The Australian Competition and Consumer Commission today issued its Final Decision under the National Gas Code on the Central West Pipeline access arrangement. The pipeline is owned and operated by AGL Pipelines (NSW) Pty Limited that is part of the recently listed Australian Pipeline Trust. The access arrangement describes the terms and conditions under which AGLP will make access available to third parties for transmission of natural gas from Marsden to Dubbo, NSW.
The ACCC has determined that the appropriate benchmark post-tax nominal return on equity for the CWP is 15.4 per cent in a framework that allows for returns above this level based on performance of the company.
In forming its Final Decision the ACCC considered comments from interested parties in response to the Draft Decision, in particular reviewing the level of returns and the regulatory framework appropriate to the CWP.
In making this decision the ACCC has demonstrated that a regulatory framework under the National Gas Code can accommodate the particular characteristics of a project. In particular, a key consideration for the ACCC in assessing this access arrangement has been to balance risks and rewards for AGLP.
The ACCC recognises the risks associated with a project of this nature - a project with limited foundation customers and contracts.
It also recognises that users of the CWP appear to face inherently high transmission charges compared with those in other parts of regional NSW. This is due to factors such as the transportation distance from the Moomba to Sydney Pipeline trunk, diseconomies of scale and the operation of the CWP as a stand alone pipeline. In its access arrangement AGLP sought a premium on the return on equity to account for the unique risks of the project. However, in the ACCC’s view, acceptance of this proposal would compound the potential for regional cost disparities via high tariffs.
Specific risks identified by AGLP are addressed through a mechanism based on an extended access arrangement period of up to 10 years' duration in conjunction with explicit discretion on the part of AGLP to submit early revisions to the access arrangement. AGLP will have the ability to retain the benefits of any out-performance for ten years and potentially earn a rate of return substantially higher than is suggested by the ex ante return on equity if it exceeds forecast volumes or reduces its forecast costs.
This return should be considered in conjunction with the regulatory framework that allows AGLP to capitalise early losses so that they can be recovered once demand grows. This significantly mitigates the risks associated with demand uncertainty.
The ACCC also identified a number of non-financial aspects of the access arrangement that do not fully meet the requirements of the code. AGLP has cooperated with the ACCC in addressing these issues.
The amendments specified in the Final Decision must be made to the access arrangement in order for final approval to be granted.