Text of letter received by the ACCC.

Santos
PUBLIC Submission to the ACCC - Roma to Brisbane Pipeline - Access Arrangement - January 2001 
1.0 EXECUTIVE SUMMARY 
1.1 Introduction 
The Australian Competition and Consumer Commission (ACCC) has invited submissions from interested parties on the Access Arrangement proposed by the owners of the Roma to Brisbane Pipeline (RBP). This paper represents Santos' submission to the ACCC, which focuses on the competition issues raised in the ACCC's Issue paper of November 2000. Santos notes the ACCC is restricted from assessment of the Reference Tariff and consequently this submission does not address this topic in detail. Santos is the largest shipper of gas in the RBP, and is operator of the South West Queensland Unit, which transports over eighty percent of all gas in the RBP. Santos also has a separate firm agreement with the RBP to transport gas to Dalby Town Council. 
Most of Santos' comments relate to the RBP trading policy, but this submission also raises serious concerns of competition in the RBP and the extension/expansion policy. 
1.2 Objective 
Santos has provided this submission to the ACCC to raise a number of competition issues in the Roma to Brisbane Pipeline (RBP), which in its opinion, are not adequately addressed in the Service Provider's submission to the ACCC. Santos has proposed a framework to address the identified issues, and its proposal is intended to develop a more dynamic and competitive environment for all uses of transportation services in the RBP. 
1.3 Summary of Submission 
The following points summarise the key items of Santos' submission:
	The RBP's trading policy contains insufficient detail to provide an effective and competitive trading environment for all shippers. 
	Any approach by a shipper for increased flexibility may be viewed as an opportunity for the Service Provider to impose additional charges, which are not reflective of the Service Provider's actual costs. 
	There is a conflict of interest for the Service Provider where it can receive substantial financial benefits by eliminating or reducing trading between shippers in the pipeline. In some circumstances where the Service Provider restricts firm shippers from fully utilising their reserved capacity (for which they are paying), the Service Provider can achieve an additional revenue stream by selling again this unutilised reserved capacity to interruptible shippers. 
	Where there is limited or no spare firm transportation capacity, the rights to utilised reserved capacity should primarily remain with the firm shippers, through a competitive trading environment. 
A competitive trading policy must provide current and new shippers the ability to: 
	receive gas through any RBP inlet run at Wallumbilla, which supports the principle of shippers being able to receive gas from multiple sources of production; 
	undertake line pack transfers between any shipper in the RBP, without consent being required; and 
	follow an agreed mechanism, which permits shippers to change Receipt and Delivery Points, including those cases where the revised transportation route is increased. 
Unlike other Queensland pipelines, the Access Arrangement fails to provide any revenue sharing or revenue cap mechanism to shippers. This is particularly relevant where substantial revenue is generated from daily variance charges, imbalance charges, over run charges, receipt point charges, and interruptible transportation services which are not included in the determination of the Reference Tariff. Such a sharing mechanism would act an automatic trigger to protect the shippers against unacceptable high transportation costs in the RBP. 
The negotiated tariff arrangement between 101 TJ/d and 118.5 TJ/d is inconsistent with the National Code. The Service Provider is seeking an unregulated portion of pipeline capacity, which is not justifiable. 
It is unclear how the Peat/Scotia lateral, which is owned by APT/IPL forms part of the Access Arrangement. As there is no reference to this pipeline (although it forms part of the 101 TJ/d to 118.5 TJ/d arrangement), it is assumed there is to be separate Access Arrangement, but no details have been provided. 
The tranche form of tariff allocations is confusing and is unlikely to provide fair and reasonable access for all users of transportation capacity in the RBP. Revisions to the Extension/Expansion Policy are proposed to address the identified problems. 
South East Queensland gas consumers, through increased delivered gas prices, ultimately bear the high transportation costs and additional service charges levied by the pipeline owners which result in above average rates of return. 
