The Australian Competition and Consumer Commission has granted final approval for the Central West Pipeline revised access arrangement lodged by the Australian Pipeline Trust.
"This decision demonstrates to the gas transmission pipeline industry and other regulated industries that the risks associated with greenfields projects (newly developed infrastructure without sufficient foundation contracts), such as the CWP, can be addressed under the current regulatory regime", ACCC Chairman, Professor Allan Fels, said today. "Most significantly, this has been achieved while setting tariffs at a moderate level.
"Under the initial access arrangement in which APT sought a return on equity of up to 19 per cent, users would have paid much higher natural gas transmission charges over the life of the assets than other gas users in regional NSW.
"The ACCC determined that the appropriate return on equity for the CWP is 15.4 per cent. This allowed return has now been adopted by APT in its revised access arrangement and is the basis on which tariffs will be set over the next ten years for the users of the region.
"However, the rate of return should not be considered in isolation but in light of other aspects of the access arrangement which specifically addresses the inherent risks associated with the project. The ACCC has approved a range of mechanisms that include an incentive to APT to earn a return substantially higher than the allowable return. For example, if APT is able to develop the market beyond its current forecast volumes and/or is able to achieve lower than forecast operating costs, then it can retain the benefits and therefore achieve a commensurately higher return than 15.4 per cent".
Other incentive based features of the framework include an extended regulatory period of ten years (although APT is able to seek an early review at any time) and provision for APT to capitalise early revenue losses so that they can be recovered once demand grows.
"The challenge for regulators is to ensure that a balance is achieved between producing efficient tariffs which allow gas users to compete and invest in other markets while also ensuring that the pipeline owner receives a fair return which will encourage future investment in the industry. The regulatory package for the CWP demonstrates the flexibility of the ACCC and the National Gas Code to balance these interests and achieve regulation which meets the specific needs and circumstances of a business", Professor Fels said.
"The return on equity of 15.4 per cent for the CWP compares very favourably with returns available on the domestic share market. The average return on equity from investing in the share market over the past ten years was 11.3 per cent,1 and the average return on Australian superannuation funds over the past three years was 10.4 per cent.2
"I note recent industry criticism regarding regulatory decisions on electricity and gas transmission businesses. In particular, it is claimed that the returns established by regulators are too low to encourage new investment in energy infrastructure.
"The CWP decision demonstrates that this criticism is unfounded.
"Despite arguments by industry to the contrary, the determinations provide a solid base for future investment in electricity and gas transmission and a secure future for the energy industry.
"Criticisms of regulatory decisions seem be to motivated by a desire to continue earning the sort of pre-regulation returns enjoyed by the energy transmission sector. They also provide a very good indicator that regulation of natural monopoly infrastructure in Australia is having the effect that was always intended. It is replacing monopoly prices with prices that are cost-reflective and fair, but at the same time allowing the regulated business to earn a commercial rate of return.
"The ACCC's regulatory approach allows a business to exceed the return on equity anticipated by the ACCC if the business is able to outperform its forecasts. In this way, the framework provides important incentives for businesses to operate more efficiently by allowing them to retain potential upside benefits.
"The ACCC is also mindful of the need to maintain incentives for efficient new investment. It is encouraged by the recent approaches being made to the ACCC by pipeline companies wishing to discuss a variety of regulatory approaches to planned new projects.
"The ACCC's decision on the CWP provides a good example of the regulatory framework's ability to accommodate and encourage new investment".
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1 Australian Stock Exchange, Fact Book 1999.
2 Mercer survey – 3 year average return on pooled superannuation funds.