Gas Transmission
Investment Programme,
Status and Development July 2013
Date issued: XX July 2013
Submissions close: XX August 2013
186104.1 31 July 2017
About Gas Industry Co.
Gas Industry Co is the gas industry body
and co-regulator under the Gas Act. Its
role is to:
 develop arrangements, including
regulations where appropriate, which
improve:
○ the operation of gas markets;
○ access to infrastructure; and
○ consumer outcomes;
 develop these arrangements with the
principal objective to ensure that gas
is delivered to existing and new
customers in a safe, efficient,
reliable, fair and environmentally
sustainable manner; and
 oversee compliance with, and review
such arrangements.
Gas Industry Co is required to have
regard to the Government’s policy
objectives for the gas sector, and to
report on the achievement of those
objectives and on the state of the New
Zealand gas industry.
Gas Industry Co’s corporate strategy is
to ‘optimise the contribution of gas to
New Zealand’.
Submissions close:
Submit to:
Enquiries:
186104.1 31 July 2017
XX August 2013
www.gasindustry.co.nz
Ian Wilson
04 472 1800
Steve Bielby’s introduction
31 July 2017
Executive summary
[To be completed]
GIC is satisfied with the outcomes of the completed projects
a. Supply and Demand outlook: GIC engaged Concept Consulting to produce a document, with
an associated model, called Gas Supply and Demand Scenarios 2012-2027. Industry
submissions were considered and the report was finalised in December 2012.
b. Backstop information gathering and analysis: GIC consulted on a Statement of Proposal in
late 2011 which set out options for improving processes for GIC to gather information
required to assist in its policy development process. Following consultation, GIC’s preferred
option was to develop a formalised and transparent protocol for requesting information
from industry participants. The protocol is now in place and has been used successfully.
GIC is satisfied with the progress of the projects still in train
c. Vector capacity determination: Vector is undertaking consultation with industry
participants to determine available pipeline capacity. In order to do this, Vector is following
a detailed project plan which it intends to complete by December 2013.
d. Transmission Access and Pricing project: industry feedback on the PEA’s ‘further advice’
paper will determine its future path. However, GIC believes that the PEA has completed its
substantive work on the project. Depending on the future path of the project, it may be
useful to refer occasional matters to the PEA for further advice (assuming the PEA are
willing to be ‘on hold’)
e. Transmission market disclosures: This project has largely been subsumed by other
projects. Many of the information gaps originally identified have been addressed: Vector
has disclosed its capacity queues and consulting on its security of supply standard, the
requirements for pipeline companies to disclose information under Part 4 regulation has
been decided by the Commerce Commission. However, GIC is still engaged with Vector on a
number of transparency matters, and we consider that it is wise to review what
information is available once the other projects are complete.
GIC acknowledges that some work remains to be done
f.
Gas trading arrangements: This was identified as a possible project in the event that a
‘market carriage’ arrangement were identified as a preferred option under the
Transmission Pricing and Access project. GIC does not consider that further work on this
option is justified at present.
g. Testing investment options: The original intention was for GIC to work with the Commerce
Commission and Government to help clarify the regulatory arrangements and to ensure
that an effective pathway for efficient gas transmission investment is in place. The project
will describe the regulatory framework in place and any barriers to investment. GIC
186104.1 31 July 2017
considered that substantial progress on Vector’s capacity review work and the CC’s Part 4
controls should be achieved before beginning this work. A start for the project is scheduled
for August 2013.
31 July 2017
Contents
Steve Bielby’s introduction
4
Executive summary
5
1
Introduction
1
1.1
Purpose
1
1.2
How to make a submission
1
1.3
Next steps
1
2
Gas Transmission Investment Programme
2
3
GTIP report card
4
3.1
Bridge commitments
4
3.2
Information projects
5
3.3
Market projects
8
3.4
Regulatory projects
9
3.5
Overall assessment
9
4
Panel of Expert Advisers deliberation on
transmission access
11
Description of the Transmission Access and Capacity
project
11
4.2
PEA’s preliminary advice
12
4.3
Issues considered since preliminary report
13
4.4
April 2013 Workshop
15
5
Description of reasonably practicable options
16
4.1
186104.1 31 July 2017
5.1
Capacity follows end-user
16
5.2
Capacity auctioning
17
5.3
Convergence
18
5.4
Integration
19
6
Proposed evaluative framework
20
7
Way forward for the GTIP
22
Glossary
31 July 2017
23
1
1.1
Introduction
Purpose
The purpose of this document is to provide a progress report on Gas Industry Co’s GTIP project. This
document is being released concurrently with the Panel of Expert Advisers’ (PEA) second piece of advice
on the optimal arrangements for gas transmission arrangements and capacity pricing. The present
document also serves the purpose of providing additional context to the PEA’s advice and will particularly
benefit new readers of this workstream.
We also provide our own description of some options, which the PEA may not address in its advice, which
are targeted at the problem identified for this workstream. We welcome submitters’ views on these
options and any other issues discussed in this paper.
1.2
How to make a submission
Submissions are invited from stakeholders on this paper. Submissions should be provided no later than
5pm on XX MONTH 2013. Please note that submissions received after this date are unlikely to be
considered. Submissions can be made by logging-on to the Gas Industry Co website
