Issues
Paper

Proposed Access Arrangement lodged by
Epic Energy South Australia Pty Ltd
for the Moomba to Adelaide Pipeline System

September 1999

	Commission File No:  CR99/53
Commission and Code Registrar Application No: GR9902

Preface
On 1 April 1999 the Commission received an application from Epic Energy South Australia Pty Ltd (Epic Energy) for approval of a proposed access arrangement for its Moomba to Adelaide Pipeline System (‘MAPS’ or ‘MAP’).  Epic Energy subsequently made a number of corrections and editorial revisions to the documents, lodging the revised set of documents on 16 April 1999, after which the public documents were placed on the ACCC Website.  
The application was submitted under section 2.2 of the National Third Party Access Code for Natural Gas Pipelines Systems (the Code), following the approval by the Commission last year of an extension of the lodgement date.  Epic Energy lodged access arrangement information for MAPS with its application.  In those documents information considered by the company to be commercially sensitive or confidential has been deleted.  Epic Energy has provided more detailed information to the Commission.  The Code’s requirements for access arrangement information, which are intended to assist the regulator and interested parties to assess the proposed arrangement, are set out in sections 2.6 – 2.8 of the Code.  
MAPS is a transmission pipeline system owned and operated by Epic Energy.  The system connects the Cooper Basin production and processing facilities at Moomba to markets for natural gas in Adelaide, Port Augusta, Whyalla and other offtake points, including Angaston, connected to the trunkline by laterals.  
The access arrangement describes the terms and conditions on which the company will make access to its pipeline available to third parties.  The access arrangement information explains how the proposed terms and conditions of access have been devised.  The Commission will assess the access arrangement and access arrangement information against the principles in the Code.  Following an extension of the assessment period decided on by the Commission, the date by which a final decision is at present due is 1 December 1999.  
The Commission has deferred its Issues Paper and invitation to make submissions on the proposed access arrangements for MAPS until now because it has been involved in discussions and correspondence with Epic Energy in relation to the existing haulage agreements for MAPS, which limit access to the pipeline until the agreements expire by 1 January 2006.  This issue is explained in section 1.2 of Chapter 1, below.  
Epic Energy owns and operates the separate South East Pipeline System originating at production and processing facilities at Katnook, South Australia, and serving the Mount Gambier distribution system and industrial sites in the region.  Epic Energy also operates the Riverland Pipeline System owned by Envestra Limited.  Those two systems are covered separately by the Code and, as such, separate access arrangements are due to be lodged in the future by Epic Energy and Envestra respectively.  Epic Energy’s treatment of revenues and costs arising from these and other activities of the Epic Energy group of companies is explained in the access arrangement information for MAPS.  
Interested parties may make submissions on any issues raised by, or relevant to, the proposed MAPS access arrangement.  Parties making submissions are free to identify other relevant issues.  Please make your submissions in writing.  The application and submissions by interested parties will be publicly available on public register files maintained by the Code 
Registrar and Commission, and Epic Energy will have the opportunity to comment on public submissions.  
If you include in your submission information that is of a confidential or commercially sensitive nature, it should be clearly marked as such.  Under the Code (section 7.12), the regulator (the Commission) must not disclose such information to any person nor to the Code Registrar.  However, information may be disclosed if the regulator is of the opinion that disclosure would not be unduly harmful to the legitimate business interests of the service provider, a user or a prospective user.  Therefore if you wish to claim confidentiality or commercial sensitivity, please explain the reasons and identify the legitimate business interests that would be harmed by public disclosure of the information.  
It would assist the Commission if two hard copies of each submission could be provided and a copy also supplied in any electronic format compatible with Microsoft Word 97 for Windows.  If you claim confidentiality for part of a submission, please provide hard and electronic copies in a ‘public’ and a ‘confidential’ version.  
Where software permits, to name electronic documents a useful convention to follow would be: ‘Public [or Confid] company name date’.  For example: ‘Public Gasgen 240999.doc’.  To avoid potential confusion over the date of submissions, please assist by avoiding use of automatic date selection and update facilities when preparing electronic versions of submissions and covering letters.   
Please address submissions as follows: 
Mr Mark Pearson
General Manager, Gas
Australian Competition and Consumer Commission
P O Box 1199
DICKSON   ACT   2602

Fax: 02 6243 1199
E-mail: katarina.glavinic@accc.gov.au
In your submission, please quote reference numbers ‘CR99/53’ (which is the Commission file number) and ‘GR9902’ (which is the application registration number used by the Code Registrar and Commission).  

Submissions are due by close of business 
Friday, 8 October 1999.  
	
Further information
Copies of the proposed access arrangement, access arrangement information and of an Epic Energy letter dated 16 July 1999 varying the proposed length of the initial access arrangement period, are freely available from the ACCC Website at http://www.accc.gov.au (under ‘Gas’).  
Photocopies of the above documents or copies on computer disc may be obtained from the Commission by contacting Ms Katarina Glavinic (phone 02 6243 1274, fax 02 6243 1202, e-mail katarina.glavinic@accc.gov.au).  There is a $5 fee for discs, while the fee for photocopies is a total of $20.  
Requests for photocopies only of these documents may also be directed to the Code Registrar in Adelaide (Level 19, Wakefield House, 30 Wakefield Street, Adelaide 5000; phone 08 8226 5786, fax 08 8226 5866).  Fees applicable will be according to the Code Registrar’s determination.
The ACCC Website will be updated as additional information becomes available.  However, because of space limitations, while a list of submissions will be placed on the Website after the closing date, submissions will not themselves be placed on the Website.  
Please direct requests to the Commission for hard copies only of submissions to Ms Hoa Nugent (phone 02 6243 1017, fax 02 6243 1199, e-mail hoa.nugent@accc.gov.au).  Requests to the Code Registrar for hard copies of submissions should be made to Mr Kym Jervois (phone 08 8226 5786, fax 08 8226 5866).  
While submissions may be inspected free of charge, a fee is payable for copies of them.  However, on request Ms Glavinic of the Commission will arrange to e-mail electronic copies of public submissions free of charge to parties that have themselves already lodged submissions.  Please contact Mr Peter Le Mesurier (phone 02 6243 1255, fax 02 6243 1205, e-mail peter.lemesurier@accc.gov.au) if you have any questions or want to discuss anything further.  

Contents

1.	Introduction	1
1.1	Purpose of paper	1
1.2	Key issues for assessment	1
1.3	The assessment process	6
2.	The South Australian gas industry structure, market and regulatory framework	9
2.1	Industry structure	9
2.2	The gas market	11
2.3	Regulatory framework for pipelines	12
3.	Criteria for assessing access arrangements	15
4.	Compliance with the Code	17
4.1	The content of the access arrangement	17
4.2	Information disclosure	17
4.3	Services policy	18
4.4	Trading policy	20
4.5	Queuing policy	20
4.6	Extensions/expansions policy	21
4.7	Terms and conditions	22
4.8	Commencement and review of access arrangement	23
4.9	Ring fencing	24
4.10	Utilization of capacity	25
5.	Pricing principles and reference tariffs	27
5.1	Operations and maintenance costs	28
5.2	Initial capital base	29
5.3	Working capital, depreciation and revaluation of the capital base	30
5.4	Rate of return	32
5.5	Revenue requirement	39
5.6	Cost allocation and tariff structure	40
5.7	Incentive mechanism	42
5.8	Performance indicators	43

Abbreviations and glossary of terms

COAG	Council of Australian Governments	
Code	National Third Party Access Code for Natural Gas Pipeline Systems	
Commission	Australian Competition and Consumer Commission 	
Covered Pipeline	pipeline to which the provisions of the Code apply	
CPI	Consumer Price Index	
Epic Energy	Epic Energy South Australia Pty Ltd	
GJ	gigajoule	
MAPS or MAP	Moomba to Adelaide Pipeline System	
MMC	Monopolies and Mergers Commission (UK) – now known as the ‘Competition Commission’	
MSPS	Moomba to Sydney Pipeline System	
NGASA	Natural Gas Authority of South Australia	
NGPAC	National Gas Pipelines Advisory Committee	
PASA	Pipelines Authority of South Australia	
PJ	petajoule (equal to 1,000,000 GJ or 1,000 TJ)	
SAIPAR	South Australian Independent Pricing and Access Regulator	
TJ	terajoule (equal to 1,000 GJ)	
TPA	Transmission Pipelines Australia Pty Ltd	
WACC	weighted average cost of capital	

1.	Introduction
1.1	Purpose of paper
The purpose of this paper is to: 
•	set out a number of issues that the Commission has identified as relevant to assessing the access arrangement and access arrangement information for the Moomba to Adelaide Pipeline System or MAPS; and
•	invite interested parties to make submissions on these and other relevant issues that the Commission should take into account when assessing the access arrangement. 
The issues set out are not meant to be exhaustive nor to limit the scope of submissions.  

1.2	Key issues for assessment
Existing haulage agreements
The proposed access arrangement and access arrangement information describe the terms and conditions on which Epic Energy will make access to MAPS available to third parties during the initial access arrangement period, which Epic Energy proposes will last until 1 January 2006.  That date is the conclusion of the period during which provisions of the existing haulage agreements impacting on third-party access will continue to have effect.  
New contracts unbundling the previous combined gas and haulage arrangements between the former Pipelines Authority of South Australia (PASA) and its customers were signed by those parties in late June 1995, on the eve of privatization of the pipeline system.  One of Epic Energy’s customers, Terra Gas Trader Pty Ltd (which trades as ‘Terra Gas trader’), has advised the Commission that in late 1996 Epic Energy offered an additional quantity of firm haulage capacity ‘to all prospective users’.  According to Terra Gas trader:
Terra Gas Trader was, to our knowledge, the only party to show any real interest in this capacity and contracted for this service in June 1998.
According to Epic Energy, all of the primary capacity of MAPS is fully contracted at present.  The fact that pipeline capacity for firm haulage services is fully contracted, together with a number of features of the current haulage arrangements, mean that third-party access would only be available if the prospective user:
•	negotiates an interruptible service of a more limited kind than that proposed by Epic Energy in the access arrangement lodged in April; or
•	funds extensions to or expansions of the system; or 
•	negotiates access on commercial terms with the existing users.  
(See clause 4.4 of the proposed access arrangement (quoted in Chapter 4.3 below) and sections 1.3(a)(ii) and 1.3(c) of access arrangement information, pages 4 and 7-8.)  
In relation to the potential for interruptible service, while capacity in the System is fully utilized on a number of days during the year, it is underutilized on other days and hours during the year (refer to Attachment E to Schedule 1 to the access arrangement).  
•	Because of a number of provisions in the existing contracts, IT Service of the type (firm on the gas day) defined in the April access arrangement cannot be provided without interfering with rights of the parties to those contracts.  
•	A service of an interruptible nature could be provided by Epic Energy for some hours during the day.  However, the current shippers have rights to use all of the capacity of the pipeline and Terra Gas trader has confirmed that it has rights of renomination within a gas day, with the result that interruptible shippers might be interrupted within the day.  
•	In addition, Epic Energy has put forward the position that, pursuant to current contracts, it does not have the ability to permit other shippers to utilize the existing capacity of the delivery points nor laterals for interruptible haulage, without enhancement of the system.  Accordingly, if that view of the contracts is correct, access to delivery points and (where applicable) laterals would need to be negotiated with existing shippers or additional delivery point and (where applicable) lateral capacity constructed.  

