Impacts of Access Regulation in the Australian Gas Sector Presentation to 2004 ACCC Conference, Gold Coast, Queensland 30 July 2004 30 July 2004
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 Slide Slide 2 2
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 Slide Slide 3 3
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 Slide Slide 4 4
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 Slide Slide 5 5
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 Slide Slide 6 6
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? Slide Slide 7 7
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 owners to negotiate access without AR • Increased efficiencies countered by need for users to be involved in negotiations Slide Slide 8 8
Other considerations � Rigidity through pre-existing contracts � Possible “leakage”: capture of benefits by non-regulated elements of supply chain Slide Slide 9 9
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 Slide Slide 10 10
Pipeline case studies $1,650 $1,600 $1,550 Optimal tariffs Optimal tariffs $1,500 DBNGP DBNGP between $1.26 between $1.26 $1,450 and $1.56/GJ and $1.56/GJ $1,400 $1,350 $1,300 $1,250 Pipeline Pipeline $1,200 Revenues Revenues $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 (NPV $m) (NPV $m) Optimal tariffs Optimal tariffs MSP MSP between $0.62 between $0.62 and $0.72/GJ and $0.72/GJ Slide 11 Slide 11 Pipeline tariff ($/GJ) Pipeline tariff ($/GJ)
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 Slide Slide 12 12
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 Slide Slide 13 13
Results from GasMark Slide Slide 14 14
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 Slide Slide 15 15
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%) Slide Slide 16 16
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 Slide Slide 17 17
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 Slide Slide 18 18
Lower bound economic impacts � 15 year NPV @ 7% Slide Slide 19 19
Upper bound economic impacts � 15 year NPV @ 7% Slide Slide 20 20
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 Slide Slide 21 21
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