Draft Decisions

GasNet Australia
access arrangement revisions
for the GasNet System

10 November 2004

File No:	Commissioners:	
S2004/74	Samuel	McNeill	
	Sylvan	Smith	
	King	Willett	
	Martin		

Contents
Abbreviations and glossary
Summary
1	Introduction
1.1	Access arrangement revisions
1.2	Criteria for assessing revisions to access arrangements
1.3	Background
1.4	Public consultation
2	Assessment of the assessment arrangement as revised
3	K-factor
3.1	Current access arrangement provisions
3.2	GasNet proposal
3.3	Submissions
3.4	ACCC’s considerations
4	Refill tariff
4.1	Current access arrangement provisions
4.2	GasNet proposal
4.3	Submissions
4.4	ACCC’s considerations
5	Weather pattern
5.1	Current access arrangement provisions
5.2	GasNet proposal
5.3	Submissions
5.4	ACCC’s considerations
6	Timing
6.1	Current access arrangement provisions
6.2	GasNet proposal
6.3	Submissions
6.4	ACCC’s considerations
7	Information provision
7.1	Code provisions
7.2	GasNet proposal
7.3	Submissions
7.4	ACCC’s considerations
8	Draft decisions
Appendix:  Submissions from interested parties

Abbreviations and glossary
ACCC	Australian Competition and Consumer Commission 	
access arrangement	an arrangement for third party access to a pipeline provided by a service provider and approved by the relevant regulator in accordance with the Code 	
access arrangement information 	information provided by a service provider to the relevant regulator pursuant to section 2 of the Code 	
access arrangement period	the period from when an access arrangement or revisions to an access arrangement takes effect (by virtue of a decision pursuant to section 2) until the next revisions commencement date	
Code	National Third Party Access Code for Natural Gas Pipeline Systems	
covered pipeline	a pipeline to which the provisions of the Code apply	
CPI	Consumer Price Index	
EDD	Effective Degree Day – a measure comprising temperature, wind chill, insolation and seasonal components that is used in the modeling of the relationship between daily weather and some gas demand	
EGP	Eastern Gas Pipeline	
GasNet	GasNet Australia (Operations) Pty Limited	
GJ	gigajoule (one thousand million joules)	
GNS	GasNet System	
K-factor	A mechanism within GasNet’s access arrangement whereby if the average tariff achieved is different to the benchmark average tariff, future tariffs are adjusted to allow the under recovery (over recovery) to be recovered (paid back to users) in the next regulatory year.  The average tariff is only affected by changes in product mix – not changes in total volumes.	
market carriage	a capacity management system where the service provider does not normally require users to commit to a contract and charges are based on actual usage	
ORG	Office of the Regulator-General, Victoria (now the Essential Services Commission of Victoria)	
PJ	petajoule (one thousand terajoules)	
prospective user	a person who seeks or who is reasonably likely to seek to enter into a contract for a service (including a user who seeks or may seek to enter into a contract for an additional service)	
PTS	Principal Transmission System	
reference service	a service which is specified in an access arrangement and in respect of which a reference tariff has been determined	
reference tariff 	a tariff specified in an access arrangement as corresponding to a reference service 	
reference tariff policy 	a policy describing the principles that are to be used to determine reference tariffs	
service provider	a person who is the owner or operator of the whole or any part of the pipeline or proposed pipeline 	
Tariff Order	Victorian Gas Industry Tariff Order	
TJ	terajoule (one thousand gigajoules)	
VENCorp	Victorian Energy Networks Corporation	
WACC	weighted average cost of capital	
WTS 	Western Transmission System	
WUGS	Western Underground Gas Storage	

Summary 
GasNet Australia (Operations) Pty Ltd (GasNet) lodged four proposed revisions to its natural gas transmission access arrangements with the Australian Competition and Consumer Commission (ACCC) on 24 August 2004:
•	K-factor – GasNet proposes that where there is an over recovery of its average revenue in a year, the associated K-factor amounts would be spread over the remaining years of the access arrangement period, rather than all of it being allocated to the next year;
•	Refill tariff – GasNet proposes that exports via the WUGS facility should not be charged the lower refill tariff but instead charged the same tariff as exports via the SEA Gas off-take;
•	Weather pattern – GasNet proposes to adjust the demand forecasts in the access arrangement to reflect an increase in the warming shift in the Victorian weather pattern; and
•	Timing – GasNet proposes a mechanism to allow implementation of the revisions for the calculation of its 2005 tariffs.
Section 2.28 of the National Third Party Access Code for Natural Gas Pipeline Systems (Code) allows a service provider to submit revisions at any time.  The regulator must then assess the revisions against the provisions of the Code.
After considering the submissions by GasNet and interested parties, the ACCC has decided to issue draft decisions with respect to each of the four revisions:
•	pursuant to section 2.35(a) of the Code, the ACCC proposes to approve the revisions with respect to K-factor, weather pattern and timing, and
•	pursuant to section 2.35(b), the ACCC proposes not to approve the revision with respect to the refill tariff.
The reasons are set out in this draft decision.
Written submissions are requested on this draft decision and should be received by the ACCC no later than 26 November 2004.
After considering further submissions, the ACCC will issue its final decisions with respect to each of these proposed revisions.

1	Introduction
1.1	Access arrangement revisions
On 24 August 2004, GasNet Australia (Operations) Pty Ltd (GasNet) submitted to the Australian Competition and Consumer Commission (ACCC) for approval under the National Third Party Access Code for Natural Gas Pipeline Systems (Code) proposed revisions to its access arrangement.
Prior to 2003, GasNet was subject to two separate access arrangements, which were approved by the ACCC in 1998, for the Principal Transmission System (PTS) and the Western Transmission System (WTS).  In the scheduled review in 2002, these were combined into a single access arrangement which applied to both the PTS and WTS, the South West Pipeline that links them, and GasNet’s segment of the Interconnect.  GasNet now refers to these assets as the GasNet System (GNS).  This single revised access arrangement, as amended by the ACCC, came into effect on 1 February 2003.  It was later varied by the Australian Competition Tribunal.  
Under the market carriage capacity management system operating on the GNS, users pay tariffs to both the system owner, GasNet, and the independent system operator, Victorian Energy Networks Corporation (VENCorp).  Approximately 85 per cent of the combined tariff is paid to GasNet.  
An access arrangement describes the terms and conditions on which a service provider will make access to its pipeline available to third parties.  The current GNS access arrangement period ends on 31 December 2007.  However, section 2.28 of the Code gives service providers the discretion to submit revisions earlier than at a scheduled review and this is the basis of GasNet's proposal on 24 August 2004. 
Under the Code, the ACCC is required to:
•	inform interested parties that it has received the proposed revisions to the access arrangement and the associated access arrangement information (parties were notified by email on 30 August 2004 or letter on 31 August 2004)
•	publish a notice in a national daily paper which at least: describes the covered pipelines to which the access arrangements relate; states how copies of the documents may be obtained; and requests submissions by a date specified in the notice (the notice was inserted in the Australian Financial Review on 1 September 2004)
•	after considering submissions received, issue a draft decision which either proposes to approve the revisions or proposes not to approve the revisions (this document is that draft decision), and
•	after considering additional submissions, issue a final decision that either approves or does not approve the revisions.
This process is different to that for revisions required by an access arrangement (for example, as part of a scheduled review) in that there is no provision for the ACCC to state the amendments (or nature of the amendments) which would have to be made to the revisions in order for the ACCC to approve them or for the service provider to submit amended revisions to the ACCC.
1.2	Criteria for assessing revisions to access arrangements
Pursuant to section 2.46 of the Code, the ACCC may approve revisions to an access arrangement only if it is satisfied that the access arrangement as revised would contain the elements and satisfy the principles set out in sections 3.1 to 3.20 of the Code, which are summarised below.  Revisions to an access arrangement cannot be opposed solely on the basis that the access arrangement as revised would not address a matter that sections 3.1 to 3.20 of the Code does not require it to address.  Subject to this, the ACCC has a broad discretion in approving or not approving revisions to an access arrangement.  
