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National competition policy and the natural gas industry.



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Nationa' Competition POIIkV The Natural has Industry

Notes for presentation to the Australian Financial Review Conference on National Competition Policy

Tuesday 26 October 1993

Sydney

Ian C Woodward Chief Executive The Australian Gas Association

Ian A Bruce Research Manager The Australian Gas Association

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Overview

Preamble

• Gas Industry size and recent growth

• Gas Industry ownership structure and natural monopoly elements

• Investment projection '

• AGA Vision Statement

Competition Policy

• National Gas Strategy

Pipeline Access Code

• National Competition Policy Review

Structural Separation

Access to Essential Facilities

— Monopoly Pricing

• National Regulatory Framework

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Gas Industr y Size and Recent Growth

Despite difficult economic circumstances, and the flow on effects of recession, natural gas

consumption increased 3.2 per cent in 1992.

In 1992, the gas distribution industry served 2.5 million customers, had sales of more than

$2.28 billion and employed 10,000 Australians directly.

The Australian Bureau of Statistics recently revealed that the value added worth of domestic

gas operations grew by 16 per cent in 1991-92 — twice the growth level of electricity.

AGA studies show that gas remains the most economical energy source in Australia in

absolute terms. Australian gas prices are amongst the lowest of OECD countries.

The export market in LNG, gas technology and appliance services continues to expand.

Gas Industry Ownership Structure and Natural Monopoly Elements

Natural gas supply can be broken down into four main component industries: exploration,

production, transmission and reticulation. The Australian gas industry, unlike its main

competitor, electricity, is largely in private hands. Gas exploration and production is almost

devoid of government ownership, whilst governments are substantial players in gas

transmission and distribution. For example, as of today, governments own 6600 km of

Australia's main natural gas transmission pipelines, or about 67 per cent. When the

Commonwealth Government sells The Pipeline Authority, as it intends, the figure will fall to

48 per cent.

In reticulation, governments now own 51 per cent of the nation's 59 000 km of gas

distribution mains.

The massive scale of investment in gas processing, transmission and distribution

infrastructure makes those activities natural monopolies. Additionally, the practical

difficulties in duplicating reticulation mains in built up areas reinforces that segment's status

as a natural monopoly.

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Investment Projection

Providing regulatory and political changes are not adverse, the industry expects to invest

over $13 billion into Australia over the next decade. This includes $1.4 billion in gas

transmission and $1.8 billion in reticulation. The bulk of the investment is anticipated to be in gas production ($6.3 billion) and new LNG expo rt facilities ($3.5 billion).

AGA Vision

The AGA Vision is an ambitious one. Our target is to have natural gas providing at least 20 per cent of Australia's primary energy requirements by the year 2000. In this context, I am talking about natural gas as a reticulated fuel which also includes towns gas and LPG.

AGA believes gas is Australia's preferred fuel for a clean, safe, economically secure energy future.

Our Association is unique in having adopted a quantifiable target as a Vision for its industry.

It is not just a motherhood statement, but a measurable, definite target for action.

COMPETITION POLICY

Competition is a means to an end rather th an and end in itself. The end is of course increased wealth and prosperity through lower p rices for our goods and se rv ices on world markets. Without this competitive advantage — without increasing our productivity at a rate greater

than our trading partners — we will not be able to grow fast enough as a nation, to ensure that our children have meaningful employment.

Competition has always been a force affecting the gas industry. Gas suppliers have spent many years ca rv ing out an increasing share of Australia's energy cake — winning business by using gas in applications previously met by electricity, coal fuel oil — or other gas forms.

The competitive driving forces in the energy markets and within gas markets will continue to drive efficiencies in the industry.

Natural gas has been an active primary fuel in Australia for less than 25 years. At this early

stage of maturity the industry remains predominantly one supplier, one pipeline, one

distributor/marketer - in each state market. We are heavil y regulated.

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National Gas Strategy

The AGA has supported the processes undertaken by the Federal Government in developing

the National Gas Strategy in 1991 and we supported the outcome.

