2 August, 2001

Mr Warwick Anderson
Director 
Australian Competition & Consumer Commission
470 Northbourne Ave
Dickson ACT 2602

Dear Warwick

Amadeus Basin to Darwin Pipeline Access Arrangement Draft Decision

NT Power Generation Pty. Limited (NTPG) is pleased to respond to the Australian Competition and Consumer Commission’s invitation to submit a response to the Draft Decision (DD) on this matter. 

This submission follows the sequence of key draft decisions set out in the parameter listing of the DD’s Executive Summary (pp.viii –x.), 

NTPG would however wish to state that they are extremely concerned with the comments made by the ACCC in their draft decision where they state,

“The ABDP is fully contracted until 2011
	Draft decision will therefore have minimal impact on current tariffs”

NTPG do not accept that statement and we believe NTPG should have the ACCC instruct NT Gas to apply the recommended tariff to NTPG’s transactions with respect to gas transportation charges our reasons are given below,

1.	ACCC should be aware that all of our gas contracts are based on interruptible supply, no other alternative was available to NTPG, as the supplier could not meet the time frames for our customer needs, as it was alleged they had a requirement to carry out capital works if NTPG required an uninterruptible supply and those works would take twelve (12) to eighteen (18) months. 

2.	NTPG on the basis of no acceptable alternative entered into an arrangement for gas supply on an interruptible basis and our electricity customers were advised their electricity supply would be interruptible.

3.	Both the supplier and the transporter of gas entered into contracts with NTPG on an interruptible basis, and have continued to supply sufficient quantities of gas to satisfy the commercial arrangements of the contracts and our customers needs in respect to electricity supply.    

4.	NTPG have not experienced any interruption to gas supply over the term of the gas supply arrangements.

5.	NTPG would request that the ACCC establish from historical data the number of occasions, if any, of interruption to the gas supply on the ABDP.

6.	The ACCC have stated in their draft decision that all of the gas is fully contracted till 2011, NTPG would request that the ACCC determine over the term of the pipelines operation if the Power and Water Authority (PAWA) have used all of their contracted quantity of uninterruptible gas. 

7.	NTPG’s view is PAWA has not utilized their nominated quantities of uninterruptible gas supply, banking of gas given the opportunities of an alternative gas supply should not occur at the detriment to NTPG, and as such it is hence extremely important that a reconciliation is initiated. 

8.	NTPG from analysis of information that is available in the public domain, have established that the gas shipments lower than previous years, and hence this supports our assertion that there is the need for a gas reconciliation of contracted uninterruptible gas supply versus actual.

9.	NTPG note that in the ABDP draft decision it is stated there is a quantity of 5TJ per day of capacity available on an interruptible basis this is excess of our current gas requirements and obviously supports our position with respect the fact that our customers currently have a degree of float with respect to the amount of interruptible gas that is available, NTPG are of the view that this should be charged at the reduced transportation charge as recommended by the ACCC. 

NTPG comments on ACCC Draft Decision

Ownership-basis for the assessment:

NTPG supports treatment of the pipeline as being under common ownership and operation.

Optimised Replacement Cost: 

NTPG contends that the initial configuration of the pipeline was not optimized. This contention is supported by comparative data presented in Table 2.3 p.27 of the DD, and the Connell Wagner contention of p.21. That table suggests that, apart from the Channel Island extension, the pipeline was initially oversized and consequently the initial capital investment was higher than would have been incurred by a prudent operator. 

Depreciated Optimised Replacement Cost:

NTPG contends that use of a unit of throughput depreciation approach based on economically recoverable Amadeus Basin gas reserves, as suggested in the NTPG submission of 12th September 1999, p.2, would better motivate NT Gas to encourage uptake of the reference service. However NTPG accepts Scenario 2 as a reasonable basis for calculation of ICB.

Deferred Tax Liability:

NTPG accepts the determination of the Draft Decision.

Initial Capital Base:

NTPG supports the Draft Decision proposed value of $176.2m at 1July 2001.

New Facilities Investment:

NTPG disputes the proposed capital expenditure forecast provided by NT Gas because it does not allow for additional compression for the pipeline so as to ensure sale of the reference service on a non-interruptible basis during the duration of the access arrangement period. A prudent operator would allow for this to provide scope to grow the market by sale of the reference service.

Depreciation allowance:

NTPG contends that any future risk of stranding is exacerbated by the attempt of NT Gas to extract monopoly rents from users of the reference service.