An access arrangement, or a revised access arrangement, must include the following elements:
•	a policy on the service or services to be offered which includes a description of the service(s) to be offered
•	a reference tariff policy and one or more reference tariffs.  A reference tariff operates as a benchmark as it sets out the specific tariff on which access to a specific service will be made available.  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 statement of whether a contract carriage or market carriage capacity management policy is applicable
•	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 the priority that a user has in obtaining access to spare and developable capacity on a pipeline
•	an extensions and expansions policy to determine the treatment of an extension or expansion of a pipeline under the Code
•	a date by which revisions to the arrangement must be submitted, and 
•	a date by which the revisions are intended to commence.  
As the GNS is a market carriage pipeline, there is no trading policy.
The Code (section 10.2) provides that, where there is more than one service provider in connection with a covered pipeline, with one the owner and the other the operator, responsibility for complying with the obligations imposed by the Code is allocated among them by their access arrangements and each service provider is responsible for complying with the responsibilities allocated to it.  GasNet does not have a queuing policy as that responsibility has been allocated to VENCorp.
The ACCC’s approach to the assessment of the access arrangement as revised is set out in chapter 2.
In assessing proposed revisions to an access arrangement, the ACCC must take into account the provisions of the access arrangement as it currently stands and, pursuant to section 2.24 of the Code, the following factors:  
•	the legitimate business interests and investment 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 ACCC considers are relevant.  
The ACCC’s assessment of each of the four proposed revisions is set out in chapters 3 to 6.
In conjunction with its proposed access arrangement, a service provider is required to submit access arrangement information in accordance with the criteria established in Attachment A of the Code.  This requirement is considered in chapter 7.
1.3	Background
Relevant aspects of the Victorian gas industry structure include:
•	GasNet owns the GNS in Victoria which transports gas supplied from the Esso-BHP Billiton fields in the Gippsland Basin, the Cooper Basin via the Interconnect Pipeline and the Otway Basin.  VENCorp is the independent system operator for the GNS
•	The TXU owned Western Underground Gas Storage (WUGS) facility (at Iona) provides a source of peak gas flows into the GNS via the Southwest Pipeline.  The WUGS facility is also connected to the SEA Gas pipeline which transports gas from Iona to Adelaide in South Australia.  As the SEA Gas pipeline is connected to the GNS at the Southwest Pipeline, gas can flow from the GNS into the SEA Gas Pipeline either directly or via the WUGS facility
•	Alinta owns and operates the Eastern Gas Pipeline (EGP) which supplies Gippsland Basin gas to NSW and the Tasmanian Natural Gas Pipeline which supplies Gippsland Basin gas to Tasmania.  These are connected to the GNS at the VicHub, and
•	a number of new gas sources, located primarily in the Otway Basin, are expected to commence supply to the GNS and to South Australian customers in the short to medium term.
1.4	Public consultation
Interested parties are invited to make written submissions to the ACCC on its draft decision by Friday 26 November 2004.  After considering further submissions, the ACCC will issue its final decisions.
Submissions are made available from the ACCC’s website (www.accc.gov.au under ‘Gas’).  They are also placed on the public register held by the Code Registrar.  Submissions should be supplied in electronic format compatible with Microsoft Word to the review email address below.  In addition, one original signed document should be mailed to the postal address below.  Any information considered to be of a confidential nature should be clearly marked as such, and the reasons for seeking confidentiality should be provided.  Under the terms of the Code, the ACCC must not disclose such information unless it is of the opinion that disclosure would not be unduly harmful to the legitimate business interests of the service provider, a user or prospective user.  
The ACCC’s email address for this review is gasnet@accc.gov.au.  Hard copies of submissions should be forwarded to:
Mr Mike Buckley
General Manager
Regulatory Affairs Division – Gas
Australian Competition and Consumer Commission
GPO Box 3648
Sydney   NSW   1044
Copies of the revisions application and this draft decision are available from the ACCC’s website.  Copies of this draft decision may also be obtained from the ACCC by contacting Ms Stacey Breen on telephone (02) 6243 1233, fax (02) 6243 1205, or at the above email address.  
Any other inquiries should be directed to Mr Alex Ralston on (02) 9230 9161.  

2	Assessment of the access arrangement as revised
As noted in section 1.2, pursuant to section 2.46 of the Code, the ACCC may approve revisions to an access arrangement only if it is satisfied that the access arrangement as revised would contain the elements and satisfy the principles set out in sections 3.1 to 3.20 of the Code.  Revisions to an access arrangement cannot be opposed solely on the basis that the access arrangement as revised would not address a matter that sections 3.1 to 3.20 of the Code do not require it to address.  Therefore, the ACCC has considered whether any of the elements of the access arrangement as revised would be inconsistent with the requirements of sections 3.1 to 3.20 of the Code.  
The ACCC has considered TXU’s submission that it opposes ‘re-opening’ GasNet’s access arrangement during the term of an access arrangement period.  However, as noted in section 1.1 above, section 2.28 expressly provides that service providers may submit proposed revisions at any time during the term of an access arrangement period.  Once proposed revisions have been lodged, the regulator must assess them in accordance with section 2.46.  TXU has also raised a specific concern on whether a fixed principle in GasNet’s access arrangement would be breached if the ACCC approves these revisions.  This issue is considered later in this chapter.
The ACCC has also considered GasNet’s submission that ‘a number of operational anomalies have emerged which were not anticipated prior to the rollout of the Access Arrangement’ and that its proposed revisions are intended to ‘cure these anomalies’.  In this regard, the ACCC notes that the provisions of the Code do not expressly differentiate between types of revisions or allow for differential treatment on the basis that proposed revisions are described as curing anomalies.  This approach of GasNet’s is considered further in section 5.4.
The ACCC’s assessment of GasNet’s four proposed revisions in terms of the section 2.24 requirements and sections 3.1 to 3.20 (as required by section 2.46) is provided in chapters 3 to 6.  The ACCC has also considered the existing provisions of the access arrangement (as also required by section 2.46) in those assessments.  The ACCC has concluded that the refill tariff revision would not comply with relevant Code provisions.  In assessing the various factors in section 2.24, the ACCC concluded that the likely detriments associated with the revision would outweigh the potential benefits.  Accordingly, it has proposed not to approve this revision.  The ACCC proposes to accept the other three revisions as they do comply with the relevant Code provisions.
The ACCC completed a full review of the access arrangement in January 2003 when it drafted and approved a revised access arrangement for GasNet, which was subsequently varied by the Australian Competition Tribunal in December 2003.  The ACCC notes that all four revisions relate to aspects of the reference tariffs (sections 3.3 to 3.5 of the Code).  Consequently, approval of the revisions would not impact on compliance with sections 3.1 to 3.2 and 3.6 to 3.20.  Sections 3.4 and 3.5 respectively require reference tariffs and the Reference Tariff Policy to comply with the principles of section 8.  
While no submissions were received from interested parties that suggested the access arrangement as revised would be inconsistent with the requirements of sections 3.1 to 3.20 of the Code (although TXU submitted that it may be inconsistent with a fixed principle, which is discussed below), the ACCC is aware that considerations relevant to the access arrangement as approved in 2003 may have varied with the passing of time.  In this respect, when assessing previous proposals to include the Interconnect Assets and the South West Pipeline in the regulatory asset base of the GNS, the ACCC discussed the potential impact of changes in the market for funds.
In relation to the current proposed revisions GasNet submitted:
GasNet submits that the Access Arrangement as revised with these Access Arrangements Revisions is not taken outside the principles in section 3.1 to 3.20. Nor has the environment in which the Access Arrangement operates changed so substantially that the Access Arrangement no longer complies with the Code.
However, if the ACCC considers that the environment has changed such that the reference tariff principles are affected, it is GasNet’s view that this change is not so significant that the costs and uncertainties associated with this review are outweighed by the need to amend the Access Arrangement. GasNet notes particularly that the ACCC should not conduct a review at this point as this may amount to repeating the full review undertaken in 2002 or anticipating the review expected in 2007.
