Maui Development Limited
158. Chapter 17 (Maui Development Limited (MDL)) discusses in detail the competition and cost benefit analysis undertaken for MDL, and the Commission's recommendations on whether control may and should be imposed on MDL.
Competition Analysis
159. In respect of the transmission market, the Commission has considered the competitive impact of interfuel competition, head-to-head competition with NGCT, long-term supply contracts and the regulatory regime and concludes that the constraint they provide on MDL's transmission services is limited. Accordingly, the Commission considers that the competition faced by MDL in the transmission markets in which it operates is limited.
Net Acquirers' Benefit
160. The Maui Gas Contract restricts the Maui pipeline to Maui gas alone. However the parties to the Contract have now reached an agreement to vary the Contract to allow for the carriage of non-Contract gas on the Maui pipeline, although priority will still be given to the carriage of Maui Gas which is subject to the Contract. MDL was not able to provide the Commission with revenue and expense data for cost benefit modelling. In the absence of detailed information, the Commission has focussed its analysis on the open access proposal, associated information, and the comparability of MDL with NGCT.
161. The access regime for non-Contract gas is still being negotiated and is currently in draft form. The Commission has given careful consideration to the draft open access regime for the Maui pipeline and possible prices for access. However, due to its draft status, it is not sufficiently certain to be used as a basis for assessing MDL's future pricing behaviour.
162. The Commission considers that the other significant transmitter of gas, NGCT, faces similar competitive constraints, and has underlying market power which reasonably approximates that of MDL. In the absence of reliable information from MDL which can be used to assess its future behaviour, the Commission has looked to NGCT as a guide.
163. The Commission's analysis has concluded that NGCT is earning excess returns and that there would be NAB from control. The Commission infers that there would also be NAB from controlling MDL. The Commission notes that it has calculated that control on NGCT may result in a reduction in its prices by around 3.5%, and concludes that a similar benefit might be achieved through control of MDL.
164. The Commission's view is that the requirements of s 52 of the Commerce Act are met for MDL, and that gas services supplied by MDL may be controlled.
Should Control Be Introduced
165. 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
166. The net efficiency costs to the economy of reducing excess returns for MDL are assumed to be the same order of magnitude as NGCT's i.e., around 30%. Thus, the cost of transferring each $1 of recoverable excess returns to consumers is likely to result in efficiency costs to the economy of around $0.30.
167. As noted above, the Commission assumes that control could reduce MDL's transmission prices by around 3.5%.
168. 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.
169. The Commission concludes that control should not be imposed on MDL.
Overall Recommendation
170. 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 MDL may be controlled.
- The Commission recommends that an Order in Council under s 53 of the Commerce Act to impose control on MDL under Part V of the Commerce should not be made, notwithstanding that the s 52 requirements for control are met.
Advice on Relevant Matters
171. 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 MDL should be strengthened and requests the Minister consider applying to MDL, a regime comparable to the targeted control regime applicable to electricity lines businesses under Part 4A.
172. 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.
173. 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.
174. 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 and bringing MDL into that regime.
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