Application Martin No: gr9902 Jones Contents

Auction

Energy SA suggested that an auction could be used to allocate capacity on the MAPS. This would involve prospective users bidding for the right to pay the reference tariff.

Such a queuing policy was adopted in VENCorp’s Access Arrangement for the PTS. When additional capacity is made available, VENCorp is to conduct an auction of that capacity and allocate that capacity in order of highest bids received. The MSOR provides that all monies received by VENCorp as a result of allocating authorised MDQ by auction are to be used by VENCorp to offset its costs for the next financial year. To date no auctions have been carried out.

In its consideration of the Victorian arrangements, the Commission said:⁴⁷⁷

In principle, the Commission sees merit in the concept of an auction process rather than a queue …

Queuing can be an inefficient way of allocating scarce resources. An auction provides a market mechanism which is more likely to lead to an efficient allocation of the potentially scarce and valuable spare capacity of the pipelines. An auction can deliver a competitive outcome in that the market value of connection may be determined. While successful bidders would in effect pay more than the reference tariff for a service, the additional amount would reflect the value they place on gaining access to the system. Any revenues raised through the auction process will be used to offset VENCorp costs in the subsequent financial year and will benefit users as a whole.

The Victorian arrangements are substantially different to South Australia’s. Victoria has a market carriage system in which capacity is allocated to customers. In 1998, when the arrangements were put into place there was an initial allocation. An auction would only be relevant for capacity that is released by a customer who no longer requires it and there is excess demand for that capacity. Additionally, the auction would be conducted by VENCorp, a not for profit organisation.

For many users, the cost of transporting gas is a relatively small part of their total costs but gas is often an essential requirement. Users are likely to value capacity just below the price of the next cheapest alternative, such as a different energy source or gas from another pipeline or expanded capacity on the MAPS. The value of existing capacity is likely to be in excess of the costs of providing that service. This would allow the service provider to obtain economic rents and defeat the purpose of regulating the revenues that can be earned by pipeline owners.

To prevent the service provider making economic rents from the auction, a mechanism for returning that revenue back to users would be required, as occurs in Victoria. The revenue from an auction of capacity on the MAPS is likely to be substantially higher than in Victoria because:

• 
  almost all of the capacity on the MAPS would need to allocated by auction;
  
• 
  the MAPS is now at the point where looping would be required for incremental capacity which is very expensive; and
  
• 
  in a contract carriage environment, auctions would need to be conducted at the expiration of every contract.
  

The Commission does not consider that an auction process is feasible when substantial amounts of capacity might need to be reallocated. In some years, the reference tariff might need to be zero or negative. In such circumstances an auction process is unlikely to provide appropriate incentives.

In a contract carriage system, the ‘good’ auctioned would need to be the right to enter into contracts at the reference tariff. Typically, such contracts are long term and run for up to ten to twenty years. For the revenue to be returned to users in future years through the reference tariff, the contracts would need to specify the reference tariff as set by the regulator from period to period. Market participants have shown very strong dissent in regard to any uncertainty with respect to future tariffs and contracts.

In conclusion, the Commission does not consider that such an approach would be appropriate for the MAPS.

Priority on the basis of public benefit

Another alternative is to use some sort of public interest criteria to prioritise prospective users.

In its submission, Energy SA suggests that it would be possible for the Commission to require that the queuing policy consider the public interest under the Code. Energy SA submits further that the queuing policy should do so, however, Energy SA does not indicate what priority would meet the public interest.

There are a range of possible public interest criteria. For example, it could be argued that electricity generation better serves the public interest than retail gas and vice versa.

Theoretically, if accurate public interest criteria could be developed, such a queuing policy would presumably have the advantage of promoting public interest. However, the Commission does not consider that it would be possible to determine in advance how priority should be accorded to promote the public interest. The Commission is able to consider the public interest when it has a proposal before it, but it can not specify how the public interest can be achieved in 15 years time, particularly given the gas industry is currently undergoing significant changes.

Priority for Foundation shippers

It is also possible that foundation shippers could be accorded priority on the basis that the existing capacity is sufficient to meet the requirements of foundation shippers and if further capacity is required it should be funded by those who require it.

Such an argument seems to assume that existing users have a property right to existing capacity which is clearly not the case. Foundation shippers signed contracts, which, while they may have underwritten the construction of the pipeline, were commercial agreements that were also in the commercial interest of those customers. The services that have been provided to foundation shippers have resulted in the consumption of part of the initial capital invested in the pipeline via depreciation.

Such an approach would not accommodate the interests of prospective users as required by 3.13(b) of the Code. In addition, such a policy does not appear to be consistent with the objectives of an access regime and the Code, such as the promotion of competitive markets for natural gas in which customers may choose suppliers, including producers, retailers and traders.