The ACCC is aware that Government bond rates (which serve as a proxy for the risk free rate) have fallen below the values used in the determination of the reference tariffs in GasNet’s access arrangement as it currently stands.  It is also aware that more recent overall demand forecasts for the GNS by VENCorp in its November 2003 Annual Gas Planning Review 2004 to 2008 suggest that GasNet’s revised forecasts may prove to be optimistic.  These, and potentially other factors of which the ACCC is not currently aware, raise a question as to whether circumstances have changed such that GasNet’s access arrangement as revised would continue to satisfy the requirements of sections 3.1 to 3.20 of the Code (including the requirements of section 8, as provided by sections 3.4 and 3.5).
The ACCC notes that some of these factors might potentially push towards lower reference tariffs (for example, lower interest rates) while others (for example, reduced demand forecasts) would tend to have the opposite effect.  It also notes that the potential implications of these factors are uncertain or unknown.  In particular, while VENCorp has forecast lower demand than GasNet, GasNet has indicated doubts about the likely accuracy of both these forecasts:
GasNet has separately commissioned a further independent study of gas use in electricity generation, which indicates higher gas demand than the current VENCorp forecast, albeit not as high as the VENCorp forecasts released previously. However, due to weather impacts, peak electricity generation is extremely difficult to forecast with any accuracy. GasNet is therefore unable to predict with certainty which of the forecasts is likely to prove more accurate.
In order to form a view that circumstances have changed such that the access arrangement as revised would no longer satisfy the requirements of sections 3.1 to 3.20, the ACCC would need to reassess various factors that contribute to the reference tariffs.  
To the extent that such an assessment would be similar in scope to a scheduled review of an access arrangement, it would impose substantial costs on GasNet and interested parties.
The ACCC does not consider such a reassessment to be justified at this time given the nature and scope of the current proposed revisions.  However, should further voluntary revisions be proposed during the access arrangement period, such a reassessment may be necessary and justified.  In deciding whether to carry out such an assessment, the ACCC would take into account factors such as the cumulative impact of revisions and the length of time since the last full review of the access arrangement.
Incentives
As noted above, sections 3.4 and 3.5 respectively require the reference tariffs and Reference Tariff Policy to comply with the principles of section 8.  Section 8 provides that, where appropriate, the reference tariff and Reference Tariff Policy should provide an incentive for the service provider to reduce costs (section 8.1(f)) and that incentive mechanisms (consistent with section 8) should be incorporated into the Reference Tariff Policy (section 8.2(d)).  
The tariffs in the access arrangement were established by applying the building block approach which estimates the total efficient costs involved in providing the regulated services.  The total costs are an aggregate of estimates for return on equity, interest payments on debt, depreciation, operating and maintenance costs, and net tax payable.  The development of these estimates includes many forecasts for the next regulatory period.  The estimated total costs are then divided by forecast volumes to derive the average revenue (which is the same as the weighted average tariff) that the service provider is to receive each year of the following regulatory period.
With limited exceptions, the service provider’s tariffs are not adjusted throughout the rest of the regulatory period in the light of actual costs incurred or actual volumes transported.  This provides the service provider with incentives to grow the market and to reduce costs as the service provider is able to keep the resulting increase in profits (at least until the next access arrangement period).
A specific incentive mechanism in GasNet’s access arrangement allows GasNet to keep any increase in profit due to cost reductions for the year in which the cost reduction was achieved plus the following five years.  This means that cost reductions early in the access arrangement period will not be any more or less beneficial to GasNet than the same reductions later in the access arrangement period.  Thus, GasNet has an incentive to achieve the cost reduction as soon as possible.
The ACCC considers these incentive features of the access arrangement to be fundamental to it.  If a mid term revision sought to adjust tariffs on the basis of changes to actual costs or volumes, much of the incentive properties could be lost.  The ACCC considers that any material change to the incentive mechanism would represent a fundamental change to the regulatory arrangement.  As such, it could not be considered in isolation from the other provisions of the access arrangement.  Any attempt by a service provider to base revisions on substantial changes in circumstances which are favourable to it without recognising changes in circumstances which are not favourable to it (‘cherry-picking’) would be considered by the ACCC to be a material change to the incentive mechanism.
As discussed in chapters 3 to 6, the ACCC considers that the three revisions that it proposes to accept (and possibly the other revision as well) address minor specific issues and do not alter the incentive properties of the access arrangement.  
A specific aspect of this incentive issue is discussed below.  
Fixed principle 
TXU has expressed concern that approval of the revisions would be inconsistent with a fixed principle of the 1998 Victorian Gas Industry Tariff Order:
Sect 9.2 of the Tariff Order sets out a number of fixed principles to apply for the duration of this access arrangement.  These include the need to utilise incentive based regulation adopting a CPI-X approach and not rate of return regulation.  TXU believes that if the ACCC re-open the access arrangements to change the operation of the “K” factor, abolish the refill tariff & re-open the demand forecasts, it risks implementing rate of return regulation.
TXU requests that the ACCC address the potentially competing tension between the fixed principle in section 9.2(a)(1) of the Tariff Order (which requires the ACCC to ‘utilise incentive based regulation adopting a CPI-X approach and not rate of return regulation’) and the Code provisions governing the approval of revisions.  TXU also recommended a regulatory approach which it considers would accommodate its concerns. 
The interpretation of this fixed principle was considered at some length by the Victorian Supreme Court in an appeal by TXU Electricity Pty Ltd against a decision by the Office of the Regulator-General, Victoria (ORG, now the Essential Services Commission).  TXU contended that aspects of the ORG’s decision constituted rate of return regulation rather than incentive based regulation adopting a CPI-X approach.  While the facts of that matter differ from those currently before the ACCC, it notes that the Victorian Supreme Court found that the ORG did implement incentive based regulation.
The ACCC considered the impact of the fixed principles as part of its 2002 review of GasNet’s access arrangement, and commented:
[T]he Tariff Order established a number of fixed principles for this next access arrangement period.  Fixed principles can only be changed with the agreement of the service provider.  However, as GasNet has not proposed to alter any of the fixed principles, the proposed revised access arrangement must also comply with these principles.
The first principle of relevance noted above is the requirement to use a CPI-X approach and not a rate of return approach.  While GasNet has proposed to modify its price path mechanism further with the introduction of an expanded pass through mechanism, the basis of regulation for GasNet remains CPI-X.  The approach has not been altered to the extent that it could be accurately described as rate of return.  
The ACCC recognises that a range of regulatory approaches is possible between incentive based regulation adopting a CPI-X approach and one using rate of return.  Its view is that in general a regulatory regime which allows the service provider to submit early revisions would be closer to rate of return regulation than if it did not provide that discretion.  However, it notes that the existing regulatory framework already provides this option.  The question then is whether the fixed principle would be breached if the ACCC approved some or all of GasNet’s proposed revisions.  
An important consideration is the extent of the revisions.  A full reassessment of the access arrangement would mean that the form of regulation is closer to a rate of return regulatory regime than a comparatively limited review, such as the current one.  Also, changing the access arrangement so that differences between forecast and actual parameters occurring before the revisions are recovered in future tariffs would be a feature found in rate of return regulation.  The ACCC has considered the nature and impact of its draft decisions regarding GasNet’s current proposed revisions.  It has concluded that its draft decisions would not result in the overall regulatory approach being altered to the extent that it could accurately be described as a rate of return regulatory regime.  This is consistent with the conclusion above that the revisions do not materially change the incentive properties of the access arrangement.
TXU has outlined a regulatory approach which it proposes that the ACCC adopt in order to resolve what it considers to be a possible conflict between the fixed principle and the ACCC’s responsibilities directly under the Code.  The ACCC notes that aspects of TXU’s approach may be incompatible with the existing provisions of GasNet’s access arrangement (which it must take into account pursuant to section 2.46(b) of the Code) and might otherwise limit the options available to GasNet under the Code.  For example, it is not apparent how the ACCC could set rules governing GasNet’s ability to submit voluntary revisions given the explicit provision in section 2.28 that gives service providers the discretion to submit revisions ‘at any ... time’.
While the ACCC does not consider it appropriate to adopt the regulatory model suggested by TXU, it acknowledges TXU’s concerns about the potential for the ‘re‑opening’ of an access arrangement during an access arrangement period to undermine its incentive properties.  As discussed earlier in this chapter, the ACCC considers that any proposed revisions which would have the effect of materially altering the incentive properties of an access arrangement could not be considered in isolation from the broader provisions of the access arrangement.  While the ACCC would assess any such revisions on their merits, it notes that there is in practice limited scope for approval of voluntary revisions (as the ACCC cannot propose amendments).  
