Our Ref:	 Accc_orcupdate.doc
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14 December 1999

Mr P Le Mesurier
PO Box 1199
DICKSON  ACT 2602

Dear Peter

Re:  Moomba to Adelaide Pipeline Access Arrangement – Optimised Replacement Cost

Subsequent to its submission of the above Access Arrangement in April 1999 and the receipt of public comment pursuant to the Issues Paper produced by the ACCC in September 1999, Epic Energy has reviewed its analysis of the Optimised Replacement Cost (ORC) of the Moomba to Adelaide Pipeline (MAP) system.

As discussed in the attached response document, Epic Energy is confident that the $572 millon figure provided in the April Access Arrangement Information is a conservative estimate of the ORC of the system.

I have also attached a copy of a review by GPA Engineering Pty Ltd of Epic Energy’s 20 March 1999 revision of the ORC analysis.  The 20 March revision was the document submitted with the April Access Arrangement Information.  The GPA document may be made public.

I will separately be providing further information in support of Epic Energy’s position on the initial capital base for the MAP within a few days.

Please contact me at any time for further information or clarification.

Yours sincerely

Ashley L Kellett
State Manager South Australia

Attchs.

MAP ORC RESPONSE TO SUBMISSION

Introduction

Responses to the Epic Energy submission on the ORC were received from Santos and Terra Gas Trader (TGT) and a summary of these responses in relation to our submission is attached. This is a report on these responses and provides further information in support of Epic Energy’s submission recommending an ORC for the MAP of $572 million.

Basis of Submission

Epic Energy used a commonly accepted costing method for pipelines of $/inch/km. We carried out flow studies and determined possible configurations for detailed costing. These configurations ranged in size from 558mm (22inch) to 863mm (34inch) and included class 600 and 900 operating pipelines. Following a detailed cost review of these configurations using costing of $22,000/inch km for the larger pipelines and $20,000/inch for smaller lines we established an ORC of $572m.

Responses

The responses from both Santos and TGT are summarised in the attachment but both organisations believe the ORC calculated by Epic Energy is more than it should be by as much as 19%. In both cases they believe the pipeline costing should be between $700 to $800/mm km (or $17,780 to $20,320/inch km) for TGT and as low as $15,000/inch km for Santos. Both TGT and Santos made comments on the cost of other items and these are detailed in the attachment.

Further Information

Since Epic Energy made its submission, recent information on pipeline costing strongly supports our costing assumptions and, in fact, would indicate that we may have understated the cost for at least the main pipeline system.

EAPL ORC Submission to ACCC

In the EAPL submission to the ACCC dated 20 June 1999, the ORC for the main pipeline from Moomba to Wilton is given as $819m. This is based on a length of 1299kms and diameter of 610mm (24 inch), with most length operating as a class 900lb line. On the basis of this information the average cost works out at $26,270/inch km (or $1034/mm km), well in excess of the $22,000/inch km used by Epic for costing a similar size pipeline in South Australia.

It Epic Energy had used this costing, the MAP ORC would have been $627m not the $572m proposed.

Pipelines Recently Completed or under Construction

The most recent major pipeline that would be similar to the MAP as far as cost is concerned is the Eastern Gas Pipeline, which is presently under construction and is anticipated to cost $450m. This pipeline is 794kms long, 450mm (18 inch) diameter, class 900lb rated and includes a compressor station and two meter stations in the configuration. Disregarding the cost for the compressor station and meter station, the cost of the pipeline works out at approximately $29,000/inch km ($1142/mm km). Again, if we apply this costing to the MAP the $572m increases to $742m. A further example of higher costs is Epic’s recently completed Southern Looping Project on the Dampier to Bunbury Natural Gas Pipeline. This 450mm diameter, 58km pipeline was built inside an existing corridor and did not require the additional costs of acquiring a corridor associated with a new pipeline (including land acquisition and environmental work). Again, the established cost at $24,000/inch km exceeded the $22,000 Epic has used in its submission for the MAP.

Additional ORC Comments

Laterals

Epic Energy allowed $46.7m in the total ORC for laterals. TGT and Santos believe this is substantially higher than it should be. Again, referring to the EAPL submission dated 20 June 1999, lateral costs for the 150mm (6 inch), 270 km long Young to Lithgow line and the 150mm (6 inch), 179km long Junee to Griffith line, disregarding the cost of stations and facilities, the cost of these laterals works out at $22,200 and $24,200/inch km respectively - well in excess of the $20,000/inch km used by Epic for similar class 600 pipelines. 

