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Central West Pipeline Access Arrangement

ACCC Issues Draft Decision on Central West Pipeline Access Arrangement

The Australian Competition and Consumer Commission today issued its Draft Decision on the proposed access arrangement for the Central West Pipeline lodged by AGL Pipelines (NSW) Pty Limited.

The access arrangement describes the terms and conditions under which AGLP will make access available to third parties for transmission through the Central West Pipeline which extends from Marsden to Dubbo, NSW. The Draft Decision is made under the National Third Party Access Code for Natural Gas Pipeline Systems.

The Draft Decision, if confirmed, means that gas users will pay lower charges than originally proposed by AGLP, but it also accommodates AGLP's desire to reduce the financial risks associated with the pipeline.

"A major issue for the ACCC in assessing the access arrangement has been that the Central West Pipeline was only recently constructed, without significant foundation contracts," Acting ACCC Chairman, Mr Allan Asher, said today. "The ACCC acknowledges the uncertainty that can arise in the early phase of such a project, in particular that take-up targets may not be achieved on time".

Mr Asher said that AGLP had proposed a number of financial risk-minimisation measures for the pipeline.

"The most important measure was a regulatory framework designed to protect AGLP from the impact of early under-performance when gas throughput volumes are expected to be low and revenues would not cover total capital and non-capital costs.

"The mechanism allows losses to be capitalised into the asset base. Consequently the asset base would increase substantially during the first phase of the life of the pipeline. Once gas demand grows in the region, AGLP would be able to recover the losses, including a return on capital derived from the regulated rate of return and the size of the asset base," Mr Asher said. "Effectively, this means that the income lost in the early years can be recovered in later years, depending on the actual volume of sales achieved."

Mr Asher stated that other important measures are that AGLP would retain any benefits of above expected volume performance during the first regulatory period, and the pricing structure is to be based on throughput only with no capacity charge in this period.

"Consequently, AGLP will have a major incentive to increase volumes and decrease costs. The acceptance by the ACCC of a single price from Marsden to Dubbo irrespective of the actual distance involved also helps to underpin the early viability of the project.

"In its assessment the ACCC has considered the proposed access arrangement and the submissions from interested parties. In this Draft Decision the ACCC has decided to accept all of the mechanisms proposed by AGLP to reduce its exposure to the risks associated with a newly established pipeline".

Mr Asher said that, in addition to the risk-averting measures, AGLP had sought a high rate of return.

"In light of the mechanisms in the regulatory framework to reduce risk, the ACCC has concluded that the appropriate post-tax nominal cost of equity for AGLP is 14 per cent. To make this figure comparable with AGLP's proposal, the ACCC has used cash-flow analysis to calculate a post-tax nominal Weighted Average Cost of Capital of 7.0 per cent and a pre-tax real WACC of 7.5 per cent," Mr Asher said. "This is in contrast to the 10% real return sought by AGLP."

The ACCC identified a number of aspects of the access arrangement that do not fully meet the requirements of the Code. Accordingly, the ACCC's draft decision that it proposes not to approve the access arrangement in its current form specifies amendments to the access arrangement which are required to be made for the access arrangement to be approved by the ACCC.

The ACCC's draft decision is subject to further public consultation prior to the release of the final decision. Submissions are requested from interested parties, to be received by 8 October 1999.

In addition to seeking written submissions from interested parties, the ACCC intends to visit the Central West region and speak directly to major users and other interested parties. This will provide an opportunity for users and interested parties to discuss with ACCC representatives the impact of the ACCC's draft decision.

"In coming to its decision the ACCC has achieved a good balance between the development needs of the local communities and their small businesses and consumers and the financial needs of the pipeline operator".

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