Linepack storage valuation under price uncertainty (original) (raw)
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Market-Based Rates for Interstate Gas Pipelines: The Relevant Market and the Real Market
Energy LJ, 1995
Under a cost-of-service regime, regulators can set a utility's rates without any explicit reference to markets.l Employing data on costs the utility expects to incur or has incurred, regulators use economically dubious formulas to allocate these costs to individual services and to set rates that recover the reported amount^.^ Generally, regulators need not make conjectures about the products and terms of service the utility would offer if regulation vanished, or about the speed at which competitors might enter an unregulated market. More important, regulators need not base any of their decisions on estimates of the utility's prices in an unregulated market. An oft-asserted norm asks regulators to set prices and outputs at the levels that would arise in a competitive market.3 This norm is often without operational content and may often be incorrect as well. Perfect competition would usually be an inefficient as well as infeasible arrangement in industries where individual sellers enjoy substantial economies of scale. We will only know competitive prices when competition arrives. A regulated price set at historical cost will only by accident also be the unregulated price in a competitive market. Economics provide no expectations that a deregulated competitive producer will have the same earnings as it would under even the most competent cost-based regulation. It is a fundamental error to confuse the costs on which buyers and sellers make market decisions with the costs on which regulators must base their decisions. Because historical costs bear no necessary relation to today's opportunities, they are irrelevant as guides for economically rational decisions. Market actors look forward, because future costs are the only ones that are avoida
Modeling Of Information Flows In Natural Gas Storage Facility INTRODUCTION
The paper considers the natural-gas storage valuation based on the information-based pricing framework of Brody-Hughston-Macrina (BHM). As opposed to many studies which the associated filtration is considered pre-specified, this work tries to construct the filtration in terms of the information provided to the market. The value of the storage is given by the sum of the discounted expectations of the cash flows under risk-neutral measure, conditional to the constructed filtration with the Brownian bridge noise term. In order to model the flow of information about the cash flows, we assume the existence of a fixed pricing kernel with liquid, homogenous and incomplete market without arbitrage.