RESPONSE OF EPIC ENERGY TO THE SUBMISSIONS MADE ON
THE ACCESS ARRANGEMENT FOR THE MOOMBA TO ADELAIDE PIPELINE
The submissions to the Access Arrangement  have raised a variety of issues, ranging from matters of policy to detailed comments on the tariffs and terms.  In responding to them Epic has placed them into 3 categories:
1.	Structural and Policy Issues;
2.	Service Issues;
3.	Tariff Issues.
These are now addressed:
1.	Structural and Policy Issues
1.1	The Capacity Management Policy:
The basic design principle of the Access Arrangement terms is the establishment and maintenance of an efficient contract carriage capacity management policy for the pipeline, which will play a part in the development and maintenance of a competitive national market in gas.  By their nature, two submissions question the appropriateness of that management policy, by suggesting the establishment of capacity trading rights and utilisation of the system without having contracted MDQ. 
Epic believes that a contract carriage capacity management policy is appropriate because of the geographic location of the market and the nature of and the density of the demand, the vast majority of which is located in and in close proximity to Adelaide, at the end of what is a long pipeline. Whyalla is the only other significant market area served by the pipeline.  It is at a location remote from the rest of the system demand.  This pipeline and the market is very different to that in Victoria where a market carriage system operates.
The key requirements of a contract carriage system need to be understood.  They are:
•	existing contractual rights must be acknowledged and respected.  Thus they cannot be changed or overridden by, or at the request of, other persons.  The Code clearly contemplates this and Epic has discussed this previously with the ACCC; and
•	the rights (entitlements) and obligations of the parties must be clear, and capable of interpretation and implementation without resort to a third party (such as an arbitrator).  It is for that reason this Epic has elected to produce very detailed terms; terms that are capable (without more) of being the contract .
In the Access Arrangement terms submitted in April, Epic has laid out in detail what it considers to be appropriate and reasonable commercial terms of a contract. These terms:
•	define rights and obligations;
•	contain minimum information requirements for reliable service;
•	provide the most economic provision of capacity and services;
•	optimise the utilisation of the available capacity;
•	contain necessary disciplines and incentives; and
•	give users reasonable latitude and options to trade and deal with their contractual rights, and thus reduce fixed costs (capacity charges) whilst obtaining value at the same time.
The Access Arrangement terms represent Epic’s preferred position at this point in time for a contract carriage system, but do not take into account the rights and constraints under the Existing Transportation Agreements.  The document was prepared in this way (that is, not subject to the existing users rights) as the current capacity has been contracted to the end of the initial Access Arrangement term, it is unlikely that  significant additional new capacity will be developed over that period (beyond that currently contemplated to accommodate the Pelican Point Power Station) and thus the terms will have little application.
However, Epic wants to communicate to the industry the contractual terms that Epic is prepared to accept for contracting new capacity on the MAPS over the initial Access Arrangement period and more particularly beyond the initial period when spare existing capacity becomes available.This is to allow time for these to be considered and understood by the existing users, and for them to consider how they will deal with a more defined environment, well before commencing negotiations for their future capacity requirements.
The terms are not a model; they are the first step in an evolutionary process, one that will take some time to complete.  To make the terms workable over this initial period, and to be consistent with the contract carriage approach, Epic must now adjust the terms as required to respect the rights of the existing users under the Existing Transport Agreements.   
The terms of the Existing Transportation Agreements reflect a very early attempt at establishing a contract carriage system and in particular:
•	They are the first commercial contracts entered into to define the transportation service requirements on the pipeline;
•	Prior to 1995, the gas supply chain downstream of the Moomba plant was managed by one government entity that held a fully integrated position as gas purchaser and wholesaler, transporter, distributor and major end user.  Things were simply 'made' to happen as the circumstances required outside of a disciplined contractual framework; and
•	The agreements contain remnants of this earlier period:
-	presumption that there are only two users;
-	in the definition of rights of the users;
-	in the level of flexibility afforded to users; and
-	in the timing of, and level of information provision - particularly on nominations to the pipeline owner, and the lack of basic information requirements from the Producers.
1.2	The Existing Transportation Agreements & the state of the market:
A number of submissions:  
(a)	call for the establishment of a competitive (gas) market in South Australia; and
(b)	suggest that the ACCC to interfere with the Existing Transportation Agreements as a means to achieving this.
These comments raise two important overarching policy questions: 
(a)	what is a competitive market in South Australia and how is this achieved?
There is no defined answer.  It is very much in the eye of the beholder.  An important point must be made - such a market place (if it does not now exist) cannot be created simply by addressing one sector (or one link in the whole chain), the transmission pipeline sector, in isolation from the others.  Every link must be prepared to co-operate and play its role.
Epic plays its role through implementing:
•	a contract carriage capacity management system that expressly limits the ability of one shipper to impact on another; and
•	a system where those rights are tradeable, and there are incentives to promote and optimize   the use of capacity.
There is little more that Epic can contribute. It is necessary for all links in the chain to co-operate to make the access arrangement work - the Producers to provide information and the Users to allow use of their facilities.  It is wrong to say that the access arrangement is the sole barrier to the development of such a market. 
One party made the suggestion that this market situation can be achieved if gas access arrangements were undertaken on the same basis as that for electricity.  The issues that arise for the ACCC in considering this request are:
(a)	the underlying issue is whether the two commodities and their markets are sufficiently similar so as to do this; and
(b)	if so, is it an appropriate thing to do.
The suggested answer is no to both - gas and electricity are such different commodities, and have such different usage demands market structures physical flow dynamics (electricity has no line pack, imbalance or storage concepts and operates on a "real time" basis), and market dynamics that it is not necessary or reasonable for the arrangements for each of them to converge in this way.  Put simply, the gas supply (Producer and pipeline) system cannot be as flexible as the electricity market.
(b )	the second issue is whether the Regulator has a right to change or "confiscate" contractual rights.
There is nothing in the construct of the Code which permits this.  Indeed, as indicated earlier, the Code very clearly seeks to preserve contractual rights - clause 6.18 requires the arbitrator to give effect to all pre-existing contractual rights (in existence before a dispute - even if it was created after the access arrangement has been lodged), other than exclusivity provision.  This is a stronger position than that which applies to the Regulator under clause 2.25 of the Code.
Epic has made certain significant amendments to the Access Arrangement terms to attempt to find some balance between the rights of Existing Users and the expectations and requirements of prospective new users.  These include:
-	redefinition of the IT Service;
-	liberalising the queuing policy; 
-	making the incentive mechanism have more immediate application to both the Service Provider and existing capacity holders, and
-	revision of procedures to ensure consistency/compatibility with the Existing Transportation Agreements.
These are discussed below.  
The fact remains that all of the pipeline capacity that is suitable for firm service is contracted under the Existing Transportation Agreements.  Although it is not used every day the capacity is contracted to provide certainty to meet peak demand requirements. Therefore, any significant new demand that requires delivery certainty on any given day (via firm capacity) will require New Facilities Investment to be undertaken to increase capacity. That situation will prevail regardless of the number of users that there are contracted to Epic for pipeline services.  
There is no perfect time to introduce reform initiatives; there will always be difficulties with the transition of these reform matters. It is not possible to start the new regulatory process without regard to what currently exists, however inconvenient that may be.  The object of the Access Arrangement is to set out the terms on which: 
-	access can be obtained to Spare Capacity; and
-	the Service Provider is prepared to develop incremental capacity.