The lateral pipelines served by MAPS are identified in Attachment A to Schedule 1 to the April access arrangement.  They comprise the lateral serving the Iron Triangle and Angaston Zones, and the Taperoo, Dry Creek and Osborne laterals in the Adelaide metropolitan area.  Delivery points are identified in Attachments B to D to Schedule 1.
•	Alternatively, current shippers could offer interruptible haulage services to prospective users from their contracted capacity reservation.  
In assessing a gas pipeline access arrangement, the Commission is required by the Code to consider issues associated with the interests of the service provider, users and prospective users; the public interest, including the public interest in having market competition; firm and binding contractual obligations; and economic efficiency of pipeline operation.  
In view of the abovementioned limitations arising from the level of contracted reservation of capacity and from provisions of the existing agreements, the Commission wishes to establish the market’s views as to whether:
•	investment in new facilities to overcome these limitations would be efficient investment for purposes of determining reference tariffs in subsequent access periods; and 
•	negotiation of access by prospective users with the present users is a satisfactory means to obtain third-party access in the period until 2006. 
Section 2.25 of the Code is particularly relevant to the regulator’s assessment of firm and binding contractual obligations.  It provides as follows:
	The Relevant Regulator must not approve an Access Arrangement (or draft and approve its own Access Arrangement) any provision of which would, if applied, deprive any person of a contractual right in existence prior to the date the proposed Access Arrangement was submitted (or required to be submitted), other than an Exclusivity Right which arose on or after 30 March 1995.  
An ‘Exclusivity Right’ is defined in section 10.8 of the Code as a contractual right that by its terms either:
(a)	expressly prevents a Service Provider supplying Services to persons who are not parties to the contract; or
(b)	expressly places a limitation on the Service Provider’s ability to supply Services to persons who are not parties to the contract,
but does not include a User’s right to obtain a certain volume of Services.  
The parties to the existing haulage agreements have provided copies to the Commission on a confidential basis pursuant to section 41 of the Gas Pipelines Access (South Australia) Law.  The Commission is disinclined to accept the agreements as binding the Regulator’s decision on approval of the access arrangement without further inquiry, given that the agreements are relatively recent, having been executed in late June 1995.  Therefore the Commission is carefully assessing its obligations and options arising under section 2.25 of the Code.  
The Commission raised these issues with Epic Energy in correspondence prior to the release of this paper.  Epic Energy in turn relayed the Commission’s letters to its customers, Boral Energy Limited (hereafter, ‘Boral Energy’) and Terra Gas trader.  
In a response to the Commission, Terra Gas trader commented essentially as follows (letter dated 22 July 1999).
•	The flexibility provided by its contracts, including rights to vary nominations within the gas day, are necessary to ensure security of supplies to electricity generators and to meet the fluctuations imposed on generators by their participation in the National Electricity Market and disruptions to the electricity supply system.
•	In unbundling the combined gas and haulage arrangements of the former PASA, the present haulage agreements were an important transition towards open access.  
•	Boral Energy and Terra Gas trader are able to trade in unutilized firm and interruptible capacity.  They are better able to stimulate a secondary market than Epic Energy because they are best placed to assess the probabilities of changes in demand during a day, and to accept the commercial risks of that.  A key objective of creating Terra Gas trader was to create secondary markets in gas and pipeline capacity. 
In recent correspondence, Epic Energy has stated that arrangements between Boral Energy and Terra Gas trader, enabling the latter to supply gas to Adelaide Brighton Cement, demonstrate that prospective users can gain access to MAPS through an existing shipper.  
In an earlier letter dated 22 July 1999, Epic Energy also made the following points.  
•	The access arrangement lodged in April 1999 provides the most effective framework for efficient utilization of capacity in the pipeline.  It is the direction that Epic Energy wants to bring to the market.  
•	A transition period to 2006 should be allowed to enable the underlying commercial arrangements between the pipeline service provider and the shippers (existing users) time to adapt to an open access regime.
•	Alternatively, a transitional access arrangement that provides for third-party access while recognizing the contractual rights of existing shippers would be fair and reasonable for all stakeholders.  
•	The contracts were already in place when the pipeline system was privatized and thus form part of the economic basis of the purchase of the assets and a binding obligation on Epic Energy as the purchaser of those assets.  
•	In retrospect, Epic Energy may have been better advised to have sought a derogation that the Code did not apply until the expiration of the 1995 Agreements at the end of 2005.  
Both Terra Gas trader and Epic Energy expressed the view that the contracts do not contain exclusivity rights nor raise issues of compliance with the competition provisions of the Trade Practices Act.  
Boral Energy has provided comments to the Commission, but on a confidential basis.  
As the issues remain unresolved at this stage, the Commission will proceed with a public assessment of Epic Energy’s April access arrangement so that it is in a position to decide as quickly as possible the terms on which it will approve access, including whether the access arrangement should take into account the terms of the existing haulage agreements.  
That assessment will have regard to the outcome of public consultations, to legal advice and to the parties’ responses to this issue. 
Issues for consideration
Specific questions on this issue are raised in Chapters 4.3, 4.10 and 5.4 below.  However, you may also make any general submissions regarding the approach to applying the Code to these circumstances.  
In addition, you are invited to comment in response to the following questions.
1.	What is an appropriate timeframe for transition to open access in South Australia?  Are the transitional arrangements of the jurisdictions’ Natural Gas Pipelines Access Agreement (November 1997) and of the Code relevant to this question in the case of MAPS services?  
2.	Are you aware of industry operating arrangements, constraints and market circumstances:
•	upstream, in gas production and processing, and in interstate pipeline connections; or 
•	downstream of transmission, in wholesale and retail gas markets
that the Commission should take into account in examining contractual limitations on Epic Energy’s ability to supply services to third parties (other than existing users’ contractual rights to obtain a certain volume of services)? 

Future impact of approval of access arrangement
Apart from these considerations in relation to the existing haulage agreements, the access arrangement may have an ongoing impact on third-party access now and in the future.  The initial arrangement, when approved, will establish the company’s capital base and revenue requirement underlying its initial terms and conditions of trading with third parties.  It will establish the terms for extensions to or expansions of MAPS.  
Epic Energy proposes a weighted average cost of capital of 9.5% real pre-tax on a depreciated optimized replacement cost (DORC) capital base.  Epic Energy submits that at this rate it would sustain on proposed tariffs that equate to the existing contract revenues a ‘theoretical revenue shortfall or deficiency of approximately $6 million (at 1999)’.  During this access period Epic Energy does not seek tariffs at a rate to equal a 9.5 % return, but it raises an interesting issue as to the tariff path that Epic Energy may seek to follow in later access periods whether or not the Commission accepts the rate proposed.  
Epic Energy has submitted (refer to letter dated 16 July 1999 on the ACCC Website, and other correspondence) that the Commission should defer determination of the initial capital base, weighted average cost of capital (WACC) and reference tariff until revisions to the access arrangement lodged in April 1999 are submitted in 2005, as that access arrangement cannot be put into effect until the existing haulage agreements expire.  Further, according to Epic Energy, the calculations made can have no material impact on the revenue for the pipeline system until at least 2006.  Epic Energy stated that it wished to work with the Commission to provide an access arrangement in the interim period to 2006 to optimize third party access and pipeline capacity utilization on fair and reasonable terms.  
However, the Commission’s interpretation of section 3.4 of the Code is that in respect of services required pursuant to section 3.3, it must determine tariffs according to the reference tariff principles set out in section 8 of the Code.  The Commission is obliged to assess the initial capital base and to make cost of capital and revenue requirement calculations in respect of such services.  Subject to comment by interested parties, the Commission takes the fact that Epic Energy has proposed FT and IT Services as an initial indication in terms of section 3.3 that, as a minimum, services along those lines are required in the market. 
Issues for consideration
You may comment on the scope of the processes that the Commission should follow to assess this access arrangement.  
Although the Commission’s decision will relate primarily to the initial access period, submissions may also bring to the Commission’s notice views on any aspects of the proposed access arrangement that may impact on future periods.  

Other issues
The Commission has identified a range of issues (refer Chapters 4 and 5 in particular) that are likely to be relevant to its assessment.  Issues on which the Commission will focus include:
•	policies for services, trading, queuing and extensions and expansions;
•	the proposed rate of return (or ‘capital charge’) on the value of capital assets; 
•	the proposed capital base valuation; 
•	operations and maintenance costs;
•	design of the reference tariff and recovery of the goods and services tax (GST) from users; 
•	the nature and design of the incentive mechanism; 
•	the reasonableness of demand forecasts and factors said to give rise to uncertainty; and
•	the development of useful performance indicators. 

1.3	The assessment process
Under the Code the Commission is required to:
•	inform interested parties that it has received the access arrangement; 
•	publish, in a national daily newspaper, a notice that at least describes the covered pipeline to which the access arrangement relates, states how copies of the documents may be obtained and requests submissions by a date specified in the notice; 
•	after considering submissions received, issue a draft decision that either proposes to approve the access arrangement or to not approve the access arrangement and states the amendments (or nature of the amendments) that have to be made to revise the access arrangement in order for the Commission to approve it.  Further submissions are to be sought following release of the Commission’s draft decision; 
•	after considering any additional submissions, issue a final decision that either approves or does not approve the access arrangement (or revised access arrangement) and states the amendments (or nature of the amendments) that have to be made to the access arrangement (or revised access arrangement) in order for the Commission to approve it; and
•	if the amendments are satisfactorily incorporated in a revised access arrangement, issue a final approval.  If not, the Commission must draft and approve its own access arrangement. 

