapted to “Coasian” bargaining in contract rights in licensed interstate pipelines.

Licensing of Physical Capacity Federal licensing resulted from pipeline companies’ demands that the new regulator limit pipeline-on-pipeline competition to sell such gas supplies to local distributors and others. It permitted the Federal Energy Regulatory Commission (the FERC), and its precursor, the Federal Power Commission, to judge the “economic need” of new pipeline capacity proposals before licensing (or “certificating”); this essentially meant approving pipeline projects that investors would support (which in turn meant projects that were fully-subscribed with long-term contracts with regulated gas distributors).20 Such licensing permits the orderly regulation of the quantity of pipeline capacity that the regulated pipelines sell.

Accounting and Public Access to Information With the Natural Gas Act, Congress, for the first time, invoked accounting regulation by legislation for any regulated industry at the federal level. It built on existing case law giving regulators control over the accounting of regulated firms.

Federal Regulation as a Spur for Long-Term Private Investment The US petroleum industry had traditionally employed vertical integration as the vehicle to safeguard long-lived and immobile capital investments in “relationship-specific” assets such as petroleum wells, pipelines, refineries, etc.23 Given the prohibition of vertical integration after the Holding Company Act, who would fund new pipelines?

The answer was deferred through the 1930s and early 1940s, as new gas pipeline construction stopped during the Great Depression and World War II. In the meantime, a group of American insurance companies did a comprehensive actuarial study of the newly independent interstate pipeline business. Recognizing the importance of the Natural Gas Act (including its accounting regulation, foundation on long-term distributor contracts and US Supreme Court validation

www.nera.com 7 with the Hope Natural Gas decision defining the value of regulated property), these insurance companies decided that 40-year interstate pipeline bonds for this newly independent industry were safe investments. Essentially, the insurance companies took such comprehensive, transparent, and cost-based federal regulation as effective security on the loans.24 They readily invested in the fast-growing US interstate pipeline business from the late 1940s on, knowing that their investments would be safely tracked in uniform accounting systems, based on nominal investment costs, and reliably repaid by high-creditworthy gas distribution monopolies according to known methods of making pipeline tariffs to accompany the pipeline companies’ gas sales to distributors.

Restructuring Regulation to Promote a Deregulated Capacity Market It took more than five decades for the Natural Gas Act to lead to the competitive trade in pipeline capacity rights—from 1938 to 2000. The legal and administrative fights during that period are a mystery to most outsiders and tedious to explain in detail. But the basic elements of the story are simple enough: semi-rival regulated pipeline companies that profit only through a return on their regulated transport investments simply do not make responsible agents for the purchase of gas on behalf of captive distribution utilities in illiquid markets dominated by long-term contracts. Trouble was inevitable—in the form of shortages, surpluses, heavy litigation, financial failure—until those regulated local distributors could buy gas in the field for themselves and simply contract with pipelines for the needed inland transport service. Pushed primarily by the successful collective action of the nation’s gas distributors, the US interstate pipeline industry by the year 2000 made the transformation from gas merchants to simply contract transporters for hire.25

Deregulated “Coasian” Markets in Pipeline Capacity Rights The deregulated trade in capacity rights on the US interstate pipeline system represents a highly successful example of a “Coasian” market—meaning the type of market in intangible rights named after Ronald Coase (the 1991 Nobel laureate in economics). Those markets reflect an insight that Coase introduced to his highly skeptical colleagues at a symposium at the University of Chicago in 1960, regarding a paper that he had written discussing telecommunications and the radio spectrum.26 Coase never himself defined the broad elements of what others have called the “Coase theorem,” but instead used a series of examples to illustrate how a market works in particular settings when property rights are defined and enforced.

In his 1960 paper, Coase argued that given well-defined property rights, low transactions costs, perfect competition, and complete information, resources will be used efficiently regardless of who owns them, resolving all private externalities in the process.27 Coase convinced his peers that it takes property rights to endow a resource with institutional scarcity in order to form the basis for trade and that a market could form where none had existed before simply by creating and safeguarding that scarcity value. Coasian markets in legal entitlements have been formed in pollution rights, carbon allowances, radio bandwidth, and other commodities through the creation and clear specification of property rights.28

In the US pipeline market, pipelines companies own and operate the facilities that support those entitlements to transport gas. But they do not control the entitlements themselves once shippers sign long-term contracts for them. Nor do the pipeline companies possess any operational or financial information that is not an open book to those who would buy or sell those entitlements.

www.nera.com 8 The entitlements themselves are explicit in terms of the physical transport they cover, have a highly predictable cost basis for those who buy and sell them, do not expire for practical purposes (as long as shippers continue to commit to pay the maximum approved cost-based price) and trade almost without friction in standardized web-based exchanges on a daily basis.29 Thus, the legal entitlements to well-defined transport rights are a competitively created and traded commodity licensed by the federal regulator (based upon highly specific physical capacities). This system is perhaps the best example of the Coase Theorem at work for the way in which an efficient market in well-defined legal entitlements so replaced an existing gas market that had been regulated on the presumption that pipeline companies would serve as intermediaries in the gas sales business.