The Access Arrangements is not a mechanism by which to create Spare Capacity.  The real issue in this scenario is how the costs of New Facilities Investment are allocated.  This is the function of the queuing and expansion & extension policies.
2.	Service Issues
2.1	The offered services:
The submissions confirm the need for the services offered:
1.	firm service - This is the mainstay of capacity utilisation.  It was sought by all who are, or would be users of the services or consumers of gas. 
The service criteria proposed by Epic appear to satisfy the needs of the market.  The issues on this service that were raised related to:
(a)	the current lack of availability of capacity for this service, and a request for verification of Epic's calculation of the 323 TJ/d quantity;
(b)	the ability of Prospective Users to access this service in the most economic way, for a term that meets their needs;
(c)	the Imbalance regime - recognition of the need for such a regime but questioning the appropriateness of the 8% threshold allowance for operation of the regime, the level of imbalance charges, and the flexibility to trade imbalances; and
(d)	the nomination process - The majority of comments were that the process was too detailed and too rigid - particularly compared to the arrangements under the current contracts, and that it did not align with the current practices of the Producers. Interestingly, the Producers did not pass comment on the process.
The issues that arise for the ACCC are thus:
•	whether the extent of reliability implied by the capacity made available for this service is appropriate;
•	the effectiveness of the queuing policy and the extensions and expansions policy;
•	whether the imbalance regime proposal is appropriate or whether it should be amended; and
•	the purpose served by the nominations procedure, and whether the proposal is appropriate.
2.	Interruptible service - The offering of such a service was clearly endorsed - both as a need of the market, and as a way of utilising capacity in off peak periods and thus as a means of providing capacity with minimal New Facilities Investment.
Suggestions were made that this service should be defined as interruptible on the day.  There was an acceptance that interruptible on the day is a suitable service provided that adequate notice of the interruption is provided.  In two sections of its submission, one party makes a statement that it will make available interruptible capacity and firm capacity.  Epic supports this commitment.
The concerns expressed about this service related to:
(a)	the willingness of existing shippers to make facilities available.  The main catalyst for this was identified as the effectiveness of the incentive (rebate) mechanism;
(b)	the level of and basis for the tariff.
In addition, the comments about imbalance and nominations are of equal relevance to this service.
Subject to these matters, an interruptible service appears to meet the market requirements.
There was no specific request for another service. Two parties interested in power generation made comments that the imbalance regime and the nomination process were too restrictive.  They sought more flexibility and one of them cited the flexibility in TGT's existing contract as being desirable (and thus addressing their concerns).  The issue for the ACCC is whether these comments justify revisions to the proposed services beyond those proposed by Epic to address these comments.  In Epic’s view, they do not.  The requirements of users of the services, particularly power stations are site and plant specific. The contract carriage system sets up a baseline that is designed to meet the basic needs of users.  Clause 2.50 of the Code recognises this by allowing terms to be negotiated.  Any enhanced services terms that are required to address a particular end use market must be paid for by those with a need for greater flexibility.  The issue for the ACCC is what is the appropriate baseline.
Accordingly, Epic considers that an appropriate baseline is not established by offering a third generic (reference) service to address the issues; these issues are best addressed by negotiating changes to the FT reference service to specifically address the requirements of each user.  
To clarify the matter in the document, Epic intends to amend the Access Arrangement terms to include in the service policy a comment that it is prepared to negotiate other services, in addition to the Specified Services. The queuing policy will also be adjusted to reflect that by having 2 such policies - one for firm (FT) service, and one for non firm service (IT Service and any other service).
The issues identified above concerning the offered services are dealt with below as separate issues.
2.2	Specific Issues:
2.2.1	Available Capacity & utilisation of Capacity
A number of submissions sought clarification of the basis for calculation of capacity, and the capacity that is to be used for IT Service.
The issue for the ACCC is whether the extent of reliability implied by this level capacity of capacity for FT Service is reasonable.  A subsidiary question is whether the methodology adopted by Epic is sound. It is Epic's submission that the approach taken is reasonable.
The contract carriage policy requires the service provider to define a maximum level of capacity that it is prepared to guarantee will be available for the reference services – in this case, firm service for 365 days of the year, subject only to force majeure events.  The level of capacity of 323 TJ/day proposed in the Access Arrangement (called System Primary Capacity) is the product of extensive pipeline system flow modelling and probability analysis undertaken by Epic's (internal) technical specialists.
The capacity derived from the Existing Agreements is a theoretical maximum capacity equivalent to 393 TJ/day that may be able to be made available, subject to the matters listed in   [ confidential information deleted ]   of the Existing Transportation Agreements, including the simultaneous operation of all compression plant on the pipeline system.  No guarantee can be provided that this capacity will be available on a day and thus, it cannot be offered for firm service. The difference between firm capacity (323 TJ/day) and theoretical capacity falls within the description of Maximum Capacity.  That definition expressly recognises (as do the Existing Transportation Agreements) that is to be determined by the Service Provider for each day.
Other issues impacting the level of firm capacity are imbalances and heating value “System Primary Capacity “ (or firm capacity) is impacted when the defined threshold allowance for imbalance are exceeded; thus the capacity available for FT service will be reduced as imbalance flexibility is introduced.  The imbalance regime has been developed to maximise the available capacity.
One party questioned the impact of the assumption that Epic has used for the heating value of the gas in calculating the System Primary Capacity.  On Epic's analysis, that factor has a very small impact – less that 0.3% for each 1% change in heating value.  Other factors are far more important, the most significant factor that has a direct impact being inlet pressure.  This is directly under the control of the suppliers of the gas.The capacity that is available for IT Service is best described as Net Available Capacity (as defined) that has not been allocated for use by FT Shippers.  On any day, Net Available Capacity is comprised of:
•	the Maximum Capacity i.e. as determined by Epic having regard to the matters that impact on the availability of the theoretical maximum capacity of that point, less gas scheduled for use for firm shippers.  (Note that Spare Capacity (as defined – being 323 TJ/day less that which has been contracted for as FT Service) is a subset of this maximum capacity.  FT Service has priority use of Spare Capacity);
•	any incremental developed capacity to the extent that it is not utilized on the day by a FT user.
Boral has sought clarification of how the rights of existing users will be reconciled to the proposed services, and the capacity allocation.  This question is really only relevant from the expiration of the Existing Transportation Agreements.  Under the Access Arrangement service definitions, the services currently provided to the Existing Shippers can only be provided through a combination of:
(a)	an amended FT Service, which is more flexible than the current proposed reference service terms; and
(b)	IT Service.
Comments were also made about the secondary capacity concept, and the requirement to nominate by reference to delivery points.  Epic has reviewed its proposal in light of these comments and proposes the following:
Secondary Capacity:
With the benefit of the feedback from the market, and on reflection, the secondary capacity concept does create a layer of complexity and confusion which is not likely to deliver a benefit during the period of the initial Access Arrangement.  Epic thus proposes to amend the Access Arrangement terms to simplify the concept of secondary capacity, to one of Net Available Capacity at the delivery point.  That Net Available Capacity will be available:
•	firstly to any firm shipper, at any delivery point, and
•	secondly, for IT and other services users to the extent that it is not utilised.
Nomination by delivery point:
Under the Existing Transportation Agreements, only TGT nominates by delivery point.  TGT does this because it serves large customers that use dedicated delivery points.  Boral nominates by zone.  Zonal nominations assist Boral to meet the vagaries of the domestic market, which varies from delivery point to delivery point over the course of a day.
