Regulating international gas transport: welfare effects of postage stamp and entry-exit systems

There is no consensus on the method to set transmission tariffs for natural gas. The entry-exit system is widely used in European markets because it is cost reflective, it allows the network users to separately book capacity for entry and exit points, beyond its pro-competitiveness characteristics. Some authors, however, defend the adoption of the postage stamp (where a single tariff is charged regardless of the origin of the gas), due to its simplicity. Our goal is to compare these two mechanisms of transmission tariff with respect to the impacts on welfare. We find that the welfare effects crucially depend on the size of the internal market and the fixed costs supported by the incumbent firm. If the domestic market is sufficiently large and there are imports from abroad, consumer surplus is higher under the postage stamp system.