IUE e-chapter 10 : Gas industry restructuring and privatization lessons

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Chapter 10 uses the theory of Chapters 38 of this book to review the best known gas industry restructuring and privatizations in the world. Examples from the USA, Canada, the UK, and Japan are considered and reviewed in the light of the theories and conclusions from chapters 38, and Chapter 1.

The chapter starts by explaining the five main types of natural gas (methane) occurring in nature, a brief history of gas production in North America, and current north American production sources and trends, including Canada and Mexico. It then applies the standard theory of Chapter 1’s vertical stages of gas production and distribution to the current US gas industry, and charts progress in implementing retail (supply) competition across the USA. The lack of progress in recent years could lead an external observer to conclude that there might be lobbying or vested interests at work here seeking to preserve the status quo. The chapter then explains how to calculate a Herfindahl-Hirschman Index (HHI) of market concentration of US gas production. The figures show that gas production, at least, should not be regarded as a concentrated industry, likely to be of interest to regulators, but the same might not be said of transmission pipes, while distribution is always a local monopoly (see Chapter 4 for the general theory on this).

The chapter next reviews the emergence of the European gas industry, and the growth of the state monopoly British Gas in the 1970s and 80s, a monopoly which many saw as embodying the definition of “abuse of a dominant position” in EU Competition Directives. It analyzes how Mrs Thatcher’s government, and its successors, comprehensively privatized and subsequently restructured this gas behemoth in a series of reforms which took more than twenty years to achieve. There are many lessons here, as most observer conclude that, unless the goal of privatization is simply to maximise the immediate proceeds from selling state assets, the British made serious and avoidable mistakes: instead of undertaking a gas industry restructuring and privatization the British did privatization followed by restructuring, to the detriment of a generation of British gas consumers.

Ignoring large gas producers such as Russia, which were totally distorted by massive corruption in the 1990s, the chapter closes by testing the chapter’s general hypotheses about the structure of a modern gas industry against the reality of a gas industry that most people will not know much about: the Japanese gas industry. The chapter concludes that the standard theories of this textbook generally predict the current reality of the Japanese gas industry’s structure quite closely.

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