2.	The South Australian gas industry structure, market and regulatory framework
2.1	Industry structure
Exploration, production and processing
In 1954, Santos Limited was granted licences to search for oil in parts of the Cooper and other basins in the north-east of South Australia.  In the process of looking for oil, natural gas was discovered at Gidgealpa in 1963.  Another gas field at Moomba was discovered in 1966, leading to the establishment of a natural gas industry.  Other companies subsequently acquired licences to explore and produce gas in that area of South Australia.  These companies are known collectively as the ‘Cooper Basin Producers’.  Santos Limited now operates the producing gas fields and the processing plant at Moomba in that area on their behalf.  
Since the first commercial discovery in 1963, more gas reserves have been discovered in the South Australian and South-West Queensland regions of the Cooper Basin and the Eromanga Basin, which overlies the Cooper Basin.  The South Australian region of the Cooper/Eromanga Basin has 93 gas fields and 378 gas wells, declared discovered recoverable raw gas reserves of 8.2 TCF, and additional undiscovered recoverable reserves.  The Cooper Basin Producers of South Australia and South-West Queensland supply over 90% of the demand for natural gas in South Australia, with the remaining demand supplied by the Katnook Producers in the Otway Basin.  
The Cooper/Eromanga Basin also supplies gas to Queensland, New South Wales and, to a limited extent, Victoria.  Gas is processed at the Producers’ Moomba plant and is then piped to Sydney, to Adelaide, to country cities and towns in New South Wales and South Australia and, via the Interconnect between Wagga Wagga and Barnawartha, to Victoria.   
The Australian Gas Association (AGA) stated that in 1996-97 wellhead production of gas in South Australia (before use in production, reinjection and interstate transfers) was 168.7 PJ.  
The South Australian Government in 1998 opened Cooper Basin acreage for public bidding in anticipation of the expiry there of long-standing Santos joint venture exploration tenements.  In the first round of bidding, eleven exploration licences were awarded to six companies, most of these new entrants to the Cooper Basin.  Eight more blocks in the core of the Basin are now on offer for the second round of bidding.  Significant exploration programmes are also currently running in the Otway, Officer, Stansbury, Arrowie and western Eromanga Basins.   

Transmission
Moomba to Adelaide Pipeline System
The MAPS trunkline stretches 781 km from north to south, and provides about 90% of transmission pipeline capacity in South Australia.  MAPS currently has a primary capacity of up to 323 TJ per day.  The pipeline was built by the South Australian Government in 1969, and was operated by PASA until 1995.  For most of its history, PASA purchased gas from the Producers and resold it to the gas retailer and the electricity authority in South Australia.  
In 1995, the pipeline assets of PASA were sold to Tenneco Gas Australia, later to become Tenneco Energy Australia.  In 1996, El Paso Energy, a US company, purchased the Australian assets of Tenneco Energy Australia.  El Paso Energy later sold down its interest and Tenneco Energy Australia was renamed ‘Epic Energy’.  
The ultimate shareholders in Epic Energy are: El Paso Energy (30%), Consolidated Natural Gas Company Inc (30%), AMP Asset Management Australia Limited (10%), Axiom Funds Management Limited (10%), Hastings Funds Management Limited (10%) and Allgas Energy Ltd (10%).  
The Epic Energy group of companies has operations in Western Australia, Queensland and South Australia.  The group owns 3,300 km of pipeline in Australia, and operates another 891 km on behalf of other owners.
South East (Katnook) Pipeline System
The South East Pipeline System owned and operated by Epic Energy is not connected to MAPS and runs 48.1 km from near Katnook to Mt Gambier.  It has an uncompressed capacity to haul approximately 20 TJ of natural gas per day.  The Commission understands that the pipeline is not fully utilized at present.  
The Riverland Pipeline
The Riverland Pipeline, operated by Epic Energy for Envestra Limited, connects to MAPS at Angaston and serves the Riverland and Murray Bridge regions.  Envestra is extending this system from Berri to Mildura.  Boral Energy Limited will be the operator of the extension to Mildura. 

Distribution
A substantial proportion of the gas transported by Epic Energy enters local distribution systems.  Envestra Limited owns and operates gas distribution systems totalling 6,361 km in Adelaide, Port Pirie, Whyalla and several South Australian and Murray Valley country towns (Mt Gambier not being connected to MAPS).  

Wholesaling
A substantial part of gas from the Cooper Basin region destined for market in South Australia is purchased from the Producers by the Natural Gas Authority of South Australia (NGASA), a statutory authority ‘constituted of the Minister’, the Minister currently being the South Australian Minister for Primary Industries, Natural Resources and Regional Development.  The gas sales agreements previously held by PASA were assigned to NGASA in preparation for the privatization of the pipeline assets of PASA.  The Commission understands that NGASA onsells the gas to Terra Gas trader and to Boral Energy at its purchase price.  The Commission also understands that NGASA’s contracts with its customers ‘mirror’ the agreements it has with the Producers.  The Commission understands that NGASA does not have a role in respect of new supply contracts between the Cooper Basin Producers and South Australian buyers.  
AGL announced in March 1999 that it had secured a gas contract to supply ‘summer gas’ to Terra Gas trader.

Retailing
Pursuant to agreement of the jurisdictions in COAG, the South Australian Government is implementing a policy to progressively make retail customers contestable.  At present, users consuming 10 TJ p.a. or more fall within a ‘deregulated market’ in which gas prices are not regulated and customers are contestable.  
There are five licensed retailers in South Australia – Boral Energy, Terra Gas trader and new entrants Eastern Energy, National Power Australia and Energy 21.  The licences for all except Boral Energy (which serves all customers) apply to sales to contestable customers.  At present, as far as the Commission is aware, all gas consumers, with the exception of ETSA Corporation, Adelaide Brighton Cement Ltd and Osborne Co-generation Pty Ltd (CUBE), buy gas from Boral Energy.  

2.2	The gas market
According to estimates by the Australian Bureau of Agricultural and Research Economics (ABARE) published by AGA, there were approximately 312,000 domestic gas consumers and about 8,000 industrial and commercial customers in South Australia in 1996-97.  In 1997, total consumption of natural gas in South Australia was estimated by ABARE to have reached over 99 PJ, making up 33.2% of the total primary energy consumption in the State.  Manufacturing (including electricity generation) and commercial customers consumed over 75% of the natural gas.  AGA figures indicate that of the 99 PJ of gas consumed in 1996-97, only 76 PJ (approximately) was available for sale to end-users in South Australia.  The figures furnished by Epic Energy (access arrangement, Schedule 1, Attachment C) for gas hauled on MAPS in calendar years 1997 and 1998 (76.2 and 79.6 PJ approx. respectively) are of the same order of magnitude. 
Future growth in gas sales in South Australia estimated by ABARE is modest, especially in terms of industrial and residential demand.  Epic Energy’s access arrangement information gives the company’s forecast of demand growth in graph form.  Epic Energy’s estimates lie below the AGA/ABARE projections, for reasons set out in the access arrangement information (refer to access arrangement information, pages 37-39).
Epic Energy has advised that the graph appearing in the access arrangement information contains an error, with data offset by one year in each year - for example, the 1997 data shown graphed is actually 1998 data.  The corrected graph reproduced in Attachment B to this Issues Paper was provided by Epic Energy.
A connection (the Crossover) linking MAPS with the Moomba to Sydney Pipeline System (MSPS) has recently been constructed by Boral Energy at Moomba.  Using the Crossover, natural gas can be made to flow between South Australia, New South Wales and Victoria, although apportionment of gas at Moomba between the two pipelines would potentially have greater effect in linking South Australia with the two other States’ systems.  Pressure differences between the MSPS and MAPS may necessitate compression of gas for it to flow over the Crossover from the MSPS to MAPS. 

2.3	Regulatory framework for pipelines
Legislative framework 
The technical operation of transmission pipeline systems is regulated by the Petroleum Act 1940 (SA).  The distribution systems were historically regulated under the Gas Act 1988 (SA).  However, since 1 July 1997, technical issues have been regulated under the Gas Act 1997 (SA). 
Until the proclamation of the Gas Pipelines Access (South Australia) Act 1997 (SA Act 97), aspects of the commercial haulage of gas through the transmission systems and access to haulage services of the transmission and distribution systems were regulated under the Natural Gas Pipelines Access Act 1995 (SA) (Access Act 95).  The SA Act 97 repealed the Access Act 95.  It applied the Gas Pipelines Access (South Australia) Law (including the Code) as law in South Australia.  The Gas Pipelines Access (South Australia) Law thereby provides the legal framework for the operation of the access regime in South Australia.  However, as a transitional measure, the Access Act 95 will continue to apply to each of South Australia’s Code pipelines until an access arrangement for each is approved under the Code.  
The Access Act 95 contains access dispute resolution provisions.  Existing contractual rights are to be taken into account, subject to provisions dealing with capacity not needed by a contracted user.  Sub-section 36(2) of the Access Act 95 provides as follows:
(2)	An arbitrator cannot make an award that would prejudice the rights of an existing pipeline user to haulage services under an earlier contract or award unless -
(a)	the pipeline user agrees; or
(b)	the arbitrator is satisfied that -
(i)	the pipeline user’s entitlement to haulage services exceeds the entitlement that pipeline user actually needs and there is no reasonable likelihood that the pipeline user will need to use the excess entitlement; and
(ii)	the proponent’s requirements cannot be satisfactorily met except by transferring the excess entitlement (or some of it) to the proponent.  
Sub-section 36(2) goes on to provide an example of how these provisions would be applied to an existing customer in the light of the claims for access of a third party (or ‘proponent’).  

Issues for consideration
In the context of the existing haulage agreements and utilization of MAPS (see Chapter 4.10 below), do the provisions of the Access Act 95 make possible an interruptible service, and, if so, on what conditions?  

Regulators and policy bodies
The SA Act 97 established the South Australian Independent Pricing and Access Regulator (SAIPAR) as the local Regulator for distribution pipelines in South Australia.  
The Department of Primary Industries and Resources South Australia (PIRSA) is responsible for policy development and for assessing applications for and awarding gas exploration, production and retention licences, and advising the Minister in respect of those matters.  The Office of Energy Policy (OEP) within PIRSA provides energy policy and energy management services and has responsibility for technical and commercial regulation of the electricity and gas sectors in South Australia, and advice to the Minister on regulatory issues for which the Minister is responsible.  NGASA operates within OEP.  
Issues for consideration
The Commission would welcome any comments, expansion of or updated information on the foregoing descriptions in Chapter 2.  For instance, the Commission is interested in the prospects and timeframe for development of underground storage in proximity to Moomba and in proximity to final markets.  
Gas demand forecasts are the subject of specific questions in Chapter 5.4 below.  

