Application Martin No: gr9902 Jones Contents

IT service

There is some debate as to whether IT service should be offered at a discount to FT services.²⁴² Since Epic’s revenue requirement is fully covered by FT services, it would be feasible for Epic to charge IT users the commodity charge rate only. However, the Commission considers that Epic should be given the incentive to maximise IT service, in order to maximise the capacity of the pipeline. If Epic were to charge the commodity charge rate only for IT services, its incentive to maximise capacity would be reduced considerably. The Commission also considers that it is reasonable for IT service to be more costly than FT service to encourage users to take up FT capacity. Once load factors are taken into account it may be the case that IT service is cheaper for some users than the FT service. Accordingly, the Commission proposes to allow the relationship between the IT and FT tariffs proposed by Epic for this initial access arrangement period (see FDA 2.5).

In relation to Potential Energy’s submission that priority should be given to earlier IT nominations, the Commission considers that there is no precedent for a mechanism of this nature, and it would add complexity to the access arrangement. Giving priority to IT users who nominated early might increase the possibility for gaming under the access arrangement. Furthermore, it is preferable that IT users be able to nominate as late as possible, to take into account the vagaries of IT demand.

Availability of delivery points for FT service

Clause 4.2(a)(iii) excludes delivery points that are subject to existing transportation agreements. In regard to AGLES&M’s submission that the exclusion of delivery points the subject of EHAs from availability for FT services constitutes an exclusivity right, the Commission takes the view that, on the basis of information presently available, this conclusion can not be sustained.

To require Epic to amend this clause may deprive existing users of pre-existing contractual rights, which section 2.25 of the Code prohibits.

Availability of delivery points for IT service

Clause 4.3(c)(ii) provides that IT service will be available from existing delivery facilities where an IT user has entered into an existing facilities access agreement. These restrictions on supply are intended to prevent Epic being required to provide IT service at a lateral point in breach of its EHAs.

In its Disclosure of Confidential Information document of October 2000, the Commission summarised the effect of clause 15.14.1 of the EHAs:

Clause 15.14.1 of the haulage agreement limits the circumstances in which the Pipeline Owner may provide interruptible services through a lateral. In essence, the clause provides that the Pipeline Owner may not offer interruptible capacity in a lateral in which firm capacity is reserved by the Shipper where the Shipper has notified the Pipeline Owner that there is sufficient unutilised capacity available in the lateral to enable the Shipper to offer lateral capacity on a firm basis.

The application of clause 15.14.1 of the EHAs could possibly see the shipper notifying the pipeline owner that sufficient capacity existed to offer the services itself, and proceeding not to use that capacity. Alternatively, the shipper might refuse to allow a third party to obtain IT service from the lateral, or might allow such access only at an excessive price or under unreasonably onerous conditions.

Were a shipper to engage in behaviour of this nature, their actions might raise issues under Part IV of the Trade Practices Act (TPA), or s.13 of the Gas Pipelines Access (South Australia) Law (GPAL).

Under s.13 of the GPAL, the service provider, or a person who is party to an agreement with a service provider, must not engage in conduct for the purpose of preventing or hindering the access of another person. This conduct could include refusing to sell a marketable parcel (within the meaning of the Code) on reasonable terms and conditions. This provision could potentially be invoked to prevent an existing shipper either from exercising an exclusivity right, or acting in any other way to restrict the access of a third party to service with respect to spare capacity in the pipeline system.

An existing facilities access agreement, made between a prospective IT user and an existing user, would enable the IT user to obtain capacity from the service provider at a delivery point the subject of an existing haulage agreement. Clause 4.3(c)(ii) of the access arrangement ensures that the access arrangement complies with clause 2.25 of the Code, and does not deprive the users of the rights contained in the EHAs.

The Commission takes the view that clause 15.14.1 is an exclusivity right. This is because by its terms, clause 15.14.1 expressly prevents Epic from supplying services at a particular delivery point to persons who are not party to the EHAs in circumstances where the shipper has notified Epic of sufficient spare capacity. Furthermore, the Commission considers that clause 15.14.1 does not merely entitle an existing user to obtain a certain volume of services. Clause 15.14.1 goes beyond this by conferring on an existing user the right to prevent services from being accessed by another user, even where the spare capacity exceeds the volume of service for which the existing user has contracted.

The Commission also considers that clause 15.14.1 is potentially anticompetitive, since it can prevent access to potential users where capacity is available.

If clause 4.3(c)(ii) were removed from the access arrangement, an issue would arise as to whether the access arrangement deprives existing users of an existing contractual right. While this issue was being resolved, IT users may not have adequate means of accessing the delivery points in question.