1.4 Conclusion 
The issues identified in this submission limit the ability of RBP shippers to reduce their transportation costs. The lack of a revenue cap mechanism, limited flexibility for shippers to trade capacity, unregulated sections of the pipeline (viz the Peat/Scotia lateral and the capacity tranche of 101 TJ/d – 118.5 TJ/d), and the process of the Service Provider on selling firm shippers' unutilised capacity to interruptible shippers are all likely to add to the cost of gas to consumers. These issues in the RBP require review by the ACCC. 
2.0 ISSUES PAPER AND RBP ACCESS ARRANGEMENT 
2.1 Reference Tariff and Services Policy 
It is noted that the Service Provider has elected to have capacity arrangements from 101 – 118 TJ/d regarded as "negotiated services", and have not proposed a reference tariff. If a Service Provider can elect to have negotiated arrangements for a portion of pipeline capacity, it seems difficult to understand why the existing general system of pipeline regulation was introduced. Indeed, if one pipeline is permitted to adopt this approach, then all pipelines would argue to have negotiated arrangements without the need for any formal Access Arrangements. 
It is also important to note that while a dispute can be resolved through a formal process with the Regulator, this is not an attractive option for any potential user. That process creates additional costs, and may cause serious delays to a proposed project. Faced with this scenario, a user may have to accept unreasonable commercial terms to protect the viability of their project. 
Such a proposal for a tranche of capacity under a negotiated service is inconsistent with the purpose of the National Gas Code. 
2.2 Tranche Capacity Model for Access Arrangements 
The Service Provider has proposed different tariff arrangements based on the following capacity tranches: 
	0 to 78.9 TJ/d 
	78.9 TJ/d to 101 TJ/d 
	101 TJ/d to 118.5 TJ/d 
	In excess of 118.5 TJ/d * 
(* latest proposal to the Queensland Government.) 
The Access Arrangements for all capacity tranches are different, and the third tranche arrangements proposed by the Service Provider are not covered by a Reference Tariff and are unknown. Each tranche contains a varied level of free flow capacity, compression capacity and looping capacity expansion. These complicated arrangements make it difficult for any user to assess whether any tariff is fair and reasonable. For existing shippers, it is also unclear how these shippers receive any benefits of lower unit cost capacity development and sharing of operating costs. Overall, this complicated model is likely to create opportunities for the Service Provider to enhance its returns. A revised model, incorporating a revenue sharing mechanism (consistent with other Queensland pipelines) and revision to the Extension/Expansion Policy, is suggested to overcome these problems. 
2.3 Extension/Expansion Policy 
The complex arrangement as noted in section 2.2 makes it difficult for any new user to assess whether a tariff is fair and reasonable compared to existing transportation users, or can be justified based on the capital expenditure required to satisfy the new users' transportation requirement. Equally, existing users may be discriminated against if they have contracted a higher unit cost (TJ/d) capacity expansion and do not share the lower capital expenditure costs or reduced operating costs associated with later new users' transportation entitlements. 
Accordingly the following revisions to the Extension/Expansion policy are proposed to address these problems: 
	During an extension/expansion the incremental expenditure be used to set a new tariff. 
	At this time, the overall return of the pipeline is reviewed based on a single combined pipeline, which includes total revenue from all arrangements (firm, interruptible, additional charges, etc.). If the rate of return exceeds a prescribed level, then some form of revenue payment is returned to existing shippers presently contracted at different capacity tranche levels. 
	This forms part of the Revenue Sharing Mechanism concept proposed in Section 4.2. 
3.0 RBP TRADING POLICY 
3.1 Introduction 
Traditional gas transportation contracts have been based on long-term agreements, which were negotiated under the prevailing market environment of the day. The evolving process of regulation and market developments has resulted in significant changes to the gas industry. Accordingly, it is appropriate that trading mechanisms and policies are updated to reflect the changing market environment. 
3.2 The Importance of a Comprehensive Trading Policy 
Overseas experience has demonstrated that as the gas industry develops, there is an increasing desire by various participants to engage in trading gas transportation capacity. Indeed, this process may involve multiple financial transactions per single physical gas transaction. This increased level of flexibility reduces the overall transportation costs to shippers, which contributes to lower gas prices to end consumers. A flexible trading environment should provide shippers the ability to: 
Mitigate potential additional transportation charges imposed by the Service Provider such as daily variance charges, MDQ over run charges, and line pack imbalance charges. These charges are ultimately borne by the end gas consumers. 
