The Regulation of Access to Gas Storage with Capacity Constraints

Due to the liberalisation of European gas markets, gas storage has been unbundled from production and transmission and nondiscriminatory third party access to storage capacity has been imposed. We claim that regulated access should be introduced until storage plants are essential facilities and competition is not feasible. However storage is not a natural monopoly and storage services may be partially substituted by alternative flexibility inputs. Moroever, access to storage is at present affected by capacity constraints. We firstly analyse the effects of storage rationing on the productive efficiency of gas suppliers and characterize an efficient allocation rule for storage. As the latter may be hard to implement, because of suppliers adverse incentives due to asymmetric information, we consider storage allocation through market and non-market (administrative) mechanisms. In particular, we compare an administrative and an auction mechanism in a two stage model where firms firstly obtain access to storage capacity and then compete in the gas market. Due to the strategic behavior of the dominant gas supplier, even a market mechanism could be characterized by capacity hoarding. However, this mechanism welfare dominates the administrative distribution of storage capacity, unless the latter assigns more capacity to the competitive follower.