(www.gasindustry.co.nz). All submissions will be published on the website after the closing date.
The recommended format for submissions is attached as Appendix A and may be downloaded in MS Word
format from the website.
Because submissions will automatically be made public on Gas Industry Co’s website following the closing
date, submitters should discuss any intended provision of confidential information with Gas Industry Co
prior to uploading their submissions.
1.3
Next steps
The next steps for this workstream are discussed in section 7 of this paper. In short, the next steps depend
on the analyses of submissions carried out on this paper and the PEA’s advice.
1
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2
Gas Transmission Investment
Programme
The Gas Transmission Investment Programme (GTIP) was Gas Industry Co’s response to industry concerns
over the long-term outlook for gas transmission capacity availability in the Auckland region. This work had
its origins in 2009 when Vector announced to the industry that it would no longer be able to sell new
capacity on its North Pipeline as that pipeline had reached the limits of its capacity. Large end users on the
North Pipeline subsequently experienced a reduction in the number of credible bids they received when
seeking a new gas supplier.
Gas Industry Co’s investigation of the situation prompted key industry members to put in place (in August
2011) a set of commitments to improve market performance. These are known as the Bridge
Commitments; the intention of the Bridge Commitments was to improve current market conditions while
providing a bridge to longer term solutions. Gas Industry Co is monitoring the effectiveness of the Bridge
Commitments.
The wider objectives of the GTIP are to:
 ensure that existing and future gas transmission assets are used efficiently;
 establish the need for gas transmission investment; and
 develop an effective pathway for efficient gas transmission investment to take place.
Within these overarching objectives, the GTIP was divided into three separate workstreams: (a)
information projects; (b) market projects; and (c) regulatory projects. Each of these projects was divided
into sub-projects, as shown in the following table.
Table X. Gas Transmission Investment Programme
Project area
Purpose
Component
projects
Why
Information
Projects
To minimise
information
Vector’s Capacity
Determination
For Vector to transparently review the North
Pipeline capacity
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Project area
Market
Projects
Regulatory
Projects
Purpose
Component
projects
Why
asymmetries
Supply and
Demand Outlook
To improve the quality of information so people
make better decisions about transmission
investment and alternatives
Transmission
Market
Disclosures
To ensure that information necessary for
efficient operation of the market is available.
(Note that the information that would be
disclosed is non-financial and sits alongside the
work of the Commerce Commission)
Backstop
Information
Gathering and
Analysis
To ensure access to data for analysis to underpin
any conclusions and recommendations in
relation to all areas of GIC’s work
To provide
efficient
transport
arrangements
Transmission
Access and
Pricing
To ensure efficient arrangements for optimal
allocation, utilisation, and pricing of capacity
Gas Trading
Arrangements
To ensure efficient arrangements for the gas
market
To define
appropriate
regulatory
arrangements
Testing
regulatory
options
To identify whether there are appropriate
incentives in place for investment
In order to develop these projects with regular industry input, Gas Industry Co established two advisory
panels, one called the Panel of Expert Advisers (PEA) and another called the Panel of Strategic Advisers
(PSA). The PEA is comprised of industry experts and it provides advice on a range of market design issues.
The PSA is comprised of senior executives and it provides programme oversight.
For a thorough background on the GTIP project, please refer to the GTIP website and the various papers
contained there: http://gasindustry.co.nz/work-programme/gas-transmission-investment-programme.
The next section of this paper provides a report card on how the various component projects of the GTIP
have fared to date.
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3
3.1
GTIP report card
Bridge commitments
The Bridge Commitments are a set of commitments made by Shippers and Vector Transmission that each
signatory will:
1.
as a Shipper supplying a large end user (end user) who obtains gas from the Northern Pipeline, where the end
user tenders for future supply to:
(a) ensure that transmission capacity (capacity) is available to the preferred retailer of the end user of gas, at a
price that reasonably reflects the value of that existing capacity to the Shipper, and at a quantity that will
reflect the end user’s demand, to the extent practicable;
(b) provide that capacity price and quantity information, at the end user’s or another Shipper’s request, within
five business days, to allow competing bidders to incorporate it into their supply proposals; and
(c) provide the information in 1(b) to Gas Industry Co, together with the name of the end user , relevant ICP
number and any other material terms of the capacity transfer offer at the time they are made to assist Gas
Industry Co in assessing the efficacy of the arrangement set out in this paragraph.
2.
to ensure that within ten business days after the completion of the tender process initiated by the end user or
Shipper, the information in paragraph 1(b) will be disclosed on the public version of the Vector Transmission
Open Access Transmission Information System (OATIS);
3.
to negotiate, and where practicable agree on, a set of reasonable commercial terms to govern the transfer of
capacity under Supplementary Agreements and Non-Code Shipper transmission services agreements (including
where relevant reasonable amendments to Supplementary Agreements and Non-Code Shipper transmission