We have added 20% to the valuation of the class 600 pipe as an approximation of the valuation for the class 900lb rated laterals used in the ORC. While this valuation may be a little high, it is readily offset by the fact (as indicated by TGT) that the Gulf Crossing pipeline is shown as a 4 inch line, whereas in fact it is a 4 inch and 8 inch line strapped together. When the net increase in valuation of this oversight is taken into account along with the possibly higher valuation for 900 rating laterals, the ORC for the laterals is unchanged from the April submission.

Compression

The Whyte Yarcowie compressor station is still required for the higher rated pipeline system since lower pressures are still possible at Port Pirie/ Whyalla off take due to pipeline pressure drops and operation or non operation of compression along the trunkline.

Other

The SCADA costs assume the current arrangements may not be available in the future as far as access to SA Cooper Basin Producer and Telstra network is concerned and therefore we have costed a complete new system at $7m which we believe is reasonable.

Asset Life

Epic has used a total remaining asset life 50 years, which on top of the existing life brings the total to 79 years. We believe this is a reasonable assessment. EAPL, in its submission, has used 80 years for most of its asset lives. Envestra in its submission to SAIPAR in fact used an asset life of 130 years for the protected steel mains forming part of its distribution network. There are pipelines in the United States that have been built to a lower standard than the MAP that have been operating for more than 80 years.

MAP ORC RESPONSES (28/11/99)

Epic
	
Santos

	
TGT

	
Epic Response	
 
ORC- $644 to $598m

Santos  cost estimate of $547 to $464m (no detail given)	
Uses the 1997 AGA Gas supply and demand study for pipeline cost pre 1997
	
•	Santos estimates are excessively low and not sustainable based on recent transmission costs
•	AGA data is more than 4 years old, out of date and not appropriate for larger sizes of pipe

Option used –22 inch 15Mpa
$572m

24 inch 10Mpa at $464m ($598m- Epic)	
None suggested	
•	Santos 18% difference is excessive and suspect uses $15,000/inch km which is incorrect and not supportable(See Below)	

Mainline Rate- $22,000/in km
($866/mmkm)
	
$15,000 to $22,000/inkm	
Used AGA pre 1997 average of $708/mm km adjusted for CPI to  $725/mm/ km

-Referred to EAPL AA submission and calculated $782/mm/km      ($ 19,8630/inch/km)
- Believe $700 to $800/mmkm more reasonable

•	Recent pipelines do not support anything less than $22,000/inch km and in fact a higher figure can be argued
•	EAPL submission is for a 600mm diameter pipeline not the 864mm diameter assumed by TGT which is the existing diameter of this pipeline- actual calculation is $1034/mm km.	

Lateral Cost - $39(class 600#) and $47m ( class 900#)

- $20,000/inkm for class 600	

$29(class 600) and $32m
( class 900)- no detail given

- $15,000/inkm	

-Whyalla Pipeline
Epic estimate - $19.1m 
TGT corrected- $21.9m
Actual Adjusted- $13.6 to $17.9m
-Believe Whyalla overstated by 20%
-The increase for Class900 has not been justified	

•	Believe Santos has used $15,000/inch km which is low and not comparable to recent cost for small diameter lines

•	The Whyalla line was built 10years ago by a Govt entity quite possibly with some form of cross subsidy to enhance regional development

•	Class 900systems are more expensive	

Compression

Costs/kw generally agree	
Whyte Yarcowie compression should not have been included in optimal design	
•	W/Y compression still required for higher pressure systems due to lower pressures at mainline offtakes 	

Meter stations- $16m	
$20m	
No comment		

SCADA- $7m	
$4m but excluding infrastructure such as towers owned by SACP	
	
•	For a new pipeline we have assumed that all infrastructure would be owned by pipeline operator	

Other costs such as interest on capital, Native Title, spares, depots, remote valves	
Unable to comment	
Refers to construction cost based on Brownfields so why $5.27m included for Native Title	
•	“Brownfield” was not used in relation to the cost estimates. The term related to pipeline route encountering current day environmental/Native Title impacts 	

Asset life of another 50 years
Totalling 79 years
	
No comment	
Refer to EAPL stated life of 60 years and TPA economic life of 38 to 60 years	
•	EAPL in table 3 quotes a life of 80 years for part of its pipeline system
•	Pipelines in the US operating successfully for more than 80 years
•	Envestra in its submission to SAIPAR in fact used an asset life of 130 years for the protected steel mains forming part of its distribution network.