Network split would aid gas industry: advisers

By BRIAN FALLOW

A review of the gas industry says there is a problem of monopoly power in gas transmission and distribution but that little regulation is needed immediately.

The Government yesterday released the report by Australian consultants ACIL as a discussion paper. Energy Minister Pete Hodgson said the Government had not formed any views on the findings.

ACIL suggests that Natural Gas Corporation's gas transmission network be put into a separate company, which NGC could part-own. That company would have other shareholders as well.

The rationale is similar to that which underlay Max Bradford's split of the ownership of electricity lines businesses from electricity retailing - the suspicion that monopoly profits from one part of the integrated business can provide an anti-competitive subsidy to the contestable parts. NGC's majority shareholder, Australia Gas Light, set up a separate entity, the Australian Pipeline Trust, last year to own and operate its pipelines. AGL kept a minority interest and floated the rest.

ACIL does not recommend that the Government require a restructuring of NGC yet, but says that if after, say, two years NGC did not wish to proceed with separation the Government "could consider introducing more specific regulatory responses".

The current arrangements for wholesaling gas were workable in a market dominated by Maui gas with its 77 per cent, ACIL said.

"However, the arrangements are inadequate for future markets with more diversified supplies and will increasingly create inefficiencies as Maui declines."

ACIL calls for measures to allow new gas fields to use the Maui pipeline, which would require renegotiating the existing Maui contracts, likely to be a long-drawn-out process.

The Maui pipeline does not have open access; it is used to supply gas only to the three users who buy gas from the Crown under 1990 contracts: Contact Energy, Methanex and NGC.

It would also be desirable, ACIL said, that access arrangements be developed for an interconnected transmission system between the Maui and NGC transmission systems. This would need to be in place by 2005, when Maui's production starts to fall significantly.

Turning to the distribution sector - the regional capillaries of the pipeline system - ACIL notes that bypass lines (lines to industrial gas users which bypass the incumbent network's lines) have been installed in parts of Auckland, Hawera, Hastings, Petone and Wellington.

"As bypass is technically inefficient when adequate capacity is available (it would be cheaper to use only one pipe system) its existence suggests monopoly pricing has been practised in some areas, possibly disguised by excessive asset valuations," said ACIL.

"NGC has acknowledged the implications of bypass in its pricing policies and has introduced bypass pricing where a customer would otherwise bypass the NGC network."

But Todd Energy argues that areas where bypass is less feasible, such as residential markets, remain subject to monopoly pricing.

ACIL concludes, however, that this is less of a problem than those affecting the trunk transmission network, given the over-riding need to develop new gas supplies.

It notes, but is unpersuaded by, criticisms of the prevalent method of valuing the line networks, optimised deprival value (ODV).

Despite those problems, ACIL concludes that only minimal regulatory intervention is required in the near term.