3.	Criteria for assessing access arrangements
The Commission may approve an access arrangement only if the Commission is satisfied that it contains the elements and satisfies the principles set out in sections 3.1 to 3.20 of the Code, which are summarized below.  An access arrangement cannot be opposed on the basis that it does not address a matter that section 3 of the Code does not require it to address.  However, the Commission has broad discretion in accepting or opposing an access arrangement.  
An access arrangement must include the following elements:
•	a services policy, which must include a description of one or more services that the service provider will offer to users and prospective users. 
•	a reference tariff policy, including one or more reference tariffs.  Tariffs must be determined according to the reference tariff principles in section 8 of the Code. 
•	terms and conditions on which the service provider will supply each reference service. 
•	a capacity management policy, i e, a statement that the covered pipeline is either a contract carriage or market carriage pipeline. 
•	a trading policy that enables a user to trade its right to obtain a service (on a contract carriage pipeline) to another person. 
•	a queuing policy to determine users’ priorities in obtaining access to spare and developable capacity on a pipeline. 
•	an extensions/expansions policy to set out the basis on which the capacity of the pipeline will be extended or expanded. 
•	a date by which revisions to the access arrangement must be submitted, and a date by which the revisions are intended to commence. 
In considering whether an access arrangement complies with the Code, pursuant to section 2.24 the Commission must take into account:  
•	the legitimate business interests of the service provider; 
•	firm and binding contractual obligations of the service provider or other persons (or both) already using the covered pipeline; 
•	the operational and technical requirements necessary for the safe and reliable operation of the covered pipeline; 
•	the economically efficient operation of the covered pipeline; 
•	the public interest, including the public interest in having competition in markets (whether or not in Australia); 
•	the interests of users and prospective users; and
•	any other matters that the Commission considers are relevant. 
The Commission addresses the elements required by the Code in an access arrangement in the following two chapters.  

4.	Compliance with the Code
4.1	The content of the access arrangement
The required elements of an access arrangement are listed in broad terms in Chapter 3 above.  The Commission must be satisfied that Epic Energy’s access arrangement meets the content requirements of the Code before it can approve the access arrangement.  It must also be satisfied that the terms and conditions on which reference services will be offered are reasonable.  

4.2	Information disclosure
The Code requires that a proposed access arrangement be supported by access arrangement information.  Section 2.6 of the Code specifies that access arrangement information contain such information as in the opinion of the regulator would enable users and prospective users to understand the derivation of the elements in the proposed access arrangement and to form an opinion as to whether the access arrangement complies with the provisions of the Code.  Section 2.7 states that the access arrangement information may include any relevant information but must include at least the categories of information described in Attachment A to the Code (also attached to this Issues Paper). 
In addition to the document described as ‘Access Arrangement Information’ lodged with its proposed access arrangement, Epic Energy is preparing information in response to a request from the Commission.  Subject to confidentiality, the Commission intends to place further relevant information, when available, on the Commission’s Home Page.  
While ensuring that sufficient information is available to users and prospective users, the Commission must also ensure that the disclosure of any information is not, in its opinion, unduly harmful to the legitimate business interests of the service provider, users or prospective users.  The Commission is also obliged to observe the provisions of section 42 of the Gas Pipelines Access (South Australia) Law in relation to information provided under section 41 of the Law.  
Issues for consideration
1.	Is the access arrangement information (when considered with the access arrangement) sufficient to enable users and prospective users to understand the derivation of the elements of the proposed access arrangement?  
2.	Is the information sufficient to allow users and prospective users to form an opinion as to whether the access arrangement complies with the provisions of the Code?  
3.	Are the items listed in Attachment A to the Code adequately addressed?  If not, what additional information (including any relevant information additional to that listed in Attachment A) should be provided, and in what form?  

4.3	Services policy
Sections 3.1 and 3.2 of the Code require an access arrangement to include a services policy, which must include a description of one or more services that the service provider will make available to users and prospective users.  The policy must contain one or more services that are likely to be sought by a significant part of the market, and any service or services that in the regulator’s opinion should be included in the services policy.  
To the extent that is practicable and reasonable, a service provider should make available a service that includes only those elements that the user or prospective user requires and should provide a separate tariff for each of those elements. 
Epic Energy proposes to offer the following classes of service under this access arrangement. 
•	Reference service
FT Service (clause 4.2 of proposed access arrangement) for delivery ‘without interruption or curtailment’ except as expressly permitted under the service agreement and subject to the agreement’s terms and conditions, with a related reference tariff (clause 5); and
•	Rebatable service
IT Service (clause 4.3), similarly available ‘on a Day if all of the Capacity is not required on that Day for the provision of FT Service …’ 
However, as indicated in Chapter 1.2 above, during the initial access period and until the beginning of 2006, these services will not be available from Epic Energy except on the conditions stated in clause 4.4 of the proposed access arrangement.  Clause 4.4 of the access arrangement states as follows:  
4.4 	Availability of Specified Services
(a)	Despite anything to the contrary contained in this Access Arrangement, a Prospective User will only be able to contract for a Specified Service prior to the expiration or termination of all of the Existing Transportation Agreements if:
(i)	New Facilities are constructed for the benefit of the Prospective User pursuant to clause 10.3 or clause 10.4; and
(ii)	those New Facilities comprise, at least, one or more new Delivery Points and an expansion of Capacity in the trunkline of the Pipeline System and in any lateral of the Pipeline System that would be utilised in providing the Specified Service.
(b)	If a Prospective User contracts with the Service Provider in the circumstances described in clause 4.4(a), the only Delivery Point(s) that it will be entitled to make nominations in respect of, and to use, on a Day, will be the Delivery Point(s) referred to in clause 4.4(a) (and/or such other Delivery Point(s) as may be the subject of a Release in favour of the Prospective User).
‘Specified services’ mean FT or IT Service.  ‘Specified services’ do not include services provided under the existing haulage agreements that Epic Energy has with Boral Energy and Terra Gas trader.  
Information provided by Epic Energy about utilization of the pipeline’s capacity is referred to in section 4.10 below.  
Issues for consideration
1.	Are your business requirements met by one or other of the proposed services?  
2.	If you have a view as to whether one or other of the proposed services is likely to be sought by a significant segment of market participants, please state your view and the basis on which it was formed.  
3.	Should any other services be included in the services policy?  If so, please specify.  
4.	If you are interested in an interruptible service, what level of certainty of interruptible service do you require?  
•	interruption permitted on the gas day? 
•	interruption not permitted on the gas day (IT Service as proposed)? 
•	timing of service provider’s confirmation of user’s nomination for the gas day?
5.	Please comment on the proposed condition that contracts for specified services (FT Service and IT Service as defined in the access arrangement) only proceed on the basis that new facilities are constructed.  Is that condition consistent with your business requirements?  
6.	If you are interested in an interruptible service that could be interrupted on the gas day to accommodate the requirements of existing shippers, would a condition that new facilities (such as a new delivery point) be constructed for the benefit of the prospective user meet your business needs?  
7.	Please identify the level at which and the period for which you would require any service that meets your business needs.  (Please note especially that you are at liberty to claim commercial confidentiality.)  
8.	Please comment as to whether it would satisfy your business needs, as an alternative to having new facilities constructed, to:
•	obtain the consent of existing users of MAPS to the use of pipeline facilities; or
•	negotiate and enter into commercial arrangements for pipeline services with the existing users.  
9.	What services would meet the needs of prospective underground storage facilities?  

4.4	Trading policy
Sections 3.9 to 3.11 of the Code set out the requirements for a trading policy.  If a pipeline is a contract carriage pipeline (as is proposed by Epic Energy), the access arrangement must include a trading policy that explains the rights of a user to trade its right to obtain a service to another person. 
Clause 26 of the access arrangement sets out Epic Energy’s trading policy, which is applicable to trade in specified services as defined in the access arrangement.  Services provided under existing contracts current until 2006 do not fall within that definition and consequently fall outside the trading policy.  
Under the proposed policy, bare transfers may be undertaken on a gas day without information being supplied to the service provider.  Epic Energy also sets out conditions under which it will facilitate and invoice a transfer notified prior to the gas day, termed a ‘capacity release’, utilizing an electronic bulletin board.  Clause 20 of the access arrangement sets out users’ rights to trade in imbalances, utilizing the electronic bulletin board to notify those trades to the service provider.  
Issues for consideration
1.	Does the proposed trading policy sufficiently explain the rights of a user to trade its right to obtain a service with another person?
2.	Does Epic Energy’s proposed trading policy meet your business needs?  
3.	Would the proposed trading policy work satisfactorily without an electronic bulletin board in operation?  
4.	In your view, for what reasons should the service provider refuse a trade on ‘reasonable commercial grounds’?  Should these reasons be defined in the access arrangement?  

4.5	Queuing policy
Sections 3.12 to 3.15 of the Code set out requirements for a queuing policy for determining the priority given to users and prospective users to obtain access to spare and developable capacity and for seeking dispute resolution under section 6 of the Code.  
The policy must set out sufficient detail to enable users and prospective users to understand in advance how it will operate and, to the extent reasonably possible, must accommodate the legitimate business interests of the service provider, users and prospective users, and lead to economically efficient outcomes.  
Epic Energy in clause 10 of its access arrangement sets out a combined queuing and extensions/expansions policy.  Prospective FT users are placed in a queue when they lodge a request for service, as are prospective IT users for whom insufficient capacity is available.  The service provider will annually review the queues and notify the prospective users whether service can be provided without or with extension or expansion of the system.  Epic Energy proposes to provide estimates of the capital contribution required from prospective users for expansion of the system ‘as soon as practicable’ after the prospective user joins the queue.  A multi-step series of exchanges between the service provider and prospective users to estimate and refine prospective users’ capital contributions would occur after each annual review of the queue.  
Issues for consideration
1.	Are there sufficient details in the proposed queuing policy to enable users and prospective users to understand how the queuing policy will operate?
2.	Does the proposed queuing policy accommodate the legitimate business interests of the service provider, users and prospective users? 

