The natural gas business is undergoing rapid change throughout the world. The main focus of change in developed economies with existing gas industries is competition leading to lower gas prices and expanded gas use, while the focus of change in less developed or former centrally planned economies is primarily on developing untapped reserves, substituting gas for dirtier energy sources, and encouraging private investment. In all regions, however, is the desire to promote efficiency in gas production, transport, and use.

In this article from Viewpoint, NERA Vice President Dr. Jeff D. Makholm outlines NERA’s approach to gas pricing in regions where we are working to promote efficient gas industries and the use of gas as a fuel. Dr. Makholm notes that 1) gas prices should be set with reference to world competitive prices or alternate fuel prices where applicable; 2) transport prices should be levied on the basis of a separate multipart tariff that specifies the difference between short-run marginal operating costs and capacity costs; 3) firm capacity on the pipeline network should be sold on an “as reserved” basis—with a secondary market in that capacity encouraged—and interruptible load should be encouraged to the degree that variations in firm load over the seasons make such interruptible load desirable; and 4) transport prices should be based on distance shipped in some degree, if only approximately. Such pricing practices, he argues, have the potential to assist the desire to move toward more efficient gas markets around the globe, with lower prices and expanded gas use.