Transformation of the Job of the Regulator The creation of a Coasian market for contracted pipeline capacity transformed the job of the FERC’s gas division. Before restructuring, the agency’s main job had once been regulating entry and price, with their almost endless litigated rate proceedings where coalitions of large shippers fought with each other over the conditions of entry and the allocation of costs on an essentially pooled pipeline system for delivering gas. Given a thorough examination of the cost of service, the tariff structure for existing pipeline capacity generally follows traditional cost allocation methods, and pipeline customers find little reason to fight over cost allocation or tariff design. In licensing, and tariff design, pipeline cases before the FERC have become somewhat perfunctory affairs. The industry essentially regulates itself.

Evidence of that administrative efficiency exists in the administrative cost of the FERC’s gas division compared, for example, to the electricity independent system operators designed to administer the conditions of transmission entry, the allocation of transmission costs, and the operation of the power markets on that pooled transmission system, shown in Table 4. It rightly can be considered a triumph of regulatory efficiency that the federal budget cost regulating an industry representing more than 70% of the world’s gas transmission pipelines can cost as little, on an annual basis, of $62 million. As an illustration, the agencies to control electricity markets (in that fraction of the country that have competitive wholesale markets) consume twenty times the resources.

Table 4. Regulatory Costs for ISOs versus the FERC Gas Division*

RTO Total Budget Amount ($) Headcount (Full-Time Employees)**

PJM Interconnection 276,000,000 695 MISO 279,300,000 905 SPP 12,178,338 33 NYISO 148,400,000 566 CAISO 198,500,000 593 ERCOT 179,951,000 693 ISO-NE 178,897,000 577 TOTAL for RTOs 1,273,226,338 4,062 FERC Natural Gas Division 62,729,000 282

*Data is collected from individuals RTOs budget reports. **Employee numbers are collected from NYISO budget report - Competitor comparison, p. 9.

www.nera.com 9 Summary: The Institutional Foundations for US Regulation Supportive of Property Rights

The US regulatory model, at its core, represents an evolution of institutions to deal with promoting orderly action where the private interests of utility investors intersect with the public interest at large. Those economists who have written extensively about the origin of the institutions of US regulation recognize that it was not merely a response to market problems (economies of scale, information asymmetry, etc.) but dealt more practically with “harmonizing relations between parties who are otherwise in actual or potential conflict…. [with] the purpose of promoting the continuity of relationships by devising specialized governance structures.”30

The US regulatory institutions created to “harmonize the relations” between private enterprise and the public interest evolved over time; a product of public opinion, legislative action and judicial precedent. As in other spheres of democratic governance, such institutions evolve. Indeed, New York can take due recognition for being central to many of the key events that led to the building of the US regulatory model:

• Private capital for US infrastructure as a reaction to failed public investments. The uniquely American track toward private investment in public infrastructure services, rather than the public financing evident in most of the rest of the world, came with the failure of early 19th century canals. In particular, the depression of 1839–1842 left New York and other states needing to raise taxes to pay off Erie Canal bonds.31 Thereafter, both public opinion (as expressed in state legislatures) and the investment community looked to harness private capital for major infrastructure and utility investments.32 • Confirmation of the role of investor-owned utilities in the United States. By 1905, the growth of private US utilities compared to public UK utilities led the National Civic Federation (a prominent civic research group) to study which path was wise to pursue further in America. A committee including economist John R. Commons, utility holding company pioneer Samuel Insull and future Supreme Court Justice Louis Brandeis spent six months studying dozens of publicly-owned and investor-owned utilities in the US and UK. They found that different public attitudes toward private enterprise and public administration in the US and UK meant for greater acceptance of continued private ownership in the US, even if public ownership was more dominant in the UK.33 • New legislation to deal with investor-owned utilities. The National Civic Federal study led directly to the model for US state utility regulation. Drawing from that study, Commons wrote the Wisconsin statute at the behest of Wisconsin Governor Robert LaFollette, Sr. The New York statute was developed by Charles Evans Hughes (later a U.S. Supreme Court Justice). Both laws were the immediate result of the 1905–1906 National Civic Federation study, and Commons had a role in the appointment of Milo Maltbie, a Civic Federation Committee member, to the new Public Service Commission in New York.34 • Public transparency of private public service firms. It was in 1912 that the Supreme Court first ruled that if a company provides services to the public, then the public in essence owns that company’s operational and financial books and records. In a case concerning transporters regulated by the Interstate Commerce Commission (ICC), the U.S. Supreme Court ruled that accounting systems for privately-owned public utilities were public matters.35

