Application Martin No: gr9902 Jones Contents

Clause 17 Retention allowance

Origin made the following comments in relation to this issue:

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  Epic should pay for system use gas;
  
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  clause 17.1(c), which requires Epic to use its reasonable and prudent efforts to minimise its use of system use gas, is insufficient, as it would be very difficult for a user to establish that Epic has not complied with this obligation;
  
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  the access arrangement contains no clear remedy for situations in which Epic has not complied with its obligation to minimise system use gas;
  
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  the cost of compressor fuel is a significant factor in determining whether expansions of the MAPS should be achieved by looping or by additional compression. Epic’s failure to pay for system use gas distorts this cost analysis, and could lead to an incorrect choice;
  
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  if, in the future, a park and loan service is introduced, and the service provider is not paying for compressor fuel, the cost of park and loan services will be borne by current users;
  
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  conversely, if a new entrant seeks back haul service, the price for the service will be higher than it needs to be, as the fuel cost savings from the provision of the back haul service will not be allowed for;
  
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  Epic should pay for system use gas at a price that approximates the prevailing Moomba ex-field price;³¹⁹
  
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  Epic should have an obligation to provide on request such information to users as is reasonably required to justify Epic’s calculation of the retention allowance in respect of a day. This will enable users to determine whether Epic is complying with its obligation to ‘reasonably and prudently estimate the total quantity of system use gas required for the provision of all services’;
  
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  provision should be made in the access arrangement for the release of system use gas. This would facilitate the reduction of linepack in the MAPS, to create capacity for the delivery of further gas. If the pipeline contains an excessive amount of system use gas, users may be unable to take adequate supplies of gas;
  
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  system use gas may be classified as either ‘Pipeline Gas’ or ‘Linepack Management Gas’. The former is consumed by Epic and should be paid for by Epic; the latter is not consumed by Epic, and should be returned to users when it is no longer required. Linepack Management Gas should be returned to the user it was borrowed from, in order to avoid transferring gas and capacity from one user to another.³²⁰
  

Epic’s general response to Origin’s comments on the issue of the retention allowance is that Epic has an incentive to ensure that maximum efficient capacity is available on a day.³²¹ Epic submitted that:

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  inefficient operation of compression equipment would increase maintenance costs and increase the frequency of overhauls;³²²
  
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  if Epic were required to pay for system use gas, this could result in outcomes that are not in the interests of any party;³²³
  
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  the ‘reasonable endeavours’ requirement imposes a measurable standard on Epic to use system use gas efficiently. If either the regulator or a user believes Epic is not complying with this requirement, they may raise the issue with Epic.³²⁴
  

In relation to Origin’s submission that Epic should be required to provide to users such information as is reasonably required to justify Epic’s calculation of the retention allowance, Epic submitted that calculation of the retention allowance is sufficiently outlined in the access arrangement.³²⁵

Commission’s considerations

The Commission takes the view that Epic should not pay for system use gas. If Epic was required to purchase system use gas, it would need to purchase small quantities of gas when demand was at its highest. Users are better placed to negotiate low prices for system use gas as an increment to their gas supply contracts.

While the Commission acknowledges that some issues arise as to Epic’s consumption of system use gas, there are several mechanisms at work to ensure that Epic’s consumption of system use gas is reasonable. Firstly, clause 17.1(c) of the access arrangement obligates Epic to use reasonable and prudent efforts to minimise the quantity of system use gas that is required for the operation of the pipeline system. In addition, inappropriate usage of compressors would increase wear and tear on the units, leading to higher maintenance expenditure and potential outages. Thirdly, the economic incentives on Epic to minimise consumption of system use gas are the same whether Epic or users pay for it. This is because if Epic is required to pay for system use gas, then the costs will be passed on to users through the O&M component of pipeline costs.

In relation to Origin’s submission that linepack management gas should be returned to the user it was borrowed from, the Commission takes the view that Epic’s use of linepack gas may create some distortion in the quantities of system use gas required from users. However, at this stage there is insufficient evidence of this effect to require corrective action. Accordingly, the Commission does not require Epic to amend the access arrangement in this respect, but will monitor the issue and reassess it at the time of the scheduled review.

In relation to Origin’s submission that clause 17.3 (d) should refer to gas scheduled to be supplied by a user rather than gas supplied by a user, the Commission considers that it is reasonable that the retention allowance should be calculated on the basis of gas actually supplied by a user. This will mean that the retention allowance reflects the amounts supplied by users.

In its Draft Decision, the Commission required Epic to comply with proposed amendment A3.14 by amending clause 17.1(c) to read:

The service provider will use its best endeavours to minimise the quantity of system use gas that is required for the operation of the Pipeline System.

Epic declined to make this amendment. Epic submitted that if required to exercise its ‘best endeavours’ to minimise system use gas, it would be required to replace its compressors with the most modern and technologically advanced compressors and computer software available, even to reduce compressor fuel by a small amount.³²⁶ Epic considers that a ‘best endeavours’ standard is too onerous, and that a ‘reasonable and prudent’ efforts standard is fairer.³²⁷

The Commission accepts that ‘best endeavours’ is an unreasonably high standard to attain and could require imprudent expenditure. Accordingly will accept clause 17.1 (c) in its current form.

The Commission accepts Origin’s submission that Epic should have an obligation to provide, on reasonable request, such information to users as is reasonably required to justify Epic’s calculation of the retention allowance in respect of a day. Given that Epic is to obtain system use gas from users free of charge, the insertion of such a provision will give additional transparency to Epic’s consumption of system use gas.

Epic indicated that it agreed that such a provision would increase transparency. However, Epic expressed concern that this information might be used by persons other than the user if it were required to be provided to a user on a daily basis. Epic suggested that it could provide this information to a user on request at the end of the month as part of the monthly invoice. The Commission agrees with Epic’s suggestion and requires Epic to comply with amendment FDA3.12.

Amendment FDA3.

For the access arrangement to be approved, the Commission requires Epic to insert the following provision into clause 17.3 of the access arrangement:

The Service Provider will, on request by a User, provide on a monthly basis such information as is reasonably required to justify Epic’s calculation of the figure indicated in clause 17.3(c)(i).
In relation to Origin’s submission that system use gas that is not used should be returned to users, the Commission takes the view that if Epic underestimates or overestimates the amount of system use gas required for a day, this could be taken into account the following day, so that a draw down or build up of system use gas in the pipeline system is avoided. The Commission considers that it is preferable for Epic to be required to balance system use gas intake to minimise any discrepancy. Accordingly, the Commission requires Epic to comply with amendment FDA3.13.

Amendment FDA3.

For the access arrangement to be approved, the Commission requires Epic to insert the following provision into the access arrangement:

The Service Provider will calculate on a daily basis any discrepancy between the Total System Use Gas Quantity from the previous day and the amount of System Use Gas actually consumed (System Use Gas Discrepancy). The Service Provider will, as soon as practicable, balance its calculation of the Total System Use Gas Quantity to minimise the System Use Gas Discrepancy.