Key Changes
Mandatory Avoidable Cost Allocation Methodology (ACAM) to Be Introduced
1. The 1997 Regulations did not include guidelines for allocating costs, revenues, etc among the activities of pipeline owners. This made it possible for pipeline owners to conceal monopoly rents. Inconsistent approaches among pipeline owners also made comparison of financial results unreliable.
2. The changes:
- require pipeline owners to use a mandatory avoidable cost allocation methodology (ACAM), to improve transparency of any monopoly rents (including the source of any cross-subsidies favouring competitive activities);
- require pipeline owners to disclose full details of how they applied ACAM, to promote high standards in the application of ACAM;
- where transmission and distribution activities are conducted by individual pipeline owners, require separate stand-alone financial statements for transmission and distribution activities and for the combined transmission and distribution activities, to assist identification of whether the charges for each of these services are reasonable.
3. A Gas Information Disclosure Handbook covering ACAM will be issued by the Chief Executive, Ministry of Economic Development. The handbook will include a table listing items required to be separately disclosed in the financial statements. A draft of the Gas Information Disclosure Handbook will be forwarded to you shortly.
Wholesaling and Retailing Activities no longer Subject to Disclosure
4. Pipeline owners no longer have to disclose financial statements covering their contestable gas wholesaling and retailing businesses, reflecting the competitive nature of these activities.
Mandatory Optimised Deprival Valuation (ODV) Methodology to Be Introduced
5. A mandatory ODV methodology for use in calculation of financial performance measures is being introduced to mitigate the risk that pipeline owners could over-inflate their valuations in order to hide monopoly profits and justify higher prices. An ODV Handbook, to be issued by the Chief Executive, Ministry of Economic Development following consultation with industry participants, will outline the methodology to be followed.
6. Under the ODV arrangements:
- ODV valuation reports are to be completed every 3 years or whenever capacity or system length changes by 10 per cent when compared with the last valuation report;
- all valuation reports must be publicly disclosed within 5 working days of completion;
- valuations are to be adjusted annually for depreciation, acquisitions and disposals of assets, revaluations and changes in net working capital;and
- the completion of a valuation report, together with the date and the amount of the valuation, is to be notified on the Internet.
7. Directors/principals of the pipeline company are to be required to certify the valuation has been undertaken in accordance with the ODV Handbook. Auditors are to be required to give an opinion that the valuation has been made in accordance with the ODV Handbook.
Financial Performance Measures to be Updated and a Derivation Table Included
8. The names of the financial performance measures are being updated and changes made to the equations for calculating return on investment and return on equity to remove anomalies.
9. The Regulations will include a derivation table for calculating financial performance measures from information provided in the financial statements to ensure consistent application of the formulas.
Asset Management Planning Information Disclosure to Be Introduced
10. Pipeline owners are to be required to disclose specified asset management planning information for their gas networks. This is designed to promote good asset management practice by pipeline owners, and enhance discussions between pipeline owners and pipeline users over asset management. The disclosure requirements have been developed to be compatible with industry asset management standards. The Gas Information Disclosure Handbook will outline the requirements relating to asset management planning information disclosure (a draft copy of the Handbook will be available shortly).
Disclosure of Service Reliability Performance Measures and Targets to Be Improved
11. The current reliability performance measures for pipeline owners do not give a full picture of reliability performance. Targets for the following year and subsequent 4 years are to be required for the measure of total unplanned interruptions to distribution and transmission systems caused by third parties (SAIDI).
12. The following new reliability performance measures are being introduced:
- SAIFI (system average interruption frequency index) for distribution interruptions, including targets;
- incidents of damage requiring repairs to the distribution systems;
- the number of gas leaks detected by routine survey; and
- the number of publicly reported escapes of gas on the entire distribution system.
Wholesale Contract Disclosure by NGC to Be Discontinued
13. Disclosure of the prices, terms and conditions of NGC's wholesale contracts is being discontinued. Significant competition has developed in the wholesale gas market in the two years since the Regulations came into force, and this disclosure requirement is therefore no longer justified.
Pipeline Charge Methodologies to Be Extended
14. Regulation 20, which requires pipeline owners to disclose the methodologies used to set charges for gas distribution and transmission services, is being amended. The enhancements are intended to improve the level of detail disclosed, and to facilitate scrutiny of whether charges are set in an efficient and equitable manner. Disclosures must:
- describe the methodology used to calculate the charges;
- include the key components of the revenue required to cover costs and profits of the pipeline owner's pipeline business activities, including cost of capital;
- state the consumer groups used to calculate the charges, including:
- the rationale for the consumer grouping;
- the method by which the pipeline owner determines which group consumers are in; and
- for each of these consumer groups, the statistics relating to that group which were used in the methodology;
- describe the method by which the pipeline owner allocated the components of the revenue required to cover the costs of its pipeline business activities amongst consumer groups, including the rationale for allocation; and
- describe the method by which the pipeline owner determined the proportion of fixed and variable charges, and the rationale for those proportions.
15. Pipeline charge methodologies are to be disclosed when they change and at least 20 working days prior to the change taking effect.
Nova Gas to Be Exempted
16. The exemption under which Nova Gas Limited is excluded from disclosing its landfill gas pipeline activities is to be extended to all its pipeline activities given that its pipelines compete with other distribution pipes. Consistent policy across telecommunications, electricity and gas is to apply information disclosure only to incumbents on the grounds that only incumbents have market power.
Availability of Certain Disclosed Information on the Internet
17. Pipeline owners are to publish the following information on the Internet, in addition to use of existing disclosure media:
- financial statements, performance measures (including methodologies) and the completed derivation table for financial performance measures;
- advice of the completion of new valuation reports and asset management plans; and
- gas pipeline capacity, excluding maps and diagrams.
Internet disclosure makes access to the information easier, quicker and less expensive for interested parties.
18. Pipeline owners will have to disclose their Uniform Resource Locator of Internet disclosures. The information required to be disclosed on the Internet is to be retained on the Internet site for four years.
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