NATIONAL THIRD PARTY ACCESS CODE FOR NATURAL GAS PIPELINE SYSTEMS - REG 7.22
NATIONAL THIRD PARTY ACCESS CODE FOR NATURAL GAS PIPELINE SYSTEMS - REG 7.22
7.22
A Service Provider
may, prior to disclosing any End User Information under paragraph 7.20,
require the End User or other recipient of the End User Information to pay the
Service Provider a fee to compensate the Service Provider for its reasonable
costs of providing the End User Information, provided that fee has been
approved in writing by the Relevant Regulator.
[Section 7.22 inserted: Gazette 22 November 2000
p. 6542-3.]
8. REFERENCE TARIFF PRINCIPLES
This section of the Code sets out the principles with which Reference Tariffs
and a Reference Tariff Policy (the principles underlying the calculation of
Reference Tariffs) included in an Access Arrangement must comply.
General Principles
The Reference Tariff Principles are designed to ensure that certain key
principles are reflected in the Reference Tariff Policy and in the calculation
of all Reference Tariffs. Within these parameters, the Reference Tariff
Principles are designed to provide a high degree of flexibility so that the
Reference Tariff Policy can be designed to meet the specific needs of each
pipeline system. The overarching requirement is that when Reference Tariffs
are determined and reviewed, they should be based on the efficient cost (or
anticipated efficient cost) of providing the Reference Services.
The Principles also require that, where appropriate, Reference Tariffs be
designed to provide the Service Provider with the ability to earn greater
profits (or less profits) than anticipated between reviews if it outperforms
(or underperforms against) the benchmarks that were adopted in setting the
Reference Tariffs. The intention is that, to the extent possible, Service
Providers be given a market-based incentive to improve efficiency and to
promote efficient growth of the gas market (an Incentive Mechanism).
The Reference Tariff Policy and all Reference Tariffs should be designed to
achieve a number of objectives, including providing the Service Provider with
the opportunity to earn a stream of revenue that recovers the costs of
delivering the Reference Service over the expected life of the assets used in
delivering that Service, to replicate the outcome of a competitive market, and
to be efficient in level and structure.
Principles for determining the Total Revenue
Reference Tariffs are to be set on the basis of the sales of all Services
delivering (or being forecast to deliver) a certain amount of revenue (Total
Revenue) over the period for which the Reference Tariffs remain in effect (the
Reference Tariff Period).
The Reference Tariff Principles specify three methodologies for determining
the Total Revenue:
· Cost of Service: where the Total Revenue is
set to recover ‘costs’ with those costs to be calculated on the
basis of a return (Rate of Return) on the value of the assets that form the
Covered Pipeline or are otherwise used to provide Services (Capital Base),
depreciation on the Capital Base (Depreciation) and the operating, maintenance
and other non-capital costs (Non-Capital Costs) incurred in delivering all
Services.
· IRR: where the Total Revenue is set to
provide an acceptable Internal Rate of Return (IRR) for the Covered Pipeline
on the basis of forecast costs and sales.
· NPV: where the Total Revenue is set to
deliver a Net Present Value (NPV) for the Covered Pipeline (on the basis of
forecast costs and sales) equal to zero, using an acceptable discount rate.
While these methodologies are different ways of assessing the Total Revenue,
their outcomes should be consistent (for example, it is possible to express
any NPV calculation in terms of a Cost of Service calculation by the choice of
an appropriate depreciation schedule). In addition, other methodologies that
can be translated into one of these forms are acceptable (such as a method
that provides a real rate of return on an inflation-indexed capital base).
The principles that guide the determination of the Reference Tariff Period are
set out in Section 3 of the Code. These principles permit the Reference Tariff
Period to be any length of time that is consistent with the objectives for
setting Reference Tariffs. However, the Relevant Regulator must consider (but
is not bound to require) inserting safeguards against excessive forecast error
if the Reference Tariff Period is over five years.
The Reference Tariff Principles recognise that these methods for calculating
the Total Revenue may provide a range of feasible outcomes. In narrowing this
range, the Relevant Regulator is permitted to have regard to various financial
and performance indicators.
Broad principles for establishing the Capital Base when Reference Tariffs are
set initially and reviewed are set out, including principles for:
· establishing the Initial Capital Base
(including principles for valuing pipelines in existence at the commencement
of the Code and those that come into existence after the commencement of the
Code);
· valuing investment in new facilities
(including principles for determining whether New Facilities Investment may be
included in the Capital Base, and for addressing differences between forecast
and actual capital expenditure) and
· reducing the Capital Base where assets
cease to contribute, or make a reduced contribution, to the delivery of
Services.
These principles apply equally to all of the methodologies for assessing Total
Revenue, and to clarify this, certain detailed principles are translated into
a form that is applicable to the IRR and NPV methodologies.
Broad principles for determining the Rate of Return are also set out,
essentially requiring a return which is commensurate with the prevailing
conditions in the market for funds and the risks involved in delivering the
Reference Service.
A number of principles are specified for the Depreciation Schedule, which
include that:
· the time-path for Reference Tariffs that is
implied by the Depreciation Schedule be consistent with efficient market
growth, and in particular, to avoid delivering Reference Tariffs that are
excessively high in early years and low in later years;
· depreciation should be over the economic
life of the assets that form the Covered Pipeline; and
· assets be depreciated only once for the
purposes of setting Reference Tariffs.
Again, these principles apply equally to all of the methodologies for
assessing Total Revenue, and to clarify this, certain detailed principles are
translated into a form that is applicable to the IRR and NPV methodologies.
Finally, the Reference Tariff Principles specify that Non Capital Costs are
the operating, maintenance and other costs incurred (or forecast to be
incurred) in the delivery of all Services provided by the Pipeline, and
provide that these can be factored into Reference Tariffs if
‘prudent’.
Allocation of the Total Revenue
The Reference Tariff Principles set out broad principles for determining
the portion of the Total Revenue that a Reference Tariff should be designed to
recover from sales of the Reference Service, and the portion of revenue that
should be recovered from each User of that Reference Service. These principles
essentially require that the Charge paid by any User of a Reference Service be
cost reflective, although substantial flexibility is provided.
An exception to the allocation rule is the case of ‘prudent
discounts’. Where a User is receiving a discount (which implies the
Service Provider is receiving less revenue from that User than that assumed in
the calculation of Reference Tariffs), and such a discount is
‘prudent’, the Relevant Regulator has the discretion (when
Reference Tariffs are set initially or reviewed) to permit the Service
Provider to recover some or all of that shortfall in revenue by raising
Reference Tariffs to other Users (if the discount is prudent, the Reference
Tariff would be lower for all Users).
Other Principles
This section also establishes:
· principles concerning the use and design of
Incentive Mechanisms;
· a mechanism whereby certain parts of the
Reference Tariff Policy cannot be changed at a review of the Access
Arrangement for a certain period; and
· principles for the charging of Surcharges
in relation to Incremental Capacity.
[Overview to section 8 amended: Gazette
2 May 2003 p. 1527.]