Annex 2: Allocation of Boundary Items
1. The purpose of this Annex is to:
- identify the items that fall within the boundary of gas distribution/transmission business ("Pipeline business") and the Other business, and of gas distribution and gas transmission; and
- develop proposals for which business(es) these items should be allocated to under the avoidable cost allocation methodology (ACAM) in the Gas (Information Disclosure) Regulations.
2. Boundary items are defined as items (expenses, revenue, assets and liabilities) where it may be unclear which business (or businesses) they should be allocated to.
Allocation of Boundary Items between the Pipeline and Other Businesses
3. The criteria for allocation of boundary items is:
- The allocation should be consistent with ACAM.
- Where more than one possible allocation would be consistent with this criterion, the allocation should minimise compliance costs.
Gas Measurement Systems
Definition and Background
4. A gas measurement system (GMS) is defined in the Gas Act as -
5. The standard components are:
- Meter (includes corrector, TOU equipment, telemetry equipment, and transducers) - measures the volume of gas consumed.
- Filter(s) - to prevent dust, oil, condensed hydrocarbons or other deleterious substances from affecting the performance of the pressure control equipment, the metering equipment or reaching the consumer's gas installation downstream.
- Regulator(s) - to ensure a constant delivery pressure (within normally accepted limits).
- Over pressure protection (relief valve or over pressure shut-off valve) - to ensure the downstream equipment (meter, consumer's gas installation) is not subject to excess pressure following upstream equipment failure.
Assessment against Criteria
6. All components of the GMS apart from the meter (ie filter, pressure regulator, over pressure protection and valves) fit more naturally with the operation of the network system, as they facilitate/contribute to quality of delivery of gas.
7. Meter ownership and associated services could be unbundled and provided by any person on a contestable basis, although slightly less so for large consumers (because in the case of large consumers the GMS mechanical configuration is generally somewhat more complex and site specific with the pipework designed to incorporate a particular meter).
Proposed Allocation
8. The Ministry proposes that:
- filters, regulators and over pressure protection should be allocated to the Pipeline business; and
- meters should be allocated to the Other business7. Where the Pipeline business requires metering information (eg for its own variable charges and/or asset management purposes) provision for a transfer payment for metering services would be appropriate.
Isolation Valves
Definition and Background
9. Insolation valves are devices for controlling or shutting off the flow of gas. NZS 5258 Gas Distribution requires all services to have a valve at the point of custody transfer. It also requires a valve to be installed at the inlet of the service regulator, or if there is no regulator (previously common for the old LP systems), at the inlet of the meter. This valve must be accessible in an emergency. In most mass market situations one valve serves both purposes, but for larger delivery points an additional valve is installed downstream of the regulating/metering equipment to enable the consumer's gas installation to be isolated without affecting the distributor's upstream equipment.
Assessment against Criteria
10. The valve at the end of the service connection is clearly part of the network. Note there are many isolation valves in a network. See also commentary above re large consumer GMSs where there is often an isolation valve at the end of the GMS to isolate the consumer's gas installation. The Ministry proposes that this valve be treated as part of the Pipeline business.
Proposed Allocation
11. The Ministry proposes that isolation valves be allocated to the Pipeline business.
Supervisory, Control and Data Acquisition (SCADA)
Definition and Background
12. SCADA equipment has been installed by some network operators to enable continuous monitoring of parts of their network (pressures, flows etc).
Assessment against Criteria
13. SCADA equipment is an integral part of the gas network, although the data acquired using the SCADA system and associated with large consumer sites may be of value to the retailer as well.
Proposed Allocation
14. The Ministry proposes that SCADA equipment be allocated the Pipeline business, with provision for transfer payments from "other" for SCADA data.
Gas Meter Test Facility and Testing
Definition and Background
15. Gas meter testing facilities are used to perform calibration tests in accordance with the requirements of NZS 5259 Gas Measurement.