As noted earlier, the ACCC has concluded that its draft decisions will not result in a rate of return regulatory regime for GasNet.  Thus the changes to the regulatory approach suggested by TXU would not be applicable in this instance.

3	K-factor
GasNet proposes that where there is an over recovery of its average revenue in a year, the associated K-factor amounts (which are part of its price control formulae) would be spread over the remaining years of the access arrangement period, rather than all of it being allocated to the next year.
3.1	Current access arrangement provisions
GasNet’s access arrangement ensures that GasNet achieves the approved average revenue (that is, average tariff) for each year, though not necessarily in that year.  The average revenue for any given year is calculated by taking the average transmission tariff set for that year in the access arrangement (which is in 2003 dollars) and multiplying it by CPI-X for each year from 2003 up to the year before the year in which the average transmission tariff applies.  GasNet bears the risk (positive and negative) of total volumes varying from the forecast volumes.  However, if the average revenue achieved is different to that set under the access arrangement (because the volume mix between high and low tariffs is different to that forecast) tariffs in the following year are adjusted (through the K-factor mechanism) so that any shortfall is recovered from users or any over recovery is distributed to users.  Thus, the forecast average revenue is guaranteed.
A limit on the implementation of the average tariff for any given year is that each individual tariff cannot be increased by more than CPI-X+2 per cent from the level in the previous year.  If the increase in the average tariff is greater than this, then each individual tariff will be increased by this percentage and the portion of the average tariff increase that cannot be implemented is carried over into the K-factor calculation in the following year.
3.2	GasNet proposal
GasNet notes that if there was a year of substantial average revenue over recovery followed by years of target average revenue recovery then it could face delayed revenue receipts.  This is because the over recovery would lead to lower tariffs the following year but for the year after that tariffs may not be able to return to the level that would allow the recovery of the average revenue for that year.  Rather they would be capped at an increase of two per cent above the CPI-X increase.  The under recovery would be carried over into the following year(s).  
GasNet is expecting a large decrease in 2005 tariffs (following a decrease in 2004 tariffs) due to over recoveries in 2003 and 2004.  It predicts that, if demand matches forecasts in subsequent years (that is, 2005-2007), there will be an unrecovered K-factor amount at the end of the access arrangement period.  
GasNet claims that two significant issues are raised:
a)	it is not in GasNet’s legitimate business interests for revenues to consistently fall below targets for any length of time
b)	a large K-factor balance carried forward into the next access arrangement period would lead to higher tariffs for that period than would otherwise be the case.
GasNet notes one solution would be to apply the individual tariff cap only if tariffs were to rise above where they would have been if the forecast tariff path had been applied from the inception of the access arrangement period (which would be the case if actual volumes had matched forecast volumes).  It calls this Option 1 but rejects it as it would lead to volatile revenues.
Instead, GasNet proposes that where there is an over recovery in a year, the associated K-factor amounts would be spread over the remaining years of the access arrangement period (Option 2), rather than all of it being allocated to the next year.  GasNet claims that this approach is superior to the current methodology as it would lead to a higher probability of GasNet recovering its appropriate revenue in the current access arrangement period (which means lower tariff fluctuations between access arrangement periods), and also because there would be lower fluctuations in tariffs within the current access arrangement period.
3.3	Submissions
Origin submits that it is inappropriate to review this issue midway through an access arrangement period.  It also submits that the concern expressed by GasNet about variability in transmission tariffs is misplaced as the majority of customers are on standing contracts and do not experience variability in retail prices and that large customers would prefer to have any reduction as soon as possible.  
TXU also considers it inappropriate to review this issue at this time and does not support this revision.  It believes that detailed consultation with all stakeholders should take place first and this should be done at the end of the access arrangement period.  
TXU notes that the revision would mean higher tariffs in the short term which it contends would not be in the interest of users (and so would be contrary section 2.24(f) of the Code).  TXU claims that these tariffs would be inefficient (a consideration which is relevant to the objective set out in section 8.1(e)) although it does not explain how.  TXU submits that any change to the price control formulae mid term would change GasNet’s risk profile and have implications for the weighted average cost of capital (WACC).  TXU also claims that the implementation of the proposed smoothing mechanism would lead to unnecessary regulatory risk and that the problem should be dealt with by addressing the rebalancing constraint at the end of the access arrangement period.
AGL supports GasNet’s proposed revision and notes that it would lead to less volatility in GasNet’s revenues and users’ costs each year.
EnergyAdvice also supports this revision which it considers to be reasonable as ‘they [GasNet] can only recover what they are entitled to, [it] minimises tariff volatility and maintains the price cap on individual tariff rises.’
3.4	ACCC’s considerations
The effect of the proposed change is that, given the expected scenario arising, GasNet would recover its revenues slightly earlier than it would under the current access arrangement provisions.  It should be noted that any K-factor balances carried between years are adjusted by the value of the one year swap reference rate to compensate GasNet (or users) for facing the delay in receiving the revenue (or paying decreased tariffs).  Consequently, GasNet’s proposed revision would not alter users’ or GasNet’s positions in present value terms.
One assertion made in the submissions is that it is inappropriate to review the K-factor methodology outside of a scheduled review.  The broader question of the ACCC’s discretion in approving or not approving proposed revisions has been discussed in chapter 2.  
Another assertion is that it is inappropriate to make mid term changes to the access arrangement simply because the volumes now expected are different to the forecasts in the access arrangement.  The ACCC considers that this assertion has misconstrued the nature of the revision.  It is not a response to variations in total expected consumption compared to forecast consumption but to changes in the product mix which have unforseen and unintended consequences.  
The advantages of the individual tariff cap are that it limits moves away from the cost reflective tariffs approved at the scheduled revision and it limits shocks to users from increases in tariffs.  This second advantage means that users can have some confidence about the level of tariffs they will face over the access arrangement period, providing a basis on which to make decisions.  The ACCC understands that users appreciate the certainty that tariffs will not be significantly above what were forecast at the beginning of the access arrangement period.  It is hard to imagine why users would be concerned if tariffs dropped below the expected level for a year.  Thus, there appears to be little reason to protect users from a large increase in tariffs if that increase is simply reversing a decrease in the previous year.  The ACCC notes that some parties consider that users would prefer to have over recoveries returned to them as soon as possible, while others prefer the lower volatility afforded by the delayed return.  GasNet also sees the lower volatility associated with the delay of the return of over recoveries as an advantage of its proposal and claims that in its experience large users prefer this.  
The ACCC is of the view that tariff volatility would be unlikely to generate a material detriment to users as long as tariffs do not increase above the level expected at the beginning of the access arrangement period.  Consequently, GasNet’s contentions about the benefits of reducing tariff volatility provide limited support for the revision.  In this respect, GasNet’s Option 1 appears to be a more appropriate revision to make because it returns users’ over payment to them with the minimum delay.
Submissions also claimed that the tariffs resulting from the proposed revision would be inefficient.  However, no evidence was provided for this contention, and the ACCC is not aware of any basis for this claim.  As GasNet subsequently stated, the tariff structure and level were set to reflect efficient pricing over the access arrangement period.  The tariffs for each year were then levelled.  This revision is to adjust the timing of the K-factor adjustment with the result, GasNet claims and the ACCC considers likely, of a smoothing of the average tariff (in the rest of this access arrangement period and also between this and the beginning of the next access arrangement period) compared to the situation that would apply in the absence of the revision.  This addresses GasNet’s second significant issue (regarding tariff volatility between access arrangement periods).  A smoothing of the tariffs is unlikely to reduce their efficiency.
GasNet’s first stated significant issue, or concern, is that ‘it is not in GasNet’s legitimate business interests for revenues to constantly fall below targets for any length of time’.  The ACCC understands that GasNet means that its average revenue should not be consistently below the average revenue set by the access arrangement.
