There was no clearer current example of the damaging impact of allowing gas pipelines to exercise market power than what was currently happening in Western Australia over the Dampier to Bunbury Gas Pipeline, an ACCC Commissioner, Mr Ed Willett, said today.
"Bids for the purchase of the Dampier to Bunbury Gas Pipeline close on Friday", he told the 2004 Energy Reform Summit in Sydney. "According to media reports, the sale process may fail, firstly, the financial institutions that currently control the pipeline are insisting that their investment of $1.85 billion be repaid in full, and secondly bidders are struggling to offer much more than the regulated asset value of $1.55 billion.
"The institutions have some leverage (reflecting the pipeline's market power) because they appear to be making the sale at their price a condition of the much needed expansion of the pipeline, which will cost around another half billion or so.
"One problem here is the lack of clarity in the Gas Code about whether expansions of a covered pipeline should be automatically regulated. The Productivity Commission has addressed this issue and recommended in the affirmative. If this recommendation was in place today then the current owners of the DPNG would be obliged to expand the pipeline if shippers were willing to pay the cost of that expansion, and the problem in Western Australia would be easily resolved.
"But the real problem in Western Australia is that Epic Energy, backed by the financial institutions, paid around one billion dollars too much for the DPNG believing that, somehow, the clear implications of coverage of the pipeline under the Gas Code would not apply to them.
"A second pipeline to meet Western Australia's needs could be built for around $1.2 billion. If it were not for the costs of a two year wait faced by energy consumers in the Perth region who desperately need more power, a second pipeline could be the best solution.
"Regardless, the financial institutions may have to face up to the fact that, had they been investing into a competitive market, funding the acquisition of an asset where the buyer paid around a billion dollars too much would quickly mean substantial losses for all involved.
"Coverage of a pipeline under the Gas Code should mean that investors face similar disciplines and incentives".