THE INTERMEDIATE RUN
Despite the large number of pipelines within 100 to 140 miles of most markets, these nearby pipelines have no time to enter a market in the short run. In this chapter, we consider whether nearby pipelines can become potential entrants within a two-year period, the length of the intermediate run. There are two requirements: The nearby pipeline must be able to construct an economically viable hookup from its trunk line to the market, and the nearby pipeline must be able to divert sufficient gas to feed the new pipeline hookup. These two requirements will be referred to as the distance requirement and the size requirement, respectively. Suppliers who require more than two years to meet the size requirement are excluded in the intermediate run. 1
Conceptually, the pipeline makes an investment in the new pipe and compressors to transport gas from its main line to the new market area. In the first year, the investment is made and the hookup is completed. 2 After the construction phase, natural gas is delivered to the new market and the pipeline incurs maintenance and operating costs that extend over the useful life of the hookup. The question is, What is the transport fee required to earn a competitive rate of return on the pipeline hookup?