4.6	Extensions/expansions policy
Section 3.16 of the Code requires an access arrangement to include an extensions/expansions policy that sets out the method to determine which extensions and expansions will be treated as part of the Covered Pipeline.  The Code also requires that if they are treated as part of the Covered Pipeline, the arrangement specify how each extension or expansion will affect reference tariffs.  
As noted above, Epic Energy proposes a combined queuing and extensions/expansions policy.  As part of that policy, where a request for service is met by the construction of new facilities for a single user, pursuant to clause 10.3(f), the service provider will:  
(f)	Not later than 90 Days after the Service Provider has completed the construction and commissioning of the New Facilities and has therefore determined the actual total costs of the New Facilities, it will: 
(i)	calculate the Actual Capital Contribution; and
(ii)	submit its calculation of the Actual Capital Contribution to the Regulator for approval as if it were a revision of the Access Arrangement submitted pursuant to section 2.28 of the Code.
There is a similar provision, clause 10.4(j), in respect of services provided by construction of new facilities following annual clearance of the queue, except that annual clearance of the queue only applies to extensions of less than 5km to the geographic range of the system, and is subject to capital expenditure caps.  
The approval process for proposed revisions to an access arrangement is public, except, pursuant to section 2.32 of the Code, where the revisions have been proposed by the service provider other than as required by the access arrangement or the regulator considers that the proposed revisions are not material.  In the case of capital contributions proposed and calculated according to the above provisions of the access arrangement, section 2.32 would require a public consultation process.  
Section 8.23 of the Code provides that new facilities investment may be added to the capital base when a user makes a capital contribution in respect of a new facility.  The Code does not limit the amount that a user may agree to pay as a charge for a service.  However, Epic Energy proposes to limit the capital contribution to the amount approved by the regulator.  Epic Energy’s formula for calculation of the capital contribution (CC = (A-I)+2%A), where I = (R/W) x (1 – D/W)) is defined in clause 10.4(l) of the access arrangement.  
Epic Energy states that it does not have a speculative investment fund.  
Issues for consideration
1.	Does the proposed access arrangement adequately specify how extensions and expansions will affect reference tariffs?  
2.	Is the formula for calculation of contributions for new facilities investment likely to generate efficient economic outcomes?  
3.	Are the proposed limitations on funding by the service provider (clause 10.5 of the access arrangement) reasonable?  
4.	For purposes of establishing the initial capital base in the next period and deriving revenue requirement and reference tariffs for that period, at the first review what account should the regulator take of new facilities investments made while the existing haulage agreements are in place?  
5.	Do you have any comments on Epic Energy’s formula for the calculation of ‘I’ (the capital investment that would be justified at the then current reference tariff) in the formula (quoted above) for capital contribution (CC)?  
6.	Is the proposed use of an ‘equity rate of return’ in accordance with clause 10(4)(i) of the access arrangement appropriate?  If so, what should the value be?  
7.	Is it satisfactory to interested parties that the regulator would decide whether to approve the capital contribution only after the new facilities have been constructed and moneys expended?  

4.7	Terms and conditions 
Section 3.6 of the Code requires an access arrangement to include the terms and conditions on which a service provider will supply each reference service.  To be approved, these terms and conditions must be considered reasonable by the regulator.  
Epic Energy has presented its access arrangement in a form that incorporates terms and conditions of service in the body of the access arrangement and in schedules to the arrangement.  Refer in particular to clauses 6-9 and clause 11 onwards in the access arrangement.  Technical specifications and forms associated with service provision are incorporated in schedules to the access arrangement.  FT and IT Service contract forms are incorporated as Schedules 6 and 7 respectively.  This means that the terms and conditions of service cannot be varied without the regulator’s approval.  
Issues for consideration
1.	Does the access arrangement clearly identify the relevant terms and conditions so as to enable a prospective user to be sufficiently well-informed to make a request for access?
2.	Are the proposed terms and conditions reasonable?  In your opinion, do they strike a fair balance between the needs of the service provider, the user and the prospective user?  
3.	Do the proposed minimum periods for which access would be provided for FT and IT Service (7 years and 1 year, respectively) meet your business requirements?  
4.	Do you have any comments on other provisions, for example, provision of credit information and liability and indemnity obligations on the service provider and user?
5.	Would you prefer that any of the terms and conditions be varied?  
6.	In the event that Epic Energy sought to vary any terms and conditions or specifications during the access arrangement period, in your view on which issues should the Commission publicly consult the market?  Can you think of any circumstances in which the regulator should check changes to forms used by the service provider in connection with its services?  

4.8	Commencement and review of access arrangement
Commencement of the access arrangement
Epic Energy has proposed that the commencement date of this access arrangement will be the date specified by the regulator in its approval of the arrangement.  

Review of the access arrangement
Section 3.17 of the Code requires an access arrangement to include a date by which the service provider must submit revisions to the access arrangement, and the commencement date for those revisions.  In the facsimile message dated 16 July 1999 revising the access arrangement, Epic Energy proposed that revisions be submitted for approval on 1 July 2005 and that they commence on 1 January 2006.  
The Commission recognizes the need to balance possibly conflicting views in favour of relatively shorter and longer access periods.  Shorter periods may be associated with rapid industry change impacting on interested parties, longer periods with less change and greater emphasis on certainty over the longer term.  The Code gives guidance on this point in sections 3.17, 3.18 and 8.1.  
Section 3.17(ii) of the Code makes provision for the regulator to specify that defined major events would trigger an obligation on the part of the service provider to submit revisions prior to the revisions submission date.  In deciding this issue, the regulator is to take account of the Code design objectives for reference tariffs.  The design objectives encompass recovery of efficient costs of service, replication of a competitive market, safety and reliability of service, non-distortionary investment incentives, efficiency, cost reduction and market development.  
Section 3.18 requires, where a proposed arrangement exceeds five years, that the regulator consider whether the arrangement should include mechanisms to address the risk that forecasts on which the arrangement is based may prove incorrect.  The relevant section includes some examples.  
Issues for consideration
1.	Do you have any views regarding the appropriate commencement and review dates of this access arrangement?
2.	Should a trigger for review of the access arrangement be included?  Please specify.
3.	Given that the proposed access arrangement period is approximately six years, are any mechanisms to address possible misforecasts appropriate?
Epic Energy proposes to pass through to users any new or increased imposts, including the GST (refer clause 30.4).  
4.	Should the access arrangement make provision to pass through any removal or reduction of imposts?
5.	Are there circumstances in which a change in imposts should trigger a regulatory review of the access arrangement?  

4.9	Ring fencing 
‘Ring fencing’ is the term used to describe segregation within a business of one activity from another.  For regulatory purposes, this results in the regulated activities being separated from any non-regulated activities within the one business. 
Regulators require adequate ring fencing to ensure that service providers do not engage in anti-competitive cross subsidization between different regulated activities or between regulated and non-regulated activities.  Ring fencing is also an attempt to prevent the disclosure of commercially-sensitive information for purposes not intended by the provider of that information.   
Section 4 of the Code imposes minimum ring fencing obligations on service providers, including an obligation to maintain a separate set of accounts in respect of the services of the covered pipeline, and a separate consolidated set of accounts for the entire business of the service provider.  It also provides for the Commission to impose additional requirements or waive minimum requirements through a public consultation process.  The ring-fencing obligations operate separately but in parallel with the obligation on the service provider to obtain approval of its proposed access arrangement.  
Chapter 2.1 of this Issues Paper briefly outlined the ownership structure of Epic Energy.  In discussions with Commission representatives, Epic Energy has advised that it does not have interests in gas marketing activities and that activities of members of the Epic Energy group of companies in States outside South Australia concern pipeline operations.  
In section 4.4 of its access arrangement information, at page 13, Epic Energy explains how it allocates costs and revenues of ‘non-jurisdictional activities’, i e, how it captures separately costs and revenues of the two pipelines operated for others; and how it deals with costs and revenues generated by the gas control centre support services supplied to the Epic Queensland business unit.  Epic Energy has provided to the Commission on a confidential basis figures in support of these allocations.  
Issues for consideration
1.	Do you have a need for greater detail on these allocations?  If so, please elaborate.  

4.10	Utilization of capacity
To assist prospective users to evaluate possible opportunities to gain access to a pipeline system, the Code obliges the service provider and, in certain circumstances, existing users, to make available information about spare capacity (refer Code section 5).  
As previously noted, Epic Energy has advised that it is unable to offer the FT and IT Services described in its access arrangement while the existing haulage agreements are in force during the initial access period.  Epic Energy has also stated that available capacity is zero (refer Attachment B to Schedule 1 to the access arrangement).  Further, Epic Energy has indicated that it does not have the ability to permit prospective users to utilize the existing capacity of the delivery points nor laterals for interruptible haulage, without enhancement of the system or consent of the existing shippers.  
Information about demands on the system is given in Epic Energy’s access arrangement information, Attachment 5.   In Schedule 1 to the access arrangement, there is information about the number and type of compressors already installed.  Information about the demand for haulage services from Epic Energy’s existing customers is given in Attachment D to Schedule 1 to the access arrangement.  Information about seasonal variation in demand and average and peak loads is given in Attachment E.  
Information about forecast demand on the Envestra pipeline system is useful to interested parties in forming a view as to the relative annual demand on the Epic Energy pipeline from each of Epic Energy’s two customers (Boral Energy and Terra Gas trader), and the volumes of gas potentially contestable in the retail gas market under the Government’s phased introduction of retail contestability.  That demand forecast information is given in section 13.3 of the Envestra revised access arrangement information lodged with the South Australian Independent Pricing and Access Regulator.  The Envestra revised access arrangement information also includes information about monthly load ratio profiles and peak day and average daily flow data for gate stations and regions (refer section 13.2).  That information is useful in forming a view as to the demand that Boral Energy may place on the MAPS system arising from its operational requirements.  
According to Envestra, total demand on its covered pipeline system is forecast (in round figures) to be 27 PJ in 1998/99, comprising 7.7 PJ domestic, 2.9 PJ commercial and 16.3 PJ industrial (or ‘demand’ market).  The total Envestra haulage demand forecast for South Australia in 2000 is approximately 36 PJ and the Commission understands that most of that gas will be hauled through MAPS.  The Commission also understands that demand on the Envestra system connected to MAPS at present comes predominantly (but not exclusively) from Boral Energy.  
Envestra’s flow data for gate stations on the Envestra distribution system served by MAPS are shown in the following table.  (Aggregate flow data on MAPS for both shippers for Mainline, Iron Triangle and Angaston Zones are given in Epic Energy’s access arrangement in Attachments C and D to Schedule 1.)  
Envestra Limited: Flow Data for 1997/98 by Gate Station and Region
	Gepps Cross Gate Station
(Adelaide Region)	Elizabeth Gate Station
(Adelaide Region)	Taperoo Gate Station
(Adelaide Region)	Nuriootpa Gate Station
(Adelaide Region)	Angaston Gate Station
(Adelaide Region)	TOTAL Adelaide Region	Whyalla Gate Station
(Whyalla Region)	Port Pirie Gate Station
(Port Pirie Region)	Peterborough Gate Station
(Peterborough Region)	Riverland Gate Station
(Riverland Region)	
Max supply pressure (kPa) 	2,000	2,000	2,000	400	2,500	-	2,000	2,000	300	2,500	
97/98 Ave Daily (GJ)	54,660	12,930	19,800	400	240	88,030	310	3,070	50	1,590	
97/98 Peak Day (GJ)	87,860	23,690	29,390	1,290	370	142,600	630	4,400	60	2,500	
Source: Envestra Limited, Revised Access Arrangement Information, 21 July 1999, page 54.  
Issues for consideration
1.	Having regard to Epic Energy’s information about historical demand for haulage services, in your view is there any spare capacity not already contracted that the service provider could commit to sell to third parties?  
2.	If so, what is the quantum of that spare capacity?  
3.	Do the Code provisions in section 5 and provisions in the Natural Gas Pipelines Access (South Australia) Law against hindering access meet your business needs in exploring and pursuing avenues to gain access to services on MAPS during the initial access arrangement period until 2006?  
4.	Do you need further information?  If so, please specify.  