Both methods are reasonable; it is a question of which is the most appropriate to the majority of the users, and does the adoption of that disadvantage other users.
Epic's preference is to have nominations by delivery point.  That follows from the contract capacity model - a clear statement of rights / obligations and an improved level of efficiency of capacity utilisation among users.  However, until the expiration of the Existing Transportation Agreements, Epic considers that it is appropriate to continue with zonal nominations until the next access arrangement term, and to review the matter at that time (in 2005).
This will not disadvantage a new user as:
•	any user may still nominate for a specific delivery point, which will be clearly identifiable within a zone; and
•	if the new user is using an existing delivery facility, it will have entered into a contract with the relevant existing user, which will address any zonal nomination questions that are relevant.
2.2.2	Access to services – the Queuing Policy
The policy received some considerable amount of criticism.  Before addressing these, it is useful to review the policy and Epic's objectives in putting it together.
Epic's Objectives:
Although they are combined into the one clause (clause 10.3), there are actually two queuing policies; one for each service.  The are:
•	FT Service:
-	a queue is immediately established.  There is no priority given to any Prospective User prior to the queue clearance (clauses 6.7 and 10.2);
-	the queue is cleared once each year.  The clearance process begins in July and is scheduled to end in November or December (clause 10.4);
-	applications to enter the queue can only be made within a defined time period (or collar) prior to service commencement.  This is to prevent gaming and uneconomic expansions (clauses 6.3 and 11.1);
-	a prospective user can expedite the application and avoid the queue if it elects to do so (clause 10.3).  The consequence of doing so is that spare capacity, and the capacity requirements of other Prospective Users are not considered.
•	IT Service:
-	applications are dealt with in the priority in which they are received;
-	if no New Facilities are required, an offer of a contract is made immediately (clause 8);
-	if New Facilities are required then an estimated cost is given together with an offer (clause 10.3);
-	if either offer is not accepted, the application lapses.
The queuing policies have been formulated in this way to recognise the factual situation that:
•	all available capacity is contracted through to 2005; and
•	thus any incremental new demand will (to ensure delivery of peak day capacity requirements) require New Facilities Investment.
The issues that were raised in the submissions are directed at the queuing policy for FT Service.  That policy is, in compliance with clause 3.13(c) of the Code, designed to produce, as far as is reasonably possible, the most economically efficient outcome. It does this by requiring that all New Facilities Investment that is identified by prospective users over the one year period of the queue be dealt with at one time, to assess the overall requirements, costs and logistics of the new development.  Thus, the Service Provider’s purchasing power and control and incurrence of overheads are optimised.
The FT Service policy also addresses, to the extent possible, (as required by clause 3.13(b) of the Code), the legitimate business interests of Epic, the existing users and prospective users: 
(a)	for Epic (as Service Provider) for the reasons advanced above;
(b)	for the Existing Users – because it does not impact on their contractual rights.  It does not however allow them to contract for existing capacity until 31 August 2003 - 29 months prior to 1 January 2006.  This needs to be addressed; and
(c)	the prospective users because :
(i)	it seeks to produce an economically efficient outcome for the reasons advanced; and
(ii)	it allows a prospective user to step out of the queue and proceed immediately to development of capacity (clause 10.3).
In addition, the extensions and expansions policy (which is relevant to both services) requires that the Regulator review the final construction costs ( clause 10.3 (a) (vi) of the Access Arrangement terms), thus protecting the prospective user's position.
The comments from submissions:
There were 3 common criticisms of the queuing policy for FT Service:
(a)	that it does not comply with the Code because it does not allocate priority.  The issue is whether clause 3.12 of the Code requires that one prospective user must have priority over another, or whether they can rank equally in priority. In Epic's view, the latter is an allowable outcome.  This outcome conforms with another requirement of clause 3.13 of the Code, being that the policy generate, to the extent reasonably possible, economically efficient outcomes.
(b)	the 29 month - 18 month time collar is too restrictive.  Epic accepts the comments made.  In addition, as indicated earlier, Epic considers that this aspect of the policy does not address the business interests of the Existing Users.
In Epic's view, it is this time collar which creates the most substantive issue.  Removal of that should address the majority of the concerns expressed.
The purpose of including a defined (and tight) time period for contracting was to promote the efficient development and utilisation of capacity and prevent parties from contracting capacity well ahead of when it is required.  The 18 month period was put forward on the basis that this is the minimum period of time that would be required to construct any reasonable New Facility.  The 29 month period reflects the operation of the queuing policy - that the queue be cleared only once every 12 months (in July).  This also had the effect of preventing prospective users from contracting a long period ahead of time and engaging in potentially opportunistic behaviour.
However, in response to the submissions, Epic proposes that the "time collar" requirement be deleted.  This will allow a prospective user (including an Existing User) to apply at any time to contract for capacity from January 2006.
Epic considers that a safeguard needs to be inserted to prevent users contracting too far ahead which creates a risk to both Epic and the user in the pricing New Facilities Investment when future costs are unknown.  The suggested safeguard is to limit the commencement date for various tranches of capacity, so that "uncontracted" capacity "holes" are not artificially created for the purpose of creating a gaming or arbitrage opportunity. 
The proposal is, from 2003, to prevent contracts from commencing later than 3 years ahead of when the queue is cleared.  Prior to 2003, prospective users can contract for capacity commencing in 2006. This is illustrated as follows:
year queue is cleared	allowable commencement date for service	
2000, 2001, 2002 & 2003	2006	
2004	2006 & 2007 	
2005	2006,2007 & 2008 	
(c)	it is too restrictive and does not allow prospective users to rapidly capture opportunities for incremental growth.  It will thus cause market uncertainty and jeopardise investment in new projects.
These comments appear to ignore the fact that New Facilities Investment is required to provide capacity for new incremental FT Service.  That being the case, Epic does not agree with the comments; the policy has been structured to address these concerns.
Epic has not attempted to expressly address the issue of whether or not the Existing Users should be obliged to contribute to the cost of new capacity.  That issue is dictated by the timing of its application to contract for additional capacity through the queuing policy.
It is for the ACCC to determine if the each queuing policy is reasonable and passes the 'balance' test of clause 3.13 (b) of the Code.
Epic also proposes to amend the policy such that the queuing policy for IT Service will also apply to any non reference service that may be negotiated. 
2.2.3	Minimum Contract term:
The relevance of the contract term arises through a number of parts of the Access Arrangement terms:
•	the type of service offered;
•	the extensions and expansion policy; and
•	the queuing policy.
Epic selected a seven year term primarily to address its own risk position on the recovery of New Facilities Investment. Seven years is considered to be a reasonable period for return of investment and risk allocation of that return requirement in the business environment.   A shorter-term contract (in the investment horizon) would have the effect of increasing Epic's risk to demand volatility and thus market risk. 
Two submissions ask that the minimum term for FT Service be one year only.  The request for a short contract is implied in a number if the other submissions.  On the other hand one submission seeks a long term contract.  The question of the appropriate minimum and maximum contract term needs to be considered in light of the fact that in the absence of a significant decline in demand, New Facilities Investment is required (to expand capacity) to meet this demand.  Investment in new facilities raises the risk of stranded investment.
