Although a task force has been set up to ensure fair competition in gas service provision with minimal government intrusion, the process the group has proposed is fraught with bureaucratic intervention and control, writes Richard Wood.
In discussions on national energy markets, gas has been the poor relation of electricity. Yet while coal-based electricity provides the bulk of Australia's non-transport energy market, gas accounts for 31 per cent.
At present there is little rivalry in gas provision to Australian markets of either an intra or inter-basin nature. A national framework for free and fair trade in gas featured strongly in the Hilmer report and is one of the pillars of the national competition policy agreed to at meetings of the Council of Australian Governments.
The settled principles include requirements that all monopolies are removed or controlled, no impediments to competition remain and government entities are placed on a commercial footing.
In the past year, a gas reform task force of government officials assisted by industry representatives has been nutting out the precise terms for fair competition.
Although ostensibly about minimal intrusion into private sector arrangements, the outcome is a process that is indelibly tattooed with bureaucratic intervention and government controls.
The task force's proposals will discourage companies from building new pipelines or pipeline capacity not a guaranteed commercial success.
The proposals contain no scope for an entrepreneur to take a punt on an uncertain pipeline venture with the hope of high profits should its demand prove to be high. This is because a regulator will ultimately determine the price of carriage -- and that price will be based on costs.
So the best the risk-taking entrepreneur can expect on a successful investment is the regulator's notion of a fair profit. This caps the profit from a successful new enterprise but, as no customer pays for a facility that has been ill conceived, there is no offsetting compensation.
This must lead to a sharp fall in new pipeline development. Taking out the most risky ventures will diminish the growth of rival pipelines and retard the competitive conditions the task force was set up to expedite.
Most pipelines are largely built on firm bankable commitments of major users and retailers for the capacity of the pipes. However, capacity can be developed so it is flexible and can be expanded at a modest cost increase -- the volume being related to the square of the surface of the pipe.
But pipeliners will only install surplus or capacity that can be easily developed if they can see a reasomable chance of profiting from it. And under the proposed regime, such scope for augmented capacity may be absent or even a liability.
Where the extra capacity must be on-sold to third parties at prices judged reasonable by a regulator, there is a risk the prices paid by those parties committing to contracts will be undermined.
The outcome is a perverse incentive. Pipeliners will be forced to design the pipes so only the committed gas can be carried.
The task force also shows no sign of restricting the control of government to these pipelines that are essential facilities.
Where, as will soon be the case with Sydney, gas can be transported by more than one pipeline system, in the absence of collusion (which would be dealt with under separate provisions of the Trade Practices Act) there should be no need for government oversight.
Yet the task force assumes all pipes will be essential facilities and subject to governmental control. In this respect it has been guided by US regulations.
But it has badly misread the US developments where the residual controls are irrelevant to the efficiency that has developed in the gas market, an efficiency created by the growth of rival pipelines, not price controls.
The task force faces up to the possibility its controls may bring an imbalance between the demand for capacity and its supply -- an imbalance likely to be made worse where, as is possible, the price may even be based on historical rather than replacement costs.
But it addresses these in ways that only compound the basic shortcoming.
For example it acknowledges the regulator's arithmetically determined tariff may sometimes bring a scramble by users for available capacity, where the calculated price is too low.
However, there is no way in the face of this recognition that the task force will retreat from its rejection of the normal market solution which allows price to allocate demand for firm capacity to those who value it most. Instead, the task force prefers a queuing approach.
Queuing is, of course, totally alien to the efficiency brought about by market-determined prices. Queues in fact epitomise the failures seen in centrally planned economies.
As if queuing were not bad enough, the task force proposes that those at the head of the queue be forbidden to sell their position to others behind them.
This means the users who value the capacity most cannot obtain it from others who place a lower value on it.
The proposals of the gas task force suffer from an inadequate understanding of market processes, of how government intervention can all too readily emasculate these, and of a cheerful optimism about the ability of regulators to establish prices which fully mirror those revealed in the interplay between demand and supply.
Like the constructs of so many other brave new worlds, its prescriptions would be a severe impediment to achieving the efficiency it seeks.
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