Application Martin No: gr9902 Jones Contents

Epic’s principles for part haul and back haul services

The Commission discussed with Epic the possibility of inserting pricing principles for part haul and back haul services. Epic went as far to provide the Commission with a document outlining such pricing principles. However, Epic also stated that:

…we would only contemplate this if the ACCC starts to take a different attitude to among other things, WACC. These services are about looking into the future beyond the existing contracts, yet the ACCC in its Draft Decision did not look into the future in determining the risk component of WACC and only look at the regulatory period and took into account the MAP was fully contracted and hence reduced the risk component of WACC.¹⁵⁷

According to these principles, a part haul tariff would be determined by the amount of existing firm forward full haul capacity ‘sterilised’ by the provision of the part haul service. This is not a linear relationship, and would be established on a case by case basis.

A back haul tariff would be determined as that proportion of the tariff for firm forward full haul service (less the BH rebate) as the distance of the back haul service bears to the full distance of the MAP. The tariff for the FT users would then be reduced to match the revenue from the back haul service, less the 20 per cent adjustment amount referred to in the ‘BHT rebate,’ which would be retained by Epic.

Commission’s considerations

The Commission acknowledges the concern raised by TGT in relation to the potential for Epic to frequently receive revenues in respect of capacity over 323 TJ per day (not including the most recent expansion of the pipeline). However, the Commission believes that the potential for revenue to be earned from Epic’s IT and non specified services is appropriate to balance any downside risk facing the MAPS.

Therefore, the Commission considers it appropriate at this time that Epic’s revenue requirement be allocated to the FT service only. However, the Commission will monitor the sale of interruptible services and capacity over 348 TJ per day over the access arrangement to assess whether its current approach to allocating revenue remains appropriate.

The Commission is unable to conclude whether back haul or part haul services meet the test set out in section 3.3 of the Code at this time.¹⁵⁸ Furthermore, until more is known about the location of a possible second pipeline and therefore the nature of the back haul service in question, it would be very difficult to allocate any revenue to a back haul reference tariff. See section 3.1.5 for further discussion.

Amendment FDA2.

For the access arrangement to be approved, the Commission requires Epic to amend the reference tariff proposed in Schedule 4 of the access arrangement. The amendment must have the effect that the FT tariff:

• 
  is initially derived by applying the system primary capacity (as amended in Amendment FDA3.2) to the revenue figure set out in Table 2. in the ‘COS revenue ACCC Final Decision’ column. Subsequent tariffs must be calculated by applying the approved escalator of 95 per cent of CPI;
  

• 
  comprises a capacity charge and a commodity charge set to the same proportion used in Epic’s Access Arrangement Information of 11 September 2000.
  

Amendment FDA2.

For the access arrangement to be approved, the Commission requires Epic to set the IT tariff to the FT tariff multiplied by 1.15. The resultant IT tariff will not include any capacity charge.

Tariff path and incentive structure

9. 
   Tariff Path
   

The Code (section 8.3) gives discretion to service providers in how to vary reference tariffs during an access arrangement period. For example, tariffs may change according to a ‘price path’ approach where tariffs follow a path determined at the start of the period. The price path is adjusted at the start of the next period. The alternative method specified in the Code is the ‘cost of service’ approach. Tariffs are set according to forecast costs and are adjusted throughout the access arrangement period in the light of actual outcomes. The Code allows variations or combinations of these approaches.

Epic proposed an initial tariff to apply in the first year of the access arrangement period, as set out in Schedule 4 of the access arrangement.

According to clause 5.2(a)(xii):

The Total Revenue Requirement and the resulting Reference Tariffs will escalate annually with inflation pursuant to clause 30.2 of this Access Arrangement consistent with the provisions of the Existing Transportation Agreements.

Clause 30.2 states:

On each January (commencing in 2000) all of the charges set out in the Tariff Schedule will be adjusted by 95 per cent of the variation (expressed as a percentage) in the CPI for the 12 month period ending on the previous 30 September.

The charges set out in the Tariff Schedule are in three groups, comprising ‘Reference Service – FT Service’, ‘Rebateable Service – IT Service’ and ‘Other Charges’. The FT charges comprise capacity and commodity charges, the ‘Whyalla Lateral Surcharge’, the monthly ‘FT Customer Charge’ and excess imbalance, zone variation and default charges. The IT charges comprise the commodity charge, the monthly ‘IT Customer Charge’ and excess imbalance and default charges. The ‘Other Charges’ comprise FT and IT service application fees and three EBB charges.

The Commission proposed in its Draft Decision to reject Epic’s proposal for a 95 per cent of CPI tariff escalator because a case for escalation of non-FT service charges had not been put by Epic.

The Commission calculated that an X factor of 1.6 per cent was required to smooth Epic’s revenue requirement over the access arrangement period, whilst maintaining the 13 per cent post-tax nominal return on equity determined by the Commission.

The Commission indicated that if Epic’s proposed tariff adjustment mechanism were to apply in place of a CPI-X mechanism, then the revenue requirement in the first year of the access arrangement period would need to be reset such that the NPV of the cost-of-service and escalated revenue streams were equated.

The SAGEUG submitted that it supports the CPI-X tariff escalator that was proposed by the Commission in the Draft Decision. The SAGEUG stated that tariffs and annual escalation factor should not be based on current contracts providing a guaranteed income stream until 2005.¹⁵⁹

Epic provided the Commission with a worked example of how the reference tariff would be calculated from the Commission’s revenue determination. This was provided to the Commission on a confidential basis.

Epic requested that the Commission confirm that the reference tariff may be escalated in accordance with the approved escalator rather than calculated each year on the basis of the escalated allowed revenue for that year.¹⁶⁰