The issue for the ACCC is what, in the circumstances, is the appropriate balance to be struck between:
•	the market desire for shorter term contracts; and
•	Epic's commercial needs to have a reasonable level of confidence that its projected return on the investment will be realised and it will not be stranded and to ensure that the level of any capital contribution for new investments is a reasonable level.
Having considered the matter in conjunction with the comments on the extensions & expansions policy, Epic is prepared to respond to the submissions and offer a 1 year term for FT Service, but only on the basis that the formula for calculation of the capital contribution is amended in the manner set out in the next section dealing with the extensions & expansions policy.
One party objected to the "non use termination" provisions applicable to IT Service.  Whilst there is no notion of "warehousing" of capacity involved, Epic considers that it is not appropriate to have potentially "dormant" contracts on foot for the sake of it.  In the example given, the user could ask for service for a minimal quantity at least once per year to keep the contract operative.
2.2.4	Expansions and Extensions Policy
This policy interacts with the queuing policy and the minimum contract term requirements.  Again, this policy has been formulated against the background that New Facilities Investment will be required to serve the next incremental demand for firm capacity, the nature of the market, and the uncertainty of medium term demand for capacity (particularly relating to life of the existing sources of gas supply.  Epic's primary objective in formulating this policy is to reduce the risk of stranded assets.  It does this in 2 ways:
(a)	by requiring a new incremental prospective user to make a lump sum contribution (as a capital contribution) to the cost of the New Facilities Investment; and
(b)	placing a limit on the amount of New Facilities Investment that Epic can be required (by the Arbitrator) to undertake, to the levels set out in clause 10.5.
The comments made in the submissions were directed to specific aspects of the policy.  These are addressed below.  The issue for the ACCC is thus whether these issues are, on their merits, reasonable:
(a)	calculation of the capital contribution:
The comments were predominantly directed at an explanation of, and justification for the calculation of the capital contribution. The amount of this contribution is effectively the amount of the capital cost, which does not pass the "economic benefits test" in clause 8.16 (a) of the Code. The detailed workings of the (current) formula, and the basis for that approach has been set out in Epic's response to the ACCC's letter of 30 April 1999.
To accommodate a shorter minimum contract term, the calculation of the capital contribution needs to be simplified, to be:
CC = Capital Cost - NPV of fixed revenue over the contract term, discounted at WACC.
This treatment of funding of New Facilities Investment has a number of consequences, which do not penalise either the prospective user, or the then users (of the then existing pipeline system):
(i)	the return on and of the capital invested is recovered over the term of the contract that is signed with the prospective user.  This assumes that the capacity thereby created is not used (by any user) beyond the contract term.  This thereby creates an incentive on the prospective user to contract for a reasonable term.
(ii)	it implies that the reference tariff used in the NPV calculation shall apply over the contract term; revised reference tariffs set by the Regulator from time to time do not apply.
(iii)	the tariff paid by that prospective user addresses only the New Facilities Investment.  It does not contribute to the capital costs of the existing pipeline.  The prospective user does contribute to operation and maintenance costs (O&M) through the O&M cost component of the reference tariff that it pays.  Epic acknowledges that this is not a precise contribution to O&M costs, but it is reasonable in the circumstances; if anything, that level of contribution is arguably a higher contribution to O&M costs than would apply if O&M costs allocated among all users (including the prospective user) on the basis of MDQ.  Importantly, the prospective user will be required to pay a pro rata contribution to the most significant variable O&M cost, being system use gas (compressor fuel), through the fixed principle that Epic seeks to establish.  
(iv)	it is intended that the capital base will be increased (at the next access arrangement review date) by the amount of the New Facilities Investment that is recovered by the reference tariffs (being the amount determined in accordance with clause 8.16 (a) of the Code).  The amount of the capital contribution is not intended to be included.
As a consequence, the reference tariffs for other users are not adversely affected (increased) as a consequence of this treatment.  Whilst the net capital associated with the New Facilities Investment is added to the capital base, the amount of the new capacity created by the New Facility is also "added in" to the "capacity base".  This increased denominator (capacity) should generally adjust for the increased numerator (capital cost base and depreciation expense).
(v)	lower reference tariffs will result if that (new) capacity is utilised after the contract term.  The reason is that the capital component added to the capital base will have been "returned" to Epic through tariffs yet the additional capacity will continue to be included in the calculation of the tariffs; a lower numerator / higher denominator.
It will be at this time that the (new) User, which made the capital contribution for the New Facilities Investment, commences to contribute to the cost of the existing system.
(vi)	Epic's "investment risk" in undertaking the New Facilities Investment is minimised, but not to the detriment of the users (existing and prospective):
(A)	that risk profile is reflected in the WACC and thus the reference tariffs when tariffs are next calculated;
(B)	the "credit risk" of the new prospective user is dealt with on the same basis as for all users; and
(b)	calculation of the "reference tariff" component
One party asked why forecast throughput revenue was not included in the net present value calculation.  The reason is that only the fixed, and thus certain, revenue is included.  Epic is not at that time in a position to make an accurate forecast of throughput. The fact that throughput revenue is not included does not give any lasting benefit to Epic; the actual and future forecast throughput revenue will be taken into account by the Regulator when the tariffs are next calculated. Thus any gain Epic receives at the commencement of the service will be brought to account at the next review date.
(c)	How is the capital contribution to be treated and how will it affect the tariffs.
This has been addressed in paragraph (a) (iv).  In accordance with the Code, there will be no adjustment to the reference tariffs as a consequence of New Facilities Investment until that capital is added to the Capital Base.  Approval of the ACCC as regulator is required before it is added.
(d)	Should the rebate mechanism also apply to a capital contribution made for IT Service:
Epic considers the answer to be no. The capital contribution reflects the capital costs of the New Facilities Investment which is actually expended - it is not a prepayment of a revenue component.  Any rebate is payable from actual throughput revenue, and not from capital contributions.
(e)	the terms do not deal with allocation of construction risks and do not reflect a negotiated outcome:
Epic considers that it is not appropriate to prescribe for these matters in the access arrangement terms.  It is intended that these matters will be negotiated and that there will be a construction agreement that deals with them.  That agreement will be a commercial contract and will not need to be reviewed by the ACCC as the regulator.  Epic proposes to include a clause in the access arrangement terms to address the minimum parameters that would apply.
(f)	There is no way to review the capital costs and the early provision of funding disadvantages the prospective user:
The expansion policy does provide a mechanism of safety for the prospective user, that being approval of the capital costs by the regulator.  The requirement to provide funds prior to the date of commencement of construction facilities is to reduce credit risk to Epic.  Large amounts will be involved and the creditworthiness criteria in clause 9 of the Access Arrangement terms are not necessarily appropriate to that level of exposure. The full amount is required prior to physical construction, not prior to development work and licencing (which are lead items to construction). Further, the matter would be open for negotiation at the time, and Epic would be prepared to consider accepting drawdowns for funding as and when it is invoiced by contractors who are engaged in the work. Epic undertakes to make amendments to the clause to clarify these matters.
(g)	limit on funding by the Service Provider 
TGT suggests that where the actual expenditure required will exceed the limits (in clause 10.5), at least the "limit" should be expended rather than no expansion taking place.  With respect, to suggest that this be a mandatory requirement lacks commerciality.  There is no benefit served by expenditure on substandard facilities.
The matter is one to be negotiated with the User, but the principle of clauses 6.15 and 6.22 of the Code must prevail - the Service Provider cannot be obliged to invest beyond the limits that have been approved.