Enhance security of supply to customers by enabling shippers to utilise other sources of gas to meet transportation obligations, in the event one of the shipper's supplier experience gas production difficulties. 
Foster growth of additional gas production areas by developing a dynamic trading environment, which utilises multiple sources of gas supply. 
Maximise the shipper's ability to satisfy gas market demand through efficient utilisation of traded transportation capacity. 
3.3 Service Provider's Methods to Reduce and/or Eliminate Trading in the Pipeline 
The Service Provider can reduce and or eliminate trading between shippers by refusing to: 
	Allow shippers to accept other sources of gas (gas from multiple producers) to satisfy the shipper's transportation obligation. In this circumstance, the service provider is restraining the shipper's ability to trade with multiple suppliers. 
Allow line pack swaps between shippers which own gas in the pipeline. 
	Permit shippers to utilise multiple receipt points at the head of the pipeline at Wallumbilla. Currently there are four inlet runs at Wallumbilla (the Wungoona LPG plant inlet run, the OCA/Kincora inlet run, the Epic interconnect and the Duke interconnect). All inlets are a matter of a few metres apart, and feed into a common manifold which combines the inlet gas into a single flow. 
	Allow shippers additional receipt points or delivery points under their transportation contract. Alternatively the Service Provider can utilise its market position to impose additional charges on the shipper seeking to utilise alternate receipt/delivery points, which do not reflect the Service Provider's additional costs and therefore prohibit the shipper's use of the alternate receipt/delivery points. 
3.4 Benefits to the Service Provider by Reducing and/or Eliminating Trading in the Pipeline. 
The service provider can financially benefit by reducing and or eliminating trading through: 
	The shipper being unable to mitigate an increased level of over run charges, daily variance charges and imbalance charges imposed by the Service Provider. 
	On-selling a firm shipper's unutilised capacity to another interruptible shipper as an interruptible service. In this instance the Service Provider can receive a double revenue stream. The first from the firm shipper paying capacity reservation charges to the Service Provider and the second revenue stream from the interruptible customer. In this circumstance the overall cost of gas transportation in the pipeline is increased. 
	Using its market position by imposing additional charges for the use of multiple receipt/delivery points, which do not reflect the Service Provider's cost, or the regulators view of an acceptable rate of return. 
3.5 Deficiencies in the RBP Trading Policy 
Santos believes the RBP trading policy (section 3 of its Access Arrangement) does not contain sufficient detail necessary to foster an operational and dynamic trading environment. The RBP's trading policy is deficient in the following areas: 
It does not address issue of shippers trading line pack in the pipeline. 
It does not give priority to existing shippers seeking to trade and utilise their reserved capacity ahead of the Service Provider on-selling this capacity to another interruptible shipper. 
There are no clear guidelines or mechanisms for shippers to utilise multiple receipt or delivery points. 
It is inappropriate for the Service Provider to be the sole judge of "reasonable commercial and technical grounds" for the use of alternate receipt or delivery points, especially where it is in the Service Provider's financial interest to refuse the shipper's trading request. Such a situation places the Service Provider in a clear conflict of interest. 
3.6 Proposed Amendments to the Trading Policy 
If the Service Provider inadvertently or deliberately affects the ability of a shipper to trade, the only course of action for the shipper is to refer the matter to the Regulator. In this circumstance, the shipper may not have the financial resources, regulation experience or cost/benefit driver to proceed with an ACCC arbitrated outcome. In addition, the potential conflict between the shipper and the Service Provider may be detrimental to its desired outcome with the Service Provider. Consequently, Santos believes the ACCC, in conjunction with all shippers and the Service Provider, should make provision for a clear and detailed framework for trading capacity. 