The ACCC notes that under GasNet’s Option 1, GasNet’s average revenue would be expected to be below target for the year following an over recovery.  Under GasNet’s proposed revision (that is, its Option 2) average revenues would be expected to be under target (but by a smaller amount) for all the following years to the end of the access arrangement period.  The ACCC makes two observations on this:
•	to the extent that it is the length of time of being under its average revenue target that affects GasNet’s legitimate business interests, Option 1 would provide the better remedy
•	to the extent that it is the degree of volatility in average revenues over the years that affects GasNet’s legitimate business interests, Option 2 would provide the better remedy 
While GasNet does not raise the second point as one of its ‘significant issues’ it does appear to be GasNet’s main reason for preferring Option 2 over Option 1.
Interested parties have claimed that implementation of this revision would change GasNet’s risk profile compared to that established at the scheduled review in 2002 and that to do so should be balanced by an adjustment to the WACC.  GasNet's response is that the WACC was set largely by reference to industry wide factors and contained no allowance for this risk.  
While the ACCC did set the WACC in the 2002 review largely by reference to industry wide factors, it was mindful of GasNet’s complete regulatory framework and in particular the access arrangement overall (including the rebalancing formula).  The ACCC agrees that the proposed revision would change GasNet’s risk profile.  However, it considers that any change would be minimal (because the present value of GasNet’s forecast revenue stream is only minimally changed by the revision) and highly unlikely to justify an adjustment to the regulatory WACC.  
Finally, a consideration of all aspects of this revision, including that it is largely about a timing difference and there is little net present value to GasNet, has led the ACCC to conclude that the incentive properties of the access arrangement will not be altered by this revision.  
Overall, the ACCC is not persuaded of the merits of Option 2 over Option 1.  However, as the current proposal is a voluntary revision, the ACCC is not able to propose any amendments to the revision.  Therefore, the ACCC must either approve or not approve the proposed Option 2 as proposed.  
The ACCC does consider that in the current expected circumstances GasNet may suffer an inappropriate detriment due to a delay to revenue recovery under the current K-factor mechanism.  This would not be in GasNet’s legitimate business interests.  The ACCC recognises that it may not be in the interests of users and in the public interest (given the broad impact of gas transportation charges) to approve this revision as it would delay the return of GasNet’s revenue over recoveries.  However, the ACCC considers the detriment that would arise to GasNet of not approving the proposed revision would outweigh these other considerations.  Having regard to this, the ACCC is satisfied that the access arrangement as revised with this revision would contain the elements and satisfy the principles set out in section 3.1 to 3.20.  Therefore the ACCC proposes to approve the K-factor revision proposed by GasNet (its Option 2).
As already noted, the effect of the revision is to delay the return to users of revenue that has been over recovered by GasNet.  That is, GasNet will receive its revenue during the access arrangement period earlier than was intended at the time of the 2002 scheduled review.  While the provisions of the access arrangement ensure that GasNet would receive the same cash flows in present value terms regardless of the method adopted, this revised approach may provide GasNet with an incentive to forecast an inaccurate volume mix in order to achieve an earlier recovery of revenues.  For this reason and the others noted above, the ACCC anticipates that it will review this adjustment to the K-factor mechanism carefully at the next scheduled review to consider whether it is appropriate for it to continue into the third access arrangement period.  It may be that Option 1 is the preferable long term solution.

4	Refill tariff
GasNet proposes that exports to South Australia via the Western Underground Gas Storage (WUGS) facility should not be charged the lower refill tariff but instead be charged the same tariff as exports via the SEA Gas off-take.  
4.1	Current access arrangement provisions
Users who withdraw gas from the GNS into the WUGS facility operated by TXU are charged a tariff which reflects the marginal cost of transporting gas to this withdrawal point (primarily the additional compressor gas used).  This costing approach is intended to encourage use of the WUGS facility for storage in recognition of the competition and system security benefits it affords users of the GNS.  When users subsequently decide to use this gas, it is injected back into the GNS and withdrawn at a withdrawal point, and they are charged a withdrawal tariff that covers their fair share of common costs.
Users who withdraw gas at the nearby SEA Gas delivery point, also at Iona, (for transportation to South Australia) pay the withdrawal tariff for the South West zone which includes their fair share of common costs.  For the 2002 revision, GasNet did not forecast any withdrawals from the SEA Gas delivery point for the 2003-2007 period.  
4.2	GasNet proposal
GasNet advises that it is now possible for gas to be injected directly into the SEA Gas Pipeline from the WUGS facility without using the GNS.  Gas exported to South Australia by this route enjoys the low refill tariff but does not give rise to the competition and security benefits mentioned above, nor contribute to common costs.  GasNet considers that such an outcome is inequitable and not in its interests.
GasNet also notes that, once the Minerva compressors are operational, exports to South Australia via the SEA Gas delivery point would be at a cost disadvantage compared with exports via the WUGS facility.  
In response to these developments GasNet proposes that exports via the WUGS facility should not be charged the lower refill tariff.  
At the time of a withdrawal into the WUGS facility, it is not possible to determine whether that gas will be exported to South Australia or whether it will eventually be injected back into the GNS.  Accordingly, it would not be practical to establish WUGS off-take withdrawal tariffs with different charges according to eventual use.  Instead, GasNet proposes to charge the same tariff for withdrawals from the GNS into the WUGS facility as for gas which is withdrawn through the SEA Gas delivery point.  Any gas that is subsequently injected back into the GNS from the WUGS facility would attract a rebate which equals the difference between the withdrawal tariff at the SEA Gas delivery point and the current refill tariff.  
GasNet states that the only net benefit to it of this revision ‘is the time value of the rebate between the withdrawal and re-injection of the gas.’  
4.3	Submissions
Origin submits that users exporting through the WUGS facility do not get a ‘free ride’ but are ‘subject to commercial rates for injection, storage, withdrawal, losses, compression and use of laterals.’  It considers that it is reasonable for exports via the WUGS facility to be charged a lower rate to encourage the efficient use of available resources (though it does not explain how this would be the result).  Origin is concerned about the cost of additional working capital that would be needed by users until the rebate is returned for gas re-injected.  Origin is also concerned that the higher tariff is not cost reflective (though it provides no evidence or argument to support this concern).  
TXU submits that it cannot be accused of abusing the refill tariff as it negotiated access to the SEA Gas 18 inch arterial before it knew the quantum of the refill tariff.  Now that it has access it will continue to use this route.  It claims that gas transportation will be more expensive via the WUGS facility than directly through the 14 inch arterial (which will be available following the commissioning of the Minerva compressors) and therefore the lower refill tariff will not distort competition in South Australia.  TXU suggests that gas exported to South Australia reinforces security of supply for that state and therefore should attract the low refill tariff.  It notes that the low refill tariff is justified by the use of the WUGS facility enhancing the security of supply to Victorian users).  Finally, TXU submits that the refill tariff should remain as it is because TXU entered into supply contracts based on this expectation.
AGL supports this proposed revision subject to users who withdraw into the WUGS facility, and then re-inject into the GNS, not being disadvantaged by the delay in receiving the rebate.
EnergyAdvice notes that ‘if ownership of the gas changes while it is in Underground Storage, neither the person who withdrew the gas at Underground Storage or the person who injects that gas at Underground Storage, will get the benefit of the rebate.’  It suggests that GasNet should record transfers of ownership to preserve the intent and integrity of the refill tariff.
4.4	ACCC’s considerations
The ACCC acknowledges GasNet's claim that the only net benefit to it of this revision ‘is the time value of the rebate between the withdrawal and re-injection of the gas’, and that some parties have expressed concern about GasNet obtaining this advantage.  The ACCC understands that this benefit is likely to be in the order of a few tens of thousands of dollars a year.  GasNet calculates that, if the full capacity of the WUGS facility was used to store gas for six months and that gas was then reinjected into the GNS, the time value of the rebate would be approximately $25 000.  The ACCC considers that, in the context of GasNet’s revenues and profits, and the tariffs paid by users, this amount is unlikely to be material.  Further, as this revision is voluntary, the ACCC cannot require a change to the revision to make it more revenue neutral by including the time value of money in the calculation.  
