A new report authored by Brattle economists on behalf of APA Group reviews integration in APA’s pipeline operations in Eastern Australia since the acquisition of Epic Energy in December 2012, and identifies the economic costs and benefits associated with integration.
Among the benefits quantified, the report finds that integrated ownership has resulted in cost savings of over $110m as the otherwise wasteful duplication of facilities has been avoided, as well as a further $40m of savings that will be realized if expectations of demand increases are borne out. In addition, operating APA’s pipelines centrally saves around $7m per annum in operating costs relative to independent operation of APA’s main Eastern Australia pipelines.
By combining the ownership of previously separate assets, integration (commonly through mergers and acquisitions) can give rise to benefits from economies of scale and scope, but can also give rise to costs if the integration increases market power. Costs could come from bundling and foreclosure, but there is no evidence that this is occurring for pipeline transportation in Eastern Australia. Costs could also come from monopoly pricing of pipeline transportation, but APA’s pipeline integration since 2012 described in this report has not increased the risk of monopoly pricing.
Since APA’s acquisition of Epic Energy, APA has been able to operate its pipeline assets in Eastern Australia as an integrated grid, allowing shippers to move gas across key routes in Eastern Australia using only APA’s pipelines, whereas previously it would have been necessary to contract with at least two pipeline owners. This provides benefits to shippers in terms of reduced transaction costs and improved service quality (for example, lower imbalance charges and more efficient scheduling). Additionally, integrated ownership allows APA to operate the grid more efficiently than multiple independent owners—i.e., at lower overall economic cost. Integration also allows APA to offer services across several assets—services which could not be provided by independent owners.
Besides the above operating and capital cost savings, integration has allowed APA to provide park-and-loan services (akin to storage services) that could not have been provided by independently owned pipelines. The report estimates that park-and-loan services provide an economic benefit of between $7.5m and $25m annually. Park-and-loan was used extensively during the commissioning phase of the LNG facilities in Queensland, creating an economic benefit of at least $10.5m and more likely around $35m in avoided costs in 2015.
In addition to these quantified benefits, integration has brought service quality improvements. Central operation of APA’s pipelines has also resulted in a system that can more quickly and effectively respond to shipper needs, for example through park-and-loan services at a fraction of the cost of imbalance charges.
The report, Benefits and Costs of Integration in Transmission/Transportation Networks: An Application to Eastern Australia Gas Markets, is authored by Brattle Principals Toby Brown, Paul Carpenter, and James Reitzes, and Senior Associates Jeremy Verlinda and Neil Lessem. It is available for download below.