AER draft decision on the Roma to Brisbane AER draft decision on the Roma to Brisbane Pipeline (RBP)Pipeline (RBP)

access arrangement proposal access arrangement proposal12 April 2012 to 30 June 201712 April 2012 to 30 June 2017

Public forumPublic forum17 May 201217 May 2012

Housekeeping mattersHousekeeping matters

• Please sign the attendance sheetPlease sign the attendance sheet

• A record of this meeting will be madeA record of this meeting will be made

• A queuing workshop, requested & chaired by A queuing workshop, requested & chaired by APTPPL, will be hosted after lunchAPTPPL, will be hosted after lunch

Purpose of the forumPurpose of the forum

This forum is being held to:This forum is being held to:

• assist users and prospective users to assist users and prospective users to understand the AER’s draft decisionunderstand the AER’s draft decision

• encourage submissions on the draft decisionencourage submissions on the draft decision

The proposalThe proposal• APTPPL submitted its access arrangement (AA) APTPPL submitted its access arrangement (AA)

proposal for RBP on 12 October 2011proposal for RBP on 12 October 2011

• The proposal was published on 16 November The proposal was published on 16 November and is available on the AER’s websiteand is available on the AER’s website

• AER received six submissions. These are also AER received six submissions. These are also available on the AER’s websiteavailable on the AER’s website

• The draft decision on the access arrangement The draft decision on the access arrangement proposal was published on 30 April 2012proposal was published on 30 April 2012

ConsultantsConsultants

• Opex and capex forecasts: Wilson CookOpex and capex forecasts: Wilson Cook

• Capacity utilisation forecasts: SKM MMACapacity utilisation forecasts: SKM MMA

• Rate of return: McKenzie and Partington/ HandleyRate of return: McKenzie and Partington/ Handley

• PMA capex: Bird Cameron/Frontier EconomicsPMA capex: Bird Cameron/Frontier Economics

• Labour cost escalation: Deloitte Access EconomicsLabour cost escalation: Deloitte Access Economics

• Queuing: Frontier Economics Queuing: Frontier Economics

Total revenueTotal revenue

Total revenue continuedTotal revenue continued• APTPPL proposed total revenue of $296.4 m excluding Lytton APTPPL proposed total revenue of $296.4 m excluding Lytton

Lateral and RBP8Lateral and RBP8– 73 % increase over earlier AA period73 % increase over earlier AA period

• APTPPL’s proposed total revenue of $339.3 m including APTPPL’s proposed total revenue of $339.3 m including Lytton Lateral and RBP8Lytton Lateral and RBP8

• AER approved a total revenue of $263.4 m including Lytton AER approved a total revenue of $263.4 m including Lytton Lateral and RBP8Lateral and RBP8– $75.8 m (22%) below APTPPL’s proposed figure$75.8 m (22%) below APTPPL’s proposed figure

• AER’s draft decision is expected to increase a typical AER’s draft decision is expected to increase a typical residential customer’s bill by around $2 in the first year of the residential customer’s bill by around $2 in the first year of the AA periodAA period

Impact on prices – transmission chargesImpact on prices – transmission chargesIndicative reference tariff path for the RBP’s reference services ($/GJ, nominal)

Reference tariffsReference tariffs• AER approved proposed reference tariff structure, comprising

95% capacity component and 5% throughput component

• AER decision results in reference tariffs 21.9 % lower than APTPPL's proposal

APTPPL proposed reference tariffs and AER decision

Tariff Component

Previous ACCC decision $(July 2006)

APTPPL proposed $(July 2012)

AER decision $(July 2012)

Capacity reference tariff ($/GJ of MDQ/day)

0.4243 0.5586 0.5149

Throughput reference tariff ($/GJ)

0.0283 0.0283 0.0344

AER’s draft decision & APTPPL’s proposalAER’s draft decision & APTPPL’s proposal

Differences between the AER’s draft decision and Differences between the AER’s draft decision and APTPPL’s AA proposal are principally driven by:APTPPL’s AA proposal are principally driven by:

• Rate of return – WACC Rate of return – WACC – AER approved WACC 8.55% against 9.63% proposed by APTPPLAER approved WACC 8.55% against 9.63% proposed by APTPPL