Santos proposes the following amendments to the RBP Trading policy: 
	A. Permit a line pack transfer between shippers by way of notice to the Service Provider, without consent being required. As a result of this transaction, no shipper shall fall below 90% of its target line pack. The shipper's own line pack in the RBP and trading line pack is a book adjustment at no cost to the Service Provider. 
	B. The Service Provider shall provide access to an additional receipt or delivery points without consent being required, where the shipper satisfies the following conditions: 
	(i) The aggregate of the varied receipt or delivery point maximum daily quantities (MDQs) does not exceed the aggregate of the shipper's receipt or delivery point MDQs prior to the inclusion of the additional receipt or delivery point. 
	(ii) It is technically feasible, within the constraints of the Service Provider's contractual obligations to receive or deliver the varied MDQs at the specified receipt/delivery Points. 
	(iii) The shipper makes all appropriate arrangements with its customers as a result of the variation nominated. 
	(iv) The Service Provider will not, as a result of such a variation, incur any additional capital cost, which it would not otherwise have incurred, or will be required to advance the time at which capital costs would otherwise have been required. In the event that a new receipt or delivery point is required, an agreement by the requesting party to indemnify the service provider for the additional costs (both capital and operating) will suffice to ensure that the service provider will not incur any additional capital costs. 
	(v) As a result of the variation, and where the transportation distance is equal to or less than previously provided under the shipper's transportation contract, the shipper will pay the same amount of revenue to the Service Provider. Where the transportation distance is increased, the shipper will provide additional revenue in accordance with the Service Provider's Access Arrangement to satisfy the incremental transportation distance. 
In the circumstances where the shipper does not satisfy all of the above requirements, then the Service Provider based on reasonable commercial and technical grounds will require consent. The ACCC should adjudicate any situation where the user believes the Service Provider has rejected its request on unreasonable grounds. 
4.0 Revenue Sharing for Pipeline Users 
4.1 Pipeline Tariff 
Santos recognises that the Reference Tariff has been set by legislation in Queensland. Nevertheless, it is appropriate to provide some further comment on this topic. 
Santos is concerned with the costs of transportation in the RBP, and the long-term implications on growth rates for the gas industry in South East Queensland. Indeed the combined reference tariffs for the RBP and Epic pipelines to transport Cooper Basin gas to South East Queensland are more than twice the reference tariff for the Cooper Basin to Sydney pipeline, and three times the Moomba to Adelaide pipeline tariff. This makes Cooper Basin gas significantly less viable for Eastern Queensland customers compared to those of the Southern States. Competitive pipeline tariffs are important to assist market growth for gas in South East Queensland, which in turn supports further exploration and development of Queensland's gas reserves. 
Santos supports the ACCC's comments on the rates of return of the RBP in its report to the NCC. The ACCC indicated "the Commission believes based on the information available, that the rates of return for this pipeline are higher than could be reasonable expected in the circumstance and may be inconsistent with the principles of the National Gas Code". 
The Service Provider's approach to trading and its continued use of firm shipper's capacity entitlements compound this concern regarding the high rates of return and transportation costs. It is unclear what level of additional pipeline charges the ACCC assumed in its evaluation of the RBP, and it is unlikely their modelling would have included a double revenue stream from firm shippers' reservation charges and additional payments from interruptible shippers. 
4.2 Importance of a Revenue Sharing Mechanism 
Santos understands that some overseas regulatory pipeline transmission models set a maximum revenue that a Service Provider can achieve in any year, based on a regulated rate of return of the asset. This may involve a process of returning revenue to shippers, if the total rate of return exceeds a prescribed limit set by the Regulator. This model is partially reflected in Duke and Epic's Access arrangements by way of tariff discounts (Duke) and Revenue Credits (Epic). There is no such provision in the RBP Access arrangements, which is a clear deficiency in the Service Provider's Access Arrangements.
The lack of a revenue sharing mechanism not only increases the already high rates of return, but may also encourage the Service Provider to act in such a way that inhibits the development of a competitive environment. Without any prescribed limits to the overall rate of return, additional revenue can be generated from "services" outside the regulated tariffs. These services could involve unreasonable commercial terms for any non regulated tariff request, or as highlighted in section 3, may involve deliberate strategies to limit the flexibility of existing firm customers in order to obtain additional revenue.
