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GAS REVIEW - Questions and Answers


GAS REVIEW

Questions and Answers

What was the scope of the review?

The review covered the production, sale and transport of natural gas to commercial and residential customers. It did not cover the petroleum exploration and gas safety regimes that had recently been reviewed, while issues related to transport fuels and LPG are being addressed through the National Energy Efficiency and Conservation Strategy.

The ACIL report that formed the basis of the public consultation process and the submissions made in response to it are available at: http://www.med.govt.nz/ers/gas/review/index.html. Are the Government’s decisions consistent with the findings of the ACIL report?

Yes. The report’s findings formed the basis for the Government’s consideration of issues and subsequent decisions. The Government agrees with the report’s overall finding that the industry should be asked to lead the development of many of the arrangements that are needed to enable the sector more effectively.

Is there enough gas for the New Zealand market?

Yes, known reserves of gas are sufficient for anticipated domestic and commercial use, and the expected demand for electricity generation for at least another decade. However, electricity generators will need to secure contracts for gas before committing to new gas-fired electricity generation plants.

The amount of gas available in the future is affected by many variables, including the level of known reserves, the amount of gas discovered, its cost of recovery, the price users are prepared to pay and its rate of use. What is critical is that the available gas is used in the way that best promotes New Zealand's welfare. The wholesale, transmission and distribution market arrangements the Government has asked the industry to develop, will help ensure that the available gas is used in the best possible way.

Is there enough exploration for gas?

Many factors affect the rate of exploration, including the price of oil and gas, the degree of confidence that oil and gas will be found, and the Government’s exploration regime. Increases in exploration have occurred over the past five years and led to such discoveries as Pohokura and Rimu. There has also been considerable interest in the recent on-shore and near-shore bidding round for exploration permits in Taranaki.

The Government’s exploration regime supports the increase in exploration, through, for example: New Zealand’s tax and royalty regimes, which are among the most competitive in the world, while still providing New Zealand with a fair return; the “use it or lose it” approach to exploration permits, which ensures areas are not locked away by companies that are not prepared to actively explore an area they have a licence for; an ongoing marketing campaign by Crown Minerals to attract new exploration in the petroleum sector; a review of the mineral programmes in the near future, as required by the Crown Minerals Act, which will ensure that they remain internationally competitive.

Further information on petroleum exploration is available at: http://www.med.govt.nz/crown_minerals/petroleum/index.asp

What is going to happen to the price of gas?

It is not possible to predict gas prices with any certainty. Implementation of the recommendations of the gas review will however help overcome factors that could result in higher prices than are necessary, including: enabling non-Maui gas to use the Maui pipeline will remove a constraint on transporting gas to markets north of Taranaki; improved information disclosure requirements will reduce the ability of pipeline owners to charge monopoly prices; and the development of enhanced industry arrangements will increase competitive pressures on companies to keep prices as low as possible.

What changes will domestic consumers of gas notice?

Domestic consumers will benefit from the Government's expectations for improved retail market arrangements. The draft GPS requires the industry to develop industry arrangements with respect to: the standardisation and upgrading of protocols relating to customer switching so that barriers to customer switching are minimised; the development of efficient and effective arrangements for the proper handling of customer complaints; the development of model consumer contracts that are fair to consumers and retailers.

Why does non-Maui gas need access to the Maui pipeline?

The Maui pipeline transports approximately 100PJ of Maui gas each year north of Taranaki for reticulation and electricity generation (for example, at Otahuhu and Huntly). The Maui contracts (to which the Government is a party) prevent non-Maui gas from using the Maui pipeline. Non-Maui gas can be transported along the older Kapuni pipeline, but its capacity is only about 11PJ a year.

Gas supply from Maui is declining while demand in northern markets is increasing. The gas industry is keen therefore to transport non-Maui gas along the Maui pipeline to ensure that it is able to supply growing northern markets.

To achieve this, the Maui contracts will need to be amended to allow non-Maui gas to use the Maui pipeline. If this does not happen, there could be insufficient gas transported north for electricity generation, with flow-on effects for electricity prices and supply security.

What is the Government doing to encourage open access to the Maui pipeline?

The Government has written to Maui Development Limited, Methanex, Natural Gas Corporation and Contact Energy advising them that the Crown wants to see open access to the Maui pipeline as soon as possible, through commercial re-negotiation of the Maui contracts. The Government has advised these parties that it will not seek to improve its current commercial position, but that it seeks to maintain the value of its existing contractual rights and will not accept any increase in commercial risk as a result of the move to open access. Open access will also need to be provided to all potential users and not be biased towards those with an existing contractual interest in the Maui pipeline.

Are the current industry structure and arrangements adequate?

No. The ACIL Report and submissions agree that current gas industry arrangements (such as the Gas Pipeline Access Code) are inadequate to cope with the more complex wholesale, transmission and distribution markets that will result from the decline in Maui. The Government is also concerned that there may be inadequate retail market arrangements.

