The saga of the price determination for the Moomba to Sydney Pipeline is compelling evidence of the reasons for avoiding government price regulation. The pipeline has been in negotiation with the regulatory authorities since May 1999. Last week the Australian Competition Tribunal (ACT) rejected the ACCC's valuation of the pipeline (and, therefore, its price determination) with a decision that can only bring further price paralysis.
Commissioned in 1976, the basic pipeline was a Whitlam Government project built at a cost of $240 million. It was privatised by the Keating Government for $534 million in 1994. And, using an alphabet soup of accountancy acronyms to update these sums, the ACCC now says its value is $559 million while the pipeline's owners, the Australian Pipeline Trust, say it is worth between $784 million and $998 million. The owners appealed the decision of the ACCC to the ACT which has required to the ACCC to re-assess its calculations applying an accountancy approach, depreciated optimised replacement cost (DORC), plus other adjustments that might result in a value approaching $800 million.
Clearly, the different means of calculating the capital base on which prices should be set is proving both tortuous and controversial. We have witnessed five years of arguing, establishing positions, and shoring these up with reports from expensive consultancies. Nor is the Moomba to Sydney pipeline unique -- its experience is duplicated in the case of Australia's five other major gas pipeline systems, a sad commentary on the bureaucratic system of price determination that we have put in place.
Moreover, the regulation is unnecessary. The peregrinations around the capital base are misplaced. There, in fact, are sufficient market disciplines on this and most other gas pipelines for the regulatory authorities to exit the game. Since first having to seek the ACCC's agreement to its prices, the Moomba to Sydney pipeline has seen its competitive situation revolutionised with the August 2000 commissioning of the rival Easterb Gas Pipeline transporting gas from Bass Strait to Sydney. Within the next decade, there is likely to be another pipeline to Sydney from Queensland -- unless, that is, the regulatory authorities stifle competition by establishing an artificial low price for gas hauled along existing pipelines.
The increased competition from the East Coast Pipeline has already resulted in the haulage price from Moomba to Sydney being marked down from 72 cents to 65 cents per gigajoule. The ACCC capital costs were developed to establish a price similar to that which their consultants had estimated to be the competitive price equivalent (53 cents). But this is simply an artificial construct, one that nobody regards as superior to a price that is the outcome of a competitive market.
Clearly, the market for the haulage of gas can never approach a "perfect market" comprising many sellers and many buyers but very few markets do. However, the past five years experience clearly demonstrates the superiority even of the imperfect competition that stems from lumpy capital to the rituals of price determination by the ACCC.
The Government, recognising the existing regulatory deficiencies has commissioned several reviews of the industry. The latest, from the Productivity Commission, is awaiting release. The PC is unlikely to have changed its draft advice that seeks a relaxation of controls on gas transport in line with the emerging competition evident in the industry.
Both the ACCC and the ACT will claim that the regulatory rules confine them to making decisions within the confines set by the regulation itself. This, they say, requires them to set a synthetic price and not to allow the price to emerge from market interaction.
There is some merit in such claims by the ACT. The ACCC had however a suite of criteria it could have used either to establish price or to allow the market to do so. The fact is that, stemming from its own interests and its personnel's flimsy experience outside of government, it is predisposed towards regulation. Indeed, the ACCC makes liberal use of its taxpayer supplied funding to promote, in a wide number of fora, additional regulation (and of course more funding). This license means a schizophrenic ACCC is both a policy body and an arbitrator. The government has successfully removed the advocacy role in taxation policy from the ATO and if it is to restore confidence in its competition commission it should adopt a similar approach with the ACCC.
In the meantime the Government needs to release the latest report of the Productivity Commission and restore price determination in the gas industry to the marketplace.
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