Discussion

Economically recoverable reserves estimated to remain in Amadeus Basin gas fields, together with the electricity growth rates forecast for the Darwin-Katherine interconnected system, suggest ABDP can remain in the current mode of operation until 2025 or thereabouts. However, earlier stranding could be brought on by continued attempts of NT Gas and the field operators to extract monopoly rents. This could result in offshore gas being landed in Darwin and shipped to southeastern markets before economically recoverable reserves in the Amadeus Basin are produced. The DD’s acceptance of the premature stranding arguments may have the unintended effect of endorsing attempts by NT Gas and the Amadeus Basin producers to raise barriers to entry and prevent competition in the Darwin-Katherine electricity market.

Rate of return:

NTPG disputes acceptance of 60:40 gearing suggested by NT Gas, and contends that for the unique circumstances of ABDP, a prudent operator would finance this pipeline using debt financing to a greater extent.

Discussion

A prudent operator would finance ABDP using the lowest available cost of capital. A tabulation of relative costs of debt and equity capital appears on p.53 of the DD.  Nominal cost of equity capital appears nearly twice as high as that of debt. In these circumstances a prudent operator would finance the project for the next five years using debt to the greatest possible extent.

The ABDP project was financed initially by a consortium of banks following the contractual commitment by Gasgo to ship gas from Palm Valley and Mereenie to the Channel Island power station. Gasgo’s commitment, as a subsidiary of PAWA and thus of the NT Government, was sufficient assurance for the banks to approve debt financing. The term of the Gasgo agreement extends to 2011, with every likelihood of extension to 2025 (a date reflecting possible exhaustion of economically recoverable Amadeus Basin gas reserves), provided the deliverers of Amadeus Basin gas remain cost competitive and efficient. 

This is a quite different situation than for most other Australian gas pipelines lacking a foundation contract guaranteed by the Crown, which assures a revenue stream from commissioning until 2011, with likely extension to 2025 provided gas is delivered in a cost competitive and efficient manner. This revenue stream acts as collateral to support an assumption of continued debt financing. As the cost of debt is less that the cost of equity a prudent operator would employ this collateral to obtain a greater proportion of debt financing than 60%.

The DD’s acceptance of the NT Gas assertion that ABDP is fully contracted, and a conclusion that sale of the reference service cannot grow the market (p.68) is unwarranted. The gearing ratio assumption for this facility used for deriving WACC in Table 2.11 of the DD (p.70) of 60:40, is inappropriate as it is predicated on badly chosen precedent and invalid financial risk assumptions proposed by NT Gas. 

Non-capital costs:

NTPG accepts the Draft Determination contention that estimates for non-capital costs are reasonable given the lower levels of throughput experienced in 2000/01.

Forecast revenue:

NTPG contends the revenue forecast determined by Commission in Table 4 (p.xvi.) of the DD is fair and equitable for all stakeholders in ABDP. However NTPG vigorously disputes the contention of NT Gas that capacity of ABDP is fully committed to users under pre-existing transportation contracts.
Discussion:

It has been the contention of NT Gas that the pipeline is fully contracted until 2011. NTPG disputes this assertion given the physical configuration of the pipeline, and published actual and forecast transportation service demands over the duration of the access arrangement period.

Table 2.3 of the DD sets out a comparison of optimum designs for the ABDP pipeline. The actual configuration of the line is given on page 37 of the NT Gas Access Arrangement Information of 25 June 1999 as:

•	355.6mm outside diameter (OD) for the southern 1110km connecting Palm Valley to Mataranka:

•	323.9mm OD for the 391 km section between Mataranka and the Darwin City Gate; and 

•	219.1mm OD for the 12km section between the Darwin City Gate and Channel Island.

The Mereenie branch supply line is 273.1mm OD and 116km in length.

Apart from the Channel Island extension, the actual pipeline configuration is in accord with the NT Gas optimum design set out in Table 2.3. However the actual diameter of the line exceeds the optimum configuration provided by Connell Wagner and accepted by the Commission for the determination of ORC as set out in Table 2.3 p.27 of the DD. Such comparisons suggest the pipeline was initially oversized. 

Examination of annual production statistics from 1996 to 2000 suggests peak shipments to Darwin take place in the October-December quarter of each year. Practically all the gas shipped (99.7%) is used for electricity generation. The highest level of gas shipments on ABDP to date took place in the October-December quarter of 1999. Shipments of 4.6 PJ can be estimated; suggesting an annual capacity of about 18 PJ existed at that time. 