One of the key elements of the National Gas Strategy was achieving free and fair interstate

trade in gas. To assist in this, in collaboration with other industry associations, and in

consultation with government and the Trade Practices Commission, AGA has developed a

Code of Practice for Access to Interstate Gas Transmission Pipelines. The Code provides a

basis for negotiation for access. It also has an independent, low-cost conciliation procedure

in the event of disputes between negotiating parties.

National Competition Policy Review

Another key element of the National Gas Strategy was light-handed regulation. The National

Competition Policy Review report has provided a useful focus which has relevance to the gas

industry along with all other parts of the economy.

The AGA is yet to finalise a detailed response to the Hilmer recommendations for reasons I

will elaborate upon in a moment. But clearly, the AGA supports much of the thrust of the

report. Issues such as the desirability of exposing government business enterprises to general competition law, many of the suggestions for structural reform of public monopolies, access

to essential facilities and the commentary on monopoly pricing issues are important matters

for debate and consideration. In principle, the proposals for access to essential facilities are

not at odds with the intent of the industry's Pipeline Access Code.

It is also important to recognise, as Hilmer does, that competition has an upstream and

downstream dimension. It requires genuine competition at both ends of the pipeline to achieve the overall policy objectives.

It is worth noting that under Hilmer's proposed regime, access is balanced by public interest

and operational factors. The balance of interests between investment, consumers and industry

is considered. The preparedness to consider gas transmission in the same framework as other

natural monopolies like electricity, telecommunications and water supply networks is

reassuring. It will be important in establishing the national competition policy that the gas

industry is not disadvantaged by bringing it under general competition law before its

competitors, especially electricity transmission and distribution.

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Much remains to be done before an effective national competition policy is implemented,

and AGA will continue to monitor developments closely in this area.

It would be nice to be able to wind up on the matter of light-handed regulation and

competition at this point, but there is more. 1 am afraid that in an industry like ours the path

of industry government relations is bound to have some rocky patches.

National Regulatory Framework

Even before the voluntary Code of Practice on Pipeline Access which I mentioned earlier had

been completed, the Minister for Resources had announced the Government would legislate

by the end of this year to regulate access to interstate gas pipelines. To say that AGA and its

sister associations were surprised by this move, coming as it does on top of the development

of the industry Code, and the National Competition Policy Review — would be an

understatement.

The Commonwealth's motivation appears to be basically to promote the sale of the Moornba

to Sydney Pipeline. But it appears to be seeking to do so in a way which will affect any

further interstate gas pipelines and without many of the safeguards that the Hilmer Report

recommended be built into the treatment of access to essential facilities and monopoly

pricing under general competition law. Whilst others have had the luxury of assessing the

Hilmer Report as a prime element for developing competition policy, the gas industry has

had its attention diverted by the Government's proposal to impose industry-specific

legislation on it. But there are three conclusions that AGA has drawn about the access to

essential facilities component of the National Competition Policy Review in this context:

• the Hilmer recommendations represent a broad economy wide — energy market wide

approach rather than the industry specific approach;

• the Code of Practice and the proposed Hilmer regime consider competition for gas

pipelines based upon issues such as developing capacity; the owners of contracted

capacity entitlements; gas quality and safety; investment risk and financial viability;

and

• it is plain that, notwithstanding the Government's claims to the contrary, the gas

industry -- unlike its competitors — is going to be subjected to two destablising

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rounds of regulatory changes (the word "reform" is a decided misnomer in this

context):

one when the interstate gas pipelines legislation comes into effect;

— the second when someone (and I don't envy them) unravels the first legislation

and finally brings the gas industry into line with general competition law at

the Commonwealth level.

The Association is doing all it can to secure the most favourable outcome from the

Government's desire to pursue a legislative route and to ensure industry self-regulation is

maximised. AGA has welcomed the opportunity for continuing consultation and dialogue

with Government in this matter. However, I reiterate the industry position supporting light-handed regulation. We want minimum bureaucracy and maximum consumer benefits.