CENTRAL WEST PIPELINE

ACCESS ARRANGEMENT INFORMATION

SUPPLEMENTARY INFORMATION

Issue

Justification of the proposed cost allocation approach in terms of the principles of the Code for both the single throughput tariff and single zone pricing.

Single Throughput Tariff

Section 8.42 of the Code requires that a Reference Tariff should, to the maximum extent technically and commercially reasonable, be designed so that a particular User’s share of the portion of Total Revenue to be recovered from sales of that Reference Service should be consistent with the principles in section 8.38.  This is subject to the provisions of section 8.43 which permit the amount of Prudent Discounts to be recovered from other users.

The principles in section 8.38 essentially require that the charge paid by the User of the Reference Service be cost reflective, although substantial flexibility is provided.

Additionally, one of the objectives of the Code is the establishment  of a framework for third party access to gas pipelines that, among other matters, promotes a competitive market for natural gas in which customers may choose suppliers.  While it is not the role of an Access Arrangement per se to create that competitive market, an Access Arrangement should not present a barrier to the development of that competition.

The proposed Reference Tariff is a simple throughput tariff where the amount paid by Users of the Reference Service is directly calculated according to the quantity of gas transported on their behalf. This Reference Tariff, in the current state of development of the market served by the pipeline, meets the Code requirements and objectives for the following reasons.

Pricing methodologies for pipelines

There are two pricing methodologies which are commonly applied to pipeline transportation pricing – two part (capacity and throughput) pricing, or throughput pricing adjusted for load factor.

The common cost allocation methodology for a transmission pipeline is the “two part” tariff where the tariff has two components – notionally, the majority (say 80%) of the total tariff reflects recovery of the capital cost of providing the pipeline (ie the capacity component) with the remainder reflecting recovery of the operating costs (ie the throughput component).  Under this pricing structure, a user is required to reserve and pay for pipeline capacity (ie MDQ) reflecting their expected highest daily usage, although that MDQ may not be utilised every day. This means that a user with uneven (or peaky) gas usage requires – over the course of a given period - more pipeline capacity (ie MDQ) to deliver its gas requirements than a user who has more even usage.

Effectively, depending on load factors, two users may have identical throughput quantities, but the user with a more fluctuating consumption profile will pay the higher effective tariff for the quantity consumed since that user will require a higher MDQ reservation than the user with a more efficient load factor.

The other methodology that is applied is a “simple” throughput tariff with an adjustment for load factor and a minimum bill.   Under this methodology, the throughput tariff is adjusted to reflect the user’s load factor so that the amount paid by the user depends on the amount of pipeline capacity actually required to satisfy that user’s requirements.  The effect of the minimum bill (usually 80% of contracted annual quantity) is to reflect that the capacity is available to the user irrespective of whether it is actually being used (ie whether gas is actually being delivered).  Like the two part tariff methodology, this ensures that users are charged on the basis of the actual pipeline capacity required to provide them with the haulage service.

Why the CWP Reference Tariff meets the Code requirements

For a developing market, it is desirable that the tariff structure is simple as this will encourage greater use of natural gas. Relaxing the load factor adjustment and minimum bill requirement of the single throughput tariff methodology in the initial  Access Arrangement Period is designed to simplify use of natural gas and encourage more use of the pipeline. The relaxation of these requirements for this initial period also gives users and end-customers  5 years to develop and implement gas management procedures appropriate for their circumstances. 

Under the throughput tariff in the Access Arrangement, users are paying for the capacity they use in the pipeline when gas is being delivered to them. This approach means that the price paid by users is, within these market development and commercial constraints, reasonably cost reflective having regard to expected pipeline utilisation.

Given there is no history of natural gas consumption in the Central West, and that other fuel sources are paid for on a “consumption” basis, this single throughput tariff achieves three important objectives of the Code –it satisfies the requirement that the portion of Total Revenue recoverable from the user reasonably reflects the costs incurred in providing the service to the user, it will assist in developing the market for the pipeline services and it will not act as a barrier to the development of a competitive market for gas supply services.

Single Zone Pricing

Pricing other than single zone for pipelines such as the CWP will result in uneconomic tariffs leading to under-utilisation of the pipeline and thus under-recovery of the reasonable costs of constructing and operating the pipeline, and would thus be a disincentive to development of such projects. To ensure that users of the CWP only bear the costs directly attributable to providing services in the Marsden to Dubbo zone, AGLP has “stranded” the excess capacity built into the pipeline.  

Issue

Explanation of assumptions and information that underpin the volume forecasts.

The basis of the throughput estimates for the CWP project has been provided to the Commission on a confidential basis.  These estimates are based on 1996 data arising from visits to potential major customers, experience with similar projects and total residential and business populations of the region likely to be serviced by the pipeline.

The original (ie 1996) throughput estimates were adjusted during the preparation of the Access Arrangement in November 1998 by increasing the original throughputs by some 50%.  This significant increase reflected optimism for the project in terms of the likely early penetration of gas into the Central West region.

Issue

Source of asset betas quoted on p. 12 of the revised access arrangement information.

