Industrial organization
Applied econometrics and computational economics
Microeconomics

Industrial Organization
Microeconomics
Applied Econometrics

May 1996 (Oral) Industrial Organization, Microeconomic Theory
May 1995 (Written) Microeconomic and Macroeconomic Theory

The Effects of Regulation in Natural Gas Markets

Professor Steven Berry
Professor Paul W. MacAvoy
Professor Ron Shachar
Professor Christopher Timmins

Summer 2001

M. Phil. in Economics, Yale University, 2000
M. A. in Economics, Yale University, 1996
M. A. in International and Development Economics, Yale University, 1995
Diplom (M.Sc.) in Applied Mathematics and Physics, Moscow Institute of Physics and Technology (MIPT), 1992

Yale University Graduate Fellowship, 1995-1998
Freedom Support Act Fellowship Program sponsored by USIA, 1994-1995
George Chopivsky Family Foundation Fellowship, 1994-1995
Graduated summa cum laude, Moscow Institute of Physics and Technology, 1992
Ranked First, Kiev-City Olympiad in Mathematics, 1982, 1986

Teaching Assistant, Yale University:
     Undergraduate Introductory Microeconomics, Spring 1998, Fall 1999, Fall 2000
     Undergraduate Intermediate Microeconomics, Fall 1997
     Undergraduate Advanced Microeconomics, Fall 1998
     Graduate First-Year Microeconomics, Spring 1999, Spring 2000
     Graduate Second-Year Microeconomics, Spring 1997

Research Assistant for Professor Paul W. MacAvoy, 1998 – present. Provided documentary materials and data analysis on the economic behavior of the natural gas industry under various regulatory regimes. Estimated dynamics of price-cost markups in US long distance telecommunications markets. Prepared economic analyses of the profitability of Northeast Utilities under various corporate strategies in the 1990’s.

Research Assistant for Professors Steven Berry and Ariel Pakes, 1998-1999. Worked on the project "Estimating the Pure Random Coefficients Discreet Choice Model," performed Monte-Carlo simulations and conducted model estimations.

• "Competition in the Natural Gas Pipeline Industry After Deregulation," manuscript, Yale University, 2000.
• "A New Long-Term Trend in the Price of Natural Gas," manuscript, Yale University, 1999 (with Paul W. MacAvoy). Forthcoming in the Resource and Energy Economics.
• "Profitability of Natural Gas Storage Resulting from Federal Deregulation in 1992," work in progress, Yale University.
• "The Asymmetric Information Model of State Dependence," manuscript, Tel Aviv University and Yale University, 2000 (with Ron Shachar). Submitted to the Marketing Science in June 2000.
• "Switching Cost or Search Costs?" the Foerder Institute for Economic Research Working Paper No. 3-2000, January 2000 (with Ron Shachar).

Conference Presentations: "Switching Cost or Search Costs?" (with Ron Shachar), Cowles Foundation Conference, Yale University, May 2000.

Other papers:
In a paper with Ron Shachar we explain persistence in choices over time. Marketing researchers and practitioners are interested in a specific aspect of this phenomenon, brand loyalty, because of it consequences for determining the market strategies of incumbents and entrants. We propose a model with two types of consumers, informed and uninformed. The first (switching) type has full information, but she is loyal to the previously chosen product, and, therefore, switching is costly for her. The second (search) type has only limited information about the products other than the one chosen before, and he has to undertake a costly search to find better alternatives before he can switch from the old product. We show that although both models lead to state dependence, their behavioral implications differ significantly to enable the researcher to identify person’s type from the data. If the majority of the population is of the first type, firms should use pricing promotions as their main competitive tool; otherwise, advertising is more efficient.

The dissertation concentrates on the effects of the recent changes in regulation of the natural gas industry of the United States. Government regulations had a significant impact on the structural form and development of the industry. Some regulatory initiatives imposed distortions on the field and transportation markets which have proven to be extremely harmful; price controls brought shortages in supply, and following phased price decontrols raised prices on just deregulated reserves well above market equilibrium levels. Important changes in regulation in the early 1990’s merit examination to compare effects of the new orders with their declared purposes.

The first paper analyzes changes in the transportation sector of the natural gas industry. This sector has undergone major regulatory reforms in the last decade initiated by the Orders 636 et al. issued by the Federal Energy Regulatory Commission, which were designed to foster competition. The objective of the paper is to quantify the impact of these regulatory changes on the degree of rivalry in the gas transportation market. Of central concern are the effects on wellhead (supply) and city-gate (demand) wholesale prices, transportation quantities, and transportation charges. In order to find these changes, I offer an original, integrated demand/supply model of the natural gas industry that explicitly accounts for the actual pipeline network architecture. Model identifies the competitive regimes in the industry in pre- and post- regulatory periods, and establishes that post regulation profit margins significantly declined. Therefore, it is concluded that entry into secondary transportation markets facilitated by the government regulation increased intensity in competition. Based on results from the traditional econometric tests, I determined that transportation charges in the deregulation period declined by approximately 12 percent compared to the pre-deregulation period. This estimate translates into 3.4 billion dollars of annual savings to consumers in transportation charges.

In the second paper (with Paul W. MacAvoy) a new outlook for the long-term price of natural gas at the wellhead is constructed from a partial equilibrium model of the industry. Incorrect forecasts of long term prices of the 1970s and 1980s led to policy decisions that significantly distorted realized prices from market-clearing levels. The empirical framework consists of a simultaneous equations system for production from reserves and for demands in the residential, commercial and industrial sectors. Our model also controls for different regulatory phases of the industry. We utilize a historical data to estimate the model and then develop two scenarios for future prices, one from current institutions, and the other on deregulation that leads to development of an open market for gas and transport services at all levels. For the next ten years the key variables - price of natural gas, level of production and underground gas reserves - improve for the consumer whether or not there is deregulation, but the deregulation scenario leaves the consumer better off sooner.

The third paper (work in progress) examines the profitability of the storage sector of the market. Due to the proximity of stored gas to demand markets, storage suppliers have a time advantage over pipelines or other sellers in meeting unexpected demand shocks. I introduce a dynamic model that allows a storage owner to balance profitability of current sales with expected profitability of future sales. Each period, the owner decides how much gas to supply to the local market or to extract from the market into storage for future use. The model allows me to estimate storage cost parameters, elasticity of demand, and profitability of this sector of the industry. It also provides grounds for counterfactual experiments. In particular, I am interested in welfare implications of such policies as expanding storage, relaxing underground reserve requirements, or changing the pipeline network architecture.