Application Martin No: gr9902 Jones Contents

The relationship between capacity and commodity charge rates

Epic proposes that its FT tariff comprise two parts: a capacity charge that will apply to the MDQ reserved for each user, and a commodity charge that will apply to each GJ of gas actually hauled.

In general, there are a number of efficiency arguments in support of two-part tariffs. The capacity charge gives each user an incentive to forecast as accurately as possible its likely haulage requirements, especially maximum haulage requirements. The accuracy of these forecasts is an important element in the service provider’s planning of pipeline operations and future expansion projects.

Second, each user has a strong incentive to maximise the use of capacity once contracted, since the user must pay a charge based on MDQ whether or not MDQ is used. Adopting practices that improve the utilisation of the pipeline and reduce the variation between peak and minimum load requirements can do this. Examples are trading in capacity and diversification of the customer base.

The Commission is satisfied that the relationship between the capacity and commodity charge supports efficient outcomes. However, the Commission proposes to consider the relative proportions of the capacity and commodity charges when it next reviews the access arrangement.

The relationship between FT and IT tariffs

TGT’s submission suggested that the price premium charged for IT service (15 per cent above FT tariffs) is not warranted given that IT is an inferior service to FT and the pipeline is fully contracted.¹⁶⁶

In response, Epic explained that FT and IT service pricing structures differ because of the need to make a ‘load factor adjustment’ to IT service.¹⁶⁷

The Commission’s understanding of Epic’s response is as follows. An FT user is required to pay a capacity charge based on the MDQ of capacity reserved for that user, whether or not the user actually employs the reserved quantity. Shippers pay for capacity based on their peak loads that they are unable to use at other times. FT users will on average pay an amount that is greater than the sum of the FT capacity and commodity charges multiplied by the actual quantity of gas hauled because the capacity charge rate is applied to the MDQ.

Since IT users only pay for the actual quantity of gas that is hauled, the relationship between the FT charge and the IT charge depends on the efficiency that the FT users are able to achieve. Epic submitted: ¹⁶⁸

The 15 per cent ‘premium’ represents a load factor adjustment. IT service is a ‘commodity’ or throughput tariff, and as such is independent of load factor, unlike FT service which is ‘capacity’ based. An FT service shipper with a ‘good’ load factor of 115 per cent would pay 1.15 x the capacity charge per GJ of throughput (the pipeline load factor is ‘worse’ than 115 per cent). The 15 per cent ‘premium’ for IT service is to reflect this load factor effect. In view of the fact that the majority of the IT service revenue will be rebated, Epic is not incented to support a high tariff.

This leads to a conclusion that the IT tariff is comparable to the FT charge.

The Commission is satisfied that the relationship between FT and IT tariffs proposed by Epic is reasonable. However, in the Commission’s view the relativity of tariffs for different services must be responsive to the market. The Commission will consider the relativity of tariffs at each review.

‘Postage stamp’ tariff

The reference tariff proposed by Epic is a ‘postage stamp’ tariff (refer renumbered clause 5.2(a)(viii)(B) in the 29 June 2001 lodgement). That is, the one tariff applies to haulage of gas to any point along the main pipeline. In addition, the access arrangement proposes a ‘Whyalla Lateral Surcharge’ on the tariff that will apply to gas delivered on the Whyalla lateral, as explained above in relation to the capacity charge.

In discussions Epic representatives explained that this structure reflects the fact that in excess of 90 per cent of the gas hauled through its pipeline system is delivered into the Adelaide metropolitan area and therefore a distance-based charging system would have very little impact on most customers. Epic submitted that the Whyalla Lateral Surcharge was calculated to recover the same revenues as under existing contracts for capacity on these facilities.¹⁶⁹ This lateral serves most of its remaining customers.

In discussions, Epic representatives stated that the concentrated location of the MAPS customers means that there is little difference in efficiency terms between a ‘postage stamp’ and distance-based pricing structure. Further, they stated that the ‘postage stamp’ system may actually be more efficient by reducing the administrative burden on Epic and its customers. Trading in capacity improves the efficiency of the market through arbitrage opportunities. According to Epic representatives, the use of a ‘postage stamp’ tariff encourages trading in capacity.

Epic’s position appears to have general support in the marketplace. However, this may simply reflect the fact that alternative haulage opportunities are not available in South Australia.

The Commission notes comments by N.T. Gas Pty. Limited in respect of the ‘postage stamp’ tariff at present applying to its pipeline in the Northern Territory, as follows: ¹⁷⁰

NT Gas recognises that maintaining such a pricing structure has the potential to impede growth in the utilisation of the ABDP. This is particularly in the case of price sensitive projects which are located only part way along the pipeline, but which, under a postage stamp tariff, would be charged for delivery of gas as if that gas was transported though [sic] the entire length of the pipeline.

The Commission is of the general view that distance-based tariffs are likely to provide better price signals to the market than ‘postage stamp’ or ‘zonal’ tariffs. Nevertheless, in the current circumstances of the MAPS, in the Commission’s view the loss in efficiency (if any) due to a ‘postage stamp’ tariff is likely to be minimal. The Commission considers that the issue needs to be addressed at the next review.