Some Benefits, Drawbacks and Perils of Negotiated Settlement as a Price Regulatory Method of Pipeline Services
Date
2022-09
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Abstract
Carriers and shippers have long preferred negotiation over litigation to solve issues of prices for natural gas pipeline services. However, parties frequently end up in litigation. This paper explains why this problem happens under Canadian law. When parties negotiate, they create benefits by solving short-term issues of financial viability of pipeline systems. Parties sometimes unanimously agree upon their own rules and incentives on price and conditions of service under minimal regulatory intervention. In addition, parties find a balance of interests and certainty by agreeing on the carrier’s total revenue requirement and the method to set the prices shippers will pay. Moreover, parties prevent abuse of monopoly and market power which used to be the main reasons for regulatory intervention based on adjudication. Parties have achieved these benefits without discussions based on regulatory principles. However, parties’ negotiation has some drawbacks and perils even in the presence of pipeline competition. Sometimes parties alone have not prevented cross-subsidization which can affect rivalry between shippers and rivalry between carriers. Even more, the growing degree of pipeline competition and other business risks can leave some transmission assets stranded. Therefore, shareholders cannot recover the profits permitted and the capital invested, and the long-term viability of a pipeline system is threatened. Here the drawback is that shippers alone cannot prevent a carrier from attempting to transfer that long-term risk to shippers. Finally, a carrier can take actions contrary to a settlement after the Regulator approves it, leading parties to new conflicts. The Regulator has adapted the regulatory processes to manage the drawbacks and perils by adjudicating on the issues posed by parties who dissent from the settlement agreed or when negotiation do not work. Despite parties’ preference for negotiation, the Regulator needs to adjudicate based on cost of service and the regulatory principles. Thus, adjudication remains the default process as the Regulator has solved the disputes based on the carrier’s burden of proof to minimize the asymmetry of information between the carrier and shippers and between the carrier and the Regulator regarding the allocation of costs and business risks. That asymmetry explains the drawbacks and perils.
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Keywords
Negotiated settlement, Market failure, Cross-subsidization, Stranded assets, Market power, Pipelines
Citation
Jimenez-Montiel, G. (2022). Some benefits, drawbacks and perils of negotiated settlement as a price regulatory method of pipeline services (Master's thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.