An investigation into creating a right of third party access to gas pipelines

Morton, Euan. (1994). An investigation into creating a right of third party access to gas pipelines Honours Thesis, School of Economics, University of Queensland.

       
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Author Morton, Euan.
Thesis Title An investigation into creating a right of third party access to gas pipelines
School, Centre or Institute School of Economics
Institution University of Queensland
Publication date 1994
Thesis type Honours Thesis
Total pages 128
Language eng
Subjects 14 Economics
Formatted abstract The National Competition Review Committee was appointed in 1992 to consider Australia's competition policy. The Committee produced a report for the Commonwealth government in 1993 (the "Hilmer Report"). One recommendation of this report was that a right of access to essential facilities be available to third parties. The Hilmer Report provided little further guidance on how a regime should operate in practice. The purpose of this thesis is to conceive such a regime for gas pipeline infrastructure.

The physical and economic characteristics exhibited by gas pipelines are thoroughly investigated. This is considered an important step of any attempt to suggest a regulatory environment for an industry. The cost of capital for a pipeline and the economies of scale potentially available were the most significant economic characteristics of gas pipelines.

It was shown that gas pipelines will typically exhibit subadditivity and transray convexity and should generally be classed as a natural monopoly. The owners of gas pipelines are shown to possess considerable latitude in sustainable price setting. The policy prescriptions of the contestability literature were thought not to be applicable for gas pipelines.

Alternative regulatory regimes for gas pipelines were considered. It was thought that judicial regulation of access to essential facilities would be undesirable because of the complex and technical economic issues that tend to arise.

The experience of third party access in the United States, Canada, the United Kingdom and New Zealand was discussed. An access to essential facilities regime is unlikely to facilitate the evolution of more competitive markets if the owner of the essential facility remains able to dominate the industry.

The interrelationships between asset values, rates of return and prices were shown. Consequently, asset values should be derived on the basis of current replacement cost. The capital asset pricing model provides a framework within which to assess the cost of capital faced by a pipeline owner. A cost of capital for the South-West Queensland to Wallumbilla pipeline and an optimal diameter for this pipeline are derived which provides a basis to determine the value of the asset base for the pipeline.

Indicative prices according to various pricing rules, including discounted weighted average tariffs (which equates with a measure of average cost of transmission throughout the useful life of the pipeline), stand alone costs, marginal cost pricing, Ramsey pricing, non-linear (or multi-part) tariffs and opportunity cost pricing are assessed for varying levels of throughput. Informational limitations are significant.

A regulatory framework is conceived which:
• creates incentives for a pipeline owner to maximise throughput and operate efficiently; and
• allows the pipeline owner to set efficient (multi-part) tariffs which satisfy an equity test and hence offer non-discriminatory on access fair and reasonable terms.

The thesis concludes by emphasising that creating a third party access regime will only be justified where it increases competition in upstream or downstream markets, which may not occur if these markets are fundamentally uncompetitive.


 
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