Production, Efficiency, and Welfare in the Natural Gas Transmission Industry

Abstract

The author investigates the Averch-Johnson-Wellisz hypothesis as it applies to the interstate natural gas transmission industry and analyzes the impact on the industry of rate-of-return regulation. Four optimization models simulate the industry's input-output decisions. The constrained revenue-maximizing model is shown to make the best predictions in comparison with the constrained profit-maximizing (CPM) and profit-maximizing (PM) models. Regulation is shown to have modified industry behavior. The author then analyzes the social-welfare benefits from marginal-cost pricing and finds them to be acceptable. 27 references.