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A Mixed Complementarity-Based Equilibrium Model of Natural Gas Markets

Project Management Program, Department of Civil and Environmental Engineering, University of Maryland, College Park, Maryland 20742
Project Management Program, Department of Civil and Environmental Engineering, University of Maryland, College Park, Maryland 20742
Project Management Program, Department of Civil and Environmental Engineering, University of Maryland, College Park, Maryland 20742
sgabriel{at}umd.edu
supat{at}wam.umd.edu
zhuang{at}umd.edu

We present a new multiseasonal, multiyear, natural gas market equilibrium model based on the concept of a competitive equilibrium involving the market participants: producers, storage reservoir operators, peak gas operators, pipeline operators, marketers, and consumers. The first three classes are depicted as price-takers consistent with perfect competition. The pipeline operations are described with regulated tariffs, but also involve "congestion pricing" as a mechanism to allocate scarce pipeline capacity. The marketers are price-takers in all markets except in sales to consumers, in which they compete as Nash-Cournot players. Finally, consumers are described by demand curves for each of the four sectors: residential, commercial, industrial, and electric power. We show that the equilibrium model is an instance of a mixed nonlinear complementarity problem (NCP) and provide sufficient detail not generally seen in previous complementarity models of natural gas. The NCP formulation is derived from considering the Karush-Kuhn-Tucker optimality conditions of the optimization problems faced by these participants. Under mild conditions, we show that this NCP has a solution, and under additional reasonable conditions, we show that the market prices are unique. We also validate the model on a representative sample network with nine market participants and three seasons, using four scenarios.

Subject classifications: games/group decisions: noncooperative; programming: complementarity; industries: petroleum/natural gas; marketing: competitive strategy; natural resources: energy.
History: Received February 2002; revision received September 2003; revision received February 2004; revision received July 2004; accepted August 2004.