These figures were sourced from Appendix 5, page 32 of “The Rate of Return for Electricity Distribution Networks: Discussion Paper November 1998”   Independent Pricing and Regulatory Tribunal of New South Wales.

Issue

How the Code reduces the appropriateness of foundation contracts (footnote 23 of the revised access arrangement information)

The footnote refers to AGLP’s view that one of the outcomes of the Code is that the significance of foundation contracts - which have historically been the foundation of Australian pipeline development  - may in the future be reduced.

Many, if not all, of the existing major pipelines in Australia have been underwritten by long term foundation contracts, which typically ensured that the foundation users enjoyed a lower tariff reflecting the risk associated with their commitment to significant minimum transportation volumes, and that this early commitment underpinned the viability of the project.

However, under the Code there can be no certainty that foundation users will enjoy this benefit - while the Regulator must consider such foundation contracts and cannot make a decision depriving a person of rights under those contracts, the Regulator is not bound by those contracts. This creates the risk that the discount required to attract the foundation user may have to be borne by the pipeline developer as the Code may not permit recovery from other users.  This in turn may make pipeline development less attractive.

In addition, if there is a possibility that non-foundation third party users could have access to the pipeline at a tariff established under the Code which is less than that which the foundation user is committing to pay, this may reduce the incentive for foundation users to commit early.

Issue

Activities and assets of AGLP that are not covered by the CWP access arrangement

AGLP has no assets or activities which are not covered by the CWP Access Arrangement.

Issue

Activities and operations of AGLP
The activities carried out directly by AGLP are ownership of the CWP and entering into transportation contracts.

AGLP has no employees

Issue

Verification of calculation of the proposed fixed principle amount and the derivation of DORC from ORC.

The derivation of DORC from ORC is detailed in the following table, together with a year by year reconciliation of the fixed principle amount.

	1999	2000	2001	2002	2003	2004	
Opening Asset Value
Less Depreciation
Add Capital Expenditure	25.940
-3.540
0.007	29.486
-3.514
0.007	33.008
-3.402
0.007	36.416
-3.190
0.007	39.613
-2.842
0.007	42.463
-2.739
0.008	
Closing Asset Base	29.486	33.008	36.416	39.613	42.463	45.210	
EBIT
Total Operating Costs	-0.239
0.724	0.245
0.742	0.807
0.760	1.453
0.779	2.208
0.799	2.675
0.819	
Total Revenue	0.491	0.987	1.567	2.232	3.007	3.493	

	1999	2000	2001	2002	2003	2004	
Revenue
Operating Costs	0.491
0.724	0.987
0.742	1.567
0.760	2.232
0.779	3.007
0.799	3.493
0.819	
Net Margin	-0.239	0.245	0.807	1.453	2.208	2.675	
Return on Assets	3.307	3.760	4.208	4.643	5.051	5.414	
Depreciation	-3.540	-3.514	-3.402	-3.190	-2.842	-2.739	

Issue

Nature of the forecast capital costs

During the normal course of operating a transmission pipeline some addition and/or replacement of the asset or components of the asset will be necessary.  Examples of the forecast capital costs include:

•	instrumentation - metering, telemetry remote terminal units etc;
•	pipeline hardware – valves, regulators and fittings etc; and
•	minor site capital improvements – fencing, security etc.

Reasons for allowing for asset replacement after one year as a capital cost

New capital expenditure or replacement of existing capital expenditure represents a capital cost to the asset, and should be incorporated into the asset base of the asset regardless of the age of the asset. 

An asset or a component of the asset could require replacement or alteration after operating for a short period of time. In AGLP’s experience some minor capital expenditure is usually required during each year of a pipeline operating  - in the early years this could result, for example, from residual dust in the pipeline causing more aggressive wearing of some components than would be expected in later years of pipeline operation.  This capital cost differs from the concept of repair and maintenance of the asset which has been included in the operating and maintenance costs for the asset.

Basis for the forecasting?

For the initial Access Arrangement Period the level of capital expenditure (which is described in the Revised Access Arrangement Information as “stay in business” capital expenditure) is anticipated to amount to around 1.5% of direct operation and maintenance cost incurred in operating the pipeline. This amount was derived from AGLP’s experience in operating pipelines.  The amount of stay in business capital, whilst minimal in the early years of operating the CWP, will increase over time as the assets increase in age and replacement  of components becomes more frequent.

It is anticipated that the stay in business capital expenditure estimated to be spent in the Access Arrangement Period will be spent on replacing small items that tend to wear out at unpredictable rates or are replaced due to changing technology (eg transducers, meter components and regulators).

In any event the Access Arrangement prescribes that the capital base will be adjusted to reflect what has actually been spent in respect of capital expenditure at the commencement of the next Access Arrangement Period.

Issue

Federal Government funding of $2 million 

The total funding of $2m has been received.
The Orana Regional Development Organisation stated that “it would allocate to the successful applicant (ie of the tender process) an amount up to $2m on an agreed basis to assist with the development of the main arterial line”.

AGLP has always understood this funding was specifically for the CWP, and it has been applied to the initial capital base of the CWP accordingly.