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Shifts in Gas Market Governance: Path-Dependent Institutional Innovation in the Netherlands

Around the turn of the century, the gas market in the Netherlands underwent a drastic shift in governance. Although the gas value chain was initially designed as a natural monopoly, it was dismantled by introducing competition on the basis of two European Union (EU) Directives that allowed third party access. The key economic question is whether the ongoing legal process of liberalization will result in an overall efficiency gain. Although this is probably still too early to tell, we provide the preliminary answer, based on an evolutionary framework of market governance, that the efficiency gain is likely to be small. First, the transaction characteristics and market structure have not changed substantially to align them efficiently with the new governance arrangement. In the Netherlands, gas market governance basically shifted from public regulation 'in disguise' (as a private bilateral governance arrangement) to public regulation. Second, the potential efficiency gains are suppressed by path dependence and lock-in. For instance, the former monopolist in the Netherlands has a strong position on the wholesale market due to its historically determined exclusive entry to the huge Groningen gas field. Despite the liberalization of the market, transaction characteristics have not changed, which has prompted a strong intrusion of governance instruments by the regulatory agent. In that sense, we argue that the governance of the Dutch gas market has made a full circle.