During 1997 Australian Governments introduced a Gas Code, the National Third Party Access Code for Natural Gas Pipelines. A stepchild of the Hilmer Competition reforms, this is administered by the ACCC and the National Competition Council (NCC).
The Gas Code itself and its administrators both pay lip service to the view that, for efficiency, regulation is very much a second best approach to market competition. Even so, perceived market imperfections invariably offer regulators opportunities for control. Because of this, gas pipeline development has been disappointing. Moreover, Duke Energy, which had been one of the most active developers of new pipelines in Australia, has recently decided to wind down new project development, at least in part because of the regulatory environment.
One key criteria in the Gas Code is that a pipeline should be regulated where this "would promote competition in at least one market". The regulatory authorities always render this down into the question of whether prices will be cheaper for the pipeline's users under a regulated regime rather than under one that relies on normal commercial interaction. Almost invariably the answer is, "yes, a regulated price would be lower".
In the narrow context of a single pipeline, it would, in fact, be astonishing if a different answer were possible. Pipeline costs are 95 per cent sunk. Once a pipeline is in the ground, forcing the owner to lower price will have no effect on capacity. Hence, at first blush, users can only gain by a lower haulage cost.
But when pipeline owners, observe such regulatory activity, they shy away from allowing a repeat performance. For, although government bodies can force down prices of existing assets, they cannot force investors to build new assets.
With pipelines, as with other assets, where governments assume control over property rights and force owners to sell at prices they think are too cheap, nobody invests. AMP has announced that it has stopped investing in regulated industries and other infrastructure investors have expressed similar sentiments.
The industry was, however, encouraged when last year the Australian Competition Tribunal overturned the NCC's ambitions to regulate Duke Energy's pipeline from Bass Strait to Sydney. That pipeline competed head on with the existing Moomba to Sydney Pipeline (MSP) and a price war had already broken out.
Following the judgement, MSP was emboldened to seek reciprocal treatment and escape its own regulatory prison. The company was out of luck. The NCC showed a dogged determination to give up an opportunity for regulation. It hired two American academics to write a report that said reciprocity was not appropriate. The academics showed touching faith in regulators' business skills. They maintained that because an ACCC draft decision proposed to reduce the price on the MSP further than it had fallen in the face of the competition from Duke, this proved the company was gouging the market!
In the light of the regulatory developments, we have major prospective developments being tailored to ensure immunity from regulatory oversight. One of these, SEA Gas, links fields in offshore Victoria with Adelaide. To escape regulation, and provide a cushion against competitors, the developers (International Power and Origin Energy) have sized the pipes to cater only for pre-booked gas haulage. This is notwithstanding the fact that pipeline economics mean costs per unit carried fall dramatically with size.
TXU, which needs gas in South Australia for generating electricity and, probably, to enter the retail market was therefore excluded. As the sponsors refused to re-size the pipeline, TXU decided to build a duplicate pipeline. Such an outcome, which is likely to add to overall costs, is one corollary of the over-regulation that confronts gas suppliers.
However, serendipitously, a TXU duplicate pipeline might bring about a major curtailment of regulatory intrusion. After all, it would mean three pipelines supplying the Adelaide area, (two on parallel routes from Victoria and one from Moomba). With three pipelines even the NCC and ACCC may have to acknowledge that the supply situation is sufficient for it to allow market competition to be the regulator.
But the industry would not want to bank on this as the ACCC has produced new draft "greenfields" guidelines for gas transmission pipelines. This envisages no scope for an unregulated pipeline to operate. Unfortunately the ACCC proposals therefore offer no regulatory respite; instead they attempt to filter projects with uncertain profitabilities through a sieve which is appropriate only for risk-free assets.
The Commonwealth Government has foreshadowed a review of the Gas Code. This cannot come too quickly. But it would be folly to leave it to the inter-governmental bargaining process that created the current Code. The vehicle used should be an expert review body like the Productivity Commission with a healthy regard for market processes and a seasoned set of review procedures.
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