An incumbent European gas company is faced with the threat of its home market being opened up to competition. Further, it has been forced by the regulator to put in place new arrangements for third party access to some of its facilities (pipelines, LNG storage, etc).

To help the company prepare for this transition, NERA’s economists advised senior management on how to adapt their retail pricing and contract strategy to a competitive environment. We conducted bottom-up modeling of the company’s cost drivers and risk factors, together with an analysis of practice in other markets, to identify a range of alternative strategies. Our modeling took into account the new access arrangements (balancing rules, etc.) and the specifics of customer load profiles. Our experts then advised senior management on which strategy to pursue based on competitor and strategic analysis, including how to price towards customer value, avoid damaging “price wars,” encourage customer loyalty, maximize company bargaining power vis-à-vis customers, and target attractive buyers. Our economists also provided the company with a schedule of detailed pricing rules and formulae, together with advice on appropriate contract terms (e.g., termination clauses, competition clauses).

NERA’s recommendations were accepted by the client, and we expect to play a role in implementing our recommendations. In addition, because the cost and pricing model we developed for this project has potential wider applications within the company, we transferred the model to the client for their own use.