Upon further consideration, Epic considers that the proposed limits will impose too great a burden on Epic (as service provider) in that the current level of $75m is well in excess of what can sustainably be provided from the business.
Epic proposes that the limits be amended as follows:
(i)	the annual maximum amount (clause 10.5 (a)(ii)(A)) be a net contribution by Epic (that is, an "equity" component) of $20m per annum; and
(ii)	the $20m limit in a year be increased by the unexpended portion of the limit in the immediately preceding year (clause 10.5 (a)(ii)(B)).
This amendment is to align the limit to an estimate of the free cash flow available to Epic (that is, earnings after interest and tax expense, adding back depreciation).  The business (of the pipeline system) must survive on its free cash flow.  This is also the source of funds for payment of dividends to the shareholders.  The shareholders are entitled to receive a return, in cash (by way of dividend) for the investment that they have made.
A commitment by Epic to make expenditure on New Facilities Investment:
(A)	commits the cash available from the business and erodes the return to shareholders; and
(B)	is the equivalent of providing a line of credit to prospective new users, at an interest rate equivalent to WACC, which is determined by the Regulator and not the "owners" of the business.
As a matter of commercial prudence, the shareholders must limit that "line of credit" to a reasonable estimate of the funds that are available from the business.
2.2.5	Imbalance Regime
The issue that the imbalance regime is designed to address is service reliability and system security and economic efficiency.  The reason for this is:
(a)	the actions of one shipper can influence the service provided to other shippers.  The submission from Boral discusses this.  That is surely the most important reason why a clearly defined and equitable regime needs to be implemented.
(b)	the main concern is negative imbalance, that is the circumstance where more gas is taken on a Day than was injected into the system.  Imbalance is thus a "physical" matter - the gas that has been 'taken' come from 2 sources:
(i)	that injected by other users; and/or
(ii)	the 'base' quantity in the pipeline - the linepack, which is owned by Epic, and which exists both as an operational necessity but also to provide system security.  Frequent use of this gas, without timely replenishment, will impact adversely on system security, reliability of service and ultimately, the level of firm capacity that can be provided (of the 323 TJ/day tranche).
(c)	the requirement for some economic efficiency signal.  The level of imbalance tolerance and quantum of penalty should not be set at a level which accommodates the shipper who has the greatest daily load uncertainty or who is utilising pipeline storage in place of contracting for appropriate input MDQ with its supplies.
The issues for determination by the ACCC are therefore the reasonableness of the amount of the allowance (or threshold), and of the measure adopted to address and incent compliance with the restrictions used. 
Also, Epic suggests that complimentary and compatible mechanisms need to be included in the distribution system to condition consumer conduct in that sector, which will then have a 'flow up' effect to the transmission level.
Only two measures have been identified as imbalance management mechanisms:
•	physical - to shut in the delivery point; or
•	financial - to meet market demand but attach a cost, as a negative incentive to condition the conduct.
[Confidential information deleted ]

The issues to be determined by the ACCC are thus:
(a)	the extent to which users are to be allowed to utilise linepack to allow flexibility, with associated potential consequences being a lessening of available capacity and system security; and
(b)	the level of negative incentive to be applied, 
(c)	the appropriateness of economic efficiency signals to ensure equity through the gas chain and between shippers with different needs or behaviour.
No single national standard for imbalance would be practical due to the different physical characteristics of each pipeline system and the nature of customer demand.  For comparative purposes, the following is a sample of imbalance regimes that are currently applicable is proposed:
DBNGP
	2% of Shipper’s MDQ	
SWQP
	10% of nomination	
EAPL
	10% of MDQ	
Amadeus – Darwin

	Requirement to correct, with charges for non-compliance	
GGT
	8% of MDQ	
CWP	Requirement to correct, with charges for non-compliance
	
MAPS (current contract)	  [confidential information deleted] 	
The regime proposed for the MAPS is consistent with that which applies (and thus accepted by the applicable regulator) for other pipelines and Epic requests that, in the absence of any convincing arguments from the market that the ACCC approve it.  
The charges are not treated (or structured to be) as a separate revenue stream.  Epic believes that if the incentives work as intended, the charges would be negligible.  
It is only the "Excess Imbalance" that attracts the imbalance charge; that is the 8% threshold amount (of nominated quantities) does not attract the charge.  This is considered to be a generous allowance.
2.2.6 Nominations Process
The nominations process is a basic building block for any pipeline system.  It is the 'backbone' of utilisation of capacity rights under a contract carriage regime:
•	it is the mechanism that gives the service provider the information required to determine available capacity and allocate that between services, and between shippers within the same service, in a timely way; and
•	it in turn allows the users to finalise their daily nomination process with the Producers and satisfy their supply needs, thus underlying their contractual rights.
It is also the mechanism through which the Service Provider will determine whether IT Service can be provided on a day.  It is therefore very important to a number of parties.
The objectives that Epic seeks to achieve with the time limits contained in the process in clause 18 are:
•	to have the process completed by the close of usual business hours on / or before the day of service.  This would also assist the Producers in planning and managing their production activities; 
•	to allow it to determine whether IT Service can be provided on a day; 
•	to identify the quantity of gas that is to enter the pipeline on each day, and thus it’s obligations to deliver gas to each user, on that day; and
•	to be able to provide users with timely information as to their compliance with contract obligations (e.g. imbalance and overrun) and potential penalties.
The process (in clause 18) addresses the many deficiencies in the process that currently applies under the existing contracts. 
[ confidential information deleted ]
In determining whether it has met its delivery obligations to a user, Epic currently operates on the assumption that each party is receiving its (nominated) entitlement to gas, that the correct amount of gas required by that shipper has been injected into the pipeline and thus there is no appropriation of gas of one shipper by the other.  This will not be a valid assumption for new users of the pipeline.
The current system presents a number of issues for Epic:
1.	the pipeline does not, and cannot accurately account to a shipper for gas injected and delivered;
2.	this deficiency creates a serious, real exposure for Epic to its users - that Epic may not have fulfilled its service obligations, 
3.	There is no information universally agreed and available under contract with which to devise a "default" receipt point allocation mechanism which Epic can rely on to protect itself against this risk;
4.	Epic cannot accurately calculate and allocate imbalances.  This creates confusion and uncertainty about who is to make up a negative imbalance (or is entitled to a positive imbalance). Thus Epic will not be able to confidently apply imbalance charges and the integrity of that regime will be lost; and
5.	administrative time and cost is incurred in preparing invoices and correcting them after they are issued.
The net effect of these issues is that Epic should not undertake to transport gas until it is aware of how much gas it is to receive.  This is the basis of the service definition - accept, transport and deliver a nominated quantity of gas.  Epic has attempted to persuade the relevant parties to change the current procedures, to one where Epic is advised directly by the Producers of the allocation of gas injected into the pipeline on behalf of each user, in a timely way.  This attempt has not been successful. Because of the overriding nature of the nomination procedures of the existing agreements, and in the absence of a change in position by the relevant parties, Epic has no choice but to amend the proposed nomination procedures - clause 18 and the allocation procedures in clause 22 to be consistent with the Existing Transportation Agreements, to a process which is much more basic, less informative and impairs rights under the contract relative to the original proposal.
