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Issues
Paper

Access Arrangement for the
Principal Transmission System

Application for Revision
by GPU GasNet Pty Ltd

September 1999

Commission File No:  C1999/361
Commission and Code Registrar Application No:  GR9905

Contents
1.	Introduction	1
2.	Revisions proposed by GPU GasNet	2
2.1	Purpose of revisions	2
2.2	The Interconnect assets	2
2.3	Impact on reference tariffs	3
2.4	Proposed costs allocation	4
2.5	Tariff methodology	5
2.6	System-wide benefits	5
3.	Commission approval of revisions	7
4.	Issues for consideration	8
4.1	System-wide benefits	8
4.2	Costs allocation	8
4.3	Proposed tariff structure	8
4.4	Other issues	9

1.	Introduction
On 26 August 1999 GPU GasNet Pty Limited (GPU GasNet) submitted to the Australian Competition and Consumer Commission (the Commission), for approval under the National Third Party Access Code for Natural Gas Pipelines Systems (the Code), revisions to the access arrangement for the Victorian Principal Transmission System (PTS) and associated supplementary access arrangement information.
An access arrangement describes the terms and conditions on which a service provider makes access to its pipeline available to third parties.  The Commission will assess the proposed revisions to the access arrangement for the PTS and the supplementary access arrangement information against the principles in the Code.
The Commission issued its final approval for the PTS access arrangement on 16 December 1998.  At that stage the system was respectively owned and operated by Transmission Pipelines Australia (Assets) Pty Ltd and Transmission Pipelines Australia Pty Ltd.  The access arrangement came into effect on 1 March 1999.  GPU GasNet acquired the PTS on 2 June 1999 and also operates the business.  The access arrangement as approved by the Commission continues to apply to the system now owned and operated by GPU GasNet.
GPU GasNet proposes to expand the capital base of the PTS, and to amend the PTS reference tariffs, to take account of what it refers to as the Interconnect assets, on the basis that they pass the Code’s system-wide benefits test.  These assets were commissioned after approval of the PTS access arrangement and comprise the interconnect pipeline that links the Victorian and NSW gas transmission systems, the Springhurst compressor, and associated valves.
This Issues Paper identifies a number of issues raised by GPU GasNet’s proposals.  However it is not intended to be exhaustive or to replicate the details of the proposals.  Accordingly, interested parties are invited to make submissions to the Commission on any issues raised by, or relevant to, these revisions by Friday 22 October 1999.  
All submissions must be in writing and should also be supplied in electronic format compatible with Microsoft Word 97 for Windows.  They will be made publicly available and placed on public registers held by the Commission and the Code Registrar.  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 Commission 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 a prospective user.  Submissions should be addressed to: 
Mr Mark Pearson
General Manager
Regulatory Affairs – Gas
Australian Competition and Consumer Commission
PO Box 1199
Dickson    ACT    2602
Copies of the proposed revisions to the access arrangement and the supplementary access arrangement information are available from the Commission’s website at http://www.accc.gov.au (under ‘Gas’).  Copies of these documents may also be obtained from the Commission by contacting Ms Katarina Glavinic (phone 02 6243 1274, fax 02 6243 1202, e-mail katarina.glavinic@accc.gov.au).  There is a $5 fee for discs and a $20 fee for photocopies.  Requests for photocopies may also be directed to the Code Registrar (Level 19, Wakefield House, 30 Wakefield Street, Adelaide 5000; phone 08 8226 5786, fax 08 8226 5866); fees applicable will be according to the Code Registrar’s determination.
Requests for hard copies of submissions lodged by interested parties should be directed to Ms Hoa Nugent at the Commission (phone 02 6243 1017, fax 02 6243 1199, e-mail hoa.nugent@accc.gov.au) or to the Code Registrar (phone 08 8226 5786, fax 08 8226 5866).  While submissions may be inspected free of charge, a fee is payable for copies of them.  
Any inquiries on this matter should be directed to the project manager, Mr Michael Walsh (phone 02 9230 9156, fax 02 9231 5652, e-mail michael.walsh@accc.gov.au).
2.	Revisions proposed by GPU GasNet
2.1	Purpose of revisions
GPU GasNet has proposed revisions under its extensions and expansions policy to incorporate the Interconnect assets, which are described below, in the PTS access arrangement.  The current revisions, however, do not cover two additional compressors placed by GPU GasNet on the Moomba to Sydney Pipeline (MSP) in conjunction with the Interconnect assets, or the recently completed South West Pipeline.  The Commission understands that these assets will be the subject of a separate application for approval of revisions or will be considered at the scheduled review of the PTS access arrangement.