www.nera.com 10 • Congress acts to deal with US holding companies. The holding company structure adopted by electric and gas utilities during the 1920s–1930s, pioneered by Insull, enabled a number of financial and affiliate abuses.36 The collapse of Insull’s holding company empire in 1931-1932 aroused strong public opinion—not unlike the controversy surrounding the unexpected collapse of Enron seventy years later.37 The Public Utility Holding Company Act was Congress’s first response. • Congress acts to regulate accounting. Congress’s second response was the Natural Gas Act of 1938—the first legislation to mandate the Uniform System of Accounts (although the Federal Power Commission, an early Congressional creation, first prescribed what led to that accounting system in 1937).38 The Uniform System of Accounts lies behind the “Form 1” (electricity) and “Form 2” (gas pipeline) publicly-accessible and highly-transparent accounting systems that are unique in the world. Those transparent systems were critical to setting up the final battle regarding how the Supreme Court would define the value of utility property for computing allowed revenues. • The Supreme Court defines the value of regulatory property under the US Constitution. In 1944, in taking the appeal of the first fully-litigated rate case under the Natural Gas Act (and the outgrowth of the Public Utility Act), the Supreme Court ruled in Federal Power Commission et al. v. Hope Natural Gas Co.39 With the Hope ruling, the Supreme Court held that the Fifth and 14th Amendments of the US Constitution required that, in setting permissible revenues, a utility’s profit (resting on invested capital as reflected in accurate bookkeeping) would be measured by potential earnings for investors based on other enterprises of similar risk. The Hope decision secured utility companies’ investments from seizure (a “taking” of private property without due process) if regulators set charges to award returns consistent with investors’ opportunity cost of the equity capital invested in regulated enterprises as recorded in those enterprises’ books. James Bonbright (the witness for the FPC in that case) called it rightly “one of the most important economic pronouncements in the history of American law.”40 • Congress legitimizes Commission regulation action. During the 1930s, legal scholars studied the legality of utility regulation’s growing impact on the value of investor property. Regulators appeared to have a degree of discretion that seemed to violate the US Constitution’s prohibition of the taking of property without due process. Congress addressed these issues by passing the Administrative Procedures Act of 1946 (the APA), which laid out procedures to assure constitutional due process in regulatory decision making (including timing limits, the need to act upon evidence, the ability of witnesses presenting that evidence to be cross-examined, and many other aspects of the work of regulators).41

To be sure, this is not an exhaustive list of the institutions that make up the US regulatory—just my own.42 Some of the institutions were invented and imposed to protect investor property (like the Hope decision and the APA). Others were invented to give regulators the tools needed to do their job effectively (like the Uniform System of Accounts). Thus, if, for example, the UK’s electricity regulator’s (Ofgem’s) board members were transferred from London to a US state capital to work, the members would find themselves straightjacketed by legal procedure (like the APA), overwhelmed by data and evidence presented by adverse parties, and curiously immune from the direct influence of the governor. Likewise, if US state regulatory commission members picked up to work in London (or any other regulatory body outside the US), they would probably be astonished at the lack of controlling precedent and their freedom to act, the lack of data, and the “absence of adverseness” as compared to back home.43

www.nera.com 11 Perhaps the best way to characterize the differences between such regulatory models is to look directly at the critical foundations of each, as the comparison between New York and the UK shows below.

Figure 4. Global Shale Oil and Natural Gas Resources in 201544

Source: Youngberg, Natural Gas, America’s Fastest Growing Industry, p. 58.

It may not do justice to represent these two regulatory systems both as pyramids in the sense that each provides a similar sort of foundation. The greatest difference is the history of these two systems: it has been over 75 years since the US Congress mandated strict accounting standards, 65 since it specified exacting administrative methods to preserve the constitutionality of regulatory actions, 70 since the Court defined what regulated private property meant, and over 100 since the Court ruled that the public owns the books and records of private utilities (not the shareholders). No living economist participated in these events.

