Application Martin No: gr9902 Jones Contents

Coverage of New Facilities

All of the interested parties who commented on Epic’s policy in relation to determining when new facilities are covered, including Santos, Origin, NRG Flinders and Potential Energy, raised concern about the degree of discretion clause 10.4(b) of the access arrangement gives Epic.⁴³⁷ TGT and NRG Flinders submitted that new facilities should be covered unless the regulator consents otherwise.⁴³⁸

Santos submitted that the service provider should be required to offer to expand the pipeline.⁴³⁹

Approaches to Financing New Facilities

In general, interested parties demonstrated strong opposition to the concept of rolled-in tariffs. The issues raised in submissions are summarised below.

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  TGT and Potential Energy submitted that a roll-in would result in uncertainty in regard to future tariffs for users, which would make it difficult to negotiate contracts.⁴⁴⁰
  
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  NRG Flinders and Potential Energy indicated that the prospect of an existing user paying increased tariffs due to a new users’ capacity requirements was undesirable.⁴⁴¹
  
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  Potential Energy and TGT also raised concerns about existing users subsidising new users and argued that tariffs based on the cost of expansion resulted in cost transparency and more appropriate pricing signals.⁴⁴²
  
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  Energy SA submitted that a rolled-in approach to tariffs may not allow a dynamically efficient level of investment in the MAPS.⁴⁴³ Energy SA considers that it is economically efficient to allow for excess capacity over and above the current projected peak requirement when augmenting or building new pipelines. The basis of Energy SA’s concern is that under 8.16(a) of the Code the capital base can only be increased by the amount that would be invested by a prudent service provider acting efficiently.
  
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  Potential Energy argued that indicative capital costs are typically overstated and optimal outcomes are more likely to be achieved at the time an expansion takes place rather than including forecast capital expenditure in the cost base for reference tariffs.⁴⁴⁴ AGLES&M indicated that estimation of the cost of expansion was likely to delay the finalisation of the access arrangement.⁴⁴⁵
  
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  TGT and Origin submitted that a rolled-in tariff on the MAPS would distort the cost of incremental capacity.⁴⁴⁶ Origin indicated that a rolled-in tariff would pre-empt decisions regarding whether the MAPS should be expanded or an alternative pipeline should be built as existing capacity would subsidise incremental capacity. TGT indicated that the MAPS would have an unfair advantage over a greenfields pipeline.⁴⁴⁷
  
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  Potential Energy and TGT indicated that multiple tariffs for the MAPS are not inappropriate.⁴⁴⁸ TGT argued that multiple tariffs are in fact the norm and that there will be multiple tariffs post 2005 due to existing contracts that are in place for that period. TGT argued further that the regulatory regime was intended to encourage negotiations between the parties, which is likely to lead to different terms and conditions for different shippers.
  
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  Energy SA suggested that market forces, such as a pipeline from Victoria to South Australia, might limit any cost differential between new and existing capacity on the MAPS.⁴⁴⁹ Given the potential for a rolled-in tariff to discourage an efficient level of investment, Energy SA argued that on balance it would be preferable to allow market forces to resolve the issue of the price of new capacity.
  
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  AGLES&M submitted that the approach in the access arrangement was acceptable if a pipeline between Victoria and South Australia was built. However, AGLES&M submitted that a trigger mechanism should be included in the expansions / extensions policy in the event that a new pipeline from Victoria to South Australia is not built.⁴⁵⁰
  
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  TGT argued that a shipper that has contracted capacity at the reference tariff or at a negotiated tariff should not be exposed to an increase in its tariff.
  
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  Santos submitted that the extensions policy contained in Epic’s access arrangement of 29 June 2001 would result in multiple and confidential tariffs for different users of the MAPS, which would perpetuate the monopoly power of the service provider.⁴⁵¹ Santos submitted that an incremental user should pay the same tariff as existing users unless the net present value of future income from expansions at that tariff is less then the cost of that expansion. Where the net present value is less, the service provider may add a surcharge to the tariffs.
  
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  Origin submitted that an expansion of the MAPS would not satisfy any of the criteria listed in section 8.16(b) of the Code and therefore a roll-in would not be permitted under the Code.⁴⁵²
  
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  Commission’s considerations
  

Coverage of expansions and extensions under the Code

Section 3.16 requires that an extensions/expansions policy in the access arrangement provide the method to determine whether any extension to or expansion of the pipeline should be treated as part of the covered pipeline.

In assessing the access arrangement lodged by the service provider the Commission is of the view that it must take into account the factors outlined in section 2.24 of the Code. Section 2.24 factors include: the public interest, the economically efficient operation of the covered pipeline and the interests of users and prospective users. An election by the service provider that a new facility not be covered may affect those factors, and therefore regulatory scrutiny is necessary to ascertain the effect of the proposal. Accordingly, the Commission is of the view that any expansion to or extension of a pipeline could be covered.

Epic does not agree with this interpretation of the Code. In a meeting on 6 September 2001 Epic stated its view that section 3.16 merely requires a policy setting out the method to be applied when determining whether any extension to or expansion of the covered pipeline should or should not be covered. Epic argues that its proposed policy sets out such a method and therefore complies with the requirements of the Code.

The Commission has considered Epic’s views and does not agree. In assessing the proposed extension/expansions policy the Commission considers that it is bound to consider the merits of the proposal against the factors listed in section 2.24 of the Code.

In a meeting on 6 September 2001, Epic has further submitted that section 1.40 of the Code talks about the period after the access arrangement has come into effect and therefore, cannot have a retrospective action in respect of expansion/extensions.

Further, it is Epic’s view that the revised proposal suggested by the Commission has a retrospective effect. The Commission does not propose that the extensions/expansions policy have a retrospective effect, that is, the policy should apply only from the date the Access Arrangement takes effect.

In relation to extensions and expansions to a pipeline that are carried out after the pipeline becomes a covered pipeline, section 1.40 states that an extension or expansion to a covered pipeline shall be treated as part of the covered pipeline for all purposes under the code if the extensions/expansions policy contained in the Access Arrangement for the covered pipeline provides that it is to be so treated. It is the Commission’s view that an extension or expansion constructed after the pipeline becomes a covered pipeline, but before the access arrangement takes effect can be dealt with pursuant to the extensions/expansions policy in the access arrangement.