The quest for the "just price". This is how ACCC Chairman Allen Fels has described the mountain of paper and cacophony of voices that have contributed to the debate on the price for the carriage of Victorian gas. He and Victorian regulator John Tamblyn have compiled 450 pages in their final reports alone.
The allowable price of transport is critical to the price the Victorian Government can expect from the proposed privatisation of the state owned gas system.
The regulators' decision requires the transport price for gas to be based on a 7.75 per cent real pre-tax return on capital. Although this represents an increase from the draft decision of 7 per cent, it falls far short of the 10.2 per cent sought by the Victorian Government. That price application itself discounted present returns and therefore represented a reduction on the price levels that Victorian industry and consumers had willingly entered into.
The Victorian regulator estimates that the average household will benefit by $40 per year in lower gas bills as a result of his reducing the price basis sought by the Kennett Government. Of course, the $40 per year benefit on the gas bill has an equal offsetting $40 cost to the consumer-as-taxpayer because of the lower returns the verdict will bring.
The catastrophe at Esso's gas plant added a further dimension to the task of estimating the "just price". From now on, neither customers' decisions nor investors' profit projections can be based on a near certainty of continuous supply. This alone will require some adjustments to buyers' valuations of the assets. It is also likely to result in the State Government spending money on storage as well as the link with the Cooper Basin system to improve the system's security. All of this means the Government has already effectively reduced the 10.2 per cent return sought from the assets.
The regulators' gas decisions are based on a misplaced assumption that pipelines are natural monopolies that can charge any price they choose. For a start, they are subject to competition from electricity and other fuels. Moreover, although the pipes are difficult to duplicate in full, they can be partially by-passed, thereby limiting their owners' pricing latitude. Curiously, the regulators saw "uneconomic by-pass" as a major reason to keep the price low. Yet the price cap they imposed does not prevent gas pipeline owners from reducing prices to meet competition. Regulators' suggestions that the avoidance of uneconomic by-pass is a reason for them to reduce prices implies a pompous self-deceit on their part. They are saying that the owners would be too stupid to make the correct decision themselves.
The ability of rival firms to by-pass existing lines and of rival fuels to win market shares provides strong disciplines on price gouging. Customers have willingly accepted existing price levels and these levels should be treated as having been contracted. It should be left to the competitive process to drive down prices. Where a regulator attempts to do so, we run the risk of prices being set too low with inadequate incentive to upgrade and maintain the facilities.
The quest for the "just price" boils down to two measures: the price that can now be achieved under competitive conditions; and the price that an entrepreneur would have required to build the system in the first place. With respect to the latter, the present system was built 30 years ago, prior to which there were virtually gas supplies. It is impossible to believe that anyone at that time would have risked their own money for a new venture to pipe gas around Victoria and been satisfied with a pre-tax return of 7.75%. Commonly, such high risk ventures would seek twice that return.
All this said, the Victorian Government willingly agreed to have an independent regulatory authority determine its financial future. The most pressing task is to return the gas transport and marketing to the private sector and thereby obtain greater efficiencies and lower costs for customers. It is unlikely that the Regulators can be persuaded to shift ground on the issue and the Government should swallow and proceed with its privatisation reforms.
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