Economies of scale and scope in expansion of the U.S. natural gas pipeline network

- Empirical analysis of natural gas pipeline expansion costs
- Estimates cost elasticities with respect to pipeline capacity and length (in miles)
- Large pipeline expansion projects may exhibit overall cost diseconomies.
- Likely provides disincentive to prospective pipeline customers via cost-of-service tariffs

I analyze cost, capacity, mileage, and technical data for 254 U.S. natural gas pipeline projects over the period 1997-2012. Although project costs exhibit economies of scale over the capacity margin and economies of scope over the spatial margin, network expansion costs may not exhibit cost economies overall. That is, proportional increases in both transmission capacity and length (in miles) may result in a proportional (or even greater-than-proportional) increase in expansion costs. Moreover, large projects (high-capacity pipelines spanning long distances) likely require installation of compression horsepower, which has direct cost effects. My results suggest such projects exhibit significant diseconomies in cost structure. As a result, pipeline tariffs based on cost-of-service pricing likely present a disincentive for prospective pipeline customers to commit to long-term contracts-which are necessary for the pipeline to acquire regulatory permission to build-particularly for large, long-distance expansion projects. The implication is that cost-of-service pricing may inhibit network expansion, exacerbating congestion issues.