5.	Pricing principles and reference tariffs
Once the services required by the market and able to be provided by the pipeline operator are identified, the pricing of those services is the core element in the assessment of an access arrangement.  Accordingly, section 8 of the Code establishes principles for setting reference prices from which commercial negotiations may proceed.  While these principles provide for considerable flexibility, they are designed to achieve the key objectives listed in section 8.1 of the Code. 
In broad terms, these objectives require the tariffs to generate sufficient revenue to enable the service provider to make a commercial return on its investment in pipeline assets over the life of those assets, and to provide it with an incentive to expand the system in a timely manner to meet market needs.  At the same time, the return is to be set so as to mimic outcomes in a competitive market, which is one free of monopoly returns.  In addition, tariffs are required to be cost-reflective.  This will promote efficiency in the use of the system.  Finally, the Code recognizes the dulling effect revenue constraints can place on the incentive to improve the efficiency of pipeline operations.  Therefore access arrangements may include revenue incentives to improve efficiency, the benefits of which are to be shared by the service provider with users and prospective users.  
The regulator’s role is to determine whether the proposed pricing methodology is consistent with the principles outlined in the Code.  The methodology proposed for the setting of reference tariffs is contained in the access arrangement and access arrangement information.  Epic Energy sets out its principles for determining the reference tariff in section 5.2 of the access arrangement.  For purposes of discussion, salient features of Epic Energy’s approach are described in the following points.  
•	Reference tariffs would normally be structured to reflect the costs of providing the reference services, including operations and maintenance, depreciation and return on the capital base (i e, to meet the service provider’s revenue requirement).  

During the initial access arrangement  period at least, for a user to receive FT or IT Service an extension or expansion will be required by the service provider (refer sections 4.3 and 4.10 above and pages 7, 8 and 10 of the access arrangement information).  Epic Energy states that therefore the reference tariff is applicable only within the context of the Extensions/Expansions Policy.  Epic Energy has established the reference tariff to equate to current contractual revenues ‘such that new Users are at parity with existing customers in the calculation of required Capital Contributions’ (access arrangement information, page 10).  Epic Energy notes that this would produce an under-recovery of its calculated cost of service. 
•	The initial asset base is valued using the depreciated optimized replacement cost methodology (DORC), although, in the service provider’s view, optimized replacement cost (ORC) or deprival value is the correct valuation (refer access arrangement information, page 11). 
•	A current cost accounting methodology (inflation adjustment of asset base) is used to determine annual depreciation and adjustment of the asset base. 
•	To the asset base each year is added working capital and ‘stay in business capital’ less depreciation to arrive at the capital base on which the annual capital charge or return on capital is calculated. 
•	A pre-tax real rate of return of 9.5 per cent is applied to the capital base. 
•	The rate of return is set using the Capital Assets Pricing Model (CAPM). 
•	The majority of costs under current contracts are recovered by way of a capacity charge.  The reference tariff for FT contracts would reflect the same proportion.  There is a distance-based allocation of costs to arrive at the reference tariff for the Whyalla Lateral. 
•	Epic Energy expects zero revenues from IT Service during the initial access arrangement period.  The IT Service tariff is calculated by summing the proposed FT capacity and commodity rates, and charging the total plus 15% as a commodity rate only. 
•	Should IT sales be made, a portion of the revenues would be available by rebate to FT customers as an incentive mechanism. 
The key pricing issues are discussed in more detail below.  The following discussion reproduces a number of Tables prepared by Epic Energy as part of its access arrangement information.  These were submitted at a time when Epic Energy proposed that the initial access arrangement period run until 1 January 2004.  As that period has since been extended two years by Epic Energy, the Commission recently requested Epic Energy to extend the data in the Tables until 2005.  The revised Tables, when received, will be placed on the ACCC Website.  

5.1	Operations and maintenance costs
The following table gives Epic Energy’s estimates of future operations and maintenance costs.

Source: access arrangement information, page 18.  
Issues for consideration
1.	Are the forecast operating and maintenance costs reasonable?
2.	Do they represent the lowest sustainable costs of efficiently delivering the reference service in accordance with accepted and good industry practice in Australia and overseas, taking account of pipeline system age, size and industry structure?
3.	Are the operating and maintenance costs sufficient to ensure safe and reliable operation of the pipeline system? 

5.2	Initial capital base
In establishing the initial capital base, the Code requires the regulator to consider the depreciated historical cost (DHC), the DORC and other factors outlined in section 8.10 of the Code.  In practice, DHC may be considered to set the lower boundary of valuations and DORC the higher.  Epic Energy proposes to use the DORC methodology based on the assumption that the pipeline system has an economic life of 79 years (access arrangement information, page 11).  Epic Energy has advised that it does not have access to DHC data for MAPS, other than that which is available in the annual reports of PASA (refer in particular to page 26 of the 1994/95 Annual Report).  The Commission is preparing an estimated comparison between DHC, ORC and DORC values and will seek the comments of Epic Energy and of parties who indicate an interest in this issue.  
Epic Energy gives the following comparison of asset values for MAPS:
Replacement Value				$643 million
ORC						$572 million
DORC						$358 million
Book Value (at 31/12/98)			$319 million
Note: the Pipeline System is stated to be 29 years old in 1999, with a further 50 years of useful life assumed given appropriate ongoing maintenance.  
Source: access arrangement information, pages 11 and 12.
Issues for consideration
1.	Is DORC the most appropriate method of asset valuation for MAPS?  If not, which methodology will provide the best valuation of MAPS and why? 
2.	If DORC provides the appropriate methodology, should the initial DORC value ($358m.) stated by Epic Energy be taken as the asset value of MAPS?  
3.	If you would arrive at a different asset valuation using a DORC methodology than does Epic Energy, what would be a fair and reasonable DORC value for MAPS?  What is the basis of your estimate?
4.	Is the ORC valuation based on the most rational and the optimal configuration of the pipeline system?
5.	Are estimated costs of a replacement pipeline system stated in the ORC Attachment (access arrangement information, pages 27-30) reasonable?
6.	Are there any other factors described by section 8.10 of the Code that should be taken into account?
7.	If the DORC method of valuing assets is not considered appropriate, what would be a fair and reasonable valuation of MAPS using the methodology you proposed in response to question 1 above?  

5.3	Working capital, depreciation and revaluation of the capital base
Epic Energy’s Table 4 below shows expected future depreciation, working capital and proposed annual charge on the capital base (discussed below, Chapter 5.4.) 

Note: estimated inflation over the period is 2.5% per annum.
Source: access arrangement information, page 19.

Working capital and stay in business capital
Issues for consideration
1.	Is the proposed level of working capital reasonable?
2.	Are the Stay in Business Capital forecasts reasonable?  

Depreciation and revaluation of the capital base
Information additional to that in Table 4 about the calculation of depreciation is given in Epic Energy’s Table 3, not reproduced here.  
Epic Energy proposes that the capital base be adjusted annually by a ‘capital cost revaluation’(i e, using a current cost accounting approach to valuation), which would be equal to the CPI and be a ‘fixed principle’ for the period of the access arrangement (refer clause 5.2(vi) of access arrangement, page 6).  
Under section 8.47 of the Code, a fixed principle cannot be changed during the period specified by the service provider without that party’s agreement.  Section 8.48 of the Code provides that a ‘market variable element’, as defined in section 10.8, cannot be a fixed principle.  
This raises three issues: specification of the duration of the ‘fixed period’, matters allowable as fixed principles and whether a ‘fixed principle’ is necessary. 
In response to a query as to the period during which the fixed principle would apply, Epic Energy advised by facsimile message dated 6 August 1999 that ‘a Fixed Principle would normally apply for and extend beyond an Access Arrangement Period’.  In relation to whether the proposal fell within the allowable matters, Epic Energy stated that it considers the ‘fixed principle’ to be the mathematical process by which the capital base is adjusted to reflect the change in CPI.  
Issues for consideration
1.	Does the depreciation schedule satisfy the design objectives set out in section 8.33 of the Code?  
2.	Is 79 years a good estimate of the useful life of MAPS?  Should this assumption apply to the whole pipeline system, or should the useful life of various segments or facilities of the pipeline system be considered separately?
3.	Is the 2.5% rate of inflation (used by the Commission in its Victorian transmission systems access arrangements Final Decision of 6 October 1998) still a good estimate of future inflation?  If not, what is the appropriate rate of inflation and why?
In its Victorian transmission systems Final Decision, the Commission accepted, in the context of consistent application of a real framework, that inflation-adjustment of the capital base during the initial access period and restatement of the capital base at the commencement of the next period to reflect the inflation adjustments of the previous period, were in accordance with the reference tariff principles in the Victorian Code.  The Victorian principles were equivalent to those in the national Code.  The Commission understands that the National Gas Pipelines Advisory Committee (the Code review and change body) is to consider whether any revisions need be made to the Code to make clear the acceptance of inflation-adjustment of the capital base for tariff-setting purposes.
4.	Can the capital cost revaluation be a ‘fixed principle’?  
5.	In the circumstances outlined above, is it necessary that it be a ‘fixed principle’?  If ‘yes’, for what period?  

