Application Martin No: gr9902 Jones Contents

Method of Incremental Pricing

Clause 3.16(b) of the Code requires an access arrangement to specify how any covered extension or expansion would effect the reference tariff.

Clause 10.4(a)(iii) of the access arrangement provides that the service provider may seek a capital contribution or a surcharge from prospective users. Clause 10.4(c) provides that any covered new facilities will not affect the reference tariff before the next revisions commencement date.

The Commission notes that clause 10.4(c) appears to preclude a roll-in during this regulatory period. In the absence of forecast expansions under section 8.20 of the Code, section 8.15 provides that capital expenditure can only be rolled-in at the commencement of an access period. Clause 10.4(c) is therefore consistent with the Code. Accordingly, while the Commission considers that clauses 10.4(a)(iii) and 10.4(c) meet the requirements of the Code and are acceptable at this time, these clauses may be subject to change in future regulatory periods.

Queuing Policy

15. 
    Code requirements
    

Sections 3.12 to 3.15 set out the Code’s requirements for a queuing policy. An access arrangement must include a queuing policy for determining the priority given to users and prospective users for obtaining access to a covered pipeline and for seeking dispute resolution (under section 6 of the Code). The purpose of a queuing policy is to allocate spare and developable capacity where there is insufficient capacity to satisfy the needs of all users and potential users that have requested capacity.

A queuing policy must be set out in sufficient detail to enable users and prospective users to understand in advance how it will operate. It must also, to the extent reasonably possible, accommodate the legitimate business interests of the service provider, of users and prospective users, and must generate economically efficient outcomes.

Epic’s proposal

Clause 10 of Epic’s 29 June 2001 access arrangement provides:

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  requests for service will be accorded priority on a first-come-first-served basis and will be dealt with in that order;
  
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  the service provider may deal with requests for service outside their priority provided that the request/s for service ahead in the queue are not disadvantaged; and
  
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  there is no automatic right of renewal of a contract in the access arrangement.
  
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  Submissions by interested parties
  

Market participants made the following comments in relation to the queuing policy in clause 10 of Epic’s 29 June 2001 access arrangement.

Energy SA and TXU submitted that a first in first served queue was not appropriate.⁴⁵⁴ The South Australian Government indicated that:

a “first in, first served” policy is not fair and equitable, nor practical from the point of view of good public policy which seeks to produce optimal outcomes for all parties.

TXU was strongly opposed to a first in first served policy on the basis that such a policy:

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  Allocates capacity on a trivial basis which results in capricious outcomes as prospective users who were seconds slower than other users may have to pay substantially higher tariffs.
  
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  Allocation of capacity on the basis of first in, allows market participants with access to that capacity to exercise market power in circumstances where existing capacity is significantly cheaper than alternative capacity. For example, a party with capacity that it does not require could on sell this gas to prospective users at a premium. Presumably, there is scope for such a ‘wholesaler’ to price up to the cost of incremental expansion.
  
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  Allows, if not encourages, ambit capacity requests.
  
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  Does not allow for consideration of the relative commercial merit of a proponent's requirement for gas. Where proponents make ambit requests market signals regarding the true requirements for new capacity are obfuscated.
  
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  May lead to results which are contrary to the interests of South Australian consumers. For example, if a market participant is able to obtain access to existing capacity it could capture economic rents on that capacity which could ultimately be passed on to consumers.
  

TXU indicated that the current ‘queue’ for capacity on the MAPS demonstrates its concerns. The MAPS becomes substantially uncontracted in 2006. Epic indicated that it would accord priority for contract negotiations for that period on a first in first served basis. Total requests for gas substantially exceeded the capacity of the pipeline.

Subsequently, TXU notified an access dispute under the Natural Gas Pipelines Access Act (South Australia) 1995 (NGPAA 1995). The NGPAA 1995 provides for an access regime for gas transmission in SA and provides that an access dispute exists if requests for service exceed the capacity of the pipeline. The 1995 South Australian access law was repealed by the GPAL but continues to apply until an access arrangement is approved under the Code.

Potential Energy submitted that clause 10 provided a workable system for prospective users as it allows for prospective users to do the following:⁴⁵⁵

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  inquire about the availability of capacity and its indicative cost on an informal basis;
  
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  firm up the availability and cost of capacity without committing to that capacity;
  
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  retain a position on the queue while feasibility studies are conducted.
  