A new interconnect zone is proposed by GPU GasNet with the capital base expanded to include the Interconnect assets.  As incremental revenue from the Interconnect assets is only expected to cover a small part of the costs associated with these assets, reference tariffs for all users of the PTS are proposed to be increased to recoup the balance of the capital and non-capital costs associated with these assets.  
The proposed commencement date for the revised reference tariffs is 1 January 2000.
2.2	The Interconnect assets
These assets comprise:
•	the interconnect pipeline, which is a gas transmission pipeline approximately 63 km long linking the PTS in Victoria with the MSP system owned by East Australian Pipeline Ltd (EAPL) in NSW.  The interconnect pipeline was commissioned in July 1998, at a capital cost to GPU GasNet of $19.5 million;
•	the Springhurst compressor, which is a gas compressor station on the PTS located at Springhurst in Victoria (approximately 20 km south of the interconnect pipeline).  Its capital cost for regulatory purposes was $16.5 million; and
•	three remotely operated regulators and an automated valve, which manage flows associated with the interconnect pipeline through the PTS.  The total capital cost for the valves was $4.4 million.
2.3	Impact on reference tariffs
Incremental revenue from the Interconnect assets is expected to cover eight per cent of their capital costs.  GPU GasNet proposes to roll-in the remaining 92 per cent to the capital base to be recovered from all users of the PTS.  Associated operating costs would also be recovered from all users.  These proposals are based on GPU GasNet’s contention that the assets provide system-wide benefits, which is discussed later.  The proposed revisions to the reference tariffs comprise:
•	a new interconnect zone, with a new zonal (peak) tariff of $1.845/GJ; and
•	an increase in the anytime volume charge applying to each existing zone. 
The table below presents three options proposed by GPU GasNet for 1999 anytime tariffs which would form the base for tariffs charged in 2000.  The three options are described in section 2.4 below.
Proposed anytime reference tariffs 1999(a) ($/GJ)
Zone no.	Transmission zone	Existing	Option 1	Option 2	Option 3	
Transmission delivery tariffs D and V	
1	La Trobe	0.053	0.2855	0.1361	0.0833	
3	Lurgi	0.131	0.3635	0.2141	0.1613	
4	Metro	0.079	0.3115	0.1621	0.1093	
5	Calder	0.262	0.4945	0.3451	0.2923	
6	South Hume	0.106	0.3385	0.1891	0.1363	
7	Echuca	0.254	0.4865	0.3371	0.2843	
8	North Hume	0.229	0.4615	0.3121	0.2593	
Transmission pipeline supply point tariffs	
1	Carisbrook	0.286	0.5185	0.3691	0.3163	
2	Chiltern Valley	0.214	0.4465	0.2971	0.2443	
Source:	GPU GasNet application, Annexure 2.
Note:	(a) The proposed 1999 tariffs would not be implemented but would form the base for 2000 tariffs. 
GPU GasNet does not propose to make a back-haul service available on the interconnect zone as physical flows are expected to be approximately equal in both directions.  The proposed zonal tariff is set approximately halfway between EAPL’s published distance-based forward haul and back-haul tariffs for the MSP (for an 80 per cent load factor customer).
No changes are proposed to the peak demand, peak volume and injection charge components of the existing tariffs.  GPU GasNet has proposed three alternative options for the revised anytime period charge, which are shown in the table above.
2.4	Proposed costs allocation 
GPU GasNet considers it appropriate that the interconnect pipeline zonal charge recovers eight per cent ($1.6 million) of the capital cost of the interconnect pipeline, which it notes would generate a tariff that lies between the front-haul and backhaul tariffs applying on the MSP on an equivalent rate per km.
GPU GasNet proposes that the remaining costs, which include all operating and maintenance costs, the capital cost of the Springhurst compressor and valves, and the residual 92 per cent of the capital cost of the interconnect pipeline, should be treated as common costs, and be recovered by an equal increase in the transmission volume tariff component for all users.  
The table above of proposed anytime tariffs for 1999 shows existing and proposed tariffs for each zone under three options.  Tariffs would be increased by the same amount for each zone.  Proposed increases are $0.2325/GJ, $0.0831/GJ and $0.0303/GJ respectively under Option 1, Option 2 and Option 3.  The percentage increases would vary considerably across the zones, with La Trobe and Metro experiencing the largest proportionate increases.
GPU GasNet states that the proposed method of cost allocation is based on the premise that the system-wide benefits are enjoyed equally by all users, in proportion to their use of the system, and are not dependent on the location of withdrawals, nor on the level of peak demand of each user.  On this basis GPU GasNet contends that it is most equitable to allocate the costs as a fixed charge per GJ of usage, in the same manner that indirect, non-locational costs are allocated within the PTS tariff methodology.
