1 Meeting Notes Transmission Pricing Methodology

Home , Te Rapa cogeneration

MEETING NOTES TRANSMISSION PRICING METHODOLOGY WORKSHOP

TIME: 1PM TO 4PM DATE: 1 May 2019

Agenda

Item Indicative Timing

1. Introduction 10 min

2. Commerce Commission revenue 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

1. Introduction

• Introduction and run-through of agenda 2. Commerce Commission revenue framework

• Commerce Commission revenue allowances and pricing framework Questions raised

Question Response Has First Gas modelled The Commerce Commission’s information disclosure their Transmission Pricing requirements only require First Gas to demonstrate the Methodology’s (TPM) extent that our TPM is consistent with the Commerce compliance against the Commission’s Pricing Principles. The TPM and Commerce Commission methodology utilised are based on previous TPM’s that pricing principles? have been previously issued by First Gas. Can First Gas include within First Gas has provided information developed previously on their TPM examples of incremental and stand-alone cost by Vector (see details stand-alone costs, as well below). as incremental costs to demonstrate the adherence of the TPM against the Pricing Principles?

3. Calculating First Gas revenue

• Calculation of forecast allowable revenue and forecast net available revenue under the Commerce Commission Default Price-Quality Path Determination • Discussion on how pass-through and recoverable costs were forecast Questions raised

Question Response First Gas provided this advice last year and will re-issue the Has First Gas discussed advice to stakeholders. with the Commerce First Gas sought advice last year on the treatment of Commission PR charges Park and Loan revenue rather than ERM Charges and ERM charges? And if specifically. In the response from the Commerce so, would First Gas supply Commission, they agreed that balancing services was the resulting Commerce regulated revenue under section 55A of the Commerce Act Commission advice? 1986 (despite not being specifically mentioned). As ERM is a balancing services charge and akin to an unauthorised park and load service, we have treated these as a pass-through cost in line with other balancing costs. Our letter to the Commerce Commission and their response have been posted here: https://firstgas.co.nz/wp- content/uploads/180316-Park-and-Loan-Revenue- Treatment.pdf and https://firstgas.co.nz/wp- content/uploads/Commerce-Commission-Response-to- First-Gas.pdf . Previously the Commerce Commission had confirmed that balancing transactions were included as a recoverable cost. This letter is available here: https://firstgas.co.nz/wp-content/uploads/Letter-to-MDL- and-Vector-re-treating-balancing-gas-transactions-as- recov....pdf First Gas has not sought specific advice on the treatment of Priority Rights revenue. Is the period considered for The period considered for the TPM is considered as Mokau Compressor usage representative. However, we will review this with our considered representative operations team prior to finalising the TPM. given potential changes in Our Board must certify that our forecast pass-through and operating regimes in the recoverable costs are reasonable(see DPP ex ante future? compliance statement) which will be released alongside final prices.

Suggestions for the TPM from Stakeholders

• More detail on how pass-through and recoverable costs are forecast in the main TPM document would be helpful; • Excluding March and April 2019 market pricing from the price used to project balancing gas costs and revenue would be preferred as it may potentially artificially inflate results due to platform outages;

• It is likely that balancing gas purchases and excess running mismatch (ERM) may not reduce immediately as it may take some time for stakeholders to adjust to the new regime. Suggest that estimates of balancing gas and ERM are not halved but estimated as the full volumes from previous years.

4. How we Charge under the GTAC

• Distribution of the Plain English Guide to charging to stakeholders • Run through of charges as a refresher to participants Questions

Response Question Aside from Priority Rights All transmission revenue must be recovered from the are all other revenue line forecast allowable revenue. items included under However, congestion management revenue is also recycled First Gas’ recoverable in the month it is earned. Any congestion management revenue? charges under interruptible contracts are recovered from those users using the delivery point in question in that month. They therefore not no affect revenue on an annual basis. Where points are located Delivery zones have been set based on the infrastructure. near another point and/or Borders between zones consider informational needs of Delivery Zone, where and operations and physical equipment (such as compressor how does a Zone end and stations). how was that decided on by First Gas? Is the presented Forecast Forecast Allowable Revenue includes Supplementary Allowable Revenue table Agreement revenue. inclusive and or exclusive of Supplementary Agreement revenue?