Assessment against Criteria
16. Gas meter testing is contestable, especially for mass-market meters. Testing for large meters is potentially contestable, although in practice there is generally not enough business to operate commercially. NGC is now the only provider of large meter testing (which it does for its own purposes and for all retailers).
Proposed Allocation
17. The Ministry proposes that gas meter testing facilities and testing be allocated to the Other business.
Meter Reading and Provision of Meter Reading (or Processed Energy) Information
Definition and Background
18. Gas measurement involves reading the meter, converting metered volume to standard volume using several factors, and then converting the standard volume to energy by application of the calorific value. Most often the conversion is done within the billing system in one step. The metering information transferred between parties may include one or more of the following - meter readings, metered volume, standard volume, conversion factor(s), or energy quantity.
Assessment against Criteria
19. Meter reading is a contestable activity. Meter reading can be provided by the incumbent (network owner), the retailer or a third party. Industry practice varies at present:
- NGC Networks requires all readings and processes volume to energy for each site. It reads some sites and relies on retailers to provide readings for other sites.
- Powerco requires all retailers to provide readings for each site.
- Wanganui Gas reads all sites and provides readings to retailers who then have to process volume to energy.
- Orion Networks requires retailers to read all sites and do their own processing to energy, then provide energy quantities to Orion Networks by site.
Proposed Allocation
20. The Ministry proposes that meter reading be allocated to the Other business, with allowance for transfer payments from the Pipeline business for metering information.
Contracting Activities (eg Pipeline Construction)
Definition and Background
21. Contracting activities can be for both Pipeline and Other business activities. They can also be provided by both external and internal sources.
Assessment against Criteria
22. Contracting activities that relate to Other business, regardless of whether they are provided externally or internally, are contestable. These activities are not discussed further. In relation to contracting activities for the Pipeline business (for example, construction, maintenance and repairs), the costs are a necessary cost of operating and managing a gas network. However, although it is legitimate for a gas network to incur such costs, the network does not need to provide the service itself. Furthermore, contracting activities are a contestable service.
Proposed Allocation
23. Contracting activities should be allocated to the Other business, with provision for transfer payments from the Pipeline business to the Other business for contracting services required by the network.
Unaccounted-For Gas
Definition and Background
24. Unaccounted-for gas (UFG) is the difference between gas metered entering a pipeline system and gas metered leaving that system in a given period, after allowing for any change in the amount of gas contained in the system
25. UFG is currently dealt with in the following ways:
- For distribution systems UFG may be purchased by the network owner (most likely from own retail operation) and included in network charges (Wanganui Gas), or purchased by retailers based on allocated quantities (NGC, Orion, Powerco); and
- For transmission UFG is purchased by NGCT (most likely from own wholesale operation) and included in transmission charges. To avoid the complication of having to allocate UFG to customers, NGCT takes responsibility for all UFG. NGCT is also responsible for maintaining the overall balance of the transmission system. It has arrangements in place to buy gas (most likely from its own wholesale operation) for system use, such as operating line heaters and compressors, and for correcting limited system imbalances. (There is not a corresponding requirement at the distribution level.)
Assessment against Criteria
26. UFG is effectively dealt with by the retailer either purchasing the lost gas directly (on the basis of allocated quantities) or indirectly through the incumbent network owner's wholesale or retail businesses (in which case they are bundled into transmission or distribution charges). The latter approach is indirect because it requires the incumbent to effectively purchase and on-sell the lost gas, with purchasing and sale of gas being a wholesale/retail activity.
27. The only circumstances where Pipeline businesses need to purchase gas (given that sale of gas is a producer/wholesaler/retailer activity) is where it requires gas for its own purposes - this is only the case at the transmission level where gas is required for system use, such as operating line heaters and compressors, and for correcting limited system imbalances. Such use makes up the majority of UFG at the transmission level.