By contrast, everything in the right-hand pyramid is somewhat of a work in progress. Regarding appeal, it has always been possible to appeal UK regulatory actions to the UK Competition and Markets Authority (CMA), but, within limits, it does not seem that such appeals limit UK regulators’ relative discretion in setting revenue levels—particularly compared to US counterparts. With regards to accounting, Ofgem has been working on Regulatory Accounting Guidelines for years, but being staffed more by economists than accountants or lawyers, it has largely abandoned that effort. With regard to administration, compared to the US 1946 APA, there is little limiting UK regulators’ discretion to render opinions regardless of the evidence before it. Nothing exists in the UK to mirror the Hope decision. And while the Ofgem “Commission” (the Gas and Electricity Market Authority) was created by law, not the Executive (i.e., the Cabinet), the Executive effectively wields considerable influence over its regulators subject to some avenues of appeal (that may lessen with Brexit).

The UK model arose only after Margaret Thatcher’s privatization efforts starting in the late 1980s. Much of it still represents an evolving effort to deal with its privatized utilities, without specific constitutional protections of property, the legislated Uniform System of Accounts or legislated administrative procedures for regulatory actions. Indeed, the key fulcrum of the US regulatory model which is referenced in every rate case—the Hope decision and the way it safeguards regulated property independently from actions of regulators or the executive or legislative branches of government—does not exist in the UK in any form.45

www.nera.com 12 How Do Gas Markets Function Without Such Property Right Institutions?

Without firm institutions for creating property rights in the capacity to ship gas from one point to another under long-term contracts at predictable prices, continental gas markets cannot develop free from the oil-based linkages that have long determined prices. Europe, which has a structural potential for a competitive gas market (including the production of local unconventional supplies), has seen its ability to access such markets defeated through institutional barriers.

The EU was established as a common market to erase the internal barriers to trade in products that its businesses and citizens produce and consume. The countries of the EU have internal sources of gas as well as four major external gas suppliers—none of which supply much more than a quarter of the EU’s gas.46 There are also prospects for major sources of gas entering the EU through Turkey from the Caucasus and the Middle East. In addition to pipeline supplies, the EU has many sites to store gas underground near the market areas and more than a dozen working LNG terminals that supply 10-12 percent of current EU consumption. The continent almost certainly has the supply diversity and the pipeline hardware necessary to create a competitive gas market. But the EU has yet to achieve any noteworthy movement in that direction as gas prices there remain linked to long-term import contracts with the EU’s major suppliers (i.e., Russia, Norway, Algeria) that are linked to the oil equivalent prices.

Compared to North America, Europe’s gas industry is in decline.47 Contributing to the decline are the EU’s counterproductive industry regulations focusing only on optimizing the short- term trading of existing imported gas supplies over socialized Member State “notional” gas networks where Europe’s gas consumers to pay oil-linked rather than competitive prices. Most gas imports arrive from state-controlled enterprises, which are apparently pursuing a market share maximization strategy.48 Oil-indexed gas import prices—which represent an upper limit for the cost of gas rather than a competitive price— are more than twice as high as the (declining) cost of producing unconventional gas. Despite evidently abundant internal resources, there is no systematic European effort to develop unconventional gas.49 Those high prices have prompted record-breaking European imports of high-carbon steam coal for use in electricity generation, which is displaced by cheaper gas in the electricity generation merit order in overseas markets.50 There is no material participation of the major independent petroleum companies in developing internal gas supplies, and all major new gas supply pipelines (e.g., Nord Stream 2 and Trans-Adriatic) are highly political and involve existing importers as key participants (e.g., Russia’s Gazprom or Norway’s Statoil).51

Europe has nothing even remotely similar to a system of tradable legal entitlements for gas transport. It does have a Gas Target Model (GTM), however, which reflects an evident desire to resist competitive entry and maximize regulatory control of the industry.52 The GTM abstracts from point-to-point transport costs within the separate Member State market zones; uses relatively short-term arrangements for booking capacity (from yearly to within-day) with occasional multi-year agreements in limited quantities; and specifies auctions to allocate capacity in the face of “contractual congestion.” Its pricing model (“entry/exit” pricing—with its socialized costs and notional gas trading points within those various zones) is opaque and dizzyingly complex, without reasonable ties to the particular costs needed for such transactions. Such a pricing system, in addition to obscuring useful pricing signals for overland pipeline transport, is massively more expensive to administer (with distinct network codes in each zone,

www.nera.com 13 continuous monopoly regulation, and special arrangements for “cross-border” capacity).53 The result is the oil-linked gas price ceilings shown in Figure 1 at the outset of this paper. With the EU’s political and institutional endowments, and the lack of any powerful constituencies to battle to effectively examine and overcome the institutional barriers to the kind of pipeline markets that work so effectively in North America, there is no evident path to the kind of competitive gas market that North America enjoys.

