Transmission Pricing Methodology 1 May 2019 1
Presentation Outline Indicative Timing 1. Introduction 10 min 2. Commerce Commission Pricing Framework 15 min 3. Calculating First Gas Revenue 20 min 4. How we charge under GTAC 20 min 5. Calculating our Prices 45 min 6. Pricing Outcomes 45 min 7. Consultation Process 15 min 8. Wrap up 10 min 2
Introduction What we want stakeholders to get out of today’s session: 1 Understanding of the First Gas revenue framework 2 Knowledge of how we calculated the prices 3 Understanding of how pricing will change and affect them 4 Opportunity to clarify any points they need to on pricing to inform their submission Overall objective: We get good quality submissions on the TPM that contribute positively to our pricing for the 2019/20 gas year 3
Commerce Commission Pricing Framework 4
Commerce Commission Pricing Framework • First Gas transmission falls under Part 4 of the Commerce Act 1986 • Since October 2017 First Gas transmission has been operating under a pure revenue cap: - Default Price-Quality Path (DPP) sets maximum revenue that First Gas is allowed to earn each year - Revenue is cap is calculated based on the allowable return from capital invested in our infrastructure - First Gas can wash-up under/over recovery in subsequent years (up to 20% of revenue cap) • First Gas must demonstrate compliance with this regime through the following documents: - Transmission Pricing Methodology - Price-Quality Compliance Statements (before start and after end of each gas year) • We must also disclose the following: - Asset Management Plan (before start of each gas year) - Financial and non-financial information disclosures (after end of each gas year) - Capacity and Peak Flow Disclosure - Non-standard Contract Disclosure Find out more on these disclosures and documents here: https://firstgas.co.nz/about- us/regulatory/transmission/ 5
Pricing Principles Prices are to signal the economic costs of service provision, by: (a) being subsidy free, that is, equal to or greater than incremental costs and less than or equal to standalone costs, except where subsidies arise from compliance with legislation and/or other 1 regulation; (b) having regard, to the extent practicable, to the level of available service capacity; and (c) signalling, to the extent practicable, the effect of additional usage on future investment costs. Where prices based on ‘efficient’ incremental costs would under-recover allowed revenues, the 2 shortfall is made up by prices being set in a manner that has regard to consumers’ demand responsiveness, to the extent practicable. Provided that prices satisfy (1) above, prices are responsive to the requirements and circumstances of consumers in order to: 3 (a) discourage uneconomic bypass; and (b) allow negotiation to better reflect the economic value of services and enable consumers to make price/quality trade-offs or non-standard arrangements for services Development of prices is transparent, promotes price stability and certainty for consumers, and 4 changes to prices have regard to the effect on consumers. 6
Calculating First Gas Forecast Allowable Revenue Forecast Revenue from Prices ≤ Forecast Allowable Revenue This equals the: This equals the: sum of each price multiplied by each forecast net allowable revenue corresponding forecast Quantity: + forecast pass-through and recoverable costs, DNC including overruns/underruns, peaking which includes: charges, auto-nomination charges and Rates and levies (Commerce Act, Industry overflow charges levies) + Non-Standard Pricing including ICA revenue Balancing gas costs and revenues and SA revenue ERM charges Mokau Compressor fuel gas costs This is our Target Revenue for the pricing CAPEX Wash-up Adjustment year. + opening balance of the wash-up account This is our Forecast Allowable Revenue for the pricing year. 7
GY 2019/20 Forecast Allowable Revenue Revenue Element Total Forecast net Allowable Revenue $126,456,000.00 Pass through costs Rates $1,673,596.12 Commerce Act Levies $832,268.00 Industry Levies $33,000.00 Subtotal Pass-through Costs $2,538,864,.12 Recoverable costs Balancing Gas costs $231,237.47 Mokau Compressor fuel gas costs $1,779,547.18 ERM Charges $468,065.08 Capex wash-up adjustment recoverable costs $755,408.70 Subtotal Recoverable Costs $3,234,258.43 Revenue wash-up $(718,770.66) Forecast Allowable Revenue $131,504,613.97 8
Balancing and Pass-through Cost Assumptions Rates and levies Balancing gas costs and revenues • Property rates from GY18 adjusted for CPI • Based on volume of gas bought and sold during GY18 • Commerce Act Levies the same as the GY18 • Priced on First Gas average buy/sell price for the first two months of 2019 • Utilities Disputes Levies based on values from 2018 revision • Reduced by 50% to reflect stronger balancing incentives under the GTAC Excess Running Mismatch Charges Mokau compressor fuel gas costs • Volumes based on absolute value of cash • Average volumes from GY17 and GY18 out gas bought and sold each year during • Average market price for the first two the period 2016 – 2018 months of 2019 • Reduced by 50% to reflect stronger balancing incentives under the GTAC • ERM Fee of $0.50/GJ 9
Balancing and Pass-through Cost Assumptions Revenue cap wash-up • Published as part of First Gas’ Default Price Path (DPP) Compliance Statement • Time value of money adjustment as prescribed in the DPP Determination is applied to the calculated raw amount. CAPEX wash-up adjustment • Difference between the revenues for a DPP regulatory period using the actual values of commissioned assets for a prior regulatory period, and the revenues using forecast commissioned assets applied by the Commission when setting prices • Ensures regulated businesses are in approximately the same position (in terms of allowable revenue), had the actual opening Regulated Asset Base been known when revenue for the DPP period were reset 10
How we charge under the GTAC 11
GTAC Pricing - Transmission • Overrun charge at DNC • Standard charge for Daily Nominated Fee x 1.5 Overrun/Underrun delivery of gas to a Capacity for Charge • Underrun charge at DNC delivery point or zone Transmission Fee x -0.5 • Mass market load • Peaky load with hourly Automated profile • Average of other load Nominations Peaking charge overrun/underrun across • Mirrors overrun/Underrun Charge system Charge • Exceeding physical • PR Auction determines Priority Rights Overflow Charge capacity of a delivery price Charges point • Rebated within year • Paid to Interruptible load Congestion • Supplementary Capacity Non-standard Management • Collected from shippers - Fixed/Throughput Fees charges Charge at beneficiary DPs • Interconnection Fees 12
GTAC Pricing – Non-Transmission Balancing Gas Excess Running • Pass-through of Costs/Credits Mismatch Charge balancing gas bought/sold to those with ERM in direction of sale • $0.5/GJ for Running • Passed through at cost Mismatch over tolerance • Doesn’t always clear a • No change in title of gas Running Mismatch position • Not all gas will be able to be passed through OBA Parties pay Overrun/Underrun and Balancing charges for their points 13
GTAC Pricing Zones • Grouping delivery points into zones: - Geographically contiguous areas - Information requirements for operations - Location in relation to infrastructure (e.g. compressor stations) - Individual points on Maui line to maintain revenue - Provide the basis for aligning pricing from an area • 16 delivery zones: - Excludes points on supplementary agreements • 4 individual points: - Bertrand Road (Methanex) - Faull Road (Methanex) - Huntly Power Station (Genesis Energy) - Ngatimaru Road (Delivery) (Methanex) 14
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