As outlined in section 2.3, the revenue sharing mechanism will also redirect sharing payments to existing shippers, if a new user obtains a lower unit cost capacity expansion. The revenue sharing mechanism would act as an automatic trigger to protect all shippers against unacceptably high transportation costs. Without such a trigger mechanism, South East Queensland gas consumers are exposed to an unacceptable level of risk to high transportation costs in the RBP. 
5.0 OTHER TRANSPORTATION ISSUES 
The following points outline other issues pertaining to the Service Provider's Access Arrangement for review: 
The penalties imposed by Daily Variance Charges (DVCs) and Imbalance Charges do not reflect any additional cost incurred by the Service Provider, where a single shipper has a DVC excursion. The charges act as an additional revenue mechanism or may be used as a point of leverage by the Service Provider against a shipper. 
For a shipper with a large retail base, a rapid change in climate conditions can easily result in a 10% variance, which would normally involve a DVC. It is understood that DVCs are intended to ensure a shipper's linepack is maintained at an appropriate level. It is possible to have no impact on pipeline linepack by having an equal and opposite receipt and delivery point variance, and yet receive a double charge. The imbalance charge also essentially acts as a duplicate charge of DVCs for linepack excursions.
The Access Arrangement provides no protection for firm shippers or interruptible shippers utilising their linepack. According to Clause 11.2.3 (linepack clause), a shipper's linepack is allocated in proportion to its MDQ. It is unclear whether interruptible shippers are provided any line pack in the pipeline, and what mechanism exists to protect firm shippers' from losing linepack to interruptible shippers, which do not have a MDQ.
The adjustment of MDQ due to heating value dropping below 40 MJ/m3 (clause 11.2.5) is not a reasonable proposition for shippers. While the shipper is delivering gas on specification to the Service Provider, it is not appropriate to reduce a shipper's transportation entitlement or charge additional throughput costs. Most gas producers in Queensland supply gas below a heating value of 40 MJ/m3. The introduction of this concept is a back door approach to change the Queensland gas specification or achieve higher revenues.
Once the pipeline is fully looped to Wallumbilla it will be possible to separate the two pipelines and run the new section at a higher pressure. The nominated maximum receipt point pressure at Wallumbilla is 8,000 kPa, although the new pipeline will be capable of receiving gas up to 9,600 kPa.
Existing shippers have paid for the infrastructure, but there is a substantial increase in transportation capacity for any new shipper delivering gas at 9,600 kPa, with virtually no incremental cost to the Service Provider. It is unclear if existing shippers, having paid for all necessary infrastructure, have any rights to this additional capacity (due to an inlet pressure increase) or share in the overall reduced cost of transportation. 
6.0 CONCLUSION 
Santos desires that the RBP be an open and competitive pipeline. The process of determining fair and reasonable tariffs, competition and trading issues in the RBP requires review by the ACCC. 
The key points to this submission are: 
	The RBP trading policy must provide for line pack swaps and a mechanism to access additional receipt and delivery points which does not rely on the Service Provider's sole interpretation of what is "reasonable commercial and technical grounds". 
Revenue sharing mechanisms must be provided to limit the incentive for the Service Provider to introduce operating constraints as a way of increasing revenue. This will also protect against excessive RBP transportation costs and ensure equality between all shippers utilising the pipeline, independent of their position in the capacity tranche tariff arrangements. 
	There is a conflict of interest for the Service Provider where it can receive substantial financial benefits by eliminating or reducing trading between shippers. 
	Additional "service charges" which are not cost related and are imposed by the Service Provider on shippers which seek more flexible transportation arrangements, are ultimately borne by the end consumers through higher delivered gas prices. 
Through consultation with all relevant parties, Santos proposes the ACCC review the areas of deficiency in Service Provider's Access Arrangement and develop a clear framework to foster a dynamic and open access trading environment in the RBP, for the benefit of all gas consumers in South East Queensland.
29 January, 2001