services agreements), by a target date of 1 December 2011;
4.
to disclose to Gas Industry Co such information as Gas Industry Co reasonably requires to enable it to understand
and assess the extent of the Northern Pipeline capacity constraint, the efficiency of the current capacity
allocation mechanism and the need for asset investment, provided Gas Industry Co only uses the information for
the purposes set out in this paragraph and keeps confidential any information identified by a discloser as
confidential (including not disclosing that information to any competitor);
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186104.1 31 July 2017
5.
to work with Gas Industry Co on a review of the Northern Pipeline capacity constraint, with the results made
public and presented in an open forum by a target date of 1 December 2011;
6.
to work together to develop a platform (known as a Bulletin Board) to facilitate the open and transparent trading
of capacity between willing buyers and sellers, by a target date of 1 December 2011; and
7.
to participate in a project with the objective of developing longer term market solutions; establishing the current
need for gas transmission investment; and developing an effective pathway for gas transmission investment to
take place, including correctly signalling the price of gas transmission capacity.
Assessment
The intention of the Bridge Commitments was to improve current market conditions while providing a
bridge to longer term solutions. The Bridge Commitments as a whole have, wholly or partly, produced
results sufficient to alleviate the short-term capacity problem (see below). Many of the longer-term issues
have been folded into the GTIP. We are satisfied with the Bridge Commitments and we commend the
efforts of industry participants in putting these together and continuing to make these work. We will
continue to monitor these.
Notable achievements for the Bridge Commitments are the establishment of a Bulletin Board to facilitate
capacity trading, an agreement to disclose useful information where desirable, and the freeing up of
additional capacity as a result of power station contract renegotiations. It is this latter point which has
alleviated the short-term capacity problem: transmission contracts to the Otahuhu and Southdown
power-stations were renegotiated which resulted in an increase in available firm capacity, additional
interruptible capacity, and additional supplementary capacity.
3.2
Information projects
The Information Projects are designed to improve the quality of information so that market participants
are able to make informed decisions about transmission investment and alternatives. The Information
Projects are summarised in the table below and then discussed in more detail.
Table X. Information projects
Purpose
Component
projects
Why
Status
Notes
To minimise
information
asymmetries
Vector’s Capacity
Determination
For Vector to transparently review
the North Pipeline capacity
Or
green?
On track for December 2013
completion (or complete?)
Supply and
Demand Outlook
To improve the quality of
information so people make
better decisions about
transmission investment and
alternatives
Complete
Concept report published
5
186104.1 31 July 2017
Purpose
Component
projects
Why
Status
Notes
Transmission
Market
Disclosures
To ensure that information
necessary for efficient operation
of the market is available. (Note
that the information that would
be disclosed is non-financial and
sits alongside the work of the
Commerce Commission)
N/A
Subsumed by various other
projects
Backstop
Information
Gathering and
Analysis
To ensure access to data for
analysis to underpin any
conclusions and
recommendations in relation to all
areas of GIC’s work
Complete
GIC published protocol for
information requests (rather than
regulatory option)
Vector’s capacity determination project
Vector is undertaking consultation with industry participants to determine available pipeline capacity. In
order to do this, Vector has outlined a detailed project plan which it intends to complete by December
2013. The project plan is as follows:
Table X. Vector’s capacity determination project
Milestone
Deadline
Interested parties provide Vector with feedback on Pipeline Capacity
Consultation paper
Complete
Physical Modelling Inputs Decision Paper
Complete
Public forum to answer questions
Complete
Complete industry feedback on first consultation papers
Complete
Final copy of Pipeline Capacity Paper
Complete
Provide indicative timeline for next steps of process
Complete
Draft Capacity Determination for consultation
February 2013 [or complete?]
Final Capacity Determination paper
Q2 2013 [or complete?]
Capacity Determinations and Pipeline Review papers published
December 2013 [or complete?]
Key points to note from this sub-project are:
o
when modelling its transmission system, Vector separates the pipeline system into several
smaller systems in order to independently assess the component parts. This is particularly
necessary as not all of the component systems are connected; and
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o
there is no single way to answer how much capacity there happens to be on a particular
pipeline at any one point in time. It therefore makes sense to think of capacity in terms of
operational capacity, aggregate contractual capacity, and uncommitted operational capacity.
Most delivery points on the Vector system have spare uncommitted operational capacity.
However, there is little room for growth in some sections of the North Pipeline, particularly
north of Auckland;
o
no material feedback was received on the process Vector uses for calculating uncommitted
operational capacity.
As a result of Vector’s project, the industry has a much better understanding of physical and commercial
capacity as it related to Vector’s transmission pipelines. We are grateful for Vector’s efforts in carrying out
this project.
Supply and demand outlook
