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Competition

144. In relation to competition faced by Wanganui Gas, the Commission has considered the competitive constraints arising from interfuel competition, the threat of by-pass, long-term supply contracts and the regulatory regime and concludes that the constraint they provide on Wanganui Gas is limited. Accordingly, the Commission considers that the competition faced by Wanganui Gas in the markets it operates in is limited.

Net Acquirers' Benefit (NAB)

145. 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 for the NAB test over the period 1997 - 2008 are presented below.

146. Overall, sensitivity testing on Wanganui Gas's NAB indicates that net benefit to acquirers would remain for all sensitivities tested.

147. The Commission's view is that the requirements of s 52 of the Commerce Act are met for Wanganui Gas, and that gas services supplied by Wanganui Gas may be controlled.

Should Control Be Introduced

148. 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

149. The net efficiency costs to the economy of reducing excess returns for Wanganui Gas were $0.374 million in annuity terms in the analysis period. The recoverable excess returns were $0.527 million, giving a transfer cost ratio of 71% (i.e. the cost of transferring each $1 of recoverable excess returns to consumers involves a net cost to the economy of $0.71).

150. Wanganui Gas earned an average return of approximately 11.8% over the analysis period. The NAB of Wanganui Gas suggests that its distribution prices could be reduced by as much as 0.2% which would result in a reduction in delivered energy prices (assuming distribution constitutes 40% of final price) to retail customers in the order of 0.1%. Alternatively, the reduction in distribution charges would save the average direct customer $1 or a 0.2% reduction in their annual line charges.

151. 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.

152. The Commission concludes that control should not be imposed on Wanganui Gas.

Overall Recommendation

153. 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 Wanganui Gas may be controlled.
• The Commission recommends that an Order in Council under s 53 of the Commerce Act to impose control on Wanganui Gas under Part V of the Commerce should not be made, notwithstanding that the s 52 requirements for control are met.

Advice on Relevant Matters

154. 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 Wanganui Gas should be strengthened and requests that the Minister consider applying to Wanganui Gas, a regime comparable to the targeted control regime applicable to electricity lines businesses under Part 4A.

155. 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.

156. 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.

157. 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.