Decision
APT Petroleum Pipelines Limited
Roma to Brisbane Pipeline
2012-13 carbon cost pass through
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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May 2014
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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© Commonwealth of Australia 2014
This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be
reproduced without permission of the Australian Competition and Consumer Commission. Requests
and inquiries concerning reproduction and rights should be addressed to the Director Publishing,
Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.
AER reference: D14/44935
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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1
Summary
APT Petroleum Pipelines Limited (APTPPL) is the owner and operator of the Roma to Brisbane
Pipeline (RBP), a gas transmission pipeline in Queensland. The RBP delivers natural gas to
industrial, commercial and residential consumers from its sources in central Queensland.1
On 14 February 2014, APTPPL applied to us for a negative carbon cost pass through of $397 678
($nominal) for carbon price mechanism costs it did not incur for 2012-13.2
The 2012-13 year was the first year of the carbon price mechanism’s operation. Under the carbon
price mechanism, relevant entities acquit their liabilities to the Clean Energy Regulator in the
financial year following the year to which the liabilities relate. In this case, the carbon liability paid
by APTPPL in January 2014 relates to carbon emitted in 2012-13.
We have determined that a carbon cost pass through event has occurred. However, we have
adjusted the proposed cost pass through amount for inflation and to incorporate the time value of
money. The result is that $427 391 ($Jun2014) will be returned to customers through lower
reference tariffs in 2014-15.3
1
Starting at Wallumbilla, near Roma, the RBP’s main line is around 440 km long, terminating at Gibson Island in
Brisbane’s port/industrial area.
2
APTPPL, Access arrangement pass through application - RBP carbon cost pass through application, February 2014,
p 3.
3
For regulated gas transmission pipelines, we determine a reference price for a reference service. That is, a service
likely to be sought by a significant part of the market. The pipeline service provider then negotiates with prospective
customers the terms and prices of specific services they require, on the basis of the reference service and reference
price.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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Table 1 - Roma to Brisbane Pipeline – negative carbon cost pass through calculation
Forecast allowance
($Jun2013)4
$595 501
4
Actual costs ($Jan2014)
$197 823
Approved negative cost pass
through amount ($Jun2014)
$427 391
APTPPL, Access arrangement pass through application - RBP carbon cost pass through application , February 2014,
p2. APTPPL note that the forecast allowance in the access arrangement was annotated in $June 2012 but was
actually calculated using a fixed carbon price for 2012-13 i.e. the forecast allowance already adjusts for inflation for
one year and so the forecast allowance is effectively in $June2013.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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2
Background
The Australian Energy Regulator is responsible for the economic regulation of covered natural gas
distribution and transmission pipelines in all states and territories except Western Australia. Our
functions and powers are set out in the National Gas Law (NGL) and the National Gas Rules
(NGR).
The Clean Energy Legislative Package established an explicit carbon price in Australia. The carbon
pricing mechanism requires liable entities to pay for each tonne of carbon pollution emitted from 1
July 2012.5
Carbon (including carbon equivalent) emissions are created from natural gas transmission pipelines
in two ways: fugitive gas emissions and combustion emissions.6 The former is gas lost from
pipelines through small leaks in the gas network. Combustion (or fuel gas) emissions are released
when gas is consumed in compressor stations along the pipeline to operate the pipeline.
Under the Clean Energy Act 2011, operators of facilities that meet or exceed emissions of carbon
dioxide equivalence (CO2-e) of 25 000 tonnes in a financial year, are liable under the carbon
pricing mechanism.7 APTPPL is a liable entity.
In our access arrangement final decision, we determined that APTPPL can recover its carbon
related costs in full.8 To give effect to this, we approved a carbon cost component in APTPPL’s
5
The central piece of legislation in the Clean Energy Legislative Package, the Clean Energy Act 2011, received Royal
Assent on 18 November 2011, with the substantive provisions of the Act taking effect from 2 April 2012.
6
Natural gas contains carbon, methane and nitrous oxide. While all three substances are considered greenhouse
gases, the contribution of substances other than carbon is commonly converted into a ‘carbon equivalent’ value.