Gas Industry Co engaged Concept Consulting to produce a document, with an associated model, called
Gas Supply and Demand Scenarios 2012-2027. As part of the development of this sub-project, industry
submissions were considered before the report was finalised.
The key findings from the completed report were:
o
New Zealand’s gas supply position is strong relative to recent decades, mostly due to
increased exploration activity encouraged by high oil prices. Increased availability has been
reflected in softer gas prices;
o
long-term gas demand is likely to vary significantly between 75-250 PJ/year depending on
price scenarios. Demand is projected to be steady for commercial, residential, and most
industrial users. Volatile demand users include petrochemical manufacturers and power
generation; and
o
existing pipelines are expected to have sufficient capacity to accommodate the projected
scenarios except Vector’s northern pipeline system for which available capacity is low or zero
at current levels. The need for new investment however could be deferred if low cost options
are taken up by large users (i.e. power-stations).
This sub-project is now complete. A model is available on Gas Industry Co’s website for interested parties
to download and use as they wish. The model may be updated periodically.
Transmission market disclosures
This sub-project has been subsumed by other projects.
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Backstop information gathering
This sub-project is complete, at least for the time being. Gas Industry Co consulted on a Statement of
Proposal in late 2011 which set out options for improving processes for Gas Industry Co to gather
information required to assist in its policy development process. From that consultation, Gas Industry Co’s
preferred option was to develop a formalised and transparent protocol for requesting information from
industry participants. The protocol covers, amongst other procedures, how Gas Industry Co will manage
confidential information. A successful operation of this protocol will either limit, or remove, the need for a
regulated approach to information gathering.
The protocol is available here: [insert link]
3.3
Market projects
The focus of this project is on whether the VTC allows for efficient arrangements for the optimal
allocation, utilisation, and pricing of capacity. The option to pursue more fundamental changes in
wholesale and capacity markets may also be considered.
The sub-projects are listed in the table and explained in more detail below.
Table X. Market projects
Purpose
Component
projects
Why
Status
Notes
Market
Projects
Transmission
Pricing and
Access
To ensure efficient arrangements
for optimal allocation, utilisation,
and pricing of capacity
Ongoing.
Gas Trading
Arrangements
To ensure efficient arrangements
for the gas market
Longer-term option.
Market proposals for gas market
are being progressed
Transmission Pricing and Access
This work is largely being progressed by the PEA. The first deliverable for the PEA was to provide advice to
Gas Industry Co on a review of Transmission Access and Pricing Capacity. That report considered the
economics of pipeline access, discussed some lessons from overseas jurisdictions, identified problems with
current arrangements in New Zealand, and proposed a straw-man for improving current arrangements.
These issues are discussed in more detail in section [XX] below. Gas Industry Co analysed the submissions
received on the PEA’s report. That analysis included a strategy to progress this workstream: it was decided
that the PEA would continue to consider options to improve current arrangements in the short-term; once
such short-term arrangements were in place, the PEA would consider reforms and improvements that
could be implemented in the medium/long-term.
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The next piece of work in this workstream is the publishing of the PEA’s further advice, which is being
released concurrently with this paper.
Gas Trading Arrangements
This was identified as a possible sub-project in the event that a ‘market carriage’ arrangement is identified
as the preferred option under the Transmission Pricing and Access sub-project. It is therefore on hold/not
necessary until the outcomes of the Transmission Pricing and Access project are clarified.
In related developments, but outside of the GTIP, there are two separate proposals being developed for a
spot gas market.
3.4
Regulatory projects
This purpose of this project is to identify whether there are appropriate incentives in place for investment
in gas transmission pipelines.
There was only one sub-project identified for this project which is discussed below.
Table X. Regulatory projects
Purpose
Component
projects
Why
Regulatory
Projects
Testing
Investment
Options
To identify whether there are
appropriate incentives in place
for investment
Status
Notes
On hold.
This project is on hold until the Commerce Commission’s regulatory regime affecting gas transmission
pipelines has been implemented. Once there is certainty on the Commerce Commission’s regulatory
regime, this projection will consider investment scenarios and options for creating certainty for investors.
Examples of the latter may include:
 the introduction of a Regulatory Investment Test; and
 a review of the Gas Act, to examine how it relates to part 4 of the Commerce Act and to ensure
alignment where feasible.
3.5
Overall assessment
Our view is that the GTIP to date has been a valuable process, but that further work is required before the
original intent of GTIP is realised. The completed and/or implemented GTIP projects include the Bridge
Commitments, the Supply and Demand study, the Information Gathering project, and Vector’s Capacity
Determination project.
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Each of the completed projects brings its own set of unique benefits to the industry. More generally, the
benefits of the GTIP thus far include:

the increased availability of information (i.e. the Supply and Demand outlook and Vector’s capacity
consultation project);

improved knowledge of physical and commercial arrangements in the industry such as how the
physical capabilities of pipelines are assessed, security of supply standards, and how constraints are
managed;

facilitating systematic discussion of issues between market participants;

influencing the renegotiation of transmission contracts for delivering gas to powerstations which has
freed up additional capacity on the North Pipeline (via the Bridge Commitments); and

allowing the industry to engage constructively on market design issues.
However, GTIP has taken longer than expected. In the initial GTIP documents, it was envisaged that each
sub-project would be completed around mid-2013. The PEA was to have provided final advice on its review
of the VTC and pricing to Gas Industry Co in November 2012 and have submitted an implementation plan
by April 2013. Due to robust consultation with the industry and the resulting
re-scoping of the project, the sub-project being led by the PEA will require more time.
Despite more work being required, we think it is worthwhile for the GTIP to continue with the outstanding
projects. This sentiment was endorsed by industry representatives at the PEA workshop held at Gas
Industry Co on 23 April 2013.
Section 7 describes in more detail how we envisage the GTIP progressing.
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4
4.1
Panel of Expert Advisers deliberation
on transmission access
Description of the Transmission Access and Capacity project
The purpose of this sub-project is to ensure efficient arrangements for the optimal allocation, utilisation,
and pricing of gas transmission capacity.
As mentioned above and in the background documents, the genesis of this workstream was the
announcement by Vector in mid-2009 that the North Pipeline was constrained and that it would be unable
to issue additional reserved capacity. A consequence of this at the time was that larger end-users received
lower interest from retailers when tendering gas supply contracts and/or those offers were made
conditional on the procurement of capacity.
Because that capacity belonged to retailers, Gas Industry Co was concerned that, owing to the capacity
constraint, some end-users would not receive offers from other retailers and would have to accept
whichever offer included capacity. This was a potential competition concern – the conditions would be
present for retailers with capacity, and in circumstances that might be only one retailer, to set the terms of
the supply agreement. Because the capacity belonged to the incumbent retailer, the VTC arrangements
for grandfathering capacity exacerbated the problem: an incumbent retailer which lost the supply contract
with a large end-user could retain the ownership of the capacity. If that capacity was the only capacity
sufficient and available to supply an end-user, the customer could be locked-out of the market.
Gas Industry Co’s response was to make a Statement of Proposal in which the preferred option would
result in capacity ‘following the end user’ in the event of the user changing retailers on a constrained
pipeline. Submissions on, and industry workshops following, the Statement of Proposal caused Gas
Industry Co to establish the GTIP project. The PEA has been tasked with carrying forward this particular
sub-project to date.
The key deliverables for the PEA were agreed as:
Key deliverable 1: Assessment of current arrangements and identification of options (Access and Capacity
Pricing Options Paper)
Key deliverable 2: Analysis of submissions on the Access and Capacity Pricing Options Paper
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Key deliverable 3: Advice on development and analysis of shortlisted options (Decision Paper)
Key deliverable 4: Analysis of submissions on the Decision Paper
Key deliverable 5: Detailed implementation plan
4.2
PEA’s preliminary advice
In its first report, which met key deliverable 1 listed above, the PEA provided Gas Industry Co advice and
options for addressing concerns regarding the availability of gas transmission capacity in New Zealand.
The PEA examined current access arrangements for Vector’s transmission system from the perspective of
economic efficiency (allocative and dynamic). It was noted that capacity allocation mechanisms are most
important when capacity is scarce. Primary problems identified were:

grandfathering inhibits efficient allocation of capacity;

there is no price signal for scarce capacity;

there is low uptake of interruptible capacity arrangements;

the effectiveness of the secondary market is unclear: it is thinly traded and non-transparent;

there is a lack of transparency regarding the determination of the amount of commercial capacity; and

there is uncertainty about whether the regulatory incentives are adequate to encourage new pipeline
capacity to be built when it is efficient to do so.
The PEA made a straw-man proposal which it deemed commensurate with an evolutionary (as opposed to
a revolutionary) approach, the small size of the New Zealand market, and was low cost. The straw-man
proposal would target each of the problems listed above. The straw-man proposal would: water down
grandfathering rights by tapering down the percentage of grandfathering each year and auctioning the
remainder if demand for capacity was greater than supply1; encourage higher uptake of interruptible
contracts to manage demand peaks and supply-side disruptions; raise fixed charges and lower variable
charges; introduce a nominations regime; and improve the available information on capacity, utilisation,
and prices of capacity in the secondary market. Further analysis was required regarding the investment
uncertainty problem.
Submissions received
A wide range of submissions were received, but some common themes emerged:

there were some concerns that a vision for the future had not been presented;

some were dissatisfied with the problem definition;
1
Grandfathering would essentially continue at a rate of 100% of last year’s capacity on a pipeline with excess supply.
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186104.1 31 July 2017

the straw-man was the only option given considerable attention. Submitters suggested that other
options should have been considered, including a common carriage regime;

concerns that Vector’s point-to-point contract carriage regime may not allow for full utilisation of
physical pipeline capacity and that a shift to common carriage or the introduction of use-it-or-lose-it
rules may need to be considered; and

support for greater transparency.
4.3
Issues considered since preliminary report
The PEA discussed and amended certain aspects of its work plan in response to the submissions received.
Characteristics of an ideal gas transmission market
The PEA developed characteristics of an ideal gas transmission market which will be a useful check for
assessing whether future changes are in the right direction. The development of these characteristics was
in direct response to calls for a ‘long-term vision’ – by agreeing on these principles up-front, the industry
would be able to assess whether the PEA’s advice was consistent with the long-term vision.
The overarching characteristic is a goal of dynamic efficiency, which is to maximise efficiency in the
present and in the future. Beneath this overarching goal, there are a number of secondary characteristics
which are:

minimisation of costs (including transaction costs) of governing and operating efficient transport
arrangements;