Suggestions from Stakeholders

• Include delivery points where Supplementary Agreements are used in the zone table to who which zones these points would fall into; • An identifier or code for each delivery zone would be useful for stakeholders (e.g. a 3 character alphanumeric code). 5. Calculating our prices

• Discussion of pricing calculations • Step through of methodology to calculate DNC Fees Questions

Question Response Has First Gas checked their Flows have been verified against historic flows and known Forecast Flows for incremental loads. They have not been checked against Gas Year 2019 and the GIC’s Supply and Demand analysis (since that has not Gas Year 2020 against the yet been released). We agree this may be a useful Gas Industry Company triangulation and will ask to see an advance copy of the Supply and Demand analysis from the GIC. analysis? Does First Gas include gas Flow comparisons in the TPM exclude Supplementary flows associated with their Agreement flows. These are included in the presentation Supplementary Agreements for information. in their Forecast Flows? Have the percentage The estimates of underruns and overruns have been based underruns and overruns on the VTC initial allocations (as an estimate of the estimates been calculated nomination a shipper might make) compared to the final on initial or final allocation BPP pool outcomes. This methodology has been used by submission? Concept Consulting in their analysis of overrun and underrun charges during the GTAC Preliminary Assessment for the GIC. What are the maximum and The 95% confidence interval gives the size of the 95% minimum monthly confidence interval as a percentage of the mean monthly confidence intervals in flow – i.e. if the mean monthly flow was 100TJ and the 95% Table 7 of the TPM? confidence interval percentage was 30% then 95% of flows would fall between 70TJ and 130TJ. The 95% confidence interval has been used to understand the variability of flows over the year. If there the confidence intervals are large or there is a large difference between the minimum and maximum over the year then the flows are likely to be more variable. The implications for overruns and underruns is that locations with higher flow variability may be more difficult to predict. Higher overruns/underruns may therefore may be more likely at these locations. Have weather impacts been Weather has not been taken into account in the estimate of taken into account for overruns and underruns, as the figures are an average over estimating overruns and a year rather than a daily comparison. underruns? What does pricing and the First Gas’ focus has been on avoiding price shock for First Gas TPM look like in participants in the initial year of the GTAC. We are open to Year 5? Is it reflective of dialogue on the long-term path for the TPM, taking into investment in assets based account likely future gas flows and moving towards greater on geographic location? adherence to a cost of service-based methodology. We will consider undertaking a bottom up cost of service model to refine the model to inform this work. However the direction of travel and speed at which pricing converges to a cost of service-based methodology is a matter than needs extensive consultation with industry. We would prefer to consult on this prior to the GY21 TPM exercise. At that point First Gas will have been able to 4

Question Response undertake cost of service modelling work and stakeholders will have a better understanding of the implications of GTAC pricing on their businesses. Key points for consideration are: • How quickly should pricing move towards a cost of service model – should it be over a fixed timeframe or a certain percentage increase per year? • What are the limits to applying the cost of service model? • How should the direction of travel adapt to changes in transmission volumes? These are matters that require consultation with stakeholders to understand the impacts on their businesses. We will amend the relevant sections of the TPM to reflect this strategy and forward consultation. How will revenue wash-ups Revenue wash-ups will be applied at the Forecast apply in future years? Allowable Revenue level – i.e. if there is an over recovery of revenue this will reduce prices for all users in future years.

Suggestions from Stakeholders

• Estimates of overruns and underruns may be better calculated based on the final allocation or the running mismatch of shippers; • For the first year of the GTAC, the estimation of overrun and underrun scale is optimistic, and shippers may do worse than this; • Stakeholders would like to see how pricing is placed between incremental and standalone and the direction of travel over time; • Stand-alone cost considerations may need to take into account electricity as an alternative fuel, as it is likely in a de-carbonising world that the closest alternative to gas would or will likely be electricity (rather than coal). 6. Pricing outcomes

• Outcomes of pricing methodology • Comparison across the network Comparison with previous years and shadow pricing undertaken in 2018 Questions

Question Response Does the price at each PWC’s work in 2012 (commissioned by Vector) revealed location lie between the implied transmission pricing caps between $4.20/GJ for incremental costs and large industrial coal users and $39.05/GJ for domestic LPG stand-alone cost? users. First Gas has therefore not sought to refresh previous work, as we are confident that prices are below 5

Question Response standalone/alternative equivalent pricing for these fuels. We acknowledge that work has not been undertaken on electricity as a substitute fuel. A summary of the PWC study is provided in our GY2018 Transmission Pricing Methodology on page 36. This document can be found here: https://firstgas.co.nz/wp- content/uploads/First-Gas-GTB-pricing-methodology- PY2019.pdf If supply increases in an It is inherently difficult to compare pricing year on year due area and or delivery zone, to the fundamental differences in the products between the then why are transmission two codes. There are uplifts in pricing due to inflation, prices also increasing in the changes in supplementary capacity in the zone and the same area, when the costs shift from reserved capacity to DNC. Each zone needs to are presumably spread be looked at individually to understand the pricing drivers. across more players in the market? Why is the Huntly Zone Huntly connects to the Maui Pipeline, which had a different transmission charge below asset base and pricing regime from that of the VTC. This that of the neighbouring pricing relativity was present under the MPOC/VTC and has Zones? been maintained under the GTAC TPM.