One party has suggested that there is an inconsistency between clauses 18.2 and 18.5 (b), and clause 21.2.  There is no inconsistency; the clauses operate together in this way:
•	The Confirmed Quantity, (the expression used in clause 21.2), is the quantity which the Producers are to advise to Epic under clauses 18.2 and 18.5 (b) as the amounts that were supplied into the pipeline for each user on the previous day.  This information is a breakup of the amount that Epic has metered at the receipt point on that (previous) day. With that information, Epic can calculate imbalance, and any imbalance make-up quantities, and confirm that it has met its delivery obligations to users; and
•	Clause 21.2 operates in a complimentary way – it operates such that if the quantity of gas measured at the receipt point does not correspond to the (aggregate) quantity of gas which the Producers have supplied into the pipeline for each user, then those "default" allocation procedures in clause 21.2 (b) shall apply.  That is, if the Producers do not advise Epic in accordance with clauses 18.2 and 18.5(b), then clause 21.2 will apply.  This could lead to an absurd result, and it is this prospect that places commercial pressure on a user to ensure that the requirements are met.
Unfortunately, there are no such provisions (or commercial incentives) in the Existing Transportation Agreement to incent co-operation.
2.2.7 Interruptible service definition
That the [ confidential information deleted]  nomination variation rights that the Existing Users enjoy under the Existing Transportation Agreements will reduce the availability of the proposed IT Service.  The reason for this is:
•	the "gas day" is to commence at 6.00am;
•	mainline capacity and all laterals and delivery points are contracted and are thus subject to the exercise of the [ confidential information deleted]  variation right which prevents Epic offering IT Service which is firm on the Day; and
•	the imbalance regime in the existing contracts does not incent the existing users not to exercise the [ confidential information deleted] variation rights.
Epic considers that the only viable, transitional way to deal with this situation is to change the interruptible service definition to one that is interruptible on the day.  That is all that can be offered at this time.  It is not considered practical or responsive to the market to offer an interruptible service that is firm on the day unless and until there is capacity available to do so, which is not subject to the [ confidential information deleted] variation right.  Regardless of whether it is firm or interruptible on a Day, the prospective user will have to enter into an agreement with an existing user for use of the delivery facilities (the lateral and delivery point) that are contracted to that existing user.
To assist the market in identifying if IT service is available, Epic also proposes to amend the Access Arrangement terms to provide that on each day, it will post on the EBB the:
•	forecast maximum capacity for each delivery point, based on the gas specifications and the conditions prevailing on the previous day; and 
•	the forecast net available capacity, based on monthly forecasts which are provided by the FT users (under clause 18.1 (c)).  
2.2.8	Incentive Mechanism - Rebate
The submissions that made comment on this were critical of the mechanism.  The criticisms were uniform that the incentives were too remote:
•	the revenue threshold was too high; and
•	the distribution in the next period was not appropriate - it was too late and users that made a contribution were not receiving sufficient recognition
as to present an incentive.
Epic acknowledges these criticisms and proposes the following revisions:
•	a rebate be paid monthly (1 month in arrears) to FT users who permit use of facilities contracted to them to be used to provide IT Service.  The existing users will qualify as FT Shippers for this purpose;
•	the rebate:
-	be paid by the Service Provider from revenue that Epic received from the IT Service that is provided by use of those facilities and is capped at the total such revenue received, subject to the following calculations;
-	is comprised of three components:
º	Lateral Fixed Cost Component.  This is to reimburse the FT User for the (fixed) tariff component paid by it to the Service Provider for the lateral that is used to provide the IT Service.  That component will be calculated by:
VIT/TVL   *   LFC
where
VIT is volume of Gas delivered to the IT User from that lateral;
TVL is the total volume of Gas that is delivered from the lateral;
LFC is the (fixed) tariff costs paid by the FT User for that lateral.  There are specific lateral charges for Existing Users under the Existing Transportation Agreements.  There are no such specific charges under the reference tariff.  Delivery Point Fixed Cost Component.  This is the delivery point equivalent of the Lateral Fixed Cost Component.  It is calculated as:
VIT/TVDP  *  DPFC
where:
VIT is the volume of Gas delivered to the IT User from that delivery point;
TVDP is the total volume of Gas that is delivered from that delivery point;
DPFC is the (fixed) tariff costs paid by the FT User for that delivery point.  It will be calculated in the same way as LFC is for the laterals.
º	Incentive Component.  This is 50% of the "net revenue" received by the service provider from the IT User (that is, the actual revenue less the sum of the other 2 components), calculated as follows:
IC = [ITR - (LFC + DPFC)]/2
where:
ITR is the total revenue from IT Service using the relevant facilities;
LFC is the Lateral Fixed Cost Component;
DPFC is the Delivery Point Fixed Cost Component.
Each of the components are to be calculated each month for the applicable month.
The purpose in the design of this proposal is to reward the Existing User who has most contributed to facilitate the IT Service - being that Existing User whose "contracted facilities" are being used.  There are issues that can be found with this proposal but in Epic's view, it represents a reasonably equitable position of risk and reward, and is available to any FT User that meets the threshold qualification.
TGT also asked the derivation of the tariff for IT Service.  The tariff is 115% of the aggregate tariff for a FT User.  The 15% "premium" represents a load factor adjustment.  IT Service is a "commodity" or throughput tariff, and as such is independent of load factor, unlike FT Service which is "capacity" based.  An FT Service shipper with a "good" load factor of 115% would pay 1.15 x the capacity charge per GJ of throughput (the pipeline load factor is "worse" than 115%).  The 15% "premium" for IT Service is to reflect this load factor effect.  In view of the fact that the majority of the IT Service revenue will be rebated, Epic is not incented to support a high tariff.
2.2.9 Retention Allowance
The comments from the submissions raised two issues on this:
(a)	no incentive to minimise: - to minimise usage of compressor fuel and thus the cost to the Users.  On the other hand, the users seek more flexibility in the service, flexibility, which creates inefficiencies in the operation of the pipeline and thus translates directly into higher usage of compressor fuel.
(b)	the fixed 5% quantity for IT Service is ambit and not reasonable. 
Epic proposes to address these issues by:
•	imposing an obligation on Epic as the Service Provider to use all reasonable and prudent efforts to minimise the amount of System Use Gas that is used in providing the services.  Thus, the service definition will dictate how much gas is in fact used; 
•	calculating the allowance for the IT Service in the same way as it is for FT Service (there are some practical issues related to timing for calculation of the allowance for IT Service.  This is to do with timing of completion of the nomination process.  This will be addressed by allowing Epic to provide an estimate and then reconciling to actual on the next day);
•	removing the 5% cap on Retention Allowance in recognition that users will want flexibility built into their contracts; and
•	ensuring that the new contracts are compatible with the Existing Transportation Agreements and that full costs are fully and fairly recorded.
[ confidential information deleted]  formula.   This formula assumes the existing shippers are the only shippers on any day. For the period of the initial access period, a new shipper will need to contribute the fuel requirements above that necessary to transport gas to the existing shippers.
Epic seeks to make 2 additional changes to clause 17 of the Access Arrangement terms:
(a)	to make it clear that the contribution of new users to compressor fuel is calculated on the incremental additional gas required to provide the service to them; and
(b)	insert as a fixed principle, that from 2006, all users of the pipeline system will contribute to system use gas pro rata to their throughput.  This fixed principle will act as a change in position for the existing users, and be beneficial to 'new' users.