Conclusion

The pipeline industry is pretty unexceptional as a technological matter. But unusually for any traded commodity, those who wish to buy and sell natural gas cannot do without pipelines for overland transport. An ideal gas market regulatory framework should recognize the economic and industrial realities of gas supply chains: (1) the upstream end—whether it is thousands of kilometers away or literally underfoot, in terms of unconventional production—involves great and risky commitments of capital in the production or import of gas and oil and (2) the downstream end, tied mainly to the more densely populated areas, involves great collections of consumers connected to natural monopoly distributors. Building the pipeline links between the upstream and downstream ends of the gas market has always involved institutional and regulatory choices.

Regulation of those natural monopolies at the downstream end is inescapable—they are natural monopolies. In North America, the local regulatory bodies and those local natural monopolies, working together, decided first to switch to natural gas (from manufactured gas). They then decided together which sources of gas best served the long-term public interest in their locales. The collective purchasing power of those millions of consumers, physically tied to local gas distributors, provided the funding engine required to support the capital investments needed for (1) long-distance pipeline transport networks and (2) production activities that spur competitive rivalry at the upstream end of the gas supply chain.

In North America, regulating the pipelines that served the gas market has been a case study in (1) replacing vertical integration with contractual regulation, (2) creating federal regulation to serve a plurality of political interests reliably, and (3) permitting regulators to avoid the painful political consequences of attempting to regulate volatile fuel markets (by leaving those markets basically to regulate themselves). All of these moves depended heavily on a foundation of property rights and regulatory institutions reaching back to the early 20th century as the US courts struggled to deal with how to define regulated property with the new transport technology of the era.

The rest of the world that now attempts to create their own competitive gas markets are trying—with no evident success at all—to substitute (1) complex pricing techniques (including administered auctions) and (2) greater regulatory control for the institutions that have been shown to work in North America. It is dispiriting to witness, first hand, the dogged determination of regulatory jurisdictions outside of North America, reflecting an extreme form of costly path dependence driven by those enjoying the entry barriers that naturally exist in the pipeline industry, to continue to resist any sort of institutional reform that would serve to mimic North America’s success with its gas pipelines and the vigorous markets they support.

www.nera.com 14 Notes

1 Presented to the PERC Workshop: Innovation, Property Rights and the 17 Indeed, when the Alberta, Canada, utilities commission (the AUC) Structure of Energy, 10-13 August 2017, Bozeman Montana. implemented a new performance-based regulatory plan in 2012, it adopted a standard for measuring total factor productivity (TFP) that 2 These figures are updates of those appearing in: Makholm, J.D I recommended, based on a long time-series of electric utility (and “Regulation of Natural Gas in the United States, Canada, and combination electric/gas utility) data from the FERC Form 1. See: AUC Europe: Prospects for a Low Carbon Fuel,” Review of Environmental Decision 2012-237, p. 79. Economics and Policy, Vol. 9, Issue 1 (Winter 2015), pp. 107-127. 18 Missouri ex rel, Southwestern Bell Tel. Col v. PSC of Mo., 262 U.S. 3 Plumer, B., “Is fracking a ‘bridge’ to a clean-energy future? Ernest 276, 289 note 1 (1923). Cited in Leonard Saul Goodman, The Process Moniz thinks so,” The Washington Post, https://www.washingtonpost. of Ratemaking, Vol II, (Vienna, VA: PUR, 1998), p. 858. com/news/wonk/wp/2013/03/04/is-fracking-a-bridge-to-a-clean- energy-future-ernest-moniz-thinks-so/. 19 Troxel, Economics of Public Utilities, p. 172.

4 US Energy Information Administration, “Annual Energy Outlook 2015,” 20 Of course, once certificated, the only way a pipeline could be taken US Department of Energy, April 2015, http://www.eia.gov/forecasts/ out of gas service would be if the owners applied to the regulator to aeo/pdf/0383%282015%29.pdf. “de-certify” a pipeline.