5.4	Rate of return
Formulae and parameters 
Sections 8.30 and 8.31 of the Code together provide that the parameters to be used in the CAPM and WACC calculations should result in a rate of return that:
•	is commensurate with prevailing conditions in the market for funds and the risk involved in delivering the reference service; and
•	takes into account a financing structure that reflects standard industry structures for a going concern and best practice.  
In line with these objectives, the Commission’s approach is to determine benchmark values for the rate of return parameters as the first step and to then take into account the unique risks associated with delivering the reference service.
In clause 5.2 (viii) of its access arrangement, Epic Energy proposes that the rate of return used by the service provider to calculate its revenue requirements be its weighted average cost of capital (WACC).  Attachment 3 (the WACC Paper) at pages 31-34 of the access arrangement information further explains how WACC was derived, using a capital asset pricing model (CAPM).
Weighted average cost of capital is the average of the respective returns required by the holders of equity and debt interests in the firm, as the basis of investment in or lending to that firm.  
Relevant formulae required in the calculation of cost of equity and WACC are:
(1)	e = a + (a – d)(1-rd/(1+rd)T)D/E
where: 	e = 	equity beta
a = 	asset beta
d = 	debt beta
rd = 	cost beta
T = 	tax rate
D/E = 	likely debt to equity funding.
(2)	Cost of equity (re) = rf +e(rm – rf) 
where: 	rf  = 	nominal risk free rate
rm = 	return on market risk
(rm – rf) = market risk premium.
(3)	Pre-tax nominal WACC (po) = [re/Te(1-)]E/V + rd * D/V
where:	 = percentage of imputation utilization.
(4)	Post-tax nominal WACC (ro) = re[(1-Te)/1-Te(1-)]E/V + rd(1-T)D/V
(5)	Real rate = [(1 + nominal rate)/(1 + f)] – 1
where:	f = 	rate of inflation
The Commission has considered such formulae in the past in its Victorian transmission systems Final Decision of 6 October 1998 and in its Draft Statement of Principles for the Regulation of Transmission Revenues in the electricity industry published in May 1999 (documents at http://www.accc.gov.au under ‘gas’ and ‘electricity’ respectively).  It has expressed concerns that the adoption of these formulations to express tax incidence and to convert nominal tax rates to real rates leads to inaccuracies in estimating the revenues necessary to support the rate of return indicated by the CAPM.  
Issues for consideration
1.	Are the formulae proposed by Epic Energy appropriate to derive a rate of return that meets the requirements of sections 8.30 and 8.31 of the Code?  
2.	Is it preferable to express the allowed rate of return on an alternative basis to pre-tax real, for example, post-tax nominal as proposed in the Commission’s Draft Statement of Principles for the Regulation of Transmission Revenues in the electricity industry?  

In proposing the parameters for these formulae, Epic Energy’s WACC Paper sets out a range of values that it considers are plausible and acceptable.  Epic Energy argues that the values determined by the Commission in its Final Decision on the Victorian transmission systems access arrangements of Transmission Pipelines Australia Pty Ltd (TPA) are a ‘starting point’ at the low end of the range of values for a rate of return.  Epic Energy also argues that a number of characteristics of MAPS (set out at page 38 of the access arrangement information) create greater risks than those faced by TPA.  The following table summarizes the ranges proposed by Epic Energy for parameters of the cost of capital and resulting WACC values.
Ranges of values for WACC parameters
Parameter	Low
(ACCC Final Decision for TPA)	High
	
Asset beta (a)	0.55	0.70	
Debt beta (d)	0.12	0.12	
Cost of debt 
•	basic rate
•	margin	
6.00%
1.2%	
6.00%
1.5%	
Total cost of debt (rd) 	7.2%	7.5%	
Tax rate (corporate and effective) (T, Te)	36%	36%	
Gearing (60% debt, 40% equity) (D/E)	60/40	60/40	
Equity Beta (e)	1.18	1.55	
Risk Free Rate (rf)	6.00%	6.00%	
Market Risk Premium (rm-rf)	6.00%	7.00%	
Cost of equity	13.1%	16.9%	
Imputation utilization ()	50%	25%	
Pre-tax nominal WACC	10.7%	13.73%	
Expected inflation (f) 	2.5%	2.5%	
Pre-tax real WACC (application transformation)	8.0%	10.95%	
Pre-tax real WACC (reverse transformation)	6.63%	9.58%	
Post-tax nominal WACC	6.85%	8.78%	

Epic Energy recommends that, after taking the risk factors at page 38 of the access arrangement information into consideration, pre-tax real WACC be set in the range 9-10%.  Taking the mid-point, it proposes a pre-tax real WACC of 9.5%.  
Issues for consideration
While Epic Energy proposes the overall rate of return determined by the Commission in its Final Decision on the TPA access arrangements as a ‘starting point’, of the values determined by the Commission for that arrangement, only the values set out below have been adopted by Epic Energy.  

Parameter	Low
(ACCC Final Decision for TPA)	High
	
Debt beta (d)	0.12	0.12	
Tax rate (corporate and effective) (T, Te)	36%	36%	
Gearing (60% debt, 40% equity) (D/E)	60/40	60/40	
Risk Free Rate (rf)	6.00%	6.00%	

1.	To what extent is the Commission’s decision on the Victorian transmission systems access arrangements of TPA a reasonable starting point from which to derive the overall rate of return and the parameters of that rate?
2.	In what respects, if any, are conditions in the market for funds observed by the Commission in its Final Decision on the TPA access arrangements in October 1998 now different?  In what way do changed conditions impact on the above parameters?  
3.	What account should the Commission take of the legislative changes to introduce a New Tax System?  
4.	Should the Commission choose different values for the four parameters of rate of return (beginning with ‘debt beta’) shown immediately above?  
Epic Energy has indicated that a number of other parameters require different values to those in the Decision on the Victorian transmission systems.  The following table shows those parameters, which to a certain extent are market-related, and briefly states Epic Energy’s argument for higher values.

Parameter	High value	Reasons
(for details see access arrangement information, pages 32-33)	
Debt margin	1.5%	•	1.5% recommended by AMP in submission to Office of the Regulator-General re ORG Draft Decision of May 1998 on Victorian Gas Distribution Arrangements, 29.6.1998. 
•	Deutsche Bank derived a range of 1.2% to 1.55% as part of the Texas Utilities submission, 15.6.1998. 	
Market risk premium	7%	Periods have existed when the premium has been greater.  	
Level of imputation credit utilization	25%	Written comments, 1 July 1998, by R R Officer, who argued that it is difficult to measure this parameter and 25% is quite within the bounds of a reasonable estimate.	
Asset beta (a)	0.70	•	Comparability of British Gas Transco in terms of regulatory regime and competitive environment, and pertinent asset beta in Monopolies and Mergers price formula review, 1997.  
•	Comments by R R Officer, 28.5.1998, re difficulties of estimating the beta for an unlisted company.  	
Equity beta (e)	1.55	Application of the Monkhouse Formula to the recommended debt beta of 0.12 and the recommended asset beta of 0.70.  	

5.	If you observed changed conditions in the market for funds, in what ways do they impact on the above parameters?    
6.	Should the Commission choose different values for the above parameters of rate of return (beginning with ‘debt margin’) shown immediately above?  
7.	Is British Gas Transco more comparable to Epic Energy than is TPA, in terms of asset risk?  
The Commission understands from the Monopolies and Mergers Commission report that a real, pre-tax cost of capital of 7% (on a modified depreciated replacement cost asset base) should apply for Transco.  The Commission understands that this cost of capital was consistent with asset betas in the range 0.45 to 0.6, although MMC did not set a specific value for the parameter.  In seeking further information from Epic Energy on a number of issues, the Commission has asked Epic Energy to clarify the source of its data for the asset beta said to have been determined by MMC in 1997.
8.	What is a reasonable asset beta for Epic Energy in respect of MAPS?  What considerations should the Commission take into account in determining the value for this parameter?  
The Commission also understands from the MMC report that a real, pre-tax cost of capital of 7% was consistent with equity betas of about 0.55 to 0.73.  
9.	What is a reasonable equity beta for Epic Energy in respect of MAPS?  What considerations should the Commission take into account in determining the value for this parameter?  

Gas and haulage market factors said to impact on expected returns to equity
Epic Energy argues in its WACC Paper that the required rate of return for equity investment in MAPS would be substantially greater than that for TPA because a number of characteristics of MAPS are ‘extremely significant’ in adding risk.  These factors are listed below.  
•	The South Australian market growth is static, with limited opportunities being available;
•	The pipeline is dependent on two customers and is exposed to volatile electricity generation load;
•	Pipeline sales to electricity generators must compete with imported and coal-fired electricity generation; 
•	Long term gas resources are uncertain; 
•	It is more likely that the system could be bypassed; and
•	No annual revenue adjustment for material changes in operating costs is being requested. 
Source: access arrangement information, page 31.
Issues for consideration
1.	Which of the above factors justify a higher risk factor for Epic Energy’s investment in MAPS?  
2.	Are you aware of other factors that would mitigate this risk?  Are there areas in which operation of MAPS would have lower business risks than operation of the Victorian transmission systems?
As noted previously, a predecessor to Epic Energy (PASA) entered into contracts with its two customers on terms that limit the flexibility of Epic Energy to offer third-party access to haulage services until 2006, unless new facilities are paid for or the third parties make arrangements with the incumbents independently of Epic Energy.  According to Epic Energy, the current shippers are able to provide access on more flexible terms than can Epic Energy during the period to 2006.  Given the terms of the existing agreements for the majority of capacity reserved until 2006, Epic Energy entered into extensions from 2004 to 2006 to contracts with these customers in respect of the proportion of capacity not previously committed until 2006.  The majority of revenues are guaranteed for the term of these contracts.  
3.	Should the pipeline’s dependence on its two customers be recognized as a factor justifying a higher rate of return? 
Epic Energy has indicated that pipeline capacity is fully booked (refer Attachment B to Schedule 1 to the access arrangement – available capacity zero) and its funding of extensions or expansions is limited in accordance with the Queuing Policy and Extensions/Expansions Policy – see in particular clause 10.5 of the access arrangement.  
4.	In assessing risk, what, if any, account should be taken of the above circumstances?  
Epic Energy comments on the availability of competitively-priced supplies of gas for South Australia at pages 38 and 39 of the access arrangement information.  
5.	How relevant is the uncertainty of gas reserves as a risk factor in the light of pipeline interconnections, the development of Cooper Basin and the development of reserves outside the Cooper Basin?  

Gas demand forecasts
In Figure 1 at page 39 of the access arrangement information, Epic Energy compares its gas demand forecast with that of ABARE published by AGA.  A revised version of that Figure provided by Epic Energy is reproduced in Chapter 2.2 (above) of this Issues Paper.  
In Epic Energy’s view, ABARE’s forecast is too high.  Briefly summarized, its reasons (set out in full at page 37 of the access arrangement information) are as follows:  
•	continuation of maximum levels of electricity imports from Victoria owing to relatively low electricity prices in Victoria and New South Wales;
•	lower gas demand from electricity generators owing to higher efficiency of new plant;
•	the addition of new electricity generation plant that is either not fired on gas or not supplied with gas via MAPS;
•	the possibility of new electricity supply interconnections;
•	uncertainty of demand by the top two or three industrial gas users.
According to Epic Energy, the only upside to future gas demand is the prospect of a magnesium plant being located in Port Augusta (2 PJ pa) and the potential substitution of LPG and distillate at Olympic Dam (2 PJ pa).  
Issues for consideration
1.	Of the forecasts by ABARE and Epic Energy, which do you think is more reliable and why?  If in your view neither of the forecasts is correct, can you provide estimates or suggest sources of more accurate estimates?
2.	Is the list of factors underpinning Epic’s demand forecast complete and reasonable?  Do other factors need to be considered? 
3.	What is your view of the risks associated with future gas demand in South Australia as opposed to the gas demand risks in Victoria?  Is future demand in South Australia more uncertain than that in Victoria?  What allowance should be made for this in the risk parameters of WACC?