3.	Tariff Related Issues
3.1	Reference tariff policy: For  the first Access Arrangement period, the primary function of the reference tariff will be to calculate the capital contribution for New Facilities Investment as the revenue will be delivered through the Existing Transportation Agreements.
The most economic impact of the reference tariff determination for the MAPS will be the determination of the initial capital base.  Epic has put forward its position on this in a separate submission.
3.2	WACC: - In view of the application of the reference tariff over the initial period, Epic does not intend to make further comment on the WACC for the pipeline system.
3.3	Fees - Comments were made on a number of the fees proposed, and in particular, the Application Fee.  The purpose of fees is to defray costs that are invariably incurred in attending to the matter at hand.  The application fee applies to defray the costs of negotiation of the contract as well as the "processing" of the application.  It is not the intention to have application fees as a defined revenue stream.  This is to ensure that only serious enquires are made.  The following should be noted:
•	A number of disciplines and thus personnel are involved in the assessment of any application (engineering, operational, commercial, financial and legal).  In many cases, external advisers may be used; 
•	the comments assume that the terms of any Access Arrangement contract are not open to negotiation; that the access arrangement terms will simply apply.  This would be the exception rather than the rule.  Negotiation of the contract terms also requires specialistic external advice; and
•	the queuing policy and the expansions and extensions policy provides for engineering studies and cost estimates to be undertaken by Epic in order to make a reasonable offer to the prospective user.  Considerable time and effort is involved in undertaking these studies.
The point is that in considering a contract, a lot of work is involved.  The same amount of care, attention and thus work is required for an "small capacity" contract as there is for a "large capacity" contract.  Much of this work (and all external costs) are not allowed for in the forecast costs that comprise the revenue requirement.  It would be possible to restructure the fee level to provide a smaller fee for lodgement and processing of the application and another fee for undertaking the cost assessment work.  This is another reason for the annual clearance of the FT Service queue.
The issue for the ACCC is whether the imposition of a fee as proposed, and the levels of the fees posed, are reasonable.
Epic Energy believes that a reasonable level of application fee is appropriate and is willing to discuss the appropriate level with the ACCC.
4.	Response to Specific Issues raised in submissions:
The following section contains Epic’s response to comments in submissions which have not been dealt with earlier in this document:
4.1	AGL Energy Sales & Marketing Limited Submission:
Epic generally agrees in principle with, and will make amendments to the Access Arrangement terms to address, the comments made by AGL in relation to clauses 6.4, 7.3, 19.2 (c), 26.2 (b)(iii) and 26.3 (b)(vi), 26.6 (a), 27.4 (d), 30.4 (a)(ii), 32.2 (a).  
In relation to the other comments that it raised, Epic’s response is:
Clause 10.3 (i)(v) - Construction of New Facilities for a single FT User or IT User - The point is noted however, Epic does not intend to undertake New Facilities Investment on a speculative basis.
Clause 10.4 (m)(i) - annual clearance of queue - Capacity - In the Access Arrangement terms the expression capacity refers to MDQ - or the fixed entitlement.  It does not refer to throughput.  Epic does not intend undertaking New Facilities Investment on a speculative basis.
Clause 22.3 (a) (ii)(B) - requirement for metering and exception to requirement - Epic disagrees with AGL's comments, Epic believes that this is an area in which clarity is required and the allocation method is equitable to all users.  Attempting to deal with cyclical or seasonal demand presents considerable potential uncertainty and thus difficulty.  The best (and only viable) alternative for those is to install actual metering facilities.
Clause 23.1 (a) - priority and sequence - the point made is recognised however Epic considers that the way to address the point will require a complex mechanism which will not be practical to implement.  In Epic's view, there is no obvious and practical method to address the point that is raised.
Clause 38.1 (a) - assignment by service provider - Epic proposes to address this point by amending the clause to provide that the rights under the Agreement can be assigned to a transferee on interest in the pipeline system so that economic entitlement to the revenue is tied to ownership of the pipeline system.  This should also address the concern about technical and financial competency because the assignment of an interest in the pipeline system will require the consent of the relevant Minister.  One of the criteria that the Minister takes into account is the (technical and financial) competence of the assignee. 
Clause 38.2 (c)(ii) - assignment by the User - Epic proposes to amend the Access Arrangement terms to provide that the User shall reimburse Epic the reasonable costs incurred in assessing creditworthiness, and preparing and executing a deed of assignment.  The application fee will not apply.
4.2	Boral Energy Holdings Limited Submission:
Trading Policy - point 1 - Epic does not propose to make a change.  Under a contract carriage regime, Epic (as service provider) needs to be aware of whose rights (to capacity) are being utilised in advance of utilisation (so that it can operate within the confines of the agreement and meet its obligations) and to whom to send an invoice.
Terms and Conditions - The terms and conditions will be refined at the revisions submission date to take into account the benefit of experience in working with the terms and the then requirements of the pipeline system.  Epic does not believe that it is necessary or appropriate to constitute a committee to review terms and conditions as has been suggested.  To some degree, this comment does overlook the fact that the Code is to promote negotiated outcomes (clause 2.50 of the Code).
General Responses - time limits - Epic will address the time limits for response and the consequences of failure to respond.  There is a need for some time definition and discipline, to define each party's rights and obligations.  Epic agrees to AGL's suggestion to allow "grace" period in the application process.
Non Specification Gas - Epic agrees that venting is to be the last resort.  However, at a practical level, it is the only real alternative to deal with gas which is not acceptable.  The fact is that the situation has arisen as a consequence of a default by the User.  Epic will review the relevant clauses and make modifications, which it believes may be appropriate to better reflect this.  
Shared Receipt Points - This clause is intended to be a default method.  It will not apply if Epic receives the relevant information from the Producers (clauses 18.2 and 18.5 (b), and details of the allocation arrangements that have been agreed by the Producers and the users to apply at the receipt point.  Epic agrees with the comments made and will revise the clause as appropriate to accommodate any agreed procedures that are notified to Epic provided that the agreed procedures do not impair the rights of other users or result in any unduly discriminatory outcomes.
Shared Delivery Points - Epic does not agree with the comments made.  Not every delivery point feeds into the distribution system.  Currently there is no allocation method applied between the MAPS and the distribution system.  Such a method is not required to meet the Code requirements.
Epic agrees that any distribution allocation method that has been developed and implemented should, to the extent practicable, form the basis for allocation at the delivery point.  However, even if such a method exists, there is no requirement that restricts the distribution system to apply (only) it, or prohibits Envestra from agreeing to another method.
Further, other access arrangements have chosen to be vague on how the allocation might be carried out.  For instance, EAPL's approach is to enable it to establish procedures if a procedure is not otherwise agreed.
Priority - Epic agrees in principle with the comments made, however does not agree that Authorised Variations should rank in priority above IT service.  Therefore, Epic believes that the current ranking of priority in clause 23 is correct.
Operational Flow Orders - Epic agrees with the comments made and will revise the clause to incorporate those comments which it considers to be appropriate.  The issue of the amount of the non compliance charge is dealt with in the response to the submission from TGT.
Electronic Bulletin Board - Epic is currently finalising the design and implementation of an electronic bulletin board system, which will be called the "Customer Response System".  That system will operate on a users personal computers, through a web browser software application.  Therefore, the EBB system will be accessible, and will operate on a users personal computers.  It is not therefore necessarily a case of user being required to sit and watch a screen.  One would expect the same level of monitoring for likely communications.  This system as would apply to a communications system based on sending of facsimiles - a facsimile must be placed in a specific location and periodically checked and cleared.  Communications made after office hours will be followed on the “manual” basis suggested (that is by telephone and fax as appropriate).
