In the US, the extensive interstate gas pipeline network has singular traits appearing nowhere else in the world. Unregulated markets flourish and genuine competition dictates who constructs new and expanded pipeline capacity. At the same time, the country is price-regulated, and pipeline companies are owned and operated separately from the highly-competitive and unregulated upstream gas-producing sector and their downstream shippers. Furthermore, the other two nationwide energy networks—oil pipeline and electricity transmission—have utterly nothing in common with the structural features of the gas pipeline industry.

In this working paper, NERA Senior Vice President Dr. Jeff D. Makholm examines gas pipelines as relationship-specific investments, illustrated by three highly distinct periods of development of the US gas pipeline industry: the era of vertical integration, the era of regulated prices and implicit pipeline contracts, and the era of contractualization. Dr. Makholm charts the development of the industry’s early vertical integration and its subsequent transition to the traits it currently displays. He describes how the gas pipeline industry dealt with various impediments to vertical integration and also addresses how those who financed the pipeline network mitigated the extraordinary risk inherent in investing in capital-intensive, immobile assets that have no other purpose than that for which they were originally designed.