some worked examples of gtac assessments, using the 3 November 2017 gtac Ian Wilson

Purpose Explain Gas Industry Co’s proposed GTAC assessment approach Illustrate approach with indicative examples using 3 November GTAC Help First Gas and other stakeholders focus on issues of significance Give opportunity for stakeholders feedback This is not an assessment of draft GTAC Gas Industry Co

GTAC assessment approach bottom up Compare specific aspects, e.g. balancing provisions against Gas Act and GPS objectives Step1 top down Consider how GTAC performs against each objective of the Gas Act and GPS Step 2 Step 3 Assess whether new GTAC as a whole is materially better than the current terms and conditions for access to and use of gas transmission pipelines Gas Industry Co

Step 1 - Bottom-up analysis of GTAC – some examples Gas Industry Co

Gas Act and GPS objectives For a concise Power Point presentation we have bundled the objectives under 5 headings (see table below). The bundled objectives referred to in this presentation do not include all of the matters in the Gas Act and GPS that GIC will have regard to during the formal GTAC assessment. For reference, the full text of these provisions is provided in the Supporting Information at the end of this presentation Efficiency Reliability Safety Environment Fairness Gas Act s43ZN(a) & s43ZN(b)(i-iv) s43ZN(b)(v) s43ZN(b)(vi) GPS Item 12(a-d) Item 9 & 12(e) Item 9 Gas Industry Co

Example 1 - Standard services, products and zones Summary arrangements MPOC Basic product: Daily Approved Nominations at each relevant Receipt Point (RP) or Delivery Point (DP) Other products: Authorised Quantity, a zone based priority right (never used and not fully detailed in the code) Noms are required at all RPs and DPs (including interconnection points between the Maui and non-Maui pipelines), on the same cycles as proposed by the GTAC. VTC Basic product: Annual blocks of Maximum Daily Quality (MDQ) entitlement at each relevant RP to DP Other products: Supplementary Agreements (including fixed term and interruptible agreements), at TSP’s discretion Noms are not required at most DPs. However, noms are required at Pokuru #2 (s5.6), and at interconnections with the Maui pipeline if they are Displaced Gas Nominations (s9). Noms may be required at large meter stations (>1TJ/day) (s5.1), but generally are not. Gas Industry Co

Example 1 - Standard services, products and zones (continued) Summary arrangements (continued) GTAC Basic Product: Daily Nominated Capacity (really Daily Approved Nominations, as in the MPOC) at each relevant RP, DP zone, Constrained DP and Dedicated DP Other products: Priority Rights (PRs) at auction for Constrained DPs only. Supplementary Agreements (SAs), and Interruptible Agreements (IAs), at TSP’s discretion Noms are required at RPs (s4.1), delivery zones (s4.3), and Individual DPs (ie where there is an OBA (s4.5), Congestion (s4.6), or a single user (s4.4)) Gas Industry Co

Example 1 - Standard services, products and zones (continued) Efficiency – are the arrangements more pro-competitive? Is all unused capacity available without discrimination?  Each day, receipt noms will be approved/curtailed by Interconnected Party (IP), delivery noms will be approved/curtailed by TSP to the amount of Available Operational Capacity (AOC) If Congestion, TSP will allocate AOC: noms backed by PRs first, remainder pro-rata to noms (and Shippers warrant not to over-nominate) Capacity cannot be hoarded for longer than a day, and published running mismatch positions would make systematic over-nomination transparent Are barriers to entry lower?  New entrant can book capacity just for the day ahead, no need not buy annual capacity Has information transparency improved?  All new SAs, IAs, and Interconnection Agreements (ICAs) will be published in full Running mismatches will be published Gas Industry Co

Example 1 - Standard services, products and zones (continued) Efficiency – do the arrangements better meet market participant needs? Can service be better tailored to a user’s daily demand profile?  Noms can be modified at each cycle (as under MPOC), no need to transfer capacity around (as under VTC) Is the service simpler when the probability of constraint is low?  or  Only zonal noms required unless probability of constraint is high (congested DPs), or where there is an opportunity to match the demand of single large user (dedicated DPs). But this is more than is currently required under the VTC [?] Is highest value user better able to get priority to scarce capacity? See Congestion Management analysis Gas Industry Co

Example 1 - Standard services, products and zones (continued) Efficiency – do the arrangements better meet market participant needs? (cont.) Are special circumstances better provided for in special arrangements  SAs (eg for bypass opportunities), IAs, and ICAs are available Continuing high level of TSP discretion Are a broader range of service durations available, if required?  As now, only in limited circumstances via PRs, SAs, and ICAs Reliability - Is the risk of interruption or contingency reduced? Is scarcity better signalled in advance?  Notifications of anticipated Congestion will be published DPs will be taken out of Zone when congestion is anticipated Gas Industry Co

Example 1 - Standard services, products and zones (continued) Fairness – are the arrangements more fair to market participants? Is there better oversight of markets, if required?  or  Auction arrangements are new, and partly defined outside code. This creates uncertainty and increased risk of unanticipated outcomes. Are there improved checks and balances on unreasonable prices? See Fees and Charges analysis Is there better notice of price changes? See Fees and Charges analysis Safety - is the risk of harm to people or property reduced?  Environmental – are environmental outcomes improved?  Gas Industry Co

