Franz Hubert

Investment Options and Bargaining Power: The Eurasian Supply Chain for Natural Gas

We use cooperative game theory to analyze the power structure in the pipeline network for Russian gas. If the assessment is narrowly focused on the abilities to obstruct flows in the existing system, the main transit countries, Belarus and Ukraine, appear to be strong. Once investment options are accounted for, Russia achieves clear dominance. Competition between transit countries is of little strategic relevance compared to Russias direct access to its customers. Comparing our theoretical results with empirical evidence, we find that the Shapley value explains the power of major transit countries better than the core and the nucleolus.

Coordination Failure with Multiple-Source Lending: The Cost of Protection against a Powerful Lender

We analyze how a firm might protect quasirents in an environment of imperfect capital markets, where switching lenders is costly to the borrower, and contracts are incomplete. As switching costs make the firm vulnerable to ex post exploitation, it may want to diversify lending. Multiple-source lending, however, suffers from coordination failure. An uncoordinated withdrawal of funds will force a financially distressed firm into bankruptcy even though it could have been rescued if lenders had stayed firm. We show that the gains from preventing renegotiation do outweigh the cost of coordination failure if a single lender has sufficient bargaining power.

INVESTMENT OPTIONS AND BARGAINING POWER: THE EURASIAN SUPPLY CHAIN FOR NATURAL GAS

We use cooperative game theory to analyze the power structure in the pipeline network for Russian gas. If the assessment is narrowly focused on the abilities to obstruct flows in the existing system, the main transit countries, Belarus and Ukraine, appear to be strong. Once investment options are accounted for, Russia achieves clear dominance. Competition between transit countries is of little strategic relevance compared to Russias direct access to its customers. Comparing our theoretical results with empirical evidence, we find that the Shapley value explains the power of major transit countries better than the core and the nucleolus.

Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-Up Problem

We develop a dynamic model of strategic investment in a transnational pipeline system. In the absence of international contract enforcement, countries may distort investment in order to increase their bargaining power, resulting in overinvestment in expensive and underinvestment in cheap pipelines. With repeated interaction, however, there is a potential to increase efficiency through dynamic collusion. In the theoretical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to fit the Eurasian pipeline system for natural gas, we find that the potential to improve efficiency through dynamic cooperation is large. In reality, however, only modest improvements over the non-cooperative solution have been achieved.

Pipeline Power: A Case Study of Strategic Network Investments

Abstract We analyze the impact of three controversial pipeline projects on the power structure in the Eurasian network for natural gas. Two pipelines, “Nord Stream” and “South Stream,” allow Russian gas to bypass transit countries, Ukraine and Belarus. The third project, “Nabucco,” aims at diversifying Europe’s gas imports by accessing producers in Middle East and Central Asia. If network power is measured with the Shapley Value we obtain a clear ranking of the projects which corresponds to the observed investment patterns. Nord Stream’s strategic value is huge, easily justifying the high investment cost for Germany and Russia. The additional leverage obtained through South Stream is much smaller and Nabucco is not viable. For the nucleolus in contrast, none of the pipelines has any strategic relevance at all, which contradicts the empirical evidence on investment.

Cross Subsidies in Russian Electric Power Tariffs: Not as Bad as their Reputation

In most industrialized countries electric power tariffs for residential consumption are higher than for industrial customers. In Russia, as in some other transition countries, this pattern is reversed, but at the same time the overall level of tariffs is very low. Cross subsidization of residential tariffs through industrial tariffs has been repeatedly criticized by economists and international organizations. This note argues that, while it is inefficient to keep tariffs below social cost, cross subsidies can be efficient. In fact, back of the envelop calculations for Russia suggest, that, given the prevailing level of tariffs, which is much too low, their structure is probably efficient.

Reform of Russian Power Industry - Which Lessons from Abroad?

In an attempt to reform the electricity industry, the Russian government has decided to break-up the major company RAO-UES into half a dozen power generating companies, a national transmission company, a unified system operator, and a holding company managing stakes in regional energos. This essay takes a critical look at the underlying approach which emphasizes competition in power generation and relies on vertical separation and centralized short term markets to achieve the goal. The Russian electric power industry is inefficient and it lacks funds for investment but tariffs, being subsidized through low fuel cost, are low. Hence the first priority must be given to a reform of the regulatory system and an increase of tariffs, in order to improve the industrys finance, its incentives for cost cutting and the energy efficiency. Competition in generation, which would be instrumental to bring tariffs down, appears less urgent. It may be achieved through decentralized trading in long term contracts, once access to the transmission grid is opened. As international experience suggests, restructuring of RAO-UES is not necessary and may even be counterproductive.

Financial Contracting When Rivals May Turn Nasty

This paper develops a principal--agent model of financial contractingin which optimal contracts resemble a combination of debt and equity. When defaulting on debt, the firm is punished by disruption of external funding. Such contracts however, invite rivals to compete more aggressively to increase the likelihood of default. The firm will respond to the threat of predation, by choosing a less leveraged capital structure, even though this will aggravate incentive problems. In contrast to the literature on debt as a device of strategic commitment, this result supports the common presumption that equity can enhance the firms competitiveness in the product market.