Electricity growth forecasts provided in Table 2.6 of Electricity Australia for the Darwin-Katherine interconnected system anticipate that load growth from 1999/2000 to 2009/2010 increase at a rate of 2.2 % annually. Gas shipments in the October-December quarter 2000/01 amounted to 3.9PJ. Application of the forecast 2.2% annual growth to this base suggests a quarterly shipment of some 4.8PJ in 2009/2010. The pipeline has already demonstrated a capability of 4.6 PJ in the October-December quarter of 1999. More detailed examination of throughput records not available in the public domain by the Commission or its expert consultant will surely confirm that spare capacity enables sale of the reference service.

NT Gas Access Arrangement Information of 25 June 1999 suggests a maximum delivery rate with one compressor of 54 TJ/day. This suggests approximately 20 PJ existing annual capacity. NTPG contends that addition of a second compressor could increase annual deliverability to approximately 25 PJ during the supply arrangement period should higher rates of growth arising from sale of the reference service require ABDP expansion. In such circumstances NT Gas, as prudent operator duty-bound by the Code is required to ensure such additional compression is provided on a timely basis.

Cost allocation and tariff setting:

NTPG accepts the Draft Decision’s acceptance of zonal pricing

Incentive structure:

NTPG endorses the Draft Decision finding on this matter.

Discussion

Equity demands that revenue benefits arising from sale of an interruptible service should be enjoyed by all stakeholders, and not captured solely by NT Gas. This is particularly the case in circumstances where offer of only the interruptible service condition is unwarranted and a consequence of improper use of monopoly power.

As a case in point, the Commission would do well to examine terms of the gas transportation contact NTPG was forced to accept in order to enter the Katherine-Darwin electricity market. These were punitive in several ways. Firstly, NTPG was forced to accept an interruptible service agreement. This was an unwarranted contractual condition given that spare carrying capacity on ABDP will most likely exist for the contract’s duration.  Secondly, NTPG was forced to accept an interruptible tariff set at a reprehensible level, as is clearly demonstrated by the DD’s analysis of an appropriate reference tariff of $1.90/GJ for Zone Three.

Fixed principle:

NTPG endorses the Draft Decision finding on this matter.

Discussion

Acceptance of the fixed principal set out in the Proposal would permit NT Gas to lock out prospective reference service entrants for the duration of the access arrangement period in the unlikely event that Gasgo requirements exceed the present capacity of ABDP with one compressor. Given the example of improper use of market power by NT Gas discussed above, NTPG strongly endorses the Commission’s finding in this matter. 

NTPG notes that the schedule of investments provided by the DD in Tables 2.6 (p.39) and 2.7 (p.41 ) makes no allowance for possible addition of a second compressor to permit increased sales resulting from take up of the reference service. 

As an added remedy to discourage behavior counter to the Code’s objectives relating to the public interest (increase of competition in NT electricity markets), NTPG contends that addition of a second compressor should be included in the schedule of future investments given in Tables 2.6 and 2.7, and considered in the derivation of the reference tariff.

Back haul tariffs:

NTPG does not support consideration of back haul tariffs at this time.

Discussion

Northern Territory energy markets have matured considerably since the commissioning of ABDP and natural gas is firmly entrenched as the dominant primary energy source for electricity generation.  Continued shipment of Amadeus Basin gas on ABDP depends on PAWA’s continued use of Amadeus Basin gas for electricity generation at Channel Island, and continued use is not assured after 2011.  It may well be that other sources of natural gas are in fact landed in Darwin at competitive costs in the future. However, the risk of supply competition in the Darwin market for Amadeus Basin gas will depend greatly on future pricing policies of both NT Gas and the producers. NTPG has experienced predatory pricing behavior and use of monopoly power to restrict supply by both NT Gas and Santos in recent contractual negotiations.  Similar behavior by these monopoly suppliers toward Gasgo will increase the possibility that offshore gas will enter the Katherine-Darwin energy market.     
 
Speculation regarding LNG export facilities being constructed at Darwin for Timor Sea gas reserves has surfaced frequently in the last twenty years. Firm project commitments which would result in this gas invading the Darwin markets seem no more concrete at present than on previous occasions. 

Considering the uncertainties involved in such a future scenario, and the effort required of the Commission in determining an appropriate back haul tariff regime, the exercise is not warranted at this time. 

Review trigger:

NTPG endorses inclusion of a trigger mechanism to deal with possible of back haul on ABDP.

Queuing policy:

NTPG strongly supports the removal of fourth dot point of clause 6.4 as required in the DD.