Also, the industry has not had a governing entity that has been able to address market developments as they arise, and enforce any arrangements that are put in place. Rather, the existing arrangements have been developed through a series of more ad hoc processes.

What is being done to develop adequate industry structures and arrangements?

The Government is now inviting the industry to develop a governing entity and decision-making process. The governing entity will then develop the arrangements necessary for the more complex gas market that is emerging.

The Government’s expectations for the industry will be set out in a “Government Policy Statement: Development of New Zealand’s Gas Industry”. In the event that the industry is unable to develop acceptable arrangements, the Government will consider legislation to bring in specific regulatory solutions.

Is the Government confident that industry self-governance will be successful in the gas sector?

The government expects that gas governance arrangements will deliver results relatively quickly, because: the industry itself has taken the initiative to begin the process of developing governing arrangements; the industry has strong incentives to resolve many issues. For example, there is an urgent need for a protocol governing transmission interconnection given the need to enable non-Maui gas to use the Maui pipeline; the industry involves relatively few organisations and is not particularly complex. This makes the process of communicating, consulting and reaching agreement easier than in some other sectors.

Should the Government introduce price control on gas pipelines?

Some commentators consider that the owners of natural gas pipelines have earned monopoly profits over a number of years. However, the measure of profits is dependent on how the assets are valued, and the extent of any excess profits is unclear. Because of these uncertainties, it is not appropriate to introduce price control, at least at this stage.

To resolve these uncertainties, the Minister of Energy will request the Commerce Commission to report under section 56 of the Commerce Act, on whether regulatory control should be introduced. The inquiry will carefully consider the various issues, including asset valuation. The Government will decide on any appropriate action once the Commission's report has been received. If control is agreed, the form of control will be for the Commission to decide.

What will be the scope of the Commerce Commission inquiry?

The inquiry will encompass the parts of the gas sector where the possibility of abuse of market power arises. In particular, the inquiry will cover both gas distribution and transmission pipelines, including the Maui pipeline as well as bypass and bypassed pipelines.

When will the inquiry be completed?

The Commerce Commission has indicated that depending on complexity, the inquiry will take 18-24 months to complete.

Why modify the information disclosure requirements for gas when the inquiry is taking place?

The Government has decided that enhancements to the information disclosure requirements should proceed as they will improve the ability of interested parties and the Government to monitor industry performance. This type of information will be necessary even if control is recommended by the Commerce Commission.

Why adopt an ODV valuation methodology now when the inquiry will determine the appropriate methodology?

The choice of asset valuation methodology is a significant issue in information disclosure. Gas pipeline companies have chosen to adopt optimal deprival values (ODV) but there are currently no regulated requirements for this.

An appropriate methodology for use in gas regulation will be determined as part of the section 56 inquiry, and it is possible that the Commission's decision could impact on the choice of methodology for use in information disclosure.

However, the Government has decided that, in the interim, ODV will be formalised in the information disclosure regime because: while ODV is currently used by gas pipeline companies there is no assurance of consistent application of valuation rules (this can impact on profit measures); and regulated ODVs ensure that any gains from asset revaluations will be transparent; This approach should not be interpreted as the Government favouring ODV as the asset valuation methodology for gas, or pre-empting the outcomes of the Commerce Commission’s deliberations.

Do multi-utility companies require control?

Given current regulatory regimes, natural monopoly multi-utility companies (e.g. companies that own both gas pipelines and electricity lines), are able to count the full cost of common activities (such as management costs and billing systems) in the costs of each of their businesses. Unlike in a competitive market, there is no means for ensuring that the benefits of these multi-utilities are shared with consumers.

The Government has decided that the information disclosure regime for gas should be adjusted so that these companies do not double count their common costs. This will make the extent of any double-counting fully transparent.

What is the Government doing to deliver safety in the gas sector?

The Government, in consultation with the gas industry, has jointly developed “Delivering Gas, Delivering Safety”, an overall plan to deliver reliable, consistent public and product safety for electricity and gas, and worker competency. When fully implemented, Delivering Gas, Delivering Safety will enable the industry to demonstrate that safety is being achieved for the public, consumers and the industry workforce.

Consistent with Delivering Gas, Delivering Safety, the Government has announced that it will introduce legislation to implement an EnergySafe programme, which covers gas as well as other forms of energy. EnergySafe will reduce the current overlap between the Electricity and Gas Acts, and the Health and Safety in Employment Act. It will also make important changes to the way electrical and gas safety is administered. Further information on the EnergySafe programme is available at: http://www.med.govt.nz/ers/safety/energysafe/decisions/index.html

The Government Policy Statement asks the industry to take responsibility for some specific aspects of gas safety, such as safety standards and conventions, and gas worker competency.

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