GasNet’s claim (that the only net benefit to it would be the time value of money) would be correct in the context of comparing the situation that would apply after the revision with the current tariff structure assumptions (that is, where all exports from the South West zone were charged the South West withdrawal tariff).  However, one of the assumptions currently underlying the access arrangement is that there would be no exports, and therefore no income from exports.  This proposed revision would allow GasNet to benefit from these unforecast volumes.  Thus, it is true to say that the revision would only give to GasNet a net benefit of the time value of the rebate compared to the tariff structure intended in the access arrangement.  However, this is not the case compared to the forecast revenue in 2002, or compared to what would eventuate if the proposed revision were not implemented.  Thus, the ACCC does not agree with GasNet's claim that ‘Nor does the revision allow GasNet to earn more or less revenue than was intended when the Access Arrangement was approved in January 2003.’  
Forecast and actual volumes of gas withdrawn into the WUGS facility are currently not included in the K-factor calculation.  Consequently, the revenue GasNet currently achieves from exports via the WUGS facility is simply determined by the $0.12/GJ refill tariff (which is based on the marginal costs incurred).  As part of this revision, GasNet says it ‘will treat withdrawals at the WUGS facility in the same way as withdrawals at the adjacent SEA Gas delivery point’.  This means that any exports through the WUGS facility would be included in the K-factor calculations.  As a result, as well as receiving $0.21/GJ (instead of $0.12/GJ) from direct tariffs, the K-factor mechanism would calculate an under recovery of the average tariff (which is $0.34/GJ in 2004) and return extra revenue of $0.13/GJ, for all gas exported through the WUGS facility, to GasNet in the following year.
This windfall may be regarded as a positive aspect of the volume risk GasNet faces under the access arrangement, in which case it is arguable that GasNet should be allowed to recover the revenues.  GasNet argues that its ability to recover more than its target revenue (in this case by charging a full export tariff for exports via the WUGS facility) is part of its incentive mechanism.  
Alternatively, it could also be argued that GasNet’s current inability to access this windfall gain is a negative outcome of the risk (positive and negative) GasNet took on when setting tariff structures under the access arrangement and that the access arrangement should not be changed now to allow GasNet to benefit.  On this understanding, one would conclude that the acceptance of this revision would alter the incentive properties of the access arrangement.  
It is relevant that if this revision were not made, GasNet would not suffer a loss of any revenue compared to that which was expected at the time the access arrangement revisions were approved in 2003.  That is, GasNet does not need this revision to maintain the expectation of recovering the forecast regulatory revenue that it had at the time of that approval.  To approve this revision would give GasNet the expectation of recovering more than the forecast regulatory revenue and thus over recovering the forecast efficient costs on which that revenue is based (contrary to section 8.1(a)).
GasNet claims that it would be discriminatory to charge lower tariffs to exporters using the WUGS facility than to those using the alternative route.  The ACCC notes that both groups of (potential) exporters will receive essentially the same service from GasNet as the withdrawal points used are located very close to each other.  The ACCC also notes that a fundamental principle of the GNS tariff design is that the same tariff applies for all withdrawals from any given zone.  The tariff for the South West zone was calculated on the same cost-reflective basis as most other tariffs in the access arrangement (contrary to the claim in one submission) and the ACCC is aware of no reason why users exporting from the WUGS off-take should not pay the same withdrawal tariff for the South West zone as other users.  This tariff is more likely to promote efficiency (and thus satisfy section 8.1(e)) than the situation where some exporters pay only marginal cost and would result in all exporters paying a fair and reasonable share of common costs (section 8.38(b)).
GasNet contends that, if the tariff for those exporting through the WUGS facility is less than for those exporting through the SEA Gas off-take, then those using the WUGS facility route will have an inappropriate advantage over their competitors in the South Australian market.  In contrast, TXU submits that there are additional costs that have to be paid by those exporting through the WUGS facility which make this route more expensive than exporting directly to the SEA Gas pipeline.  These contentions raise a number of issues.
First, the ACCC has sought to confirm TXU’s contention about the level of additional costs incurred when exporting through the WUGS facility.  While TXU has provided figures confidentially to the ACCC to support its claim, the ACCC has been unable to independently verify all the data.  
Second, the ACCC notes that these costs are paid to the owners of the WUGS facility and the SEA Gas pipeline, not to GasNet.  These costs may be of relevance in assessing the impact on competition in the South Australian market, but they are not relevant to the question of whether users receiving the same service from GasNet should pay different tariffs.  If the total cost was less than the alternative then there may be a competitive advantage that could distort competition in the South Australian market and this would be a factor the ACCC would take into account under section 2.24(e).  
Third, the ACCC notes that if it does not approve this proposed revision, to the extent that there may be a competitive advantage to those transporting gas to South Australia via the WUGS facility, the advantage would be likely to be short lived.  The advantage does not yet exist (as the SEA Gas off-take is not yet an operational alternative) and the ACCC expects that GasNet would propose the same tariff for all exporters to South Australia for its next access arrangement period which is expected to begin in 2008.  
The ACCC has taken these considerations into account in making its decision on this proposed revision.
It is also argued in the submissions that exports of gas from Victoria to South Australia contribute to security of gas supply in South Australia and that this provides grounds for using the low refill tariff.  This argument would also suggest that withdrawal charges for direct supply to the SEA Gas pipeline should be reduced.  However, the ACCC considers it is generally appropriate for those who benefit from enhanced security of supply to pay for that benefit.  
The ACCC considers the strongest argument against approving this revision is that TXU has entered into contracts based on the expectation that the current tariffs will continue through to 2007.  TXU has submitted that it would be materially disadvantaged if the revision were to be approved.  However, it has informed the ACCC that its ability to substantiate this potential detriment has been hampered by its customers’ concerns about the confidentiality of the terms of their contracts. 
The ACCC understands that approval of an access arrangement (or of a revised access arrangement) provides a degree of certainty (for the service provider and for users) about the tariffs and the mechanism by which they can change for the duration of the access arrangement period.  In this instance, TXU would have needed to make a judgement, when entering into arrangements for the period up until the end of 2007, about the likelihood of a mid term revision occurring that had the effect of increasing its tariffs.  As there has been limited use by service providers to date of the option of submitting early revisions, some users may have discounted the likelihood of GasNet submitting voluntary revisions during the current access arrangement period.
Approval of the proposed refill tariff revision would potentially expose those who have entered into fixed contracts to financial loss.  This is not in the interests of users (section 2.24(f)) and especially not in the interests of those in binding contracts (section 2.24(b)).  More broadly, approval of this revision might have the effect of reducing the degree of certainty that parties attach to reference tariffs in future.
EnergyAdvice noted in its submission that the proposed revision does not accommodate transfers of ownership of gas in the WUGS facility.  GasNet has responded that changes of ownership can be dealt with under Schedule 1.5(d)(v) and (vi) of the access arrangement.  The ACCC has made GasNet’s submission available on its website and invites submissions from interested parties which it will take into consideration before making its final decision on this proposed revision. 
In conclusion, an important tariff setting principle applied in the 2002 access arrangement revision was that a share of joint costs should be recovered from a reference tariff that is commensurate with the costs incurred in providing that reference service, and that each user pay its fair share of joint costs.  The use of the WUGS facility for storage was considered to have benefits that justified marginal cost pricing for withdrawals which will be re-injected as the appropriate share of joint costs would be recovered at the time of re-injection.  The development of the ability to inject from the WUGS facility directly to the SEA Gas Pipeline has enabled use of the refill tariff in a way that was neither intended nor foreseen.  Some users have benefited by accessing a reference service at an inappropriately low tariff and thus are not contributing their fair share to joint costs.  
If approved, the effect of the proposed revision would be to restore the degree of cost reflectivity that was proposed by GasNet and accepted by the ACCC at the time of the 2002 scheduled review.  Establishing the same tariff for users receiving essentially the same services would also promote efficiency in the use of the GNS (sections 2.24(d) and 8.1(e)) and re-establish a fair share of costs (section 8.38(b)).  In addition, as noted earlier, the revision would allow GasNet to receive a windfall gain, which would be consistent with its legitimate business interests (section 2.24(a)). 
