31 BGT provides transportation services for shippers under contracts for either firm or interruptible transportation. Firm customers must pay all relevant capacity charges as well as a commodity charge. Interruptible customers pay an NTS entry capacity charge and a commodity charge. Interruptible transportation is available only for transportation of more than 200,000 therms a year, and it can be interrupted for up to 45 days each year. In addition, BGT offers nominated interruptible transportation that can be interrupted for more than 45 days a year. Customers using this service pay an NTS entry capacity charge as well as discounted NTS and LDZ commodity charges.

Because BGT has a monopoly position in gas transportation in the U.K., its rates for capacity and transportation services are regulated by Ofgas, under a mix of rate-of-return and price cap regulatory methods. Rates are first calculated to ensure that BGT's revenues from transportation cover its total costs and provide a return on capital. They are then subject to a price cap, which limits growth in revenues and allows for productivity improvements over a certain period. When the price cap expires, Ofgas reviews BGT's revenues, costs, and asset value and, based on its findings, sets a new price cap with necessary adjustments. The rate structure is determined by BGT, although Ofgas closely monitors the structure and approves any changes. Ofgas's aim is to support long-run efficiency in the primary capacity market and transportation. The underlying objectives are therefore to protect consumers from BGT's market power and allow BGT's shareholders to earn a fair rate of return.

BGT's rate structure for transportation and capacity is gradually being revised to better reflect the true costs of these services.<sup>13</sup> The current rate structure, which came into effect in October 1994, introduced locational pricing for capacity and a _50/50_ split of revenues between capacity and commodity charges. It was preceded by a rate structure built around distance-based transportation charges and the same 50/50 split between capacity and commodity charges. The goal of BGT and Ofgas is to provide market participants with the right signals about the efficient location of sites and the size of consumption. Despite substantial improvement in the efficiency of rates, Ofgas is pushing BGT to reduce commodity charges in order to achieve a 90/10 split between capacity and commodity charges. This rate structure should better reflect the ratio between BGT's fixed and variable costs.

The pricing of NTS capacity is based on the long-run marginal cost of capacity. Capacity charges are determined for each NTS entry point and about 80 NTS exit points, which are structured into 34 zones. A charge for each point is determined by an approximation of a matrix of the long-run marginal costs of the capacity needed to meet the incremental deman-d for transportation from a particular point to all exit zones. BGT, in cooperation with Ofgas, has decided to use long-run marginal cost pricing of capacity rather than short-run marginal cost pricing, which would lead to high price volatility. Although longrun marginal cost pricing does not achieve the same allocative efficiency as short-run " This section is based on Higson 1996.