Energy Minister Pete Hodgson today released a discussion paper on the state of the New Zealand gas sector.

ACIL Consulting was appointed to examine whether the gas sector is meeting the Government’s objective that natural gas is delivered to users in an efficient, fair, reliable and sustainable manner.

The report reviews the current regulatory regime for gas companies in the light of its findings.

The consultancy found that the gas wholesale market, although adequate for the present, will be less suitable in the future as the Maui gas field declines.

It also concluded that there may be monopoly pricing in gas transmission and distribution.

“An efficient gas sector is important for the New Zealand economy” Mr Hodgson said. “This paper is intended to provoke informed comment from New Zealanders on issues concerning the gas industry, to help the Government consider what action it might take”.

Submissions on the gas review are due by 31 January 2002, with an opportunity for cross submissions by 22 February 2002. Submissions will be posted on the Ministry of Economic Development website.

Mr Hodgson said the Government had not formed any views on ACIL’s findings. The release of the report did not imply Government agreement or disagreement with its conclusions.

A summary of ACIL’s findings is attached.

The ACIL report is available on the Ministry of Economic Development website at: www.med.govt.nz.

ACIL conclusions

 ACIL concludes that there may be monopoly pricing in transmission and distribution and proposes enhancements to the existing regulatory regime that will allow more definite conclusions to be reached on this in the next few years.

 ACIL also notes that historical circumstances (reliance on Maui, close involvement in development of the gas market by the government in the 1970s and early 1980s) have resulted in a wholesale market that has been adequate but will be less suitable in the future as the Maui gas field declines. New arrangements for gas wholesaling will therefore be needed and the industry should be encouraged to develop these.

 The short term measures proposed by ACIL to address monopoly power are:

 information disclosure should be enhanced to include data on retail switching rates;
 current information disclosure on gas transmission and distribution should continue;
 asset valuation could continue to be based on Optimised Deprival Valuation (ODV), but the methodology for calculation of asset valuation should be mandated and a one-off independent exercise undertaken to ensure the asset valuation is valid;
 the Government could encourage the Natural Gas Corporation (NGC) to separate its transmission activity into a separate legal entity, accompanied by ownership restructuring along the lines undertaken by NGC’s Australian parent company;
 a review of NGC’s approach to transmission pricing and measures to provide for gas injection at various points and capacity rights reservations could be encouraged; and
 the Government should encourage industry participants to set up a voluntary industry body to address technical issues relating to competition.
 ACIL suggests that the Government could encourage participants to renegotiate the Maui contract, to address the current lack of access to the Maui pipeline for transporting non-Maui gas.

 ACIL concluded that there are technical reasons for hydro spill and there is unlikely to be an economic incentive to burn gas in preference to hydro.

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