Gas Contract Indexation and Market Power

Recent high natural gas prices have focused attention on competition in European gas markets. In response to anti-trust pressures, many long-term pipeline gas contracts in Europe have shifted from oil-linked indexation to pricing based on traded European gas hub indices. In this short paper I show, using a simple monopoly plus fringe model, that shifting long-term gas contract indexation to prices based on short-term spot prices may have had the unintended consequence of increasing the market power of large spot market suppliers such as Gazprom, with negative consequences for European gas and power consumers