The three tariff options shown above reflect GPU GasNet’s proposal that three periods should be considered by the Commission regarding the recovery of costs on the Interconnect assets:
•	option 1: recovery of capital costs in one year (2000);
•	option 2: recovery of capital costs over the remainder of the initial access arrangement period (2000 to 2002 inclusive); or
•	option 3: recovery of capital costs over the remaining economic life of the assets.
Option 1 would result in a one year price spike with revenues (and hence average tariffs) increasing by approximately 76 per cent.  While GPU GasNet acknowledges that this option is not likely to be favoured by users, the service provider considers that it would reflect the immediate system security benefits relating to critical support during the gas supply emergency in 1998 and security against uncertainty of supply in the winter of 1999.  
Option 2 would result in an increase of approximately 27 per cent for the last three years of the initial access arrangement period.  
The increase of approximately ten per cent under Option 3 would be for the remaining life of the assets. 
GPU GasNet would be expected to earn the same additional revenue in present value terms under each option.
2.5	Tariff methodology
GPU GasNet states that the broad principles and parameters underlying its reference tariff calculations are the same as those used in the PTS access arrangement.  These include:
•	pre-tax real WACC of 7.75 per cent;
•	CPI annual escalation rate of 2.5 per cent; and
•	forecast volumes as used in the existing tariff model.  GPU GasNet states that this preserves the original intent of the incentive based regulation despite changed perceptions since the approval of the PTS access arrangement.
For Option 3, the economic life of the interconnect pipeline is assumed to end in 2033 (based on the economic life of other pipeline assets).  The Springhurst compressor is assumed to have a 30 year technical life ending in 2028.
GPU GasNet states that the proposed tariffs have been calculated under the net present value (NPV) approach referred to in the Code, and that this methodology has been used to determine tariffs in the other zones of the PTS.  In broad terms this method aims to equate the NPV of the revenue requirement over the first access arrangement period with the NPV of the forecast revenues (where the annual revenue requirement is determined by the cost of service model based on the assumed depreciation profile). 
2.6	System-wide benefits
Under the PTS access arrangement extensions and expansions policy, new facilities investment that passes the economic feasibility test is included in the capital base, and users are charged the existing reference tariff.  Where the investment does not pass that test, the prudent proportion of the investment that does pass the test may generally be included in the capital base.  The balance would be included in a speculative investment fund, or recovered through a levy or surcharge (or a combination of these options).  Alternatively, the new facilities investment may be included in the capital base, and all users charged a higher reference tariff, if the investment passes the system-wide benefits test (clause 5.7.2(c)(1) of the PTS access arrangement), or if it is necessary to maintain the safety, integrity or contracted capacity of the reference services.  
Pursuant to section 8.16(a) of the Code, the amount by which the capital base can be increased is the actual capital cost of the investment provided that it does not exceed the amount that would be invested by a prudent service provider acting efficiently, in accordance with accepted good industry practice, and to achieve the lowest sustainable cost of delivering services.
GPU GasNet states that the Interconnect assets do not pass the economic feasibility test but that they do pass the system-wide benefits test.  GPU GasNet proposes that the Interconnect assets be included in the capital base and that the Commission approve higher reference tariffs for all users.  System-wide benefits identified by GPU GasNet are discussed below.
System security benefits
GPU GasNet states that the assets have provided (and continue to provide) enhanced system security to all users of the PTS by enabling gas sourced from the Cooper Basin to flow south into Victoria.  This added security was provided during the gas supply emergency in Victoria following the explosion at the Longford plant in September 1998.  GPU GasNet states that flows through the interconnect pipeline allowed critical loads such as nursing homes and hospitals not to be curtailed and helped avoid the risk of a total system collapse.  Interconnect flows subsequently ‘formed a key element of Victoria’s planning for dealing with a supply shortage in the event that Gas Plant No. 1 at Longford did not provide uninterrupted supply’.  GPU GasNet further notes that over the long term the assets will provide an additional source of gas which would mitigate the impact of gas supply emergencies and avoid other unplanned curtailments.
Competition benefits
The Interconnect assets have enabled “basin on basin” competition for the first time in both Victoria and NSW. 
Continuation of system-wide benefits
GPU GasNet contends that the system-wide benefits provided to users of the PTS by the Interconnect assets would be largely undiminished by the expected commencement of operations by Duke Energy’s Eastern Gas Pipeline (EGP) after the winter of 2000 as the EGP is designed primarily to ship gas northwards from Bass Strait to Wilton in NSW.  GPU GasNet states that it is unaware of any intention by Duke to connect the EGP to the PTS, or to configure its Longford compressor for southward flows.  
