Application Martin No: gr9902 Jones Contents

Commission’s considerations

In relation to submissions by AGL and AGLES&M as to the Term of the Agreement, the Commission maintains its position in the Draft Decision at p.148 that a two year term is reasonable for FT service, and that Epic should accept shorter terms for IT service, as amended by Epic in response to the Draft Decision.

In the Commission’s Draft Decision, proposed amendment A3.10 required:

For the access arrangement to be approved, the Commission requires that clauses 6.3, 11.1 and 11.2 be amended in the manner proposed in the lodgement of 2 March 2000, subject to adding to clause 11.2 a provision to the following effect:

The Service Provider will accept reasonable requests for a shorter Term of Agreement for IT service.

The Commission also requires that clause 11.3 be amended to read as follows:

(a) Providing the User is not in default at the date of notice, the User may extend the Term for FT service by minimum periods of 2 years at a time:

(i) by giving written notice to the Service Provider not less than 3 months prior to the Termination Date; or

(ii) by giving notice at a time and in a manner previously arranged with the Service Provider.

(b) Where the Agreement is for IT Service, the Term will automatically extend on a year by year basis from the Termination Date unless:

(i) the User has given written notice of termination to the Service Provider under clause 36.5;

2. 
   the User is in default under the Agreement at the Termination Date.
   

In response to the first part of A3.10, Epic responded that it would insert a provision into the access arrangement to provide for it to accept reasonable requests for a shorter term for IT service. Epic has made this amendment.

In response to the second part of A3.10, Epic submitted:

Epic will amend clause 11.3 to reflect the proposed amendment. The change in queuing policy and the shorter time for exercise of the right to extend the term for FT Service creates an issue on how Epic should (for the purposes of the queuing policy) deal with Spare Capacity and the rights of an FT User to extend its contract – that is, whether or not Epic should “reserve” Spare Capacity (equivalent to that contracted to the FT User) and thus exclude that amount of capacity from the queue on the expectation that the FT User will exercise the right to extend. If the FT User does not exercise the right then Prospective Users that have made an application earlier in time may have been prejudiced by unnecessarily committing to an expansion.

In the circumstances, Epic believes that:

• 
  capacity can not be reserved for an FT User on the assumption that they may exercise their right to extend; and
  
• 
  the right to extend should therefore have no priority status over any other Prospective User;
  

FT Users seeking to exercise a right to extend must therefore be treated as Prospective Users and proceed through the queue. This may mean that they have to commit to an expansion to contract for FT Service.

The position outlined above adopts a competitive situation and places the onus on an FT User to cover its position with its contracting approach.

Epic proposes that the document also be amended to state this, and require that an FT User exercising the right to extend must proceed through the queuing process (and contribute to the cost of an expansion if there is inadequate spare capacity available at the time that the right is exercised).²⁷²

The Commission accepts Epic’s proposition that the existing users should not have an automatic right to extend their term. If existing users possessed this right, capacity of the pipeline system could be locked up for a considerable period into the future. This would have the effect of perpetuating the current market structure. Accordingly, the Commission is satisfied with the current wording of clause 11.3 and does not require an amendment.

Accordingly the Commission does not require Epic to comply with the outstanding elements of proposed amendment A3.10 of the Draft Decision.

Clause 12 Principal receipt and delivery obligations of user

In relation to Schedule 2, Origin submitted that the hourly rate of flow of gas at receipt points is influenced by the manner in which the service provider operates the pipeline system, as well as by the users.²⁷³ Accordingly, users should have only a ‘reasonable endeavours’ obligation to achieve a uniform rate of flow. Origin submitted that since it is difficult to identify whether a fluctuation in flow rates was caused by Epic or by users, a penalty charge for failure to achieve a uniform rate of flow should not be imposed on users.²⁷⁴

In response, Epic stated that only users can control how gas is to be supplied at the receipt point to the user. Accordingly, the user is to ensure that its supplier(s) provide gas to the users’ requirements.²⁷⁵

Origin further submitted in relation to Schedule 2 that the service provider should not have an absolute discretion to alter the required hourly rate of flow at the receipt point, given that the service provider can impose an excess imbalance charge on users who can not comply with this hourly flow rate.²⁷⁶ Origin submitted that the hourly rate of flow should only be changed by agreement between all users of a receipt point.²⁷⁷

In response, Epic submitted that it would consider amending the access arrangement to provide that it will not change the required hourly rate of flow at the receipt point without the consent of all users.²⁷⁸ To date, Epic has inserted no such term in the access arrangement.

