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GAS REVIEW - Summary of Government Decisions


GAS REVIEW

Summary of Government Decisions

BACKGROUND

The Government has undertaken a comprehensive review of the gas sector . The objective of the review was to ensure the gas sector could meet the Government’s overall energy policy objective .

The Government's objective for gas is:

“To ensure that gas is delivered to existing and new customers in an efficient, fair, reliable, and environmentally sustainable manner." Achieving that objective is critical to the New Zealand economy: Natural gas currently provides 30 percent of total primary energy, including 23 percent of electricity generation in normal years, rising significantly in a dry year (e.g. 30 percent in the dry winter of 2001); and Gas-fired electricity generation is likely to be the most cost-effective large-scale energy source for medium term new generation capacity requirements in the North Island. The gas sector is currently undergoing a transition with: new sources of supply likely to be from many smaller fields rather than large fields such as Maui, which is expected to deplete early; and the Government’s direct commercial involvement in gas ending in 2009, when the Maui contracts end.

ACHIEVING THE GOVERNMENT’S OBJECTIVES

To meet its objective for the gas sector, the Government favours industry-led solutions where possible, but is prepared to use regulatory solutions where necessary.

Government’s Expectations for Industry Development

A “Government Policy Statement: Development of New Zealand’s Gas Industry” will provide guidance to the industry on its expectations for industry development. A draft statement has been released, setting out the outcomes the Government is seeking, principles to guide industry action, and the specific areas where industry-led solutions are required. Market participants will be asked for comment on the draft Government Policy Statement to ensure that the wording and implementation details are robust and clear. The draft is available at http://www.med.govt.nz. A final Government Policy Statement will be released following the consultation process. The Government proposes to issue the final Statement as a Statement of Government Policy to the Commerce Commission under section 26 of the Commerce Act 1986.

INDUSTRY-LED SOLUTIONS

Governing Entity

To enable the development of industry-led solutions, the Government invites the gas industry to establish a governing entity and decision-making process to manage the further development of gas market arrangements. The governing entity must develop a work programme that enables the development of efficient gas market arrangements in a timely and effective manner. The governing entity must be representative of all stakeholders, including consumers, and have an independent chair. Importantly the entity must have a majority of independent persons, appointed after consultation with the Minister of Energy. It must have the power to develop and enforce arrangements consistent with the Government Policy Statement, and must not operate in the interests of individual participants. The Government appreciates efforts the gas industry has already made in beginning the process of establishing a governing entity and decision-making process.

Industry Work Programme

The governing entity will need to develop arrangements relating to production, wholesale markets, transmission and distribution networks, and retail markets. The required initiatives include: Improving arrangements for the wholesale trading of gas; developing an open access regime for all transmission pipelines; developing standard terms and conditions for accessing distribution pipelines; developing model contracts for consumers; developing standardised arrangements for customer switching; and, establishing an independent system for handling consumer complaints. The Government will monitor the industry’s progress in developing these market arrangements. If the governing entity and decision-making process do not make sufficient progress, the Government will consider regulatory action (including legislation).

OPEN ACCESS TO THE MAUI PIPELINE

Open access to the Maui pipeline has a critical role to play in promoting the efficient delivery of gas, especially for electricity generation. The Government wishes to facilitate the process of amending the Maui contracts (in which the Government has a significant commercial interest) so that non-Maui gas can be transported on the Maui pipeline. The Government, as a party to the Maui contracts, invites Maui Development Ltd, the Natural Gas Corporation, Contact Energy and Methanex to present it with a proposal providing for open access to the Maui pipeline consistent with the following approach: the Government does not seek to improve its current commercial position as a result of a move to open access; the Government seeks to maintain the value of its existing contractual rights; the Government will not accept any increase in the risk it faces as a party to the Maui contracts as a result of the move to open access; and the open access arrangements need to provide non-discriminatory access to all potential users and not be biased towards those with an existing contractual interest in the Maui pipeline.

NATURAL MONOPOLY GAS PIPELINES

Control Inquiry by the Commerce Commission

There has been significant debate over the extent of any rent-seeking behaviour by gas pipeline owners. Some commentators suggest that pipeline owners have earned significant excess 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. To resolve these uncertainties, the Minister of Energy will request the Commerce Commission to report under section 56 of the Commerce Act, on whether “control” should be introduced for gas pipelines. A formal inquiry offers the best way of dealing with the various monopoly issues, including appropriate asset valuation. The inquiry will cover both gas transmission and distribution pipelines, including the Maui pipeline as well as bypass and bypassed pipelines . The inquiry is expected to take 18 to 24 months to complete.

Information Disclosure

A number of deficiencies with the Gas (Information Disclosure) Regulations 1997 have previously been identified. The deficiencies include inconsistency in the allocation of costs and the valuation of assets, and insufficiency of information on asset management planning. The Government has decided that enhancements to the Gas (Information Disclosure) Regulations 1997 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 firmer regulation is recommended by the Commerce Commission.

The main changes are: tightening accounting rules including for calculating performance measures; requiring the use of ODV for valuing pipeline fixed assets; requiring pipeline owners to disclose asset management planning information; introducing new measures for reliability performance; providing for most disclosed information to be made available on the Internet; extending the range of new contracts relating to the Maui pipeline that must be disclosed to any new transportation contracts (at present, disclosure applies just to those contracts in which transmission charges are separately identified); removing the requirement to separately disclose line charges to all customers; and exempting Nova gas pipelines from information disclosure, as its pipelines are almost entirely by-pass pipelines.

Asset Valuation

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 provide a firm basis for making any commercial gain 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.

Multi-Utility Natural Monopolies

Under the current information disclosure regimes for gas and electricity, multi-utilities (e.g. Powerco and Vector, who own both gas pipelines and electricity lines) are able to include in the disclosures for each of their businesses the full cost of supplying each service independently. This includes the full amount of any common costs (such as management costs, billing systems, and inquiry/complaints handling). Unlike in a competitive market, there is no means for ensuring that the benefits of natural monopoly multi-utilities are shared with consumers. The Government has decided that the information disclosure regime for gas should be adjusted so that multi-utility businesses do not double count their common costs. The Gas (Information Disclosure) Regulations 1997 will be amended to require gas pipeline owners who also own other assets for which accounting information must be made available to regulators (e.g. electricity) to report the common costs of both activities. This amendment will enable common costs to be identified.

GAS SAFETY

The Government will proceed with the EnergySafe programme that clarifies responsibilities for electricity and gas safety, and seeks to improve its administration. When fully implemented, the EnergySafe programme will enable the industry to demonstrate that reliable, consistent public and product safety for electricity and gas are being achieved and that workers in these areas are competent. http://www.med.govt.nz/ers/safety/energysafe/decisions/index.html

BARRIERS TO THE DIRECT USE OF GAS

As part of its National Energy Efficiency and Conservation Strategy, http://www.eeca.co.nz/strategy, the Government is investigating whether there are barriers to the increased direct use of gas (including LPG) as a substitute for electricity where that can achieve national energy efficiency gains.

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