GPU GasNet states that, even with the necessary connection and compression, the EGP would provide limited system security to Victorian users.  In particular, the available capacity of the MSP would be lower for deliveries from Moomba through Wilton (to the EGP) than through Young (to the interconnect).  Relevant factors include the longer transportation distance to Wilton and that the prevailing demand in Sydney has a greater impact on the capacity to Wilton.  
GPU GasNet considers that the greater distance from Moomba to Melbourne via Wilton and Longford (2,220 km) compared with the interconnect (1,570 km) might be an important issue in an emergency because of the time taken to deliver gas.  A further point made by GPU GasNet is that the EGP would inject at Longford (if a connection were available) and could not provide system security if there was a failure of the main supply pipeline from Longford into Melbourne.
3.	Commission approval of revisions
Section 2 of the Code sets out the consultative process the Commission must follow when reviewing revisions to an access arrangement that would result in changes to the reference tariffs.  The Commission must issue a draft decision on the revisions after considering submissions from interested parties.  The Commission will then request submissions on the draft decision before issuing its final decision.  
Pursuant to section 2.46 of the Code, the Commission may approve the proposed revisions only if it is satisfied 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 (the mandatory elements).  Conversely, the Commission must not refuse to approve revisions solely for the reason that the revised access arrangement does not address a matter that sections 3.1 to 3.20 do not require an access arrangement to address.  
In assessing proposed revisions, the Commission must take into account the provisions of the access arrangement and the following factors which are described in section 2.24 of the Code.
(a)	the Service Provider's legitimate business interests and investment in the Covered Pipeline;
(b)	firm and binding contractual obligations of the Service Provider or other persons (or both) already using the Covered Pipeline;
(c)	the operational and technical requirements necessary for the safe and reliable operation of the Covered Pipeline;
(d)	the economically efficient operation of the Covered Pipeline;
(e)	the public interest, including the public interest in having competition in markets (whether or not in Australia);
(f)	the interests of Users and Prospective Users;
(g)	any other matters that the Relevant Regulator considers are relevant.
4.	Issues for consideration
This section lists a number of issues that interested parties may wish to address when preparing submissions for consideration by the Commission.  The list is not meant to be exhaustive and interested parties are invited to raise any issues considered relevant to the Commission’s consideration of the revisions.  
The Commission’s current review is of the proposed revisions to the reference tariffs and is not intended to extend to the broader issues considered at the time the PTS access arrangement was approved in 1998.  These issues will be re-assessed as part of the review of the access arrangement when GPU GasNet submits revisions pursuant to section 3.17 of the Code in 2002.
4.1	System-wide benefits
GPU GasNet has submitted that the Interconnect assets provide (system security and competition) system-wide benefits and that all users of the PTS should contribute to the actual capital costs of these assets (other than for approximately eight per cent of capital costs which would be recovered from users of the new interconnect zone).
•	How relevant are the system security benefits identified by GPU GasNet?
•	How relevant are the competition benefits identified by GPU GasNet?
•	Do any or all of the Interconnect assets pass the system-wide benefits test?  
•	To what extent, if any, would the EGP, connection with the Western Transmission System or underground storage diminish the system-wide benefits provided by the Interconnect assets?
4.2	Costs allocation
Under GPU GasNet’s proposals, eight per cent of the capital costs of the Interconnect assets would be recovered from users of the new interconnect zone.  All users of the PTS would contribute to the balance of the costs of these assets.  Three options are proposed relating to the time periods over which GPU GasNet would recover these costs.
•	To what extent do the Interconnect assets pass the prudent investment test?
•	Is the proposed tariff for the interconnect zone appropriate?
•	Which of the proposed options is preferred?  Is there a better alternative?  What is the basis for the preference?
4.3	Proposed tariff structure
Under the proposed tariff structure the costs related to the Interconnect assets (other than that recovered by the interconnect zone tariff) would be recovered from all users of the PTS through an equal increase in the anytime (or commodity) charge.  Based on 1999 tariffs, the increase would be 23.25 cents/GJ (Option 1), 8.31 cents/GJ (Option 2) or 3.03 cents/GJ (Option 3).  As existing peak charges would be unchanged, the capacity:commodity ratio would fall from approximately 64:36 to about 58:42 under Option 3, or further under the other options.
•	Does recovery of the costs associated with the Interconnect assets through an equal increase across all zones in the anytime charge reasonably reflect the distribution of benefits associated with these assets?
•	Is the proposed tariff structure efficient?  If not, what would be a more appropriate structure to generate the same amount of revenue?
4.4	Other issues
Interested parties are invited to raise any other issues that are relevant to the Commission’s review of the proposed revised reference tariffs.