In relation to clause 12.3, Origin submitted that multiple users of a delivery point are unable to monitor their hourly take as required by paragraphs (b), (c) or (d) of Schedule 2. Origin submitted accordingly that any allocation of penalty charges between users for exceeding MHQ would be inequitable as between users.²⁷⁹

In response, Epic claimed that most users have the ability to measure gas on an hourly basis, and that such penalties are required to discourage users from taking more than their allocation, since this means that another user must take less than their allocation.²⁸⁰

Origin submitted that a user’s hourly MHQ should be six per cent of their MDQ.²⁸¹ Origin submitted that this would be sufficient to maintain the integrity of the pipeline system.²⁸² Origin further submitted that this six per cent figure should be calculated on the basis of the total capacity of the pipeline system of 393 TJ per day, rather than 323 TJ per day.²⁸³ Accordingly, Origin submitted that the figures of 144 per cent and 126 per cent in paragraph (c) of Schedule 2 should be replaced with 175 per cent and 153 per cent respectively.²⁸⁴

In response, Epic submitted that the MHQ proposed in its access arrangement is fair to all users.²⁸⁵

In relation to paragraph (c) of Schedule 2, Origin submitted that paragraphs (i) and (iv) are sufficient to maintain the integrity of the pipeline system, and that paragraphs (ii) and (iii) are unnecessary.²⁸⁶ Origin submitted that the hourly limitations in paragraph (c) should be based on total deliveries from the pipeline system rather than deliveries into the two separate zones.²⁸⁷

Origin also commented that paragraph (d) of Schedule 2 should be replaced by the following:²⁸⁸

The User must not take delivery of gas in aggregate at all Delivery Points in the Iron Triangle Zone in excess of:

(i) 115% of 1/24 of the user’s MDQ for that Zone in any 1 hour period;

(ii) 105% of 12/24ths of the user’s MDQ for that Zone in any period of 12 consecutive hours,

If to do so would prevent the Service Provider from supplying another User that User’s Scheduled Delivery Quantities for a Day.

Origin also made the following comments regarding clause 12 of the proposed access arrangement:

• 
  scheduled delivery quantities are not a practical basis to determine MHQ limitations;^th
  
• 
  Schedule 2 assumes that all customers have a flat demand, which is not the case;²⁸⁹
  
• 
  in relation to clause 12.3, minor excursions over the MHQ levels set out in paragraphs (c) and (d) of Schedule 2 do not pose a material threat to the operation of the pipeline system.²⁹⁰ Accordingly, a penalty charge should not be imposed on users for failing to comply with these limits;²⁹¹
  
• 
  the integrity of the pipeline system will be sufficiently protected if Epic has the right to curtail deliveries of gas to a user who is violating the MHQ limitations in circumstances where that violation is a material threat to the operation of the pipeline system;²⁹²
  
• 
  no specific charge should apply if the user breaches this provision.²⁹³
  

In response, Epic submitted that:

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  it is prepared to discuss Origin’s MHQ requirements on a case by case basis;²⁹⁴ and
  
• 
  the limits Epic has proposed are necessary to ensure the pipeline capacity is available each day for the benefit of all users.²⁹⁵ Accordingly, the range within which users operate should not be broadened, which is the effect that Origin’s suggestion would have.²⁹⁶
  

In relation to clauses 12.2, 12.4 and 15.2, Origin submitted that Epic should not be entitled to unilaterally change the gas specification, gas temperature or gas pressure.²⁹⁷ Origin submitted that changes to specifications should occur only if required by law or if all users, prospective users, relevant producers and Epic agree to vary their existing contracts.²⁹⁸

In response, Epic refers to its response to the Commission’s comments on changing the gas specifications if a national gas specification is approved.²⁹⁹ Epic commented in that context:

Epic can not be expected to allow gas to be supplied in to the pipeline system that might have a deleterious effect on the physical integrity or the capacity of the system. Equally, Epic will not cut across existing contractual rights.

