Structural and Regulatory Reform of the European Gas Market - Does the Current Approach Secure the Public Service Obligations

The European natural gas market is in a state of flux. In order to better secure the public service obligations – supply security, competitiveness and sustainability – this market is currently being liberalized. This requires significant structural and regulatory reform. This reform process is not yet finished; the European gas market finds itself in a transition phase from the traditional managed market structure towards an internal European gas market which is governed by competitive forces. In such a transition phase, problems and tensions are inevitable. This study assesses the adequacy of the current approach towards structural and regulatory reform of the European gas market in light of the changes that are taking place on this market. These changes create a new context for gas regulation. Given the vital role of investments in securing any of the public service obligations, the analysis is conducted from the perspective of ensuring sufficient investments. The theoretical part criticizes the current neoclassical approach towards reform and argues that the transaction cost perspective will result in better outcomes in terms of market behavior in the new regulatory context. The empirical part undertakes case studies on two recent amendments to gas regulation – the possibility for certain investments to be exempted from the provisions to provide third party access, and the enlarged scope for concluding downstream long-term gas supply contracts – in order to assess whether the theoretical critique is also valid in practice. Both case studies confirm the theoretical critique. The current regulatory approach appears to be stuck between the neoclassical and the transaction cost perspective. Recommendations are provided in order to better align current regulation with the insights provided by Transaction Cost Economics