If clause 4.3(c)(ii) remains in the access arrangement, users will have a mechanism for gaining access to delivery points that are subject to EHAs. However, the Commission notes that when IT users negotiate with existing users to access these delivery points, there is scope for existing users to engage in anticompetitive behaviour, either by denying IT users access, or by allowing access only on unreasonable terms.

Were existing users to engage in such behaviour, IT users could seek redress under either Part IV of the TPA or section 13 of the GPAL. On balance, this mechanism is likely to better address the interests of IT users.

Accordingly, the Commission considers that it is preferable that clause 4.3(c)(ii) remain in the access arrangement.

However, the Commission considers that it would be inappropriate for Origin or TGT to restrict access to delivery points on the basis of 15.14.1. Further, the Commission considers that access to delivery points should be provided on reasonable terms and conditions.

In its Draft Decision the Commission proposed several amendments to the access arrangement in respect of the EHAs. These are assessed in the light of Epic’s response to the Draft Decision.

Proposed amendment A3.5 was:

For the access arrangement to be approved, the Commission requires that it be amended to contain a provision in the following terms:

This access arrangement takes effect subject to any contractual rights in existence prior to the date of lodgement of the proposed access arrangement, 1 April 1999, with the exception of Exclusivity Rights (within the meaning of the Code) that arose on or after 30 March 1995.

Epic’s response to this amendment proposal was:

Epic does not believe it is appropriate to restate specific provisions of the Code in its access arrangement.

Epic proposes that a section be included at the start of its access arrangement stating that the access arrangement is subject to the Code.

Epic also inserted clause 1.4 into its access arrangement, which reads:

This Access Arrangement must be read subject to applicable provisions of the Code, including those provisions dealing with Exclusivity Rights.

The Commission considers that the insertion of clause 1.4 into the access arrangement adequately addresses the issue of access by prospective users to delivery facilities subject to EHAs.

Proposed amendment A3.6 required:

For the access arrangement to be approved, the Commission requires that clause 4.3, other than clause 4.3(g)(ii), as proposed in Epic’s lodgement of 2 March 2000 be incorporated in the access arrangement, subject to adding the following to clause 4.3(c):

For the avoidance of doubt, nothing in the Agreement requires or permits the Service Provider or User to observe or give effect to the terms of any Exclusivity Rights (within the meaning of the Code) that arose on or after 30 March 1995.

In response to proposed amendment A3.6, Epic amended clause 4.3 of its access arrangement as proposed in its lodgement of 2 March 2000.²⁴³ However, Epic declined to amend clause 4.3(c) in accordance with proposed amendment A3.6, choosing instead to insert clause 1.4 into the access arrangement.²⁴⁴ Epic reiterated its opposition to restating provisions of the Code in its access arrangement.²⁴⁵

The Commission considers that the insertion of clause 1.4 into the access arrangement adequately addresses the issue of access by prospective users to delivery facilities subject to EHAs.

Proposed amendment A3.7 required:

For the access arrangement to be approved, the Commission requires that the definition, in clause 43.1, of ‘Existing User Rights’ proposed in Epic’s lodgement of 2 March 2000 be incorporated in the access arrangement, subject to adding the following:

The term ‘Existing User Rights’ does not include any Exclusivity Right (within the meaning of the Code) that arose on or after 30 March 1995.

In response to proposed amendment A3.7, Epic amended the definition of ‘Existing User Rights’ in clause 43.1 of the access arrangement as proposed in its lodgement of 2 March 2000. ²⁴⁶ However, Epic declined to amend the definition of ‘Existing User Rights’ as required by proposed amendment A3.7.²⁴⁷ Epic restated its opposition to restating provisions of the Code in the access arrangement.²⁴⁸

The Commission considers that the insertion of clause 1.4 into the access arrangement adequately addresses the issue of access by prospective users to delivery facilities subject to EHAs.

Proposed amendment A3.8 required:

For the access arrangement to be approved, the Commission requires that the definition, in clause 43.1, of ‘Existing Delivery Facilities’ proposed in Epic’s lodgement of 2 March 2000 be incorporated in the access arrangement, subject to the deletion of references to laterals.

In response to proposed amendment A3.8, Epic amended the definition of ‘Existing Delivery Facilities’ in clause 43.1 in the access arrangement in accordance with its lodgement of 2 March 2000.²⁴⁹ However, Epic declined to delete references to laterals as required by proposed amendment A3.8.²⁵⁰ Epic indicated that it did not understand the rationale for the Commission’s proposed amendment, and sought further clarification.²⁵¹

The Commission considers that prospective users seeking access to delivery facilities the subject of EHAs may apply for arbitration. Under sections 6.7 and 6.18 of the Code, the arbitrator may override clause 4.3(c)(ii) to the extent that to do so would merely deprive an existing user of an exclusivity right. Accordingly, it is the Commission’s view that Epic’s response to proposed amendment A3.8 is satisfactory.