Proposed Allocation
28. The Ministry proposes that UFG on distribution pipelines be allocated to the Other business. Where retailers make payments to the incumbent network owner for UFG this should be unbundled from the distribution charges, and the revenue allocated to the Other business. At the transmission level, the Ministry proposes that UFG be allocated to the Pipeline business, with a transfer payment to the Other business for purchase of the UFG on the transmission network (which would be required to be disclosed in Pipeline business's financial statements).
Transmission System Receipt Point and Custody Point of Transfer
Definition and Background
29. Transmission system receipt points typically comprise the following:
- a compound owned by the producer;
- a pig receiver owned by the producer;
- a custody point of transfer (generally a flange containing an electrical isolation device) which is the interconnection point between the producer's delivery system and the transmission system, and also the point of sale between producer/wholesaler and wholesaler/retailer;
- compression equipment, metering equipment, odorisation facilities and pig launcher owned by NGCT.
30. NGCT owns and operates all of the facilities up to the point of interconnection with any downstream system, that is the delivery point. This custody point of transfer is generally a flange downstream of all of the delivery point equipment owned by NGCT.
31. Having purchased gas at the receipt points, retailers (including NGC Retail) are then responsible for arranging transmission service and distribution service respectively to consumer's offtake points.
Assessment against Criteria
32. While odorisation has traditionally been the supplier's (ie retailer's) responsibility8, the deregulated market with multiple retailers trading within each network has made this requirement impractical9. Recognising this NGCT has taken the initiative and installed sufficient odorisation injection facilities to ensure that in normal circumstances the gas complies with the NZ Code of Practice for Odorisation GCP3 when delivered through an average distribution network.
33. Compression is important for the operation of the pipeline system (in terms of pressure and flow). Meters - as with customer based meters (part of the GMS) - are contestable.
34. Pig launchers are an integral part of the transmission system, and should therefore be treated as part of the natural monopoly. All the delivery point facilities are considered an integral part of the transmission system.
Proposed Allocation
35. The Ministry proposes that the assets from the custody point of transfer at receipt points (as currently defined) to the custody point of transfer at delivery points (as currently defined) be allocated to the Pipeline business. The exception would be for meters which should be allocated to the Other business, with provision for transfer payments from the Pipeline business to the Other business for metering information.
Network Growth (Marketing) Incentives
Definition and Background
36. These are payments offered by network owners to reward retailers who connect new load, and for retention of existing load, for example:
- NGC Networks and Wanganui Gas have a "market maintenance incentive" which is an annual payment made to retailers based on the number of mass market connections they supply and is subject to the retailer demonstrating they have undertaken marketing activity to promote gas usage; and
- NGC Networks has a "new connection reward" and "large appliance incentive" that are aimed at new connections and the load installed.
Assessment against Criteria
37. Network growth incentives are effectively a form of network charge rebate - designed to encourage certain behaviour that is to the benefit of the network. They could actually be merged into network charges.
Proposed Allocation
38. The Ministry proposes that network growth incentives be allocated to the Pipeline business, and that the pipeline owners would have to disclose these separately (see Annex 3).
Allocation and Reconciliation Services
Definition and Background
39. Allocation and reconciliation is the service provided to allow multiple retailers to operate on one network with one receipt point meter. The service allocates the shared meter quantity to each of the retailers using a process agreed between the retailers and documented in an allocation agreement. These quantities are then fed upstream to enable billing of the correct quantities for transmission and wholesale gas. The agreement sets out the charges for the service, although some network owners have elected in the early stages of competition to provide the service as part of the network service charges. The industry definition is "Allocation is the process of attributing quantities of energy to persons with an interest in any gas at a point of transfer."
Assessment against Criteria
40.Provision of allocation and reconciliation is contestable service. In practice it is provided by allocation agents and either included in transmission or distribution charges or provided separately on a contestable basis.
Proposed Allocation
41. Allocation and reconciliation expenses should be allocated to the Other business. Allocation and reconciliation charges should be unbundled from line charges, with revenue from these charges being allocated to the Other business.