5 See: US Energy Information Administration, “Four countries added to 21 Ibid. global shale oil and natural gas resources assessment,” 14 December 22 Troxel, Economics of Public Utilities, p. 120. 2015, http://www.eia.gov/todayinenergy/detail.cfm?id=24132. 23 Klein, B.J., Crawford, R. and Alchian, A., “Vertical Integration, 6 See: Bordoff, J., and Houser, T., “American Gas to the Rescue: The Appropriable Rents, and the Competitive Contracting Process,” The Impact of US LNG Exports on European Security and Russian Foreign Journal of Law and Economics, Vol. XXI, No. 2 (1978). Policy,” Columbia/SIPA Center on Global Energy Policy, Columbia University, September 2014. 24 Hooley, R.W., Financing the Natural Gas Industry: The Role of Life Insurance Investment Policies, Columbia University Press, New York 7 See: Makholm, J.D., “Why Does Most Shale Gas Worldwide Remain in (1961). the Ground?” Natural Gas and Electricity, Volume 32, Issue 7 (February 2016), pp. 29–32. 25 See The Political Economy of Pipelines, pp. 151-52, for the briefest available summary of those decades of legal and administrative drama. 8 Calcuttawala, Z., “Poland Reaches End Of The Road For Shale Gas Prospects,” http://oilprice.com/Latest-Energy-News/World-News/ 26 Coase, R.H., “The Federal Communications Commission,” Journal Poland-Reaches-End-Of-The-Road-For-Shale-Gas-Prospects.html. of Law and Economics, Vol. II (1959). Economist Steven N.S. Cheung relates the story of how Coase convinced a highly skeptical 9 “It is not too much to say that in terms of cost, delay, uncertainty, and group of economists at the University of Chicago. Cheung, S.N.S., the arousing of animosity and contention, the performance of the … “Ronald Henry Coase (b. 1910),” in The New Palgrave Dictionary of method falls little short of a public scandal; by far the greater part of Economics, First Edition, Palgrave Macmillan (1987). the grotesque and costly ponderosity which characterizes modern rate regulation is to be attributed directly and solely to [that] approach.” 27 Coase, R.H. “The Problem of Social Cost,” Journal of Law and See: Lyon, L.S., and Abramson, V., Government and Economic Life: Economics, Vol. 3 (1960), pp. 1-44. Development and Current Issues of American Public Policy, Volume 28 See: Ellerman, A.D., Joskow, P.L., and Harrison, D. Jr., “Emissions II, Brookings, Washington, D.C. (1940), p. 691; “[H]ad the [Supreme] Trading in the US: Experience, Lessons and Considerations for Court deliberately set out to defeat the whole purpose of regulation Greenhouse Gases,” The Pew Center on Global Climate Change, May, and to make public ownership [of utilities] inevitable, it would hardly 2003; Kwerel, E.R., and Rosston, G.L., “An Insider’s View of FCC have pursued this objective more effectively than by its rulings and Spectrum Auctions,” Journal of Regulatory Economics, Vol. 7, No. 3, dicta on valuation.” Bonbright, J.C., The Valuation of Property, Volume (May 2000), pp. 253-289. II, McGraw-Hill Book Company, New York (1937), p. 1154. 29 Fuller descriptions of these elements appear in The Political Economy 10 Commons, J.R., Legal Foundations of Capitalism, Macmillan, New of Pipelines, pp. 140-146. York (1924). This volume is remembered more by legal than economic scholars, as evidenced by it being the only one of Commons’ 10 books 30 Williamson, O.E., The Economic Institutions of Capitalism, Free Press, still in print—by a publisher of legal reference texts. New York (1985), p. 3. 31 11 Commons, J.R., The Economics of Collective Action, The Macmillan The Erie Canal was critical in opening up the “Northwest Territories” Company, 1950, p. 21. of the early nineteenth century (i.e., Illinois, Indiana, Michigan and Ohio) to East Coast markets. Begun in 1817 and completed in 1825, 12 Federal Power Commission et al v. Hope Natural Gas Co, 320 U.S. the canal linked Lake Erie on the Great Lakes to the Hudson River 591 (1944)., p. 603. that flowed to New York City. The Erie Canal was key to making New 13 Canada has its own version of the Hope decision (which rests not on York City the most important trading and finance city in the world—a constitutional principles, as such, but on legal precedent): Northwest position it still holds. Utilities v. City of Edmonton, S.C.R. 186 (NUL 1929). 32 Davis L.E., and North, D.C., Institutional Change and American 14 Bonbright, J.C., “Utility Rate Control Reconsidered in the Light of the Economic Growth, pp. 77-79, 139-143. Even the state of New York Hope Natural Gas Case,” The American Economic Review, Vol. 38, had trouble raising the $7 million for a canal that was 363 miles long, No. 2. (1948), p. 465. 20 feet wide and 4 feet deep, with a rise of 630 feet and a drop of 62 feet from the Hudson River to Lake Erie. 15 See: Troxel, E, Economics of Public Utilities, p. 120, citing Interstate Commerce Com. V. Goodrich Transit Co., 224 U.S. 194, 211 (1912). 33 Municipal and Private Operation of Public Utilities (three volumes), National Civic Federation, New York (1907). See: Munro, W.B., 16 See: Kansas City Southern Ry. Co. v. U.S., 231 U.S. 423, 440-441 “Review: The Civic Federation Report on Public Ownership,” Quarterly (1913), also cited in Troxel (ibid), Journal of Economics, Vol. 23, No. 1 (1908), pp. 161-174.