However, access to the windfall gain would allow the expectation of recovering more than efficient costs, which is contrary to section 8.1(a).  Also, approval of the proposed revision would potentially expose parties who have entered into fixed contracts on the basis of the current tariffs (with the expectation that they will not increase more than CPI-X+2 per cent per year) to financial loss.  Rejection of this revision would protect these parties from this exposure, which would be consistent with section 2.24(b) of the Code (recognition of existing contracts) and in the interests of users (section 2.24(f)).  The ACCC does not accept GasNet’s assertion that there is a benefit to other users of ending the discriminatory pricing that outweighs the benefit to these parties.  The ACCC understands there to be no monetary benefit to other users of these parties paying a higher tariff.  In fact, as noted earlier in section 4.4, the approval of this revision would result in all users paying more as they share in the funding of the $0.13/GJ difference between the South West withdrawal tariff and the average tariff.  Therefore the approval of this revision would be detrimental to all users.  If this revision was not approved, GasNet’s expectation of recovering the target revenue established as part of the 2002 review, which is consistent with GasNet’s legitimate business interests (section 2.24(a)), would not be altered.  
On balance, the ACCC considers the likely detriments associated with approval of this proposed revision would outweigh the potential benefits that may arise.  Having regard to this, the ACCC is not satisfied that the access arrangement as revised with this revision would contain the elements and satisfy the principles set out in section 3.1 to 3.20.  Consequently, the ACCC proposes not to approve the refill tariff revision.  

5	Weather pattern
GasNet proposes to adjust the demand forecasts in the access arrangement to reflect a warming shift in the Victorian weather pattern.
5.1	Current access arrangement provisions
The tariffs currently in the access arrangement are based on demand projections set out in VENCorp’s November 2001 Annual Gas Planning Review 2002 to 2006, but with yearly totals reduced by an average of 0.9 PJ to account for a warming trend identified by GasNet.  The warming trend was expressed as a reduction of 5.5 Effective Degree Days (EDD) per year from the base of 1445 EDD for 2001.
In September 2002, during the ACCC’s assessment of GasNet’s scheduled revisions to the access arrangement, GasNet submitted some evidence of a greater shift in weather pattern.  However, GasNet chose not to submit revised volume forecasts at that time so that the approval process would not be delayed by a further round of public consultation.  The ACCC noted in its final decision document ‘that GasNet may seek an early review of its revised access arrangement if it has sufficient evidence to support its contention that a further warming trend in terms of 10 peak days needs to be accommodated.’
5.2	GasNet proposal
GasNet is proposing to adjust the demand forecasts in the access arrangement to reflect the shift in the Victorian weather pattern for which it says it now has new evidence.  In particular, GasNet notes that VENCorp has incorporated the shift in its 2003 annual planning review forecasts.  GasNet’s proposal would reduce the current forecasts by 1.53 PJ each year, which would increase the average transmission tariffs for 2004-2007 by an average of 0.65 per cent.  The annual impact on GasNet’s forecast revenue would be an increase of $0.5 million.  
5.3	Submissions
Origin submits that the ACCC’s comments in the 2002 final decision document, acknowledging that GasNet may seek a mid term revision if further evidence of a warming shift emerged, were framed in terms of the impact of the warming trend on 10 peak days and not the annual demand.  Origin also submits that part of the proposed revision has a retrospective effect which is inappropriate.  Origin notes that VENCorp, in its 2003 review of EDD, did not accept that there has been a recent step change in the climate.  It considers that any adjustment to the demand forecasts to reflect a step change in weather patterns should be done after VENCorp’s proposed 2005 review of the weather standard in which this issue will be considered in the context of broad consultation with industry.  
TXU considers that the question of whether a warming trend has caused reduced demand is too complex to clearly answer.  It does not consider clear evidence to be available and states that the trend is not supported by 2003-2004 actual demand data.  TXU notes that allowing a mid term review introduces asymmetry into the regulation of the GNS and questions whether the ACCC would, if it could, request a variation to the access arrangement if forecast volumes were too low.  It also questions whether this asymmetry was factored into the cost of capital at the recent review.
AGL supports the proposed alteration to forecast volumes.  EnergyAdvice considers that the revision is reasonable and in accordance with the principles of the Code and the spirit of the access arrangement.
5.4	ACCC’s considerations
As noted in the submissions, the ACCC’s comments in its 2002 final decision document which acknowledged GasNet’s discretion to initiate a mid term revision were framed with respect to 10 peak days demand and not the annual demand.  These comments were made in that context because GasNet had suggested a modification to the peak demand forecasts which the ACCC considered not to be appropriate at that time.  GasNet had not proposed a modification to the annual demand forecast it presented in the March 2002 proposed revisions.  
The comments made in the submissions and by GasNet suggest a misinterpretation of the ACCC’s comment.  The ACCC was simply acknowledging that under the Code, GasNet (like any other service provider), is able to propose revisions at any time.  It was not a concession made to GasNet because there was not time to consider the issue in 2002 and still implement the new tariffs at the beginning of 2003.  Neither was it an endorsement of GasNet’s proposal.  
In response to concern expressed in the submissions that allowing a mid term review introduces asymmetry into the regulation of the GNS, the ACCC reiterates that the Code has always explicitly stated that service providers may submit voluntary revisions at any time, and thus any such asymmetry has always been an aspect of the gas regulatory regime.  This was the context in which the ACCC considered the cost of capital in the 2002 GNS review, and indeed in its assessment of all access arrangements for gas pipelines under the Code.
GasNet presents this weather pattern revision as a correction of incorrect information currently in the access arrangement.  As noted in chapter 2, the ACCC does not agree with such a characterisation.  The volume forecast proposed by GasNet for the 2002 access arrangement revision was based on the information available at the time.  GasNet’s current proposed EDD calculation (that is, this revision) is based on later evidence which it claims is ‘more conclusive and reliable than the evidence on which GasNet relied in March 2002.’  This, however, does not logically lead to a conclusion that the adjusted forecast is a ‘correct’ or ‘accurate’ forecast compared to an ‘incorrect’ or ‘inaccurate’ forecast in 2002.  Unless an outcome is exactly the same as a forecast, it is inappropriate to label a forecast as accurate.  This certainly cannot be claimed in advance of knowing the outcome.  GasNet’s new forecast can be claimed to be more ‘conclusive and reliable’ than the previous forecast (as GasNet does).  It can also be described as more up to date, which would be expected of any forecast made at a later date using consistent methodology.  Similarly, it would be expected that a forecast made in the future will be more reliable and up to date than a current forecast.  Thus, the ACCC rejects the suggestion that it should accept this revision on the grounds that this would correct an error.  The ACCC has considered this revision on the same basis as any other revision it may receive under section 2.46 of the Code.
While the ACCC does not accept the ‘correcting errors’ argument, it does recognise that this revision is intended to implement an issue GasNet raised during the 2002 revisions assessment and is not seeking to revise the whole volume forecast (for example, by adopting the VENCorp November 2003 forecast in total).  The ACCC considers that this is a relevant factor to take into account when balancing the competing factors in section 2.24 of the Code.  The ACCC considers that it is appropriate for a revision of this nature to be made mid-term as it is designed to resolve an issue that was identified but unable to be settled at time of the last scheduled review and does not alter the incentive properties or any other fundamental properties of the access arrangement. 
TXU questions whether there is sufficient evidence for the warming trend.  However, the ACCC notes Origin’s submission to VENCorp that it ‘believes that there has been a step change in the climatic patterns over this nine year period, and therefore that last nine years may not be representative of current EDD trends. Origin considers that an annual EDD standard of 1396 is too high given recent annual weather patterns.’  Despite this, Origin suggests that the ACCC should reject GasNet’s proposed step change.  However, as the ACCC understands the proposed revision, GasNet is not proposing a step change.  It is proposing that the trend, which was incorporated in the volume forecasts of the access arrangement in 2002, be increased.
The ACCC notes that this trend has been adopted by VENCorp which conducted a rigorous and transparent public consultation process as part of its 2003 review of the weather standard (to which TXU made no submission).  The ACCC considers that the methodology and approach adopted by VENCorp should allow parties to have confidence in its findings on this matter.  GasNet is merely proposing that the same trend at the same quantum be incorporated into its access arrangement.  The ACCC sees no reason to dismiss VENCorp’s conclusions and no reason to wait until this matter is reconsidered by VENCorp in 2005 (as Origin suggests).  