Example 2 - Congestion management Summary arrangements MPOC Primary transmission service is based on approved daily noms If physical congestion occurs on a day, TSP may reduce noms, while respecting priorities for service: 1st balancing gas, 2nd category A noms, 3rd category B noms based on pro- rata net historic usage. [s8.20-8.28] Category A noms are those subject to Authorised Quantities (AQ). TSP required to obtain approval from Gas Industry Co for queuing rules before issuing AQ [such rules have not been proposed or approved] VTC Annual Reserved Capacity (CR) is primary transmission service. Contractual congestion may arise if shippers seek CR that exceeds available pipeline capacity Shippers have a right to CR up to amount held in previous year [s4.5] If physical congestion occurs (i.e. insufficient capacity to flow desired volume on the day), TSP may reduce gas receipts, flows or deliveries “on a fair basis” [s10.1(g)] If such action is required, TSP will use all reasonable endeavours to first curtail or shutdown gas receipts subject to an Interruptible Agreement Gas Industry Co

Example 2 - Congestion management (continued) Summary arrangements (continued) GTAC TSP will use reasonable endeavours to predict where Congestion is most likely to occur [s10.1] TSP may seek Interruptible Load, and may offer Interruptible Agreements [s3.5-3.12] TSP will offer Priority Rights (PRs) to DNC for Congested DPs, up to prevailing amount of AOC [s3.13] Number of PRs offered and the PR term will be determined by the TSP and notified at least 20 business days prior to an auction [s3.18] PR auction rules (and objectives) will be developed outside GTAC. PR auctions will have single clearing price for each DP [s3.11]. PRs are tradeable, and Gas Industry Co

Example 2 - Congestion management (continued) Efficiency – do congestion management arrangements better promote economic efficiency? Have users more flexibility to select their preferred priority during congestion?  or  (more analysis required) As now, SAs, and IAs only offered at TSP’s discretion Shipper can now bid for PRs Priority between SAs, IAs and PRs unclear Is scarce capacity better allocated to users who value it the most?  or  (more analysis required) Auction mechanism is positive in principle, but unclear how much capacity might be offered via IAs and SAs and whether PRs will be actually be picked up by those who value them the most Auction design will be key to outcome, but is outside the code Gas Industry Co

Example 2 - Congestion management (continued) Efficiency – do congestion management arrangements better promote economic efficiency? (continued) Do arrangements better ensure available capacity will be fully utilised in the event of physical congestion?  Capacity is more likely to be fully utilised if physical congestion arises because TSP would have more comprehensive nomination information Do arrangements provide better signals to TSP to inform decisions on capacity investment  TSP will get price signal from auction and from requests for SAs and/or ICAs. But, price signal from auctions may be of limited value if term of PRs is short Are arrangements more cost effective ,  or  (more analysis required) Gas Industry Co

Example 2 - Congestion management (continued) Reliability – Is the risk of interruption or contingency reduced? Are there greater incentives to reduce demand?  Fairness – Are the arrangements more fair to market participants? Are new entrants treated more equally?  Grand-fathering is removed, so no bias to incumbents having first call on capacity Safety - is the risk of harm to people or property reduced?  Environmental – are environmental outcomes improved?  Gas Industry Co

Example 3 - Fees and charges (F&C) Summary arrangements MPOC Transmission fees are volume or volume/distance based. Peaking charges also apply. Accumulated Excess Operational Imbalances are cashed out daily at a market related price. TSP may change F&Cs at no more than 12 monthly intervals, with at least 60 days written notice, in accordance with tariff principles in Sch 10. Sch 10 principles provide for capital related costs to be recovered by $/GJ.km charges, and opex from $/GJ charges. Cash-out prices are determined as set out in s12. Peaking prices are determined as set out in s13. Setting of fees is subject to general Code dispute resolution provisions. VTC Transmission fees are volume and capacity-based (related to location), with additional charges for overruns. Balancing and peaking pool (BPP) cost allocations are separate. TSP may propose fee and charge adjustments in June for application in next transmission year. BPP allocations are as set out in s8. Gas Industry Co

Example 3 - Fees and charges (F&C) Summary arrangements VTC (continued) Fee proposals need to be in accordance with prevailing pricing methodology and the BPP rules [s8] Fees can be challenged (but not the methodology itself) under dispute resolution procedures [s15.7] GTAC DNC fees are volume and zone based (broadly distance related). Overrun and Underrun charges, Hourly Overrun charges, Over-flow charges, and Excess Running Mismatch (ERM) fees also apply. In addition, cash-outs of ERM may occur when TSP takes a balancing action Fee structures and levels are determined annually by TSP, based on its then current Gas Transmission Pricing Methodology (GTPM – not part of Code) and Commerce Commission pricing principles (to the extent practicable) [s11.15] Neither GTPM nor setting of any transmission charge is subject to dispute resolution under the Code [s11.17] Gas Industry Co