NRG Flinders submits that it ‘agrees with the proposed queuing policy.⁴⁵⁶ TGT indicated that clause 10 was acceptable.⁴⁵⁷ Origin noted that the first in first served is more flexible and less prescriptive than Epic’s original queuing policy.⁴⁵⁸

Alternative Queuing Policy

Due to concerns in relation to the operation of a first in first served queue in the current circumstances of the South Australian gas industry, the Commission sought comments from market participants on an alternative queuing policy. The alternative raised by the Commission involved the service provider holding an open season prior to allocating existing capacity. The open season would involve the service provider advertising that spare capacity was available and allowing prospective users to submit a request for service. Where the demand for existing capacity exceeded capacity, capacity would be allocated by negotiation, conciliation or arbitration.

Market participants, including TXU, Energy SA, National Power, AGLES&M, and NRG Flinders supported the proposed queue in principle.⁴⁵⁹

TXU indicated that the alternative policy was a ‘very positive advance which has the potential to provide benefits both to participants in the South Australian gas market and ultimately to consumers of both gas and electricity in South Australia’.⁴⁶⁰

Origin indicated that it was an appropriate method to allocate spare capacity to incremental users in circumstances where:⁴⁶¹

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  Users with contracts have been given the opportunity to renew their contracts and have decided not to recontract;
  
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  Existing users’ requirements for gas have been satisfied. Origin consider that the intent of Section 6.15(d) of the Code is that existing users of gas should have priority over incremental users.
  

A number of parties made comments in relation to the details of the proposed policy, which are outlined below.

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  Energy SA, ANP, AGLES&M and TXU submitted that the queuing policy for existing capacity should provide for conciliation and/or negotiation prior to arbitration. This is on the basis that an outcome arising out of conciliation / negotiation is more timely and cost effective.⁴⁶²

  In relation to the terms of conciliation / negotiation, ANP and TXU argued that participation should be voluntary and if one party withdraws the dispute would automatically go to arbitration.

  
  
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  ANP submitted that there should be a definite time period for each stage of the process.⁴⁶³ ANP and TXU both suggested that the dispute process should have a final closing date for all requests for capacity.⁴⁶⁴ TXU indicated that 60 days would be a reasonable period for the submissions of requests for service.
  
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  AGLES&M and Energy SA submitted that requests for developable capacity should be aggregated rather than dealt with on a first in first served basis.⁴⁶⁵ AGLES&M argued that this was necessary because different tranches of developable capacity may have different costs, and therefore would need to be offered to customers at different prices on the basis of their priority in the queue. AGLES&M suggested that developable capacity and existing capacity should be dealt with in a single process because having separate queuing policies is not workable in practice.
  
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  TXU submitted that a queue was not necessary for developable capacity because an operator would presumably be prepared to augment the pipeline to meet new demand.⁴⁶⁶
  
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  ANP noted that the process provided for must not compromise, deteriorate or over ride the rights available to access proponents under the arbitration process described in the GPAL.⁴⁶⁷
  
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  Energy SA submitted that it would be preferable for the regulator to opt not to be the arbitrator given that the focus of the arbitration should be on achieving an outcome which is commercially acceptable to all parties.⁴⁶⁸ Additionally, Energy SA suggested that alternative means of allocating capacity could be adopted in limited circumstances, such as an auction and the allocation of contracted but unused capacity to a prospective user for a fixed time.
  
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  TGT submitted that the proposed queuing policy was unnecessary as the capacity allocation issue which has arisen in relation to 2006 will be resolved under 1995 South Australian access law. However if an arbitration process was included in the access arrangement, it should be confined to the 2006 capacity issue. TGT argued that such a process would be cumbersome if it was to apply to spare capacity for any quantity every time it arose.⁴⁶⁹
  
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  TXU noted that as the proposed process was not a queue that the concept of a queue should be dispensed with.⁴⁷⁰
  
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  TXU submitted that for the process to operate efficiently and effectively, there should be a requirement that service requests should be made ‘in good faith, reflect a proponent’s reasonable commercial requirements and be one to which the proponent is prepared to immediately commit by entering a contract.