ACCC issues Victorian gas transmission decisions

The Australian Competition and Consumer Commission has issued its Final Decision on GasNet’s access arrangement, ACCC Chairman, Professor Allan Fels, announced today.

"The ACCC has decided to approve an increase in benchmark revenues for the next five years of 10 per cent, which is about three per cent in real terms", he said. "This increase reflects a substantial expansion in GasNet's regulated asset base. The ACCC has decided to approve total benchmark revenues over the next five years of $385 million, which compares with the $377 million it proposed in its Draft Decision.

"The moderate increase approved by the ACCC will allow GasNet to earn a reasonable return on its assets, including the recent addition of the Southwest Pipeline, and ensure a fair balance between the interests of GasNet and its users. GasNet proposed a larger increase in its benchmark revenues than the ACCC considers is justified.

"The ACCC has concluded that some of the cost increases proposed by GasNet are unwarranted. These include GasNet's proposal to redetermine the size of its initial capital base and increase it by $41 million and its proposed rate of return, which is inconsistent with current market evidence.

"The ACCC assessed GasNet's proposed capital expenditure of $87 million over the next five years. It considers that expenditure of $47 million is justified and should be included in GasNet's regulatory accounts. The balance, if undertaken, can also be included providing it passes the tests under the National Gas Code".

Professor Fels said that while the ACCC has decided to moderate GasNet's proposed revenue increase and capital expenditure program, it will accept a range of changes that lead to benefits for both GasNet and users of the pipeline system:

• merging GasNet's two access arrangements (for the Principal Transmission System and the Western Transmission System) into a single access arrangement
• including the Southwest Pipeline in GasNet's asset base
• allowing GasNet to choose whether new pipeline extensions will be regulated under its arrangement
• allowing GasNet to retain approximately $16 million in tax allowance provided in the initial access arrangement under the pre-tax framework.

The ACCC also issued its Final Decision on VENCorp’s access arrangement. It has decided to approve reduced natural gas transmission tariffs for VENCorp.

"The ACCC's final decisions under the National Gas Code are that it approves VENCorp's revised access arrangement but that it does not approve GasNet's revised access arrangement in its current form", Professor Fels said.

The ACCC has set out the amendments it considers are necessary to GasNet's revised access arrangement for it to be approved. The final decisions are available on the ACCC's website , under Gas.

The revised tariffs are due to commence on 1 January 2003.

Background

The ACCC approved access arrangements under the Victorian Third Party Access Code for Natural Gas Pipeline Systems in 1998 for GasNet's predecessor and for VENCorp. An access arrangement describes the terms and conditions on which a service provider will make access available to third parties. GasNet owns the pipeline system while VENCorp is the independent system operator under the market carriage capacity management system operating in Victoria.

As required by those access arrangements, GasNet and VENCorp submitted proposed revisions to their access arrangements on 28 March 2002 for approval by the ACCC under the National Third Party Access Code for Natural Gas Pipeline Systems. This process determines the tariffs which will be charged on the Victorian natural gas transmission system for the period 2003 to 2007.

GasNet proposed substantial tariff increases while VENCorp proposed reductions. GasNet accounts for approximately 85 per cent of the combined charges.

Care needs to be taken in comparing the level of charges paid by GasNet's customers and the revenues achieved by GasNet over time. The ACCC's decisions determine the regulatory or benchmark revenue. The 10 per cent increase noted above is the increase in nominal terms between the benchmark revenue currently set for 2002 and the average benchmark revenue determined by the ACCC for the next five years. GasNet may also earn unregulated revenues as it currently does for usage of the Southwest Pipeline. Hence, comparing the revenues approved by the ACCC for 2002 with those for 2003 to 2007 would exaggerate the size of any increase.

In addition, under incentive regulation, GasNet may over or under perform the benchmarks set by the ACCC. For example, it may achieve higher (lower) revenues if the demand for gas is higher (lower) than forecast.

GasNet's benchmark revenues must also be considered in the context of the size of its regulated asset base, which has increased from $358.0 million in 1998 to $494.2 million in 2002 chiefly as a result on new investments such as the Southwest Pipeline and the Interconnect and associated compressors and valves.

The ACCC has reached its final decisions after carrying out a process of public consultation. The ACCC considered a first round of submissions on the proposals before issuing draft decisions in August 2002. It then considered a further round of submissions.

The ACCC has decided to approve VENCorp's revised access arrangement. The ACCC has specified a number of amendments that it requires to GasNet's revised access arrangement in order for it to be approved. Revised tariffs for both entities are scheduled to commence on 1 January 2003.