Obviously, in situations where emergency legislation is enacted, Epic will fully comply with direction.

Origin submitted that clause 12.4 should oblige Epic to operate the pipeline system in a way such that the users’ ability to comply with their obligations under paragraphs (a) to (c) of that clause is not impaired or prevented.³⁰⁰ It is to be assumed the Origin is referring to its obligations under clause 12.4 (a)(i) to (iii).

In response, Epic stated that it considered that the current wording of clause 12.4 is fair and reasonable.³⁰¹

In relation to clause 12.4 of the access arrangement, OEP made the following comments:

• 
  an inlet temperature of gas of 60C is a safer operating temperature than 71C. Epic currently cools the gas through its plant after the receipt point, and the cost of operating this plant has been included in the access arrangement. If this function were to be performed by production plant operators rather than Epic, a new cooling plant may need to be constructed. This would increase the price of gas, despite the fact that the costs of gas cooling have already been incorporated into the access arrangement, delivering a windfall to Epic;
  
• 
  such a shift in responsibility for cooling may increase the risk of stress corrosion cracking on the MAPS; and
  
• 
  whoever cools the gas must be carefully assessed.³⁰²
  

Commission’s considerations

The Commission takes the view that a ‘reasonable endeavours’ clause for users is not appropriate for clause 12. To preserve the integrity of the pipeline it is necessary to place binding obligations on users, and to impose penalty charges for non-compliance with these obligations.

With respect to the relationship between the pressure and volume requirements of users, the Commission takes the view that it is unreasonable that users be subjected to such onerous restrictions in relation to both volume and pressure on the MAPS. Given that it is essential that uniform pressures be maintained to preserve the integrity of the MAPS, users should have more flexibility as to volumes. Accordingly, Schedule 2(a)(i) should give users some flexibility at receipt points. It is unreasonable to expect that users will be able to supply exactly 1/24 of their scheduled receipt quantity each hour into the pipeline system. Accordingly, the Commission requires Epic to comply with amendment FDA3.6.

Amendment FDA3.

For the access arrangement to be approved, the Commission requires that Epic amend clause (a)(i) of Schedule 2 to read as follows:

(i) 110 per cent of 1/24^thth of the User’s Scheduled Receipt Quantity at that Receipt Point.
In relation to hourly rates of flow, Origin submitted that hourly rates of flow at a receipt point should be changed only with the consent of all users at a receipt point. Epic agreed to insert a provision to this effect into the access arrangement but did not do so. The Commission does not consider it necessary that all users agree to changes in hourly rates of flow. This would impose on Epic a procedure for changing hourly flow rates that was too cumbersome. However, the Commission takes the view that it is unreasonable that the service provider have an absolute discretion to alter the required hourly rate of flow at the receipt point and then be entitled, under clause 12.2, to impose an excess imbalance charge on users who can not comply with this hourly flow rate. Schedule 2(a)(ii) confers such a power on Epic. Accordingly, the Commission requires Epic to amend Schedule 2(a)(ii) to provide that Epic may unilaterally give users a higher hourly flow rate, but may not lower the rate unilaterally.

Amendment FDA3.

For the access arrangement to be approved, the Commission requires Epic to amend clause (a)(ii) of Schedule 2 to the access arrangement to read:

Such greater proportion of the Scheduled Receipt Quantity at the Receipt Point as the Service Provider may, in its absolute discretion, approve.
In relation to Origin’s submission that users should not be required to pay a penalty charge for exceeding MHQ where multiple users use a delivery point, the Commission takes the view that any apportionment of penalty charges will be to some extent arbitrary. However, this is not a reasonable basis for excusing users from their obligations as to MHQ. In any case, clause 12.3 provides the incentive for users to obtain equipment that is capable of monitoring their take of gas on an hourly basis.

