Impacts of Access Regulation in the Australian Gas Sector - - PowerPoint PPT Presentation

Impacts of Access Regulation in the Australian Gas Sector

Presentation to 2004 ACCC Conference, Gold Coast, Queensland

30 July 2004 30 July 2004

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Background…

ACCC commissioned ACIL Tasman in mid-

2003 to undertake a study to estimate the benefits and costs of access regulation for gas and electricity

Final report presented February 2004

• Formed part of ACCC submission to PC Inquiry

into Gas Pipeline Access Regulation

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Industry context

Gas industry (June 2001)

• Turnover: $5,066.6m
• Value added: $1,047.4m
• Employment: 2,710 FTE

Electricity industry (June 2001)

• Turnover: $27,448.3m
• Value added: $10,294.2m
• Employment: 33,435 FTE

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Study Scope

Assessment of impacts of access regulation

under:

• Trade Practices Act, Part IIIA
• National Electricity Code
• National Gas Pipelines Access Code

Actual & projected outcomes 1998/9 to

2012/13

• Reference case with access regulation
• Counter-factual case without access regulation

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Methodology

Sectoral impacts assessed using ACIL

Tasman models of electricity and gas markets

• GasMark
• PowerMark

Economy wide impacts estimated using

ACIL Tasman general equilibrium model

• Tasman Global

Methodologically challenging, esp defining

the counterfactual

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Anticipated benefits

Lower transmission/distribution costs

through reduced potential for rent seeking

• Lower costs to consumers, increased

consumption, economy-wide impacts on production etc

Upstream facilitation: e.g. access to

market for competing gas suppliers

Downstream reform – retail contestability

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Anticipated costs

Costs of regulatory compliance

• Government and industry devote significant

resources to TPA regulation – Costs of ACCC, QCA, IPART, ESC, ESCOSA etc – Costs incurred by asset owners in complying with

regulators and preparation of access arrangements

Indirect Costs

• Medium-to-long term impact upon investment?

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Direct Costs

Admin costs of regulatory agencies Recognition of avoidable cost for

counterfactual

• ie: will government controls or other forms of

regulation be required without AR?

Compliance costs offset by need for

• wners to negotiate access without AR
• Increased efficiencies countered by need for

users to be involved in negotiations

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Other considerations

Rigidity through pre-existing contracts Possible “leakage”: capture of benefits by

non-regulated elements of supply chain

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Scenario Development

Reference case: 10-year forward projection

with regulated pipeline tariffs using GasMark, plus 5-year prior based on historical outcomes

Counter-factual based on transmission &

distribution companies initial proposed AA/Reference Tariffs

Case studies looking at hypothetical profit-

maximising on DBNGP, MSP

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Pipeline case studies

$1,200 $1,250 $1,300 $1,350 $1,400 $1,450 $1,500 $1,550 $1,600 $1,650 $0.76 $0.86 $0.96 $1.06 $1.16 $1.26 $1.36 $1.46 $1.56 $1.66 $1.76 $1.86 $1.96 $2.06 $2.16

Pipeline tariff ($/GJ) Pipeline tariff ($/GJ) Pipeline Pipeline Revenues Revenues (NPV $m) (NPV $m) DBNGP DBNGP MSP MSP

Optimal tariffs Optimal tariffs between $1.26 between $1.26 and $1.56/GJ and $1.56/GJ Optimal tariffs Optimal tariffs between $0.62 between $0.62 and $0.72/GJ and $0.72/GJ

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Lower bound gas scenario

Transmission and distribution tariffs set to

mimic owners tariff applications to regulators

Conservative and credible Supply assumptions unchanged from

reference case

No Northern gas/transcontinental pipeline

in the 15-year period

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Upper bound gas scenario

Transmission and distribution tariffs set 25%

higher than the reference case

Significantly above lower bound – but still

conservative in view of monopoly strategies

Supply assumptions unchanged from

reference case

No Northern gas/transcontinental pipeline

in the 15-year period

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Results from GasMark

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Results from GasMark cont.

Reference case

• Projected large growth in gas consumption

Lower Bound

• Aggregate consumption reduced by 248PJ
• Weighted average gas prices around 3% higher

Upper bound

• Aggregate consumption reduced by 1,104PJ
• Weighted average gas prices around 3% higher

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Direct cost for gas

Direct cost of gas access 2003/4

• Administration $16.1m
• Compliance $8.9m
• Total $25.0m

Of this, $16.1m deemed to be avoidable,

with compliance largely maintained in counterfactual

Over the 15-year study period total

avoidable costs = $194.6m (NPV @ 7%)

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Costs continued…

Total avoidable costs for electricity and

gas = $461.4m

Potential for other costs

• detrimental impacts upon investment if returns

set too low (both greenfield and brownfield)

• Inefficiencies if returns are set too high

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Economic Impact

Extends the sector analysis Used ACIL Tasman’s Tasman Global

general equilibrium model of the global economy

• 66 countries (including Australian states)
• 57 commodities (enhanced energy sector)

Important distinction between wealth

transfers and welfare benefits

• Reduced tariffs may not translate fully into

economic benefits

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Lower bound economic impacts

15 year NPV @ 7%

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Upper bound economic impacts

15 year NPV @ 7%

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Conclusions

Access regulation limits potential for monopolistic

pricing behaviour in electricity and gas

• alternative is NOT unconstrained monopolistic behaviour

Reduced transportation costs drive increased gas

consumption (250 – 1,100PJ over study period) and small average price reduction(~3%)

Net GDP benefits between $2.2 and $11.0 billion

(15 year NPV @ 7%)

• Approximately 10% of which relate to gas