3. Background
3.1 Light-Handed Regulation of the Gas Industry
9. The Regulations form part of the Government's "light-handed" regulatory regime for the gas sector. This regime comprises:
- use of the Commerce Act 1986 to prohibit anti-competitive behaviour;
- extensive information disclosure, under the Gas (Information Disclosure) Regulations 1997; and
- the ability to apply further regulation, such as introduction of price control under the Commerce Act, if market dominance is abused.
3.2 Objectives of the Gas (Information Disclosure) Regulations
10. Information disclosure regulations are intended to encourage self-regulation by encouraging pipeline owners, where they are in a position of market dominance, to avoid the risk of price control or court proceedings under the Commerce Act. They do this by making transparent the conduct and performance of those pipeline owners' activities. This means that information disclosure regulations should be designed to assist identification of whether pipeline owners with market dominance are:
- pricing inefficiently - i.e. earning excessive profits and/or recovering excessive costs (monopoly pricing); and/or
- engaging in anti-competitive conduct, by:
- failing to provide cost-based access to their natural monopoly services; and/or
- using their non-contestable services to subsidise their contestable activities; and/or
- providing an inadequate service quality (e.g. in terms of reliability and security).
3.3 Summary of the Current Gas (Information Disclosure) Regulations
11. Six categories of information are currently required to be disclosed by pipeline owners with market dominance:
- Financial statements and performance measures: Financial statements for wholesale (in the case of the Natural Gas Corporation - NGC), transmission, distribution and retailing businesses and a prescribed set of financial performance measures must be disclosed within 5 months of the end of each financial year (Regulations 6, 7 and 15-19).
- Methodologies for allocation of costs, revenues, etc: The methodologies used in preparing financial statements must be disclosed within 5 months of the end of each financial year (Regulation 21).
- Contracts: Certain details about contracts for the conveyance of gas. In addition, NGC must disclose certain details about its contracts for the wholesale supply of gas (Regulations 8-14).
- Line charge methodologies: Methodologies used to determine pipeline charges must be disclosed within 5 months after the beginning of each financial year; any changes to methodologies must be disclosed within 1 month of that change (Regulation 20).
- Line charges: Any company which invoices any consumer for a pipeline charge is required to disclose that charge and related information within 3 months after the beginning of each financial year. In addition, any changes to pipeline charges must be disclosed within 2 months of first invoicing any customer for the new charge (Regulations 24-27).
- Pipeline capacity: Details of pipeline capacity must be disclosed within 2 months after the end of each financial year (Regulation 23).
3.4 Review of the Effectiveness and Value of Information Disclosure in Gas
12. In addition to comments on the proposed amendments in this paper, the Ministry would welcome any overall comments on the ongoing effectiveness and value of information disclosure in gas, assuming that the proposals in this paper are adopted. The following questions are intended to focus discussion:
- Do gas pipelines have natural monopoly characteristics?
- Does robust information disclosure help discourage pipeline owners from taking monopoly rent (excessive costs or excessive profits)?
- Is earning profits greater than the weighted average cost of capital (WACC) evidence of abuse of market dominance or monopoly, and is this a concern (a) in the short term, and (b) the long term?
- Does the requirement to disclose rates of return in the regulations inevitably mean that the information disclosure regime has a "rate of return" focus? Is this a problem? If so, what could be done to mitigate it?
- Is there a clear distinction between "natural monopoly service" and "contestable service" and are these adequately reflected in the definitions in the information disclosure regime? Could any improvements be made?
- Does the information disclosure regime enhance cost-based access to "natural monopoly services"?
- Is cross subsidisation between natural monopoly and contestable activities an actual or potential problem in the industry?
- Will the proposed mandatory ODV methodology for fixed assets help to more accurately measure pipeline profits and expose monopoly rent?
- Will the proposed mandatory asset management plans enhance reliability and security of supply over the long term? What alternatives are available?
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