Duke Energy's Eastern Gas Pipeline will soon carry gas between the Bass Strait and Sydney. Regulators' manoeuvrings regarding this new pipeline have demonstrated that the regulatory structure, finalised only last year, is seriously flawed.
Under the national Gas Code, pipelines are generally envisaged to be natural monopolies. Their prices are regulated and they are not allowed to discriminate between potential users.
Two alternative regulatory routes are in place.
The first is through Graeme Samuel's National Competition Council (NCC). This establishes the need for regulation, then passes the baton to Alan Fels' Australian Competition and Consumer Commission (ACCC) to determine prices.
The alternative is for the ACCC to accept an "undertaking" by the pipeline owner on price and other conditions. At least according to the ACCC, this pre-empts the need for NCC involvement.
These alternatives have resulted in a regulatory demarcation dispute with both the ACCC and the NCC seeking to control the regulation of Duke's Eastern Gas Pipeline. That pipeline will compete in the NSW market with the existing East Australia Pipeline (EAPL) which transports gas from the Cooper Basin. EAPL is presently majority owned by AGL but is in the process of being floated.
Faced with two alternative regulatory paths, for its part, Duke opted for the ACCC route, because this allows it to offer a uniform price while avoiding the Gas Code procedures with their tortuous and inflexible cost based pricing formulae. But both regulatory paths leaves Duke vulnerable since the company already has the pipeline in the ground and can hardly walk away in the face of regulatory zeal to lower prices. And, in the past, the ACCC has only accepted price "undertakings" after slicing something off suppliers' proposed prices.
A more fundamental issue than who has the regulatory authority is why should there be any regulation at all? The existence of two transmission pipelines serving NSW is the very definition of competition, the absence of which provided the initial rationale for regulation.
Some may claim that the two pipelines both need to be controlled because they traverse different paths. But it is rarely the case that two competitive products are identical and if we were to use their differences to justify regulation, almost everything would be covered. Two robust competitors, as long as they do not collude, are usually sufficient to bring the required efficiency driving customer focus. With the Eastern Gas Pipeline and EAPL, we have Coke versus Pepsi, Ansett versus Qantas, and Lion Nathan versus Fosters. Competition -- even where there are only two rivals -- prevents price-gouging and promotes cost savings far more effectively than regulation. And it does so without the price distortions and paperburden costs that are inevitable with regulation.
Hence the issue for the Eastern Gas Pipeline is not whether the ACCC or the NCC should regulate the NSW pipelines. Competition has broken out. The Eastern Gas Pipeline should not be regulated and the regulatory controls on the existing East Australian Pipeline from the Cooper Basin should be lifted. EAPL and Duke both now take the view that regulation of the two competing pipelines is unnecessary and constitutes paperburden costs and costly operational rigidities.
Not so the NCC. In its draft recommendation it has shown an admirable defence of its regulatory turf. Unsurprisingly, it has confirmed that it, rather than the ACCC, should determine the need for regulation. In addition, assuring itself of a continuing busy-body role, the NCC wishes to regulate both pipelines on the basis that they are not exactly parallel. And it further argues that even if the lines were parallel regulation would be necessary because each of the lines would have "market power"!
The distressing aspect of all this is the negative value the regulatory authorities add. If each new pipeline needs to pass an exhaustive regulatory review before it can seek customers, there will be far fewer pipelines built. Companies will be unwilling to leave their money hostage to an unnecessary regulatory regime and consumers will lose fuel choice options. Ironically, not only will this mean fewer opportunities for increased income but it will mean fewer competitive pressures.
Of course, the regulatory authorities will gain since they are assured of an on-going role for themselves. But should we really be running the economy for the benefit of the regulators? For gas, electricity, telecommunications, ports, etc. Australia's supposed "light handed" regulation is a masquerade for one of the world's most intrusive regulatory regimes. The demarcation dispute between the regulators over gas illustrates the absurdity of the present regulatory morass. The NCC's draft recommendation on the matter indicates some urgency in the need to revisit the entire regulatory structure.
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