The Marginal Cost of Natural Gas Distribution Pipelines: The Case of Société en Commandite Gaz Métropolitain, Québec

Abstract

Investment expenditures in natural gas distribution pipelines account for 70% of the rate base of Société en Commandite Gaz Métropolitain (SCGM), the natural gas utility which serves most customers in the province of Québec. In allocating these costs to rate payers, the regulatory process divides costs into an access fee which reflects the fixed costs of planning and implementing the system that is to be divided equally over all users and a user or variable cost fee reflecting the capacity they use. In this paper we estimated a cost function to provide information to regulators on how these tariffs should be set. We use a unique data set of 131 observations which represent natural gas extension projects realized by SCGM in four Québec regions (Trois-Rivières, Sherbrooke, Québec and Chicoutimi) in the eighties and early nineties, to analyze the main determinants of capital costs. It is found that capital cost is not separable into a fixed and a variable component, that the elasticity with respect to maximum daily demand is not significant, and that the elasticity with respect to pipe length is slightly less than one. Maximum daily demand by each consumer class and consumer density per kilometer play no statistically significant role.