The Commission does not accept Origin’s submission that hourly limitations should be a proportion of the capacity of the pipeline system, rather than a proportion of scheduled delivery quantities. Once FT users have nominated their scheduled delivery quantities, Epic may then sell IT service for the remaining pipeline capacity. If MHQs were based on the proportion of capacity reserved by a user, this could affect Epic’s ability to deliver capacity to IT users. The Commission also takes the view that clause (b) of Schedule 2 gives users some flexibility to take larger amounts of capacity on an hourly basis.

In relation to Origin’s submission that no penalty should apply for minor excursions of the limitations in Schedule 2 (c) and (d), the Commission takes the view that if these limitations are reasonable, then the imposition of penalties for non compliance is the preferred means of ensuring compliance.

In regard to Origin’s submission that paragraphs (ii) and (iii) of Schedule 2(c) are unnecessary, the Commission considers that there is insufficient evidence at this point in time to warrant such a conclusion.

Concerning Origin’s submission that the proposed limitations in Schedule 2(c) should be based on total deliveries from the pipeline system, the Commission considers that the current wording of Schedule 2(d) is reasonable in this respect.

With respect to Origin’s submission that the temperature, pressure or gas quality should not be changed unless all users, prospective users, relevant producers and Epic agree to vary their existing contracts, the Commission notes the submission of OEP to the effect that the South Australian government will shortly legislate to introduce a gas quality specification.³⁰³ The Commission considers that this is the most likely means by which any such change would be implemented. The Commission has required an amendment to clause 15 of the access arrangement in order to address this issue.

In relation to Origin’s submission as to Schedule 2(d), the Commission does not accept that MHQs in the Iron Triangle Zone should be based on users’ MDQs, for the reasons discussed above.

The Commission also considers that there is insufficient evidence at this point in time to justify the conclusion that paragraphs (ii) and (iii) of Schedule 2(d) should be removed. The Commission considers that provided the restrictions in Schedule 2(d) are reasonable, it is appropriate for a charge to apply to users who breach this provision. This is the most effective means to ensure compliance.

In its Draft Decision, the Commission required Epic to amend clause 12.4 to comply with proposed amendment A3.11. Epic has declined to make this amendment. Epic submitted in relation to this issue that:

• 
  the temperature of gas entering the pipeline system must be less than 60 C, in order to ensure that the protective pipe coating is not damaged, and to reduce the risk of stress corrosion cracking;
  
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  if a new user delivers gas at the Moomba receipt point, it would be reasonable to accept gas at the same temperature specification as faced by existing users; Epic indicated that it would amend the access arrangement to reflect this;
  
• 
  Epic would amend the access arrangement to clarify that if the cooler capacity is exceeded, Epic will treat the expansion of the capacity of the cooler as a required new facility investment, or else part of a pipeline expansion;
  
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  at new gas receipt points other than the Moomba receipt point, shippers must be required to meet the 60C limit; and
  
• 
  If this is not the case, Epic will treat the installation of the necessary gas coolers at the receipt point as a required new facilities investment.³⁰⁴
  

Epic has inserted clause 12.4(b) into the access arrangement as a compromise on this point. The Commission accepts this amendment as satisfactory.

In relation to safety concerns raised by the OEP concerning cooling of gas, the Commission is satisfied that Epic will not accept gas into the pipeline unless it has been acceptably cooled. Furthermore, the Commission notes that Epic has amended clause 12.4(b) of the access arrangement to prevent the capacity of coolers used to cool gas supplied at above 60C being exceeded.

In relation to OEP’s concerns that the costs of cooling have already been included in the access arrangement, the Commission’s view is that Epic’s offer to cool the gas up to its existing capacity, and beyond that point to require new users to finance expansion of the cooling capacity, is reasonable.

Clause 13 Principal receipt and delivery obligations of service provider

Origin submitted that clause 13.3 is inappropriate as its exercise by Epic would affect the ability of users to take delivery of gas. Exercise of the clause by Epic might also place users in breach of their obligations to Envestra or their obligations to customers.³⁰⁵

In addition, AGL noted that any amendments proposed by the service provider can occur only in consultation with the user, in order to meet downstream obligations.³⁰⁶

In response, Epic stated that it would consider amending the access arrangement in response to Origin’s comment.³⁰⁷ Epic has amended clause 13.3 to address the concerns raised by Origin.