This book was written while the author was a senior economist with the Bureau of Economics at the Federal Trade Commission (FTC). It was completed in August 1989 and approved by the Bureau of Economics, by the Bureau of Competition, and by an outside reviewer. Given the policy implications of the analysis, however, it could not be released without the further review by each commissioner and his/her staff. For the next two and one-half years, the book was revised numerous times in an effort to narrow the policy implications of the study and meet the concerns of each commissioner. In late October 1991, the author was given permission to publish the book on his own. The author is currently the director of the Division of Competition Analysis in the Office of Economic Policy at the Federal Energy Regulatory Commission.
Hopefully, this book will make a contribution to the economics literature as well as to litigated and nonlitigated proceedings where competition or the exercise of market power is an important issue. First, the book suggests how to quantify the competitive effect of potential entry. The methodology is applied to the natural gas pipeline industry. Second, it is shown that any competitive analysis of the natural gas pipeline industry that ignores the competitive effect of potential entry is likely to suggest market power concerns where none, in fact, exist. Third, to the extent that federal regulation of the natural gas pipeline industry is based on the premise that current pipeline suppliers will exercise market power if allowed to set market-based rates, the reasonableness of this premise should be reconsidered by performing a competitive analysis of the market that includes the competitive effect of potential entry.
The research for this book was conducted in the mid- 1980s when gas customers tended to purchase both gas and transportation from the pipelines