NGCT
81. Chapter 12 (NGC Holdings Ltd - Transmission (NGCT)) discusses in detail the competition and cost benefit analysis undertaken for NGCT, and the Commission's recommendations on whether control may and should be imposed on NGCT.
Competition
82. In respect of the transmission market, the Commission has considered the competitive impact of interfuel competition, head-to-head competition with MDL, long-term supply contracts and the regulatory regime and concludes that the constraint they provide on transmission service providers is limited. Accordingly, the Commission considers that the competition faced by NGCT in the transmission markets in which it operates is limited.
Net Acquirers' Benefit (NAB)
83. In determining whether control may be imposed, the Commission assesses the NAB of imposing control. The results of the Commission's base case and sensitivities of the NAB test over the period 1997 - 2008 are presented below.
Table 5: NGCT| Scenario | NAB Annuity ($000) |
| Base case | 2,364 |
| High and low WACC (75th and 25th percentile) | -263 to 4,913 |
| Higher growth in forecast period [ ] | 3,505 |
| High and low unrecoverable excess return (25% and 10%) | 2,090 to 2912 |
| Common cost reductions (10-30%) | 2,738 to 3,486 |
| Low and high missing market elasticity | 2,115 to 2,488 |
| High and low missing market output effect | 2,115 to 2,613 |
84. Overall, sensitivity testing on NGCT's NAB indicates that net benefit to acquirers would remain for all but one of the sensitivities tested (75th percentile of WACC).
85. The Commission's view is that both requirements in s 52 of the Commerce Act are met for NGCT, and that gas services supplied by NGCT may be controlled.
Should Control Be Introduced
86. The Commission considers the following additional matters in assessing whether control "should" be introduced: the net efficiency cost to the economy of reducing excess returns; the size of the benefits; and the impact of a recommendation not to control.
87. The net efficiency costs to the economy of reducing excess returns for NGCT were $1.096 million in annuity terms in the analysis period. The recoverable excess returns were $3.629 million, giving a transfer cost ratio of 30% (i.e., the cost of transferring each $1 of recoverable excess returns to consumers involves a net cost to the economy of $0.30).
88. NGCT earned an average return of approximately 9.1% over the analysis period. The NAB of NGCT suggests that transmission prices could be reduced by as much as 3.5% which would result in a reduction in delivered energy prices to retail customers (assuming transmission constitutes 10% of final price) in the order of 0.35%. Alternatively, the reduction in transmission charges would save the average direct customer $213,000. Such savings would likely be passed on to end consumers.
89. The Commission considers that if control were not imposed, the threat of control might be weakened which could result in future increases in prices from current levels.
90. The Commission concludes that control should not be imposed on NGCT.
Overall Recommendation for NGCT
91. The Commission's recommendations are set out below.
- The Commission advises that the requirements of s 52 of the Commerce Act for the introduction of control have been met and therefore the gas services provided by NGCT may be controlled.
- The Commission recommends that an Order in Council under s 53 of the Commerce Act to impose control on NGCT under Part V of the Commerce should not be made, notwithstanding that the s 52 requirements for control are met.
Advice on Relevant Matters
92. Control under Part V is high cost relative to other regulatory options. The Commission notes that the Minister has a wider discretion than the Commission to consider other matters including alternatives to control under Part V. The Commission considers the regulatory constraints on NGCT should be strengthened and requests the Minister consider applying to NGCT a regime comparable to the targeted control regime applicable to electricity lines businesses under Part 4A.
93. While the Commission has not carried out a detailed analysis of the costs and benefits of applying to the gas pipeline businesses a regime analogous to the targeted control regime applying to the electricity lines industry under Part 4A, the Commission has considerable experience of the implementation and operation of the Part 4A regime. The Commission's view is that such a regime has the potential to offer a more favourable trade-off between costs and benefits of regulatory intervention than control under Part V.
94. If the Minister were minded to consider adopting a regime comparable to the Part 4A targeted control regime applying to electricity lines businesses, consultation with interested parties as to its relative merits may be necessary or desirable.
95. In addition, the Commission notes the poor quality of business specific data available through the Gas (Information Disclosure) Regulations 1992. The Commission considers there would be substantial benefits from requiring the businesses to disclose consistent and robust information and therefore, requests that the Minister consider strengthening the gas pipeline information disclosure regime.
Other Matters for the Minister to Consider
96. The Commission has not considered the implications of Vector's proposed acquisition of NGC. The Minister may need to consider the implications of that acquisition should the acquisition proceed.
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