In any event, Epic recognises the comments as valid concerns and, will make revisions to the Access Arrangement terms as it considers appropriate, taking into account the implementation of the CRS, and the feedback from customers (Epic will be conducting a briefing session and induction programme for the customers in the utilisation of the CRS).
Assignment - Epic does not agree with the comments.  In terms of clause 38.3 are quite usual in commercial arrangements where credit risk is an important factor.
Rolling in of laterals and delivery points - allocation of capacity – As discussed earlier, it is proposed that all new capacity arising from New Facilities Investment will be included in system capacity at the time of calculating new reference tariffs.  Until 2006, (in the absence of an agreement with the Existing Users) new users will only have rights to laterals and delivery points that are constructed to serve them.
4.3	Terra Gas Trader Pty Ltd Submission:
Comment 4.2.1 - No detail is provided of TGT's particular concerns.  Epic believes that the provision of information is adequate.
The structure proposed was on the basis of Epic's expectation that during the first access arrangement period, the revenue received would be derived from the existing contracts.  Epic has not sought to obtain any higher return than that under the existing contracts.  Accordingly, and in order to treat all parties equitably, Epic constructed the arrangement access tariff structure to reflect the structure currently in place.
Comment 4.2.3:
Category 2 - Economic Life Assumption
The independent third party review commissioned by Epic (Glen Parkinson & Associates) has advised that estimate is reasonable and justified.  The economic life of a pipeline (and any asset) is a function of the physical assets and the nature of the market.

Comment 4.4 - Trading Policy - Epic Energy agrees to delete the indemnity. The intent of the requirement that the Acquirer be an existing User is to address credit risk of the Acquirer; Epic takes the credit risk of the Acquirer and will have already have accepted that credit risk.  Otherwise, Epic needs to undertake a credit analysis to determine whether it is prepared to accept the credit risk.
In relation to MDQ, Epic agrees that if the Acquirer already has FT contract, then the Acquirer can aggregate the MDQ under the contract with the released MDQ.  That is, in relation to the main line.  That does not apply to MDQ for specific delivery points.
Comment 4.6.6 - Equity rate of return - This comment reflects a lack of commerciality.  As Epic is spending its own funds, it believes that an equity rate of return is appropriate in the circumstance.  The approved WACC assumes that Epic can and does secure gearing.  The extent to which this is or can be obtained will vary on the circumstances.  Thus, there is financing risk to Epic implied in the WACC.  Further, and as discussed in section 2.2.4 on Expansions & Extensions Policy, the funds provided by Epic constitute a "free" line of credit, and these funds may never be returned to it (through further new investment).  Thus, an equity rate of return is considered appropriate.
Specific clause comments:
clause 12.4 - temperature – This is a pipeline safety and pipeline life issue.  The requirement is based on the current recommendations of pipeline coating manufacturers that pipeline coating significantly deteriorates when gas is flowed at temperatures in excess of 60oC.  Operation at higher temperature also renders the pipeline susceptible to stress cracking.  Notwithstanding what may be in the existing transportation agreements, Epic considers that it is appropriate to retain 60oC as a standard to work to.  This issue indicates the requirement for a national standard.  If and when one is developed, all regulated pipelines should adopt that standard.  Epic considers that the ACCC should support the suggestion of such a standard.  Further applying this requirement will fulfil in part Epic's responsibility to minimize costs of operation and maintenance of the pipeline.
Clause 25 - OFO - the rate of $7.50 GJ does not represent an estimate of likely damage that may be suffered from such an event.  It is impossible to quantify what the direct losses would be for a failure to comply with an OFO because it depends on the relevant circumstances.  The default charge rate is not meant to be liquidated damages, it is meant to act as a negative incentive and thus enforce behaviour.  In putting forward a per unit rate, Epic Energy has elected for a simplified process.  The alternative is to ask for an indemnity against the direct losses incurred for failing to comply with the OFO.  That (traditional) process would involved much time and effort in resolving a claim, and there would always be grounds to challenge and object to any claim made, such that the process may well be frustrated.
Clause 34.4 - Force Majeure - Epic is prepared to agree to the position put forward and amend the access arrangement accordingly.
Clause 35 - Limitation of Liability - Epic believes that the regime it has offered is reasonable, commercial and appropriate for a service provider that is required to accept a regulated (fixed) return.  Epic Energy notes that in relation to the TPA system in Victoria, the service providers’ liability is also limited.
Clause 38.3 - Change in control - Epic Energy accepts the point made that listed companies should be excluded from the application of the clause.  Otherwise, Epic believes that the clause is appropriate and reflects usual commercial practice.
Clause 42.1 - Amendment - The amendment of the Access Arrangement terms will occur through a full and open public process.  Epic's view is that a user’s position is well covered given that the user is able to make submissions, and given the role that is played by, and the considerations to be taken into account by the regulator.  In any event, it is more likely going to be the rule than the exception that a contract for service will represent a negotiated outcome, which may well include the deletion of the clause that TGT refers to.
Schedule 2 - MHQ definition - Epic does not agree to the point made.  The aggregate of the MHQ's at the delivery points is to be the same as that applying on the day at the receipt point - the service is to deliver the amount of gas that is injected at the receipt point.  It is the nominations and scheduling process that determines the relevant amount of gas, not the capacity of the pipeline or the contracted MDQ.  Further, the user has the "free" imbalance buffer (of 8% of nominations) to assist it.  Other users potentially suffer to the extent that one shipper seeks a privilege.
Schedule 3 - Gas specification - The specification  aims to be identical with the specification for the EAPL line, which receives gas from the same gas, sources.  Epic's technical advice is that this specification does not affect any power generation facilities.  Further, Santos did not raise an issue on gas specification.
Comment 4.8 - Commencement and Review:
4.8.2 and 4.8.5 - The triggers for revisions for the Access Arrangement should be left for Epic to determine.  The position is no different than that which applies to parties to negotiated contracts - it is necessary for those parties to seek to negotiate revisions with each other.
4.8.4 - This has been addressed in the response to the comments made by AGL.
Comment 4.9 - Ringfencing
Epic believes that the information it has provided to the ACCC demonstrates that there are no cross subsidies involved.  The matter is one for the ACCC to be satisfied with.
5.	Pricing Principles - the majority of these comments have been addressed by Epic in its response to the ACCC's letter of 30 April 1999 and specific responses on capital base.
5.5	Escalation:
[ confidential information deleted]  
Stay in business capital - There is an error in this figure.  Stay in business capital was detailed in Table 4A of the confidential version of the Access Arrangement Information.  Epic considers that the forecast outlays are quite reasonable for an asset of this size.
GST - Impact on inflation - Epic is not certain of the net effect of the GST on inflation; with the system still being implemented, it will be some time before an accurate assessment can be made; it is not something that can be accurately forecast.  Again, the matter is substantially moot for reasons of the practical utility of the reference tariff.
Comment 5.8 - Performance indicators - No performance indicators are currently available.
4.4	Osborne Cogeneration Pty Ltd submission
Excess Imbalance - request for intra-day balancing (page 3).  This is not appropriate in the context of a contract carriage system because the service provider is not able to confirm during the day ownership of gas.  This can only be done at the end of the (gas) day.