Firm and Interruptible Pricing Patterns: Public versus Private Gas Distribution Utilities.

This study presents a model of the determination of firm and interruptible gas pricing patterns for a sample of municipal and private natural gas distribution utilities. Firm and interruptible gas pricing is widely used by gas distributors as an alternative to peak and off-peak pricing. How enterprise form affects these pricing patterns is the focus of this study. Although state regulated municipals are included in the analysis, the focus of the investigation is on the difference between state regulated privates and locally regulated (unregulated) municipals since these are the major options from a public policy perspective. The natural gas distribution industry is chosen for study since this industry is largely ignored in the empirical literature. The few gas distribution pricing studies which exist are generally quite limited in scope [10; 42], examine the economic efficiency of private gas distributors from a cost and profit perspective [33], or focus upon state regulatory effects on service contracts [23] or private distributors' pricing [29]. None of these studies addresses the relationship between ownership form and firm/interruptible gas pricing patterns. This paper provides statistical tests for the effect of municipal and private ownership forms on firm and interruptible gas prices. To test for ownership effects, systems of demand, price, and cost equations are estimated for six customer groups served by natural gas distribution utilities. Statistical results support the hypothesis that unregulated municipal ownership lowers firm rates, thereby encouraging peak usage. In the case of residential customers, which generally is the largest political constituency among the various gas customer groups, there is strong evidence that unregulated municipals charge lower rates than regulated privates. Additional evidence is presented to support the hypothesis that other unregulated municipal firm customer rates are lower relative to those charged by regulated... [ABSTRACT FROM AUTHOR]