maximum efficient use of physical capacity, particularly at times of capacity scarcity;

competition in related markets not distorted;

efficient investment in related markets is facilitated;

investment in pipelines is facilitated;

independence of functions in governance and operation;

appropriate operational and commercial transparency; and

arrangements evolve in a timely fashion to meet changing needs.
Best access regime for the future
The PEA considered which particular access regime was best suited to the future New Zealand gas market.
It concluded that there are too many uncertainties about the future gas market to reach a confident view
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about which transmission access regime design would best fit. In any case, incremental changes are
preferred to radical changes given the high cost of significant regime changes.
Revised problem definition
Given submitters’ views on the problem definition, the PEA carried out a gap analysis of current
arrangements versus the ideal characteristics. This exercise led to a revised problem definition as follows:
Current access arrangements do not provide for:

efficient allocation of scarce capacity, both physical and commercial;

price signals to facilitate efficient investment; or

transparency on physical state of the pipelines and contractual arrangements for the use of
pipelines.
Also:

grandfathering of capacity may reduce competition to supply downstream users;

unnecessary costs may arise from different Maui and Vector access arrangements;

end users do not need to secure long term capacity rights, as evidenced on the Maui pipeline; and

vertical integration demands special care that arrangements cannot favour affiliate businesses.
Transmission Access and Capacity Pricing project: Revised purpose statement
With all of the re-framing discussed above, the PEA considered that it was necessary to re-examine the
purpose statement for the transmission access and capacity pricing project. This was agreed as:
The purpose of the Transmission Access and Capacity Pricing project is to ensure that transmission
pipeline access arrangements are dynamically efficient. In particular, the arrangements should:

transparently provide for the efficient utilisation of physical transmission pipeline capacity ;

enable and facilitate efficient investment;

be harmonised across both transmission systems, to the extent that it is efficient; and

offer transport services that, to the extent that is efficient, meets the needs of users.
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4.4
April 2013 Workshop
Gas Industry Co hosted a workshop in April 2013. The workshop was an opportunity for the PEA to update
the industry on the PEA’s work and findings. Detailed presentations for the workshop are available on Gas
Industry Co’s website.
The workshop included three separate sections. First, Gas Industry Co provided an introduction to the
GTIP project including a recap on what was initially intended to be accomplished. We noted that the scene
had changed since the initial concerns about the capacity shortage emerged, particularly that all requests
for firm capacity were met in the current gas year. Second, Graham Scott and Lewis Evans (the PEA Chair
and PEA’s Economics Advisor respectively) provided their and the PEA’s assessments of the current status
of the Transmission Access and Capacity project. Some of the points made are worth repeating:

the Vector and Maui systems are both multilateral contracts suited for the current position of excess
capacity;

current Vector and Maui arrangements for interruptible contracts are reasonable for the present state
of throughput but not for any future throughput requiring congestion management;

future arrangements should include some (at least partial) provision for long-term security of access,
particularly for potential green-field investments. However, this must match with a solution to
congestion management;