www.nera.com 15 Notes

34 Read, H.J., Defending the Public: Milo R. Maltbie and Utility 49 The continuing prospects for unconventional gas supplies, including Regulation in New York, Dorrance Publishing, Pittsburgh (1998). the production cost and available future supply, are the subject of 35 Troxel, E, Economics of Public Utilities, p. 120, citing Interstate intense study in North America. See: Ikonnikova, S., J. Browning, G. Commerce Com. V. Goodrich Transit Co., 224 U.S. 194, 211 (1912). Gülen, K. Smye, and S.W. Tinker , “Factors Influencing Shale Gas Production Forecasting: Empirical Studies of Barnett, Fayetteville, 36 Phillips, C.F. Jr., The Regulation of Public Utilities, Public Utilities Haynesville, and Marcellus Shale plays.” Economics of Energy & Reports, Inc., Arlington, Virginia (1993), pp. 625–635. Environmental Policy, 4(1): 19–35 (2015). 37 Cudahy, R.D., and Henderson, W.D., “From Insull to Enron: Corporate 50 Makholm. J.D., “Regulation of Natural Gas in the United States, Canada (Re)Regulation after the Rise and Fall of Two Energy Icons,” Energy and Europe: Prospects for a Low-Carbon Fuel,” Review of Environmental Law Journal, Vol. 26, No. 1 (2005), pp. 35–110. Economics and Policy, Vol. 9, No. 1 (2015), pp. 107–127. 38 Federal Power Commission, Uniform System of Accounts for Public 51 Nord Stream 2 is owned by Gazprom Gerosgaz Holdings B.V., the Utilities and Licensees, Jan. 1, 1937. Netherlands, an affiliate of PJSC Gazprom, and supported by Uniper SE 39 The Hope Natural Gas Company was a Standard Oil Company gas and BASF SE/Wintershall Holding GmbH (Germany), the Royal Dutch pipeline subsidiary that filed suit against the FPC over its first ruling Shell plc (UK and the Netherlands), OMV AG (Austria), and Engie S.A. under the Natural Gas Act of 1938. (France). See https://www.nord-stream2.com/company/shareholder- and-supporters. Trans Adriatic Pipeline is owned by BP (20%), SOCAR 40 Bonbright, J.C., “Utility Rate Control Reconsidered in the Light of the (20%), Snam S.p.A. (20%, acquired from Statoil, a project developer), Hope Natural Gas Case,” The American Economic Review, Vol. 38, No. Fluxys (19%), Enagás (16%), and Axpo (5%). See https://www.tap-ag. 2. (1948), p. 465. com/about-us/our-shareholders. 41 Administrative Procedure Act (APA), Pub.L. 79–404, 60 Stat. 237. 52 European Gas Target Model: Review and Update, Agency for the Former Senator Moynihan (Democrat – New York) discussed the Cooperation of Energy Regulators (ACER), Ljubljana, Slovenia, historical and political origins of the Administrative Procedures January 2015. Act. See: Moynihan, D. P., Secrecy: The American Experience, Yale 53 University Press, New Haven, Connecticut (1998). Article 36 of the Third Package contains a procedure for requesting exemptions from entry/exit and the jurisdiction of the transmission 42 Longer discussions of each appear in my book The Political Economy system operators. of Pipelines. 43 In noting the general failure of oil pipeline regulation under the Interstate Commerce Commission, the U.S. Department of Justice once lamented the interlocked shipper ownership on the oil pipeline system, and the resulting lack of strong contending constituencies, labeling the problem the “absence of adverseness.” See: In the matter of Valuation of Common Carrier Pipelines, Docket No. RM-78-2, Statement of the Department of Justice (Donald A. Kaplan, Chief, Energy Section, Antitrust Division), October 23, 1978, p. 9. 44 I thank my NERA UK colleagues (Graham Shuttleworth, Richard Hern, Richard Druce and James Grayburn) for helping with the UK pyramid and the subsequent explanations of its relevant components in the context of the UK’s RIIO. 45 Makholm, J.D., “Utility Regulation Principles Vary Widely Country to Country,” Natural Gas and Electricity, Vol. 32, No. 4 (December 2015). 46 In the EU, Russia serves less than 30 percent of the market, and the top five producers account for about 85 percent. See Holz, F., von Hirschhausen, C., and Kemfert, D., “A Strategic Model of European Gas Supply,” Energy Economics, vol. 30, issue 3, (2008). 47 Europe’s gas demand has dropped since 2010, as reported by the US Energy Information Administration. See: Europe’s gas demand has dropped since 2010, as reported by the US Energy Information Administration. See: US Energy Information Administration. “Multiple factors push Western Europe to use less natural gas and more coal,” by Michael Kopalek and Tejasvi Raghuveer. http://www.eia.gov/ todayinenergy/detail.php?id=13151. 48 See: Call for Tenders, No. ENER/B2/2016-413, European Commission, Directorate-General for Energy, p. 6 (Section 2).

