Asset valuation, cost of capital, and access pricing in the Australian gas industry

Abstract

This paper examines a number of the issues raised in the restructuring, and proposed privatisation, of the Victorian gas industry from a government owned monopoly supplier to a market structure involving competition in several parts of the supply process and regulatory oversight of access arrangements for "natural monopoly" components. The focus of the paper is upon the determination of access arrangements encompassing the determination of target revenue and pricing rules for the distribution and transmission businesses. The paper outlines the nature of the proposed "target revenue" model and identifies a number of key issues which have been raised in attempting to implement the model. These involve both asset valuation and cost of capital considerations, and have engendered considerable controversy and public debate. Contributing to that controversy are a number of agency problems arising from the nature of the regulatory and privatisation process which the paper considers.