Discussion

This issue relates to the misleading contention of NT Gas that ABDP firm capacity is fully taken up by Gasgo shipping needs until 2011. NTPG endorses the view expressed by Woodside that at very least existing users should need to demonstrate a business requirement for that capacity. Failure to require this invites continuation of actions by PAWA to prevent entry of competition in the Darwin electricity market. Inclusion of the offending provision of clause 6.4 would encourage strategies designed to hinder competition.

NTPG is of the view that an independent technical examination of the veracity of the contention of NT Gas relating to availability of firm capacity is required before acceptance of that contention. Acceptance is presently spelled out or implied on page vii, xi, 6, 13, 68, 92, 94, and 98 of the DD. 

Extensions/Expansions policy:

NTPG endorses the amendment requiring NT Gas to obtain Commission consent before electing to omit new facilities from the covered pipeline.

Discussion

Reasons relating to strategic management theory (see NTPG submission of 12th September 1999 p.10) have already been put forward to explain why NT Gas acts against its apparent interest as a prudent operator and is withholding non-interruptible access to potential users of the reference service.

The failure to acknowledge that addition of a second compressor eliminates any credible risk of existing contractual obligations preventing offer of the reference service during the access arrangement period provides additional grounds for a conclusion that NT Gas is exercising improper use of monopoly power by withholding non-interruptible gas transportation services. 

Other comments:

1)	NT Gas asserts, (DD page xiii), that Amadeus Basin gas reserves are only expected to meet NT demands until 2015. NTPG contends that this time estimate is unfounded based on the estimates of proven plus probable economically recoverable gas reserves published by the various field operators, and likely future growth of energy consumption in the Katherine-Darwin electricity market. A more credible time estimate is 2025, and this date may be significantly extended depending on gas production technology advances that could result in the economical recovery of very large matrix gas resources of the Palm Valley field presently listed as possible recoverable reserves.

2)	NTPG supports the Connell Wagner finding (p.21) regarding the initial sizing of ABDP.  NTPG contends that this is a matter the Commission should examine in determining an appropriate ORC valuation, and for an independent verification of the NT Gas contention that the pipeline is fully contracted for the duration of the access arrangement reference service.

3)	NTPG supports the contention by the Commission (DD p.34) that examination of the valuation of ABDP at the time of AGL’s shares acquisition is necessary to determine whether this transaction will provide meaningful information regarding an appropriate ICB.

4)	NTPG considers the contention by the NT Government and PAWA regarding possible exhaustion of Amadeus Basin gas by 2015 (DD p.48) to be misleading, as it ignores the supply potential of Palm Valley. 

5)	NTPG strongly disputes acceptance of the NT Gas contention (DD p.68) that ABDP is fully contracted and there is little scope to grow the market. In NTPG’s view this misleading contention is a ploy designed to create an impression that the Code requirement to offer the reference service is a pointless exercise.

6)	NTPG contends that NT Gas, under the Code’s obligations relating to prudent operator behavior, is required to add addition compression to ABDP should sales of the reference service require ABDP expansion.  PAWA’s obligations under terms of the foundation agreement (discussed on pp.96 and 97 of the DD) do not remove NT Gas from such an obligation under the Code. Should unforeseen growth in PAWA transportation service requirements trigger such a requirement during the access arrangement period, it will be a matter for the Commission to rule on an equitable division of expansion costs between PAWA and users of the reference service.

Yours faithfully

Jeff Hutchison
Chief Executive
NTPower Generation

Abbreviations/glossary of terms and references:

ABDP		Amadeus Basin to Darwin Pipeline

Agreement	Mereenie Producers-Gasgo Sales Agreement File No.CA97/41 dated 7th April 1999

Code		National Third Party Access Code for Natural Gas Pipeline Systems

Commission	Australian Competition and Consumer Commission

DAC		Depreciated actual cost

Darnor		A gas pipeline subsidiary of PAWA

DD		ABDP Draft Decision File No.C1999/329 dated 2nd May 2001

DORC		Depreciated optimised replacement cost

Gasgo		A gas purchasing and transportation arrangement subsidiary of PAWA

GJ		Gigajoule

ICB		Initial capital base

Issues		Commission’s Issues Paper - File No: C1999/329 dated August 1999. 

NCP		National Competition Policy

NT		Northern Territory

NT Gas		N.T. Gas Pty.Ltd.

NTPG		Northern Territory Power Generation Pty. Ltd.

OD		Outside diameter of the pipeline

PAWA		Power and Water Authority of the NT

PJ		Petajoule (equal to 1,000,000 GJ)

Proposal		Access arrangement information for ABDP authored by NT Gas dated 25th June 1999

WACC		Weighted average cost of capital