Joining pipes

Competition in infrastructure is more nuanced

APGA CEO Steve Davies has been doing some more thinking about competition in the pipeline industry and he's posted an item on LinkedIn.

In my last post I wrote about the disconnect between the ACCC’s views on the level of depreciation of pipeline assets and what was reported in October 2018 by pipeline operators under the new information disclosure regime.

There’s another reason the ACCC shouldn’t be so surprised at the level of capital recovery: competition. Now, of course, competition in infrastructure markets is more nuanced than competition in markets for most goods. Infrastructure is expensive and that means the market for infrastructure services has a high barrier to entry. In many a regulator’s mind this means most, if not all, infrastructure assets are monopolies with extensive market power.

This is not the case. Let’s looks at pipelines. Pipeline services face competition from other pipelines, other energy options and LNG import terminals to name a few. In an environment of high gas prices, the competition from other energy options and LNG import terminals is higher than it has ever been. If it is deemed that the competition for any particular pipeline is insufficient to deliver good market outcomes, the regulatory framework of the National Gas Law provides oversight. However, I think that these days there is a tendency to forget that regulation, rather than being a good outcome, is merely the least-worst outcome. The outcomes delivered by any level of competition are typically considered superior to those delivered by regulation.

Regardless of what one thinks of the level of competition faced by pipelines or the ability of regulation to deliver reasonable outcomes, one key fact that is not in dispute is the level of competition faced by pipeline operators when building a new pipeline.

New pipelines are built in a highly competitive environment. This was acknowledged by the ACCC in the final report of the East Coast Gas Inquiry (p97). Those in the industry experience this every day. Pipeline operators compete to build new pipelines. Contractors compete to win the construction contract. Suppliers and service provider compete to provide goods and services to a project. This competition ensures the price to build a pipeline is as low as possible.

One of the key variables pipeline operators can compete on is capital recovery and long-term risk. That is, how quickly does an operator need to recover its investment and how much of that recovery needs to happen through the foundation contract. Quite clearly, in a competitive environment, the pipeline operator that builds a new pipeline is the operator that was willing to recover its investment more slowly and with more risk.

This means it should be far from surprising that some pipelines have not recovered much of their original capital investment.

Aside from my frustration at the ACCC; what I find particularly concerning is that the ACCC chooses to focus on its surprise at information disclosed in October last year. In none of the speeches it has delivered this year has it provided a view on the outcomes being delivered by the new information disclosure and arbitration regime itself. Shouldn’t this be what the ACCC is focussing on?

By all accounts, the new regime is delivering improved outcomes for gas users and is working well. At APGA’s request, in the December 2018 Interim report, the ACCC reported the number of contracts that have been modified or entered into in the first 13 months of the regime. The numbers are good: 22 new contracts and 81 contract modifications and renewals have been executed. Given there has been only one arbitration in this time, this is further evidence the regime is delivering the right outcomes for users.

Why isn’t the ACCC talking about this in its speeches as well?

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