Liability for greenhouse gas emissions is commonly referred to as a carbon liability.
7
Clean Energy Act 2011 (Cth) s 20; Clean Energy Regulator website: www.cleanenergyregulator.gov.au
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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overall opex allowance in the access arrangement for the RBP.9 This was calculated using forecast
carbon cost estimates.10 We also approved a carbon cost pass through which trues up differences
between actual carbon costs incurred and the forecast costs included in the opex allowance.11 We
specifically required that APTPPL must seek a negative cost pass through in the event that a
negative carbon cost pass through event occurs.12
8
AER, APT Petroleum Pipeline Pty Ltd, access arrangement final decision, Roma to Brisbane pipeline 2012-13 to
2016-17, August 2012, p. 110.
9
‘Opex’ refers to the operating costs incurred by network service providers. An ‘opex allowance’ is the regulated
revenue we determine a network service provider may recover from its customers to cover the efficient cost of
providing a reference service.
10
AER, APT Petroleum Pipeline Pty Ltd, access arrangement information, effective 1 September 2012 – 30 June 2017,
August 2012, table 5.1.
11
AER, APT Petroleum Pipeline Pty Ltd, access arrangement (including terms and conditions), effective 1 September
2012 – 30 June 2017, August 2012.
12
AER, APT Petroleum pipeline Pty Ltd, access arrangement final decision, Roma to Brisbane pipeline 2012-13 to
2016-17, August 2012, p. 44.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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3
Application
APT Petroleum Pty Ltd submitted to us a negative cost pass through application of $397 678
($nominal) on 14 February 2014.
Our RBP access arrangement final decision for the 2012-17 regulatory period included an opex
allowance of $714 601 ($Jun2012) for carbon costs for all of 2012-13.13 That is, APTPPL was
permitted to recover this amount from its customers in the 2012-13 year in expectation of incurring
these carbon liability costs in that year. With its pass through application, APTPPL submitted that
as the regulatory period only commenced 1 September 2012, rather than 1 July 2012, the forecast
allowance should be adjusted to cover ten months. 14 The relevant forecast allowance is therefore
$595 501 ($Jun2012).
APTPPL’s actual carbon liability for the 2012-13 year was $197 823 ($Jan2014) (paid on
29 January 2014). The variance from the forecast allowance is due to the forecast allowance being
calculated on the assumption that APTPPL would face a carbon liability for both fugitive gas
emissions and combustion emissions. For the RBP, combustion emissions make up around 75 per
cent of total annual carbon emissions. However, for 2012-13, APTPPL incurred carbon costs only
for fugitive gas emissions and not for combustion emissions. Under commercial agreements
between APTPPL and its customers, the 2012-13 carbon liability for combustion emissions was
borne by APTPPL’s customers.15
13
AER, APT Petroleum pipeline Pty Ltd, access arrangement final decision, Roma to Brisbane pipeline 2012-13 to
2016-17, August 2012, p. 110.
14
APTPPL, Roma-Brisbane Pipeline - carbon cost pass through application, February 2014, p. 2.
15
APTPPL staff advised that this atypical cost sharing arrangement resulted from the short time difference between
finalisation of the carbon price mechanism and the beginning of the 2012-13 year. APTPPL will bear the carbon
liability for combustion emissions from 2013-14 onwards.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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As required by its access arrangement, APTPPL applied for a negative cost pass through of the
difference between the forecast allowance and actual costs. APTPPL noted it expects that its
subsequent annual costs under the carbon price mechanism will more closely match its carbon cost
opex allowance.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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4
Approach and assessment
4.1
Carbon cost event definition
Clause 4.5.2 of the RBP access arrangement information provides the following definition of a
carbon cost pass through event:
Carbon cost event—means:
An event that occurs if, for a given Regulatory Year of the Access Arrangement Period, the total
carbon cost incurred (part of which may be an estimate) by Service Provider in complying with the
carbon pricing mechanism established under the Clean Energy Act 2011 (Cth) and associated
legislation relating to the management of greenhouse gas for that Regulatory Year is higher or
lower than the forecast amount for that Regulatory Year set out in table 5.1 of Service Provider’s
Access Arrangement Information. The carbon cost event is taken to have occurred at the time that
it is possible for Service Provider to calculate the carbon costs it has incurred for a Regulatory Year
without use of estimation.