www.nera.com 16 Index

Bonbright, J.C., The Valuation of Property, Volume II, McGraw-Hill Book Company, New York (1937).

Bonbright, J.C., “Utility Rate Control Reconsidered in the Light of the Hope Natural Gas Case,” The American Economic Review, Vol. 38, No. 2. (1948).

Bordoff, J., and Houser, T., “American Gas to the Rescue: The Impact of US LNG Exports on European Security and Russian Foreign Policy,’ Columbia/SIPA Center on Global Energy Policy, Columbia University (September 2014).

Coase, R.L., “The Problem of Social Cost,” Journal of Law and Economics, Vol. 3 (1960).

Commons, J.R., Legal Foundations of Capitalism, Macmillan, New York (1924).

Commons, J.R., The Economics of Collective Action, The Macmillan Company (1950).

Cudahy, R.D., and Henderson, W.D., “From Insull to Enron: Corporate (Re)Regulation after the Rise and Fall of Two Energy Icons,” Energy Law Journal, Vol. 26, No. 1 (2005).

Ellerman, A.D., Joskow, P.L., and Harrison, D. Jr., “Emissions Trading in the US: Experience, Lessons and Considerations for Greenhouse Gases,” The Pew Center on Global Climate Change (May 2003).

Goodman, L.S., The Process of Ratemaking, Vol II, (Vienna, VA: PUR, 1998).

Holz, F., von Hirschhausen, C., and Kemfert, D., “A Strategic Model of European Gas Supply,” Energy Economics, vol. 30, issue 3 (2008).

Hooley, R.W., Financing the Natural Gas Industry: The Role of Life Insurance Investment Policies, Columbia University Press, New York (1961).

Ikonnikova, S., J. Browning, G. Gülen, K. Smye, and S.W. Tinker “Factors Influencing Shale Gas Production Forecasting: Empirical Studies of Barnett, Fayetteville, Haynesville, and Marcellus Shale plays.” Economics of Energy & Environmental Policy, 4(1) (2015).

Klein, B.J., Crawford, R. and Alchian, A., “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” The Journal of Law and Economics, Vol. XXI, No. 2 (1978).

Kwerel, E.R., and Rosston, G.L., “An Insider’s View of FCC Spectrum Auctions,” Journal of Regulatory Economics, Vol. 7, No. 3, (May 2000).

Lyon, L.S., and Abramson, V., Government and Economic Life: Development and Current Issues of American Public Policy, Volume II, Brookings, Washington, D.C. (1940).

Makholm, J.D., “Utility Regulation Principles Vary Widely Country to Country,” Natural Gas and Electricity, Vol. 32, No. 4 (December 2015).

Makholm, J.D., The Political Economy of Pipelines, University of Chicago Press, Chicago and London (2012).

www.nera.com 17 Index

Makholm, J.D “Regulation of Natural Gas in the United States, Canada, and Europe: Prospects for a Low Carbon Fuel,” Review of Environmental Economics and Policy, Vol. 9, Issue 1 (Winter 2015).

Makholm, J.D., “Why Does Most Shale Gas Worldwide Remain in the Ground?” Natural Gas and Electricity, Volume 32, Issue 7 (February 2016), pp. 29–32.

Moynihan, D. P., Secrecy: The American Experience, Yale University Press, New Haven, Connecticut (1998).

Munro, W.B., “Review: The Civic Federation Report on Public Ownership,” Quarterly Journal of Economics, Vol. 23, No. 1 (1908).

National Civic Federation, Municipal and Private Operation of Public Utilities (three volumes), New York (1907).

Phillips, C.F. Jr., The Regulation of Public Utilities, Public Utilities Reports, Inc., Arlington, Virginia (1993).

Troxel, E., Economics of Public Utilities, New York: Rinehart and Co. (1947).

Williamson, O.E., The Economic Institutions of Capitalism, Free Press, New York (1985).

www.nera.com 18 About NERA

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