the use of grandfathering contracts should be limited; and

ideally, both the Maui and Vector systems should publicly reveal the state of capacity and utilisation on
each pipeline, as well as the nature of contracts available and in place, including the prices of these.
The Vector system may be less transparent than the Maui system to reflect a different regime but
there ought to be some convergence between the codes in terms of transparency. If such transparency
would be limited by either the VTC or MPOC, the respective Code should be the thing to change.
The third part of the workshop provided an opportunity for the industry to discuss the topics presented
and some of the options available for making improvements for transmission capacity arrangements. In
general, the industry endorsed the GTIP carrying on to complete the incomplete projects. No further
options were raised by the industry so only the options presented at the workshop are assessed in section
5 below.
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5
Description of reasonably practicable
options
This section describes the options available for improving capacity arrangements for gas transmission
pipelines in New Zealand. This description is Gas Industry Co’s own – it is independent of the PEA’s advice.
5.1
Capacity follows end-user
This option was first proposed by Gas Industry Co in its Statement of Proposal on Retail Competition and
Transmission Capacity in late 2010. The option is simple in design: on a constrained pipeline, which would
be defined in a set of rules, a retailer who wins a contract to supply a large end-user receives an amount of
capacity to supply that customer. A ‘large end-user’ would be defined in relation to an annual demand
threshold which itself would be specified by Gas Industry Co based on the objective of facilitating
competition.
The amount of capacity to be transferred (by Vector) would be deduced firstly by Vector calculating a
‘Capacity Amount’ based on the historical daily gas demand of the large end-user over the period of peak
demand of the incumbent retailer on the constrained pipeline. A Reserved Capacity Increment (RCI) is then
agreed by Vector and each retailer (other than the incumbent) that is bidding to supply the large end-user.
The RCI is the amount of incremental capacity a retailer will require should its bid be successful. If the
incumbent retailer loses the tender a switch takes place. On the switch date, Vector transfers the RCI from
the old retailer to the new retailer. Any difference between the RCI and the Capacity Amount is rescinded
to Vector. Retailers make no payments to each other in relation to a capacity transfer.
At the time, this option was the preferred option in the Statement of Proposal. It was assessed as
delivering a ‘good’ rating for the promotion of competition, a ‘moderate’ rating for consistency,2 a ‘very
good’ rating for timeliness of implementation, ‘moderate’ for preservation of existing contractual rights, a
‘good’ rating for the avoidance of shocks on end-users and retailers, and a ‘very good’ rating for the
curtailment criterion.3
More detail on the option itself is available in the Statement of Proposal.
2 Consistency
3
was defined as…
Curtailment was defined as…
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5.2
Capacity auctioning
Capacity auctioning was one of the key components of the PEA’s proposal. We provided an overview of
the PEA’s straw-man proposal in section 4.2. For the full proposal, see the paper here.
Of course, an option for capacity auctioning need not be limited to the PEA’s advice. This section briefly
outlines capacity auctioning at a more general level. Before discussing capacity auctioning, it is useful to
outline the capacity reservation process used by Vector to allocate capacity to its pipeline users.
Capacity reservation process
At present on the Vector system, capacity is primarily allocated on a grandfathered basis which means a
Shipper is entitled to the same amount of capacity in the following year that it used in the current year. To
be clear, the type of capacity referred to here is reserved capacity: Vector will not issue reserved capacity
which exceeds the physical capacity of a pipeline. Capacity must be paid for each year by Shippers. Any
capacity that is not grandfathered may be reserved by way of the capacity reservation process.
By 5pm on the second Friday of August in each year, a Shipper notifies Vector of its expected reserved
capacity requirements between each Receipt Point and each Delivery Point for the following gas year. A
process follows whereby Vector confirms a Provisional Reservation Requirement for each Shipper, the
Shipper then confirms its reserved capacity requirements, and then Vector confirms the extent to which
the reserved capacity requirement is accepted.
If there is insufficient transmission capacity in a pipeline to meet the confirmed reservation requirements
of all Shippers then Vector will first allocate the same amount of reserved capacity to each of the Shippers
that had capacity on the pipeline, provided the amount is less than or equal to the reserved capacity in the
previous year. Vector will then allocate any remaining capacity in a pipeline to Shippers based on the
proportion that the Shipper’s request for increased capacity from the previous year on that pipeline bears
to the aggregate of all Shippers’ requests for increased capacity from the previous year on that Pipeline.
The VTC also sets out processes for the reservation of additional capacity during a year and for
cancellation of capacity during a year. Shippers may transfer Reserved Capacity to other locations or to
another Shipper, subject to Vector’s approval.
Problems with capacity reservation process
The problem with this approach of grandfathering capacity, from an economic perspective, is that the
value of capacity is uncertain and non-transparent. This means that, particularly if a pipeline is constrained,
capacity is unlikely to be efficiently allocated amongst Shippers. This situation was played out after
Vector’s announcement in 2009 that it would be unable to issue additional reserved capacity. It became
apparent that the VTC arrangements would essentially lock-in the existing Shippers’ reserved capacities (if
those Shippers wished to roll-over that amount) and the only way for a competing retailer or new entrant
to access capacity on the North Pipeline would be for such a retailer to seek a Reserved Capacity trade.
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The value of capacity in such a trade would be uncertain to the prospective entrant and the incumbent
would enter such a negotiation in a dominant position.
Capacity auctioning
Capacity auctioning would be one way to solve the problem discussed above. Without discussing the
specifics of the design of the auction, a price ought to be struck which would ensure those who value the
product the highest would receive an allocation, provided they were willing and able to pay for it. This
would be particularly useful where the product was scarce – as was the case for the North Pipeline. This
allocation by price would in theory improve the efficiency of the capacity allocation process.
If capacity auctioning was a preferred option then more analysis could be carried out on the preferred
auction design (including a more detailed proposal based on the PEA’s initial advice). That analysis could
consider some lessons from capacity auctions used internationally, such as in the Victorian (Australia)
market or in the United Kingdom.
5.3
Convergence
[Delete this section and replace with a note referring to the PEA’s report?]
Convergence, as discussed by the PEA, is the idea that the two transmission systems should merge where
they have common processes. The industry’s preferred arrangements appear to be towards a common
carriage arrangement which is more similar to the arrangements for the MPOC than the VTC.
At the April 2013 workshop, it was discussed that convergence could include:



common administrative arrangements, for example:
o
dispute resolution arrangements:
o
code change arrangements:
o
technical standards;
common transportation concepts, for example:
o
extending operational balancing agreements to all receipt and delivery points:
o
equating Authorised Quantity (AQ) and term capacity:
o
a common nominations regime across both pipeline systems:
o
common curtailment arrangements on both pipelines; and
a common IT system, such as a less customised system of OATIS.
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An idea for implementing convergence is to create a new document, perhaps an all-of-industry-code,
which would carve out those aspects of the MPOC and the VTC deemed to fit the convergence mould.
5.4
Integration
This option is about a wider-ranging reform to the New Zealand gas market. Rather than making piecemeal changes to current transmission codes or carving out aspects of each to be shared in a single code,
integration would likely do away with the MPOC and the VTC and replace them with national gas
transmission rules. Additional features could also be added, including specified markets for balancing gas
transactions and secondary and/or futures trading of products (including gas).
Such an option would more closely align the gas market with the procedures for the New Zealand
electricity market. In essence, the transmission system would be split up into many entry/exit points
(‘nodes’) and there would be a market clearing mechanism for each node taking into account temporal
supply and demand at regular specified intervals. Thus, the gas market would transition to a spot market.
A common criticism of such a wide-ranging reform from the incumbent industry is that such changes are
not commensurate with the small scale of the New Zealand system and/or that implementing such a
system would be too costly. [Discuss Victorian example]
Pros/cons of this option [TBC]
Q1:
Do you have a preferred option from those discussed above? If so, do you prefer your option to the one
put forward by the PEA? Please provide full reasoning.
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6
Proposed evaluative framework
Gas Industry Co intends to consider submissions from the industry on the PEA’s paper and on the options
outlined in section 5. We will then assess the submissions against the framework outlined below.
Regular Gas Act objectives
In our normal policy development, we would consider any options against the objectives listed in the Gas
Act. We would also assess the costs and benefits of the options and whether they would be achievable
without having to make regulations.
PEA’s characteristics of an ideal gas market
Given the considerable work of the PEA, it makes sense to also factor in the characteristics of an ideal gas
market that were agreed by PEA members (as discussed in section 4.3 above).
Gas Industry Co’s proposed approach to evaluating the options and submissions
The question is: which of these should determine the evaluation for the preferred option or options? We
have cross-referenced the Gas Act objectives and the PEA’s characteristics of an ideal gas market. This
assessment shows that there is a complete overlap between each set of criteria (see the figure below).
The implication is that the evaluation at the next stage of this workstream could include either or both of
the frameworks mentioned above. Because there is a complete overlap, our preference is to consider the
preferred option or options against the Gas Act objectives. This is primarily because, should this
workstream eventually result in having to make a recommendation to the Minister, such a
recommendation would have to be consistent with the Gas Act. Therefore, it makes sense to use that
framework as early as possible.
We welcome submitters’ views on this.
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Cross referencing evaluation criteria with Gas Act objectives
Ideal market characteristics
1. Dynamic efficiency
Gas Act 1992 s43ZN Objectives
ensure that gas is delivered to existing and new customers in
a safe, efficient, and reliable manner (s43ZN(a))
3. Efficient use of physical assets
the facilitation and promotion of the ongoing supply of gas to
meet New Zealand’s energy needs, by providing access to
essential infrastructure and competitive market
arrangements: (s43ZN(b)(i))
4. Related market competition not distorted
barriers to competition in the gas industry are minimised
(s43ZN(b)(ii))
2. Minimum governing and operating cost
5. Related market investment facilitated
incentives for investment in gas processing facilities,
transmission, and distribution are maintained or enhanced
(s43ZN(b)(iii))
6. Pipeline investment facilitated
7. Independence of pipeline business
8. Operational/commercial transparency
delivered gas costs and prices are subject to sustained
downward pressure (s43ZN(b)(iv))
risks relating to security of supply, including transport
arrangements, are properly and efficiently managed by all
parties (s43ZN(b)(v))
9. Able to evolve in timely fashion
consistency with the Government’s gas safety regime is
maintained (s43ZN(b)(vi))
Q2:
What are your views on the appropriate evaluation methodology for assessing the preferred option or
options that result from this paper and the PEA’s second piece of advice to Gas Industry Co?
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7
Way forward for the GTIP
There are several projects still to be completed under the GTIP. The industry endorsed the ongoing
programme at the April workshop. We therefore intend to continue working on the outstanding GTIP
projects, as set out below.
Market Projects
The Transmission Pricing and Access project is the main focus of this paper and the PEA’s second piece of
advice to Gas Industry Co. The outstanding tasks for this project are:
1. to analyse submissions received on the PEA’s report and on this paper;
2. to agree on the preferred option and how to implement it; and
3. to implement the option.
Though originally slated to be achieved by mid-2013, we consider that all of the steps above can be
achieved by mid-2014. This may require the on-going involvement of the PEA.
As discussed above, the Gas Trading Arrangements project is on hold until the outcomes of the
Transmission Pricing and Access project are clarified. We will revisit the purpose of this project at the
completion of the Transmission Pricing and Access project, however it seems as though this project will no
longer be required at this point.
Regulatory Project
As discussed above, the regulatory project has not yet commenced. A detailed project plan will be
formulated at the completion of the Commerce Commission’s set-up of the input methodologies. We
expect that our project will begin at some point in the second half of 2013.
Q3:
Do you agree with the proposed way forward for the GTIP?
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Glossary
GTIP
Gas Transmission Investment Programme
MPOC
Maui Pipeline Operating Code
OATIS
Open Access Transmission Information System
PEA
Panel of Expert Advisers
RCI
Reserved Capacity Increment
VTC
Vector Transmission Code
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Gas Transmission Investment Programme, Status and Development - July 2013
Submission prepared by:
QUESTION
(company name and contact)
COMMENT
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31 July 2017