Suggestions from Stakeholders

• Stakeholders would like to see more detail on Supplementary Agreement revenue to help inform stakeholders view of pricing; • Consider using daily mismatch from the VTC as a better estimate of overrun and underrun percentages.

Action list

Action Update following meeting Status 1 First Gas to provide a copy See response in section 3. Closed of the Commerce Commission ERM advice to stakeholders. 2 First Gas to upload the GTAC Pricing Guide can be found here: Closed First Gas Plain English https://firstgas.co.nz/about-us/gtac/project- Guide to Charging on the information/ GTAC Project website. 3 First Gas and the GIC to The GIC, through its consultant, has Open work through comparator of committed to provide a high level review of Forecast Gas Flows and flows for the GY20 year. However as the GIC Supply and Demand supply/demand balance work relates to analysis. forecast of demand at a market level (e.g. industrial, power, commercial) rather than at the individual delivery point level it is not 6

Action Update following meeting Status possible to use this data for more detailed work at a delivery point or delivery zone level.

First Gas will revert on comparison of flows once this work has been completed. 3 First Gas to distribute to Vector’s work on comparison between Closed stakeholders Vector’s work standalone and incremental cost can be on Comparison between found here on pages 23-30: https://blob- Standalone and static.vector.co.nz/blob/vector/media/vector- Incremental costs for regulatory-disclosures/2016-gas- transmission pricing. transmission-pricing-methodology.pdf. 4 First Gas will provide TBC Open stakeholders with any analysis they are able to find on the Maui Pipeline and the cost to serve different users on the pipeline. 5 First Gas to review the Reviewed and attendance list updated Closed invited attendees for the IT Workstream fortnightly project call. 6 First Gas to provide a list of See table below for a list of the Closed the delivery Points where supplementary agreements included in the there are supplementary current TPM. The total revenue from agreements supplementary agreements in the TPM is $32,351,577.89. Ex-post reporting on supplementary agreement revenue per contract is provided in Appendix 3 of the Annual Compliance Statement here: https://firstgas.co.nz/wp- content/uploads/First-Gas-transmission-DPP- compliance-statement-2018.pdf

Table of Supplementary Agreement Delivery Points

Agreement Name Delivery Point Expiry Date Reason for Capacity Transmission Fees Agreement 1 Supplementary Agreement Te Rapa 30/09/19-23 Physical bypass mdq 23,200 GJ; mhq Fixed fee ($/day); variable fee (Te Rapa Cogeneration Cogeneration 1,092 GJ ($/GJ); (daily) overrun fee ($/GJ) Plant) Plant 2 Supplementary Agreement Greater 30/09/18 Encourage new mdq: 1,451 GJ; mhq: Fixed fee ($/day); variable fee (Auckland District Health Auckland use of gas mdq/16 ($/GJ); (daily) overrun fee ($/GJ) Board) 3 Supplementary Agreement Whakatane 30/09/18 Alternative fuel mdq: 3,400 GJ; mhq: Fixed fee ($/day); variable fee (Whakatane Mill) 176 GJ ($/GJ); (daily) overrun fee ($/GJ) 4 Supplementary Agreement Marsden 1 30/09/18 Investment mdq: seasonal profile, Fixed fee ($/GJ.mdq); variable fee (Marsden Point) certainty for First 13,600 to 15,600 GJ; ($/GJ); (daily) overrun fee ($/GJ) Gas mhq: mdq/24 5 Interruptible User Contract Marsden 1 30/09/18 To access mdq: approved NQ; Fixed fee ($/GJ.mdq); (daily) (New Zealand Refining capacity above mhq: approved NQ/24 overrun fee ($/GJ) Company) firm limit 6 Supplementary Agreement Greater 30/09/21 Physical bypass mdq: 1,600 GJ; mhq: Fixed fee ($/GJ.mdq); (daily) (CHH Penrose) Auckland mdq/20 overrun fee ($/GJ) 7 Supplementary Agreement Kauri, 31/12/18 Alternative fuel mdq: seasonal profile, Fixed fee ($/GJ.mdq); variable fee (Kauri & Maungaturoto Dairy Maungaturoto 2,500 to 5,000 GJ; ($/GJ); (daily) overrun fee ($/GJ) Factories) mhq: mdq/20 with max. 130 GJ per DP 8 Supplementary Agreement Warkworth 30/09/18 Alternative fuel mdq: 1,500 GJ; mhq: Fixed fee ($/GJ.mdq); variable fee (Southern Paprika) 73 GJ ($/GJ); (daily) overrun fee ($/GJ) 9 Confidential Supplementary Agreements (4)