• Capital expenditure Capital expenditure – AER approved addition of Lytton Lateral and RBP8 and subtraction AER approved addition of Lytton Lateral and RBP8 and subtraction

of PMA buyout contractof PMA buyout contract

• Operating expenditureOperating expenditure– AER proposed adjustment to opex mainly due to labour cost AER proposed adjustment to opex mainly due to labour cost

escalation forecastsescalation forecasts

AER’s draft decision – key issuesAER’s draft decision – key issues

Key aspects of the AER’s draft decision:Key aspects of the AER’s draft decision:

• Rate of return – WACCRate of return – WACC

• Capital expenditure Capital expenditure

• Operating expenditureOperating expenditure

• Capacity utilisationCapacity utilisation

• Extension and expansion requirementsExtension and expansion requirements

• Pipeline servicesPipeline services

• Queuing arrangementsQueuing arrangements

Rate of returnRate of return

Key WACC parameters

Previous ACCC Decision

APTPPLProposal

AER Draft Decision

Risk free rate 5.70 4.25 4.21

Equity beta 1.0 1.0 0.8

Market Risk Premium 6.0 7.0 6.0

Debt Risk Premium 1.14 4.31 4.03

Inflation 3.21 2.62 2.60

Nominal Vanilla WACC 8.78 9.63 8.55

Capital expenditureCapital expenditureAPTPPL's proposed and AER approved capex ($m, nominal)

PMA contract buyoutPMA contract buyoutAER did not approve capitalisation of the Pipeline Management Agreement (PMA) contract buyout. AER requires APTPPL to remove $30.1 million ($nominal) from its opening capital base

Issue AER draft decision

Rule 69 of the NGR requires that capex be costs and expenditure of a capital nature incurred to provide, or in providing, pipeline services.

It is not clear that expenditure on the goodwill of a purchased business is incurred to provide or in providing pipeline services. APTPPL has not demonstrated that the submitted expenditure was incurred for the provision of pipeline services for the RBP.

Rule 79(1)(a) of the NGR requires capex to be as incurred by a prudent service provider acting efficiently, in accordance with accepted good industry practice, to achieve the lowest sustainable cost of providing services.

AER calculations show expenditure on the PMA contract attributed to the RBP is greater than the cost of continuing with the PMA contract. It is therefore not expenditure to achieve the lowest sustainable cost of providing services. AER does not accept the ‘terminal value’ attributed to the PMA contract beyond 2020 when the contract would have expired.

PMA contract buyout continuedPMA contract buyout continued

Issue AER draft decision

Rule 79(1)(b) of the NGR requires capex to be justifiable on a ground stated in r. 79(2) of the NGR. APTPPL justified the PMA contract buyout capex using r. 79(2)(a) of the NGR, requiring the overall economic value of the expenditure be positive

PMA contract buyout does not result in a positive NPV and is therefore not conforming capex for the purposes of r. 79(2)(a) of the NGR

AER does not accept the approach for calculating expected savings over the life of the PMA contract as set out in the KPMG report

AER also considers that the PMA contract buyout capex is not justifiable under any other test under r. 79(2) of the NGR

Operating expenditureOperating expenditureAPTPPL opex – historical and forecast ($’000, 2011–12)

Capacity utilisation forecastsCapacity utilisation forecasts

Extension and expansion requirementsExtension and expansion requirements

• AER accepted the majority of APTPPL’s extension and expansion AER accepted the majority of APTPPL’s extension and expansion requirements but did not approve the inclusion of fixed principles requirements but did not approve the inclusion of fixed principles in the AAin the AA

• APTPPL proposed that the capital investment, operating costs and APTPPL proposed that the capital investment, operating costs and usage associated with extensions and expansions be excluded usage associated with extensions and expansions be excluded from regulatory coverage for 20 years (through a fixed principle)from regulatory coverage for 20 years (through a fixed principle)

• AER considers offering developed capacity as a negotiated service AER considers offering developed capacity as a negotiated service during the current AA period is sufficient to support APTPPL’s during the current AA period is sufficient to support APTPPL’s investmentinvestment

Pipeline servicesPipeline services

• AER did not approve APTPPL’s proposal to restrict the capacity AER did not approve APTPPL’s proposal to restrict the capacity and geographic reach of the covered pipeline to 2006 levelsand geographic reach of the covered pipeline to 2006 levels

• AER considers the AA applies to the entire covered pipeline as at AER considers the AA applies to the entire covered pipeline as at the commencement of the access arrangementthe commencement of the access arrangement

