Investment mechanism design and public policy for a natural gas grid

This paper discusses how the government can design investment mechanisms to induce a socially optimal capacity increase in a gas grid that is owned by a syndicate of gas producers. Designing the investment mechanisms, the government has to take account of stepwise investment and asymmetric information of the network owners' willingness to pay for a capacity increase. We show that investment mechanisms allocating capacity based on the principle of Vickrey's second-price auction combined with regulated tariffs equal to marginal costs would be preferable. However, setting higher tariffs may reduce the problems associated with coalitional manipulation, voluntary participation and open access and nondiscriminatory prices.