GasNet is proposing to vary its demand forecasts for 2004-2007 and its tariffs for 2005-2007.  While GasNet is not proposing that the tariffs for 2004 be changed, which would be difficult to implement, it is proposing that the volume forecast for 2004 be changed because this feeds into the calculation of the average tariff appropriate for 2004.  When this new average tariff is used in the calculation of the 2005 tariffs at the annual reset, a larger under recovery (or smaller over recovery) will be calculated by the K-factor mechanism than currently would be the case and the tariffs for 2005 will be increased accordingly.  Thus, without changing the 2004 tariffs, GasNet will achieve the revenue it would have obtained if the 2004 tariffs had been changed at the beginning of 2004 (though the revenue would only be received in 2005).
The ACCC is concerned that approval of this proposed weather pattern revision would have the effect of users, as a group, paying higher tariffs for gas transported during 2004 than anticipated when they made their gas transportation decisions.  The ACCC considers that users should be able to rely on published tariffs and not have them increased after the relevant gas has been transported (even if the increase is only conceptually, through the operation of the K-factor adjustment mechanism).  The ACCC also notes that in 2002, GasNet was only proposing that its later change to demand forecasts would alter the forecasts for 2005-2007.  
The ACCC notes that in its response to comments on retrospectivity in the submissions, GasNet does not mention the above issues but simply points out that the maximum tariff users can face in each of the next three years will not increase as it will be capped by the CPI-X+2 formula.  This is true, but it does not address the point that the likelihood of that cap being reached would be enhanced by this proposed revision and that part of the increased tariffs and revenue as a result of this revision would relate to gas that has already been transported. 
In summary, the ACCC considers the proposed adjustment for the warming trend to be an appropriate component of the formulation of demand projections for Victoria.  However, it is not convinced of the merits of the adjustment to the 2004 volumes.  Even though there would be no retrospective change to tariffs, the adjustment would result in GasNet deriving revenue for almost a year before this decision and for more than half a year before its application was submitted.
While the ACCC has concerns about the adjustment to the 2004 volumes, it has considered these within the context of the Code provisions relevant to a proposed voluntary revision which only allow it to approve or not approve the revision as a whole.  The ACCC is mindful that this is a small revision which would have a small effect on tariffs.  The ACCC considers the incorporation of the proposed weather adjustment into the volume forecast, and the consequential 0.65 per cent rise in average tariffs, will increase the probability of GasNet achieving its target revenue and thus recover its efficient costs (section 8.1(a)).  The proposed revision is to a forecasting parameter rather than actual results and the ACCC considers that the approval of this revision will not alter the incentive properties of the access arrangement.
The ACCC understands that the small tariff increase would add marginally to users’ costs.  Accordingly, it expects that users and prospective users would prefer that the proposed revision not be approved by the ACCC.  However, rejection of the revision would be disproportionately contrary to GasNet’s legitimate business interests (section 2.24(a) of the Code).
On balance, the ACCC considers that GasNet’s interests in having a target revenue based on the proposed forecast volumes outweighs the small effects on users and prospective users (section 2.24(f)) and of end use customers (as incorporated in consideration of the broader public interest under section 2.24(e)).  Having regard to this, the ACCC is satisfied that the access arrangement as revised with this revision would contain the elements and satisfy the principles set out in section 3.1 to 3.20.  Accordingly, the ACCC proposes to approve this proposed revision to alter the demand forecasts in GasNet’s access arrangement for the years 2004 to 2007.

6	Timing
GasNet proposes a mechanism to allow implementation of the proposed revisions for the calculation of the 2005 tariffs.
6.1	Current access arrangement provisions
Each November, as required by the access arrangement, GasNet lodges for the ACCC’s approval a calculation of its tariffs for the following year.  This incorporates both the CPI-X and the K-factor adjustments.  The ACCC is required to approve or not approve the new tariffs within 20 business days.  The process anticipates the new tariffs commencing on 1 January of the new year.  
6.2	GasNet proposal
The weather pattern revision, if approved by the ACCC, will result in changes to the average tariffs that feed into the 2005 tariffs to be calculated in 2004.  In addition, if approved, the K-factor revision would impact on the 2005 annual reset calculation.  However, the changes to the access arrangement consequent to these revisions may not come into effect in time to be incorporated into GasNet’s lodgement of its 2005 tariff reset application which is due on or before 17 November 2004.  As a result, the revisions may not be implemented until the calculation of the 2006 tariffs.
GasNet proposes to add to the access arrangement a mechanism which, if the current proposed revisions are approved after the November reset is lodged with the ACCC, allows it to resubmit the reset calculations accommodating the effect of the revisions.
6.3	Submissions
AGL supports this proposal.  Origin, TXU and EnergyAdvice did not comment.
6.4	ACCC’s considerations
The ACCC notes that the purpose of the revision is to incorporate the 2004 and 2005 average tariffs into the annual reset calculations this year.  In the absence of this timing revision, depending on when the ACCC makes its final decision, GasNet may not receive any benefit from the ACCC’s approval of the change to the 2004 volume forecast.  In addition, without this revision, GasNet may not benefit from ACCC approval of the K-factor revisions or benefit from a change in 2005 volumes until 2006.  This would be contrary to GasNet’s legitimate business interests (see section 2.24(a) of the Code).
The ACCC considers that this proposed revision is of a mechanical nature.  As noted above, the ACCC does not favour the retrospective effect of the change to the 2004 volumes forecasts.  However, this concern was not sufficient to persuade it not to approve the weather pattern revision in total.  The ACCC has also considered this issue in reference to this timing revision.  It considers that although there would be benefit in not approving the revision because this would remove the retrospective element of the weather revision, it does not outweigh the benefits of approving this revision to allow the K-factor revision to be implemented for the 2005 tariffs.  
A typographical error appears in the proposed revision that the ACCC expects GasNet will correct when it lodges the complete revised access arrangement document at the end of the current approval process.  
Accordingly, the ACCC proposes to approve this revision relating to the timing of tariff adjustments.

7	Information provision
7.1	Code provisions
In conjunction with its proposed access arrangement (or revised access arrangement), a service provider is required to submit access arrangement information in accordance with the criteria established in Attachment A of the Code. The service provider’s access arrangement information must contain information that, in the opinion of the regulator, is sufficient to enable users and prospective users to: 
•	understand the derivation of the elements in the proposed access arrangement described in sections 3.1 to 3.20 of the Code; and 
•	form an opinion as to the compliance of the access arrangement with the provisions of the Code (section 2.6).
7.2	GasNet proposal
GasNet notes that incorporation of the proposed weather pattern revision would require consequential amendments to its access arrangement information and has provided those proposed changes in Schedule 2 to its application.  
7.3	Submissions
No submissions were received from interested parties on this matter.
7.4	ACCC’s considerations
The ACCC considers that the existing access arrangement information continues to satisfy the relevant Code requirements other than with respect to the weather pattern revision.  The ACCC considers that the access arrangement information would fully comply once the proposed changes listed in Schedule 2 of GasNet’s application are incorporated.

8	Draft decisions
GasNet submits that each proposed access arrangement revision is independent and acceptance or rejection of one would not require acceptance or rejection of the others:
GasNet seeks each Revision both individually and collectively in each combination of two or more Access Arrangement Revisions.
The ACCC accepts this form of revisions to the access arrangement.  It has made separate draft decisions with respect to each of the four proposed access arrangement revisions.
Pursuant to section 2.35(a) of the Code, the ACCC proposes to approve the following revisions:
•	K-factor revision
•	Weather pattern revision
•	Timing revision
Pursuant to section 2.35(b) of the Code, the ACCC proposes not to approve the following revision:
•	Refill Tariff revision
The ACCC’s reasons for these decisions are set out in this decision document.
Appendix:  Submissions from interested parties
Origin Energy	29 September 2004	
TXU	30 September 2004	
AGL Victoria 	4 October 2004	
EnergyAdvice	8 October 2004	
TXU	28 October 2004