• The effect of the AER’s draft decision is that the Lytton Lateral and The effect of the AER’s draft decision is that the Lytton Lateral and the RBP8 expansion (if in operation before the AA commences) the RBP8 expansion (if in operation before the AA commences) form part of the covered pipelineform part of the covered pipeline

Pipeline services continuedPipeline services continued

• AER also examined the inclusion of additional reference services AER also examined the inclusion of additional reference services such as intra-day renomination, as available and backhaul servicessuch as intra-day renomination, as available and backhaul services

• AER considers there is insufficient evidence to support the view AER considers there is insufficient evidence to support the view that these services should be defined as part of the reference that these services should be defined as part of the reference service, or as additional reference services in accordance with r. service, or as additional reference services in accordance with r. 101(2) of the NGR101(2) of the NGR

Queuing requirementsQueuing requirementsAER did not approve APTPPL’s proposed auction-based queuing requirements and requires APTPPL to revert to the existing queuing requirements, based on first-come-first-served

Issue AER draft decision

The negotiate-arbitrate model established by the joint operation of the NGL and NGR

Chapter 6 of the NGL and part 12 of the NGR which provide the access dispute provisions

Auctions to allocate capacity and set terms and conditions go beyond establishing positions in a queue. Users should always be able to choose the reference tariff and reference terms and conditions. Role of the arbitration process may not be maintained

Rule 103(3) of the NGR requires that a process or mechanism for establishing an order of priority between prospective users must be established

An order of priority may not always exist. Lack of clarity regarding when APTPPL will hold an auction, the amount of capacity which will be offered, the terms and conditions to apply and when negotiations rather than auctioning will take place

Queuing requirements continuedQueuing requirements continuedIssue AER draft decision

Rule 103(3) of the NGR requires prospective users to be treated on a fair and equal basis

AER not satisfied users would be treated fairly and equally. Unclear how APTPPL will determine bid requirements and bid compliance. Insufficient detail on NPV ranking and how users will be treated

Rule 103(4) of the NGR provides the example of a publically notified auction in which all relevant prospective users are able to participate

Auctioning provided as example only. Queuing requirements must satisfy other requirements of the NGL and NGR

Rule 103(5) of the NGR requires sufficient detail to enable prospective users to understand the basis on which an order of priority between them is determined

Insufficient detail for users to understand the basis for order of priority between them. Insufficient detail to understand how the NPV ranking operates. Lack of clarity in processes prevents understanding how order of priority will be determined

Queuing requirements continuedQueuing requirements continuedIssue AER draft decision

Section 23 of the NGL - National Gas Objective (NGO): efficient operation, use of, and investment in, the pipeline

Section 24 of the NGL - revenue and pricing principles: efficient investment in, or in connection with, a pipeline, the efficient provision of pipeline services and the efficient use of the pipeline with respect to the reference service

Higher tariffs and larger revenues may distort incentives for pipeline and related investment by APTPPL and users

Since NPV rankings would be determined by APTPPL using unclear methods, an inefficient outcome could result

One-shot irrevocable bids create information asymmetry and negate effective negotiation

Users bid for unspecified non-homogeneous product

Unclear what is being auctioned, as the capacity and terms and conditions must be nominated by the user. Bidders may face difficulty in forming valuations for an imprecisely defined product. Bids may not accurately reflect the relative valuations of capacity across bidders - efficient allocation less likely

SubmissionsSubmissions

• Interested parties can forward submissions on the Interested parties can forward submissions on the draft decision and on APTPPL’s revised proposal todraft decision and on APTPPL’s revised proposal to rbp@aer.gov.au, until , until 25 June 201225 June 2012

• The AER’s access arrangement guideline provides The AER’s access arrangement guideline provides guidance on making submissionsguidance on making submissions

• Timeframes under the NGL and NGR limit the AER’s Timeframes under the NGL and NGR limit the AER’s ability to consider late submissionsability to consider late submissions

Indicative TimelineIndicative Timeline

AER’s draft decision releasedAER’s draft decision released 30 April 201230 April 2012

Revised proposals to be submittedRevised proposals to be submitted 25 May 201225 May 2012

Submissions dueSubmissions due 25 June 201225 June 2012

Release of final decisionRelease of final decision August 2012August 2012