Rate of return proposal
Issues for consideration
1.	Is the 9.5% pre-tax real WACC proposed by Epic Energy a reasonable return on the capital base proposed for MAPS?  If not, what alternative would better represent the risk profile of MAPS?  

5.5	Revenue requirement
Based on forecast operations and maintenance expenses, depreciation expenses and a 9.5% pre-tax WACC, the revenue requirement for MAPS is as summarized by Epic Energy in its Table 1.  

Issues for consideration
1.	Given that the total revenue requirement would be higher than the revenue Epic Energy will receive from the existing haulage agreements, does this indicate that:
•	the revenue requirement is overstated; or
•	existing haulage tariffs are too low; or
•	neither of the above?
2.	Would the revenue requirement you propose be sufficient to provide incentive for efficient new investment in MAPS?  
3.	Is the revenue requirement significant as an incentive for new investment in the light of the limitations on service provider funding of extensions proposed in the extensions and expansions policy?  
4.	How should the Commission deal with the notional deficiency or surplus on revenue requirement compared to Epic Energy’s contracted revenue during the initial access arrangement period?  

5.6	Cost allocation and tariff structure
As a general principle under the Code, the costs (including capital costs) of providing reference services or the revenues earned in providing those services should be allocated to users, to the maximum extent commercially and technically reasonable according to the use they make of system assets (refer Code section 8.38 and following).  Costs or revenues that cannot be directly attributed should be allocated to various users on a fair and reasonable basis and in accordance with the Code’s general principles for tariff design encompassing efficient pipeline usage and market growth incentives.  The tariff for a reference service should reflect these principles.  
According to section 2.2 of the access arrangement information (page 10):
Under existing contracts, the majority of total revenue, excluding gas cost, is recovered through fixed capacity charges with the remainder recovered through a commodity charge.  The same proportion is to be reflected in the proposed Reference Tariffs.  Allocation of costs and revenues was required to arrive at the Whyalla Lateral Surcharge for FT Service on the Whyalla Lateral.  The Whyalla Lateral Surcharge was calculated to recover the total current revenues recovered under existing contracts for capacity on these facilities.  A summary of this allocation and derivation of Reference Tariffs is shown at Attachment 1, Table 6.
The allocation formula for the mainline and the surcharge for the Whyalla lateral were related to capacity of the pipeline and distance, as indicated briefly in Tables 5 and 6 at pages 20 and 21 of the access arrangement information.  The total capacity assumed is the ‘system primary capacity’ of 323 TJ/day, as defined in clause 2.2 of the access arrangement.  
Section 2.2 of the access arrangement information also states:
There is also one Rebatable Service (Interruptible (IT) Service) which is inferior in quality to FT Service.  The price of IT Service has been set to equate to 115% of FT Service as shown on Attachment 1, Table 6, but will be charged on a commodity basis only.  Revenues from IT Service are expected to be zero during the initial Access Arrangement Period.  Should any revenues be recovered, they would be subject to the incentive mechanism …
Schedule 4 of the access arrangement (on the ACCC Website it appears at page 45 of the electronic document ‘Public – AA Schedules.doc’) sets out Epic Energy’s proposed tariff structure, which is based on these allocation procedures.  
The tariff structure is summarized in the following.  Tariff values are those at the lodgement date.  Actual values would escalate in line with provisions of the access arrangement (refer clause 5.2 in particular).  
Class FT Services
•	Capacity charge based on MDQ and a fixed capacity charge rate of $0.3525, which will be paid in 12 equal monthly instalments; 
•	Whyalla lateral surcharge of $0.179 per GJ in addition to the capacity charge rate; 
•	Commodity charge of $0.0879 per GJ; to be paid monthly for gas delivered; 
•	Customer charge of $100 per month; 
•	Excess imbalance charge and zone variation charge of $0.30 per GJ respectively; and
•	Default charge of $7.50 per GJ. 
IT service
•	commodity charge of $0.5065 per GJ; 
•	customer charge of $50 per month; 
•	excess imbalance charge, $0.30 per GJ; and
•	default charge, $7.50 per GJ. 
Other charges
•	Application fee and charges for using electronic bulletin board. 
Issues for consideration
1.	Are you satisfied that the allocation methodology and data to explain the structure and level of tariffs accord with Code principles?  If not, what additional information would be of assistance?  
2.	Is the approach taken to set Class IT tariffs reasonable?
3.	Are the proposed levels and structure of tariffs economically sound in terms of providing price signals for maximizing the efficient utilization of the system?
4.	Will the proposed tariffs provide incentives for Epic Energy to minimize costs and develop the market?

5.7	Incentive mechanism
Section 8.46 of the Code describes the design objectives of an incentive mechanism.  
Epic Energy’s proposed ‘incentive and risk sharing mechanism’ is a rebate mechanism for reference (FT) service customers related to the level of IT Service provided.  Its stated objective is to improve the efficiency of utilization of the pipeline system.  If MAPS generates substantially more than its total revenue requirement and it generates IT Service sales, a portion of the revenue from IT sales will be ‘rebated’ to continuing contracted FT customers at the end of the access arrangement period, by way of reduction in the reference tariff.  Similarly, any revenue shortfall will be debited to FT customers.  Details of the mechanism are set out in clause 5.3 of the access arrangement. 
Issues for consideration
1.	In terms of section 8.46, will this mechanism give the Service Provider an incentive to:
•	increase the volume of sales?
•	minimize overall costs consistent with safe and reliable operations?
•	develop new services in response to the needs of the market?
•	undertake only prudent new investment and incur only prudent non-capital costs? 
•	ensure that users and prospective users gain from increased efficiency, innovation and volume of sales?
2.	Is the proposed rebate mechanism likely to be an effective efficiency-sharing mechanism?  Does your view depend on whether services are normally sold at or below the reference tariff?  
3.	Is the proposed risk-sharing mechanism, whereby the service provider will recover deficiencies in revenues during the next access arrangement period (refer clause 5.3(b)(iv)(B)) reasonable?
4.	Are any other measures necessary to achieve the Code’s objectives?  Should the Commission as regulator require some additional or alternative mechanism while the existing haulage agreements are in operation?  

5.8	Performance indicators
In order to determine a value for the service provider’s level of costs and revenue requirement consistent with the broad tariff principles set out in section 8.1 of the Code, the regulator may have regard to any financial and operational performance indicators it considers relevant.  
Epic Energy’s position is that there are at present no useful comparators in Australia as a means to justify reasonably-incurred costs.  It argues that the Code should be modified to enable pipelines to develop quality of service standards and supporting data.  However, at page 16 of the access arrangement information, it does give a distance-based comparison of pipeline tariffs in 1997 (which it acknowledges to be ‘crude’ and ‘simplistic’, and intended to illustrate the limited usefulness of such comparisons) and some service comparators to illustrate service provider performance over time.  
Issues for consideration
1.	Can you propose a fair and reasonable basis of comparison of pipeline systems?  Is the illustration given by Epic Energy of comparative tariffs useful for purposes of assessing an access arrangement?  
2.	Are the other comparators provided by Epic Energy of assistance in evaluating its level of costs?  
3.	Does the information provided by Epic Energy meet the requirements of Attachment A to the Code?  
4.	Can you suggest useful indicators of service quality and efficiency? 

Australian Competition and Consumer Commission

ATTACHMENT A TO CODE (AND TO ISSUES PAPER)
INFORMATION DISCLOSURE BY A SERVICE PROVIDER TO INTERESTED PARTIES
Pursuant to Section 2.7 the following categories of information must be included in the Access Arrangement Information.
The specific items of information listed under each category are examples of the minimum disclosure requirements applicable to that category but, pursuant to Sections 2.8 and 2.9, the Relevant Regulator may:
	allow some of the information disclosed to be categorised or aggregated; and
	not require some of the specific items of information to be disclosed,
if in the Relevant Regulator's opinion it is necessary in order to ensure the disclosure of the information is not unduly harmful to the legitimate business interests of the Service Provider or a User or Prospective User.
Category 1: Information Regarding Access & Pricing Principles
	Tariff determination methodology
	Cost allocation approach
	Incentive structures
Category 2: Information Regarding Capital Costs
	Asset values for each pricing zone, service or category of asset
	Information as to asset valuation methodologies ‑ historical cost or asset valuation
	Assumptions on economic life of asset for depreciation
	Depreciation
	Accumulated depreciation
	Committed capital works and capital investment
	Description of nature and justification for planned capital investment
	Rates of return ‑ on equity and on debt
	Capital structure ‑ debt/equity split assumed
	Equity returns assumed ‑ variables used in derivation
	Debt costs assumed ‑ variables used in derivation
Category 3: Information Regarding Operations & Maintenance
	Fixed versus variable costs
	Cost allocation between zones, services or categories of asset & between regulated/unregulated
	Wages & Salaries ‑ by pricing zone, service or category of asset
	Cost of services by others including rental equipment
	Gas used in operations ‑ unaccounted for gas to be separated from compressor fuel
	Materials & supply
	Property taxes
Category 4: Information Regarding Overheads & Marketing Costs
	Total service provider costs at corporate level
	Allocation of costs between regulated/unregulated segments
	Allocation of costs between particular zones, services or categories of asset
Category 5: Information Regarding System Capacity & Volume Assumptions
	Description of system capabilities
	Map of piping system ‑ pipe sizes, distances and maximum delivery capability
	Average daily and peak demand at "city gates" defined by volume and pressure
	Total annual volume delivered ‑ existing term and expected future volumes
	Annual volume across each pricing zone, service or category of asset
	System load profile by month in each pricing zone, service or category of asset
	Total number of customers in each pricing zone, service or category of asset
Category 6: Information Regarding Key Performance Indicators
	Industry KPIs used by the Service Provider to justify "reasonably incurred" costs
	Service provider's KPIs for each pricing zone, service or category of asset
________

ATTACHMENT B TO ISSUES PAPER

Source: according to Epic Energy, the source for AGA (ABARE) data in the above Figure is the AGA’s Gas Supply and Demand Study 1997 – Participants’ Report, Table D5: ‘Projections of Natural Gas Consumption - South Australia’, page 119.  As the figures in Table D5 were in financial years, Epic Energy adjusted to calendar years by averaging.  
From the AGA/ABARE forecast figures should be deducted the amount of gas forecast to be sold through the South East Pipeline System, which is not connected to MAPS.  For  the base year 1997, this amount was in the order of 2 PJ.