The Australian Competition and Consumer Commission today issued its Draft Decision under the National Gas Code on the Moomba to Sydney Pipeline access arrangement.
The pipeline is owned by East Australian Pipeline Limited which is now part of the recently listed Australian Pipeline Trust. The access arrangement describes the terms and conditions under which EAPL will make access available to third parties on the natural gas transmission pipeline.
"This represents a fall in tariffs on the main pipeline (from Moomba to Wilton, just outside Sydney) of 34 per cent compared to the proposed tariff on the pipeline", ACCC Chairman, Professor Allan Fels, said today.
"EAPL's proposed tariffs* were set on the basis of a higher asset base, a higher rate of return and higher depreciation charges than those proposed by the ACCC in its Draft Decision. In proposing this reduction, the ACCC aims to establish tariffs that are efficient and provide the right incentives for both pipeline investment and pipeline utilisation.
"However, the reduction in reference tariffs will not be across the board."
Under the existing third party access tariffs on the MSP, common tariffs are charged on the mainline pipeline and lateral pipelines supplying regional NSW centres. In its application EAPL proposed that separate tariffs would apply to mainline and lateral pipelines to better reflect the underlying costs associated with these services. Based on EAPL's proposals, gas users on the lateral pipelines would face increases in tariffs of up to 60 per cent by the fifth year of the access arrangement period. The amendments proposed by the ACCC to the asset base and return on equity will result in smaller increases of approximately 10 per cent on lateral tariffs.
The ACCC has proposed that the appropriate benchmark return on equity for the MSP is 13.0 per cent, which is just below the range of 13.1 to 14.6 per cent proposed by EAPL. In this context it is important to note that the Moomba to Sydney pipeline is an established pipeline with firm contracts in place and therefore relatively less risky than a greenfields pipeline with no established market.
However, EAPL has the opportunity to exceed this rate of return if it is able to outperform its forecasts of market demand or projected costs. In this way, the framework provides important incentives for EAPL to operate more efficiently by allowing it to retain potential upside benefits.
EAPL proposed an asset valuation of $666 million for the pipeline system for the purposes of setting the transmission tariffs. This value represents EAPL's calculation of the depreciated optimised replacement costs, the upper limit allowed under the Gas Code. The ACCC considers that this overstates the value of the depreciated optimised replacement costs and has determined that the value of the asset base should be set at $502 million. While this is less than the valuation proposed by EAPL, it is above EAPL's current book value and is broadly consistent with the sale price of $534 million paid by EAPL for the pipeline assets in 1994.
The determination of tariffs also requires an assessment of forecast volumes. EAPL's forecast volumes include a loss of market share to the Eastern Gas Pipeline, which is operated by Duke Energy International and delivers gas from Victoria to Sydney and surrounding areas. Advice to the ACCC, from consulting firm n/e/r/a, recommended that tariffs for the MSP should be determined on the total capacity of the pipeline rather than forecast volumes to give the service provider the incentive to utilise spare capacity. This would have the effect of reducing tariffs even further below the tariffs resulting from the amendments proposed in the ACCC's draft decision. However, in its draft decision, the ACCC believes at this stage that the use of forecast volumes remains a reasonable approach and has determined tariffs for the MSP accordingly.
While the amendments proposed by the ACCC will reduce the reference tariffs proposed by EAPL, EAPL's actual cash flows are not expected to be significantly affected during the five year regulatory period. The Gas Transportation Deed negotiated between EAPL and AGL Wholesale Gas Limited (AGLWG) in June 2000 specifies a minimum level of monthly payments that AGLWG must make to EAPL until 1 January 2007. These payments resulted from the renegotiation of the Gas Transportation Agreement (GTA), a long term haulage contract between EAPL and AGLWG executed in 1994 which accounted for a large part of the pipeline's capacity. The GTA was associated with the Commonwealth's decision to privatise the MSP.
The falls in tariffs, assuming they are confirmed in the final decision expected mid-year, are expected to have a sustained effect with big users and retailers being the first beneficiaries ahead of flow-on benefits to smaller users facilitated by the introduction of retail contestability. It should be noted that because the cost of transporting gas from Moomba to Sydney is only one component of the price of delivered gas, the ultimate percentage fall in the price of gas because of this decision will be much less than 34 per cent – the ACCC estimates that the fall will be up to 8 per cent.
The ACCC identified a number of financial and non-financial aspects of the access arrangement that do not fully meet the requirements of the code. Accordingly, the ACCC's Draft Decision proposes not to approve the access arrangement in its current form. The Draft Decision specifies amendments that must be made for the access arrangement to be approved by the ACCC.
The ACCC's Draft Decision is subject to further public consultation prior to the release of the final decision. Submissions are requested from interested parties, to be received by 9 February 2001.
Copies of the document will be available from the ACCC's website.
* It should be noted that tariffs have already fallen by 7 per cent since the access arrangement was lodged with the ACCC.