There is no materiality threshold for carbon cost pass throughs events. 16
4.2
Factors considered
We assessed the cost pass through application in accordance with factors listed in clause 4.5.2 of
the access arrangement. This section sets out those factors and our considerations against each.
16
AER, APT Petroleum Pipeline Pty Ltd, access arrangement (including terms and conditions), effective 1 September
2012 – 30 June 2017, August 2012, clause 4.5.3.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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In making its decision on whether to approve the proposed Cost Pass-through Event/s adjustment,
the AER must take into account the following:
whether:
(a) the costs to be passed through are for the delivery of Pipeline Services;
We accept that the costs passed through are for the delivery of pipeline services because fugitive
gas (and subsequent carbon emissions) is a by-product of delivering pipeline services.
(b) the costs are incremental to costs already allowed for in Reference Tariffs;
The cost pass through amount (based on actual carbon costs incurred) is in addition to current
reference prices (which were based on forecast carbon costs).
(c) the total costs to be passed through are building block components of Total Revenue;
As determined in the access arrangement, carbon costs are part of the opex building block.
(d) the costs to be passed through meet the relevant NGR criteria for determining the building
block for Total Revenue in determining Reference Tariffs;
Rule 91(1) of the NGR provides that opex must reflect the costs incurred by a prudent service
provider acting efficiently, in accordance with accepted good industry practice, to achieve the
lowest sustainable cost of delivering reference services.
We are satisfied that APTPPL is meeting its carbon tax liability in an efficient and prudent manner,
by only recovering its actual costs and passing through to customers the difference from the
forecast allowance.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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(e) any other factors the AER considers relevant and consistent with the NGR and NGL.
We adjusted the proposed negative cost pass through amount ($397 678 ($nominal)) for inflation
and the time value of money.
This involved an inflation (March CPI) adjustment to bring the forecast allowance and actual
payment to the same dollar terms (to $Jun201417).
We also applied a half year Weighted Average Cost of Capital (WACC) adjustment.18 The pass
through amount is calculated for June 2014 but customers will gradually receive the money through
lower reference prices throughout 2014-15. Therefore, on average, customers will receive the
amount in December 2014 and so a half year WACC adjustment is appropriate to compensate
them for the delay experienced.
We informed APPTPL of these adjustments to the proposed amount. APTPPL accepted that the
adjustments were required. 19
17
AER, APT Petroleum Pipeline Pty Ltd, access arrangement (including terms and conditions), effective 1 September
2012 – 30 June 2017, August 2012, clause 4.5.1. March quarter CPI figures are used for end of year CPI
calculations in the annual reference tariff adjustment formula mechanisms. The same approach is adopted here.
18
WACC is the rate of return we determined for APTPPL as part of our access arrangement final decision.
19
APTPPL email, 31 March 2014.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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5
AER Decision
We determine that a negative carbon cost pass through event has occurred and that a negative
pass through amount of $427 391 ($Jun2014) is appropriate. This differs from the amount
proposed by APTPPL because it incorporates adjustments for inflation and the time value of
money.
The approved negative cost pass through amount will be returned to customers in the form of lower
reference tariffs in 2014-15.
Table 2 - Roma to Brisbane Pipeline – negative carbon cost pass through calculation
Forecast allowance
($Jun2013)20
$595 501
20
Actual costs ($Jan2014)
$197 823
Approved negative cost pass
through amount ($Jun2014)
$427 391
APTPPL, Access arrangement pass through application - RBP carbon cost pass through application , February 2014,
p2. APTPPL note that the forecast allowance in the access arrangement was annotated in $June2012 but was
actually calculated using a fixed carbon price for 2012-13 i.e. the forecast allowance already adjusts for inflation for
one year and so the forecast allowance is effectively in $June2013.
AER Decision | Roma to Brisbane Pipeline 2012–13 cost pass through
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