Example 3 - Fees and charges (continued) Efficiency – do F&Cs better promote economic efficiency? Will prices better reflect economic principles (cost reflective, provides price signals to indicate scarcity, allocate any congestion rents in a way that does not distort behaviour etc) ?  At high level, GTAC pricing provisions are similar to those in MPOC and VTC. GTAC provides for prices to be established for major service types, and for TSP to set prices based on published principles Principles are outside the Code, like VTC, but unlike MPOC, where the principles are a schedule to the Code (although these are relatively formulaic and not framed in efficiency terms) While priority rights should set a more efficient price where capacity is constrained, uncertainty about the design and operation of the market suggests that the risks of unexpected outcomes may be significant, and we should be cautious about assuming an efficiency improvement. Gas Industry Co

Example 3 - Fees and charges (continued) Efficiency – do F&Cs better promote economic efficiency? (continued) Is there better flexibility for TSP to adjust prices if needed?  F&Cs can only be reset annually once they are posted, so TSP can’t respond to any issue until 12 months later. However, this is the same as in the MPOC. Are there improved checks and balances around F&C changes  Minimum notice period is shorter at one month (cf. 4 months for VTC and 60 days for MPOC) and there is no right to invoke dispute provisions to challenge fee levels TSP is subject to price control and no reason to structure F&Cs inefficiently… but higher risk of unintended outcomes if users have inadequate notice and can’t challenge proposals TSP can unilaterally decide to change make-up of delivery zones Gas Industry Co

Example 3 - Fees and charges (continued) Reliability – Is the risk of interruption or contingency reduced?  Fairness – Are the arrangements more fair to market participants? Is there less scope to vary fees  As now, most fees are determined at TSPs discretion (although the new balancing incentive fees are “hard-coded”) Is there more opportunity for F&Cs to be challenged?  Setting of fees under MPOC and VTC is subject to dispute resolution provisions. GTAC excludes these issues. This causes a potential concern re procedural unfairness (although concern is partially mitigated because pipeline is subject to price control) Safety - is the risk of harm to people or property reduced?  Environmental – are environmental outcomes improved?  Gas Industry Co

Step 2 - Top-down analysis of GTAC – illustration Gas Industry Co

Top-down approach Efficiency Reliability Safety Environment Fairness Standard services products and zones No clear change in fairness  … Congestion management Grand-fathering is removed  Fees and charges No right to challenge process  Looks at how GTAC performs against each objective in Gas Act and GPS Gas Industry Co

Step 3 – Overall assessment of GTAC Gas Industry Co

Overall assessment The overall assessment will make judgements about significance of each area of gain / concern – taking account of their importance in terms of the Gas Act and GPS i.e. it will consider Performance against each objective in Gas Act and GPS Relative significance of improvements / detriments Gas Industry Co

Supporting information Gas Industry Co

Objectives: Efficiency Gas Act s43ZN(a) the principal objective is to ensure that gas is delivered to existing and new customers in a safe, efficient, and reliable manner Gas Act s43ZN(b)(i-iv) 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 barriers to competition in the gas industry are minimised incentives for investment in gas processing facilities, transmission, and distribution are maintained or enhanced delivered gas costs and prices are subject to sustained downward pressure risks relating to security of supply, including transport arrangements, are properly and efficiently managed by all parties consistency with the Government’s gas safety regime is maintained Gas Industry Co

Objectives: Efficiency (continued) GPS item 12(a-d) Energy and other resources used to deliver gas to consumers are used efficiently Competition is facilitated in upstream and downstream gas markets by minimising barriers to access to essential infrastructure to the long-term benefit of end users The full costs of producing and transporting gas are signalled to consumers The quality of gas services where those services include a trade-off between quality and price, as far as possible, reflect customers’ preferences Gas Industry Co

Objectives: Reliability Gas Act s43ZN(a) the principal objective is to ensure that gas is delivered to existing and new customers in a safe, efficient, and reliable manner Gas Act risks relating to security of supply, including transport arrangements, are properly and efficiently managed by all parties Gas Industry Co

Objectives: Fairness GPS item 9 It is also the Government’s objective that Gas Industry Co. takes account of fairness and environmental sustainability in all its recommendations. To this end, the Government’s objective for the entire gas industry is as follows: To ensure that gas is delivered to existing and new customers in a safe, efficient, fair, reliable and environmentally sustainable manner. Gas Industry Co

Objectives: Safety Gas Act s43ZN(a) Gas Act s43ZN(b)(vi) the principal objective is to ensure that gas is delivered to existing and new customers in a safe, efficient, and reliable manner Gas Act s43ZN(b)(vi) consistency with the Government’s gas safety regime is maintained Gas Industry Co

Objectives: Environmental GPS item 9 & 12(e) It is also the Government’s objective that Gas Industry Co. takes account of fairness and environmental sustainability in all its recommendations. To this end, the Government’s objective for the entire gas industry is as follows: To ensure that gas is delivered to existing and new customers in a safe, efficient, fair, reliable and environmentally sustainable manner. The gas sector contributes to achieving the Government’s climate change objectives as set out in the New Zealand Energy Strategy, or any other document the Minister of Energy may specify from time to time, by minimising gas losses and promoting demand-side management and energy efficiency. Gas Industry Co