Research and Development Expenses
Definition and Background
42. Research and development can relate to development of network technologies or other products.
Assessment against Criteria
43. Research and development activity, be it related to networks or otherwise, is a discretionary activity. It is not clear a natural monopoly should undertake its own research and development.
Proposed Allocation
44. The Ministry currently proposes that research and development activity be allocated to the Other business.
Capital Works Under Construction
Definition and Background
45. Works under construction are assets that are not yet operational. In the case of network assets there is a short life before they become operating fixed assets.
Assessment against Criteria
46. Works under construction do not belong in the ODV, as they do not relate to the operating component of the network. Nevertheless, works under construction are a legitimate non-performing asset, which has an associated capital cost to the Pipeline businesses.
Proposed Allocation
47. The Ministry proposes that capital works under construction be allocated as they will be when they are completed and operational. Where they relate to gas system fixed assets or other network assets, they should be allocated to the gas network. Otherwise they should be allocated to the Other business.
Intangible Assets other than Goodwill
Definition and Background
48. Intangible assets (other than goodwill) include such things as deferred development costs, patents, trademarks and licences.
Assessment against Criteria
49. Intangible assets, such as deferred development costs and patents, are not a necessary part of natural monopoly activity.
Proposed Allocation
50. The Ministry proposes that intangible assets (other than goodwill) be allocated to the Other business.
Billing System (also used as Connection and Consumption Databases)
Definition and Background
51. Billing systems are required for charging for wholesale, transmission, distribution, retail and other activities. Industry practice varies at present:
- NGC has a retail billing system which is used to meet both retail and distribution requirements.
- Powerco has retained the retail billing system it used as a bundled business.
- Wanganui Gas has a retail billing system which is used to meet both retail and distribution requirements. The Pipeline business only owns information on connections and volume consumption, while the retail business owns the additional processed energy information.
- Orion Networks has established a new cut-down database to reflect its reduced information requirements, while Orion Gas Trading has established its own retail billing system to suit its large customer billing requirements.
Assessment against Criteria
52. Billing costs are a legitimate cost for each business area (as billing is necessary for recovery of each business's charges), though it would be expected that the retail business would incur the bulk of the costs. This is because the retail business would have direct contractual arrangements with the bulk of consumers - only large consumers are likely to have separate contractual arrangements with transmission and distribution businesses.
Proposed Allocation
53. The Ministry proposes that billing costs be treated as a common cost, and allocated on the basis of ACAM Principle II (see Annex 1, paragraph 5).
Mergers and Acquisitions Expenses
Definition and Background
54. The costs of investigating potential mergers and acquisitions are incurred whether the merger or acquisition occurs or not. The expenses include legal and consulting fees, and losses/gains on sale of investments entered into with a view to mergers and acquisitions.
Assessment against Criteria
55. Any of a gas utility's businesses can be expected to potentially derive benefits from mergers and acquisitions, for example, through economies of scale. A gas utility that was limited to gas distribution and transmission may still legitimately seek to investigate potential mergers and acquisitions.
Proposed Allocation
56. The Ministry proposes that merger and acquisition costs be able to be allocated to both business. If the potential merger and acquisition opportunity is with a business that is solely a Pipeline business, then the costs would be allocated solely to the Pipeline business (consistent with ACAM Principle I - see Annex 1). Likewise, if the opportunity is with a business that is in contestable gas activities and/or other services (excluding gas networks), then the costs would be allocated solely to the Other business (consistent with ACAM Principle I - see Annex 1). Where the opportunity is with a business that provides services which fall into both categories (Pipeline and Other business), ACAM requires that the amount that would be allocated to the Pipeline business would be the amount that would have been incurred if the opportunity was with a business that only provided Pipeline services, and the remainder of the costs should be allocated to the Other business (consistent with ACAM Principle II - see Annex 1).
Take-Over Defense Expenses
Definition and Background
57. Take-over defence is the cost of protecting against hostile take-overs, and may include legal and consulting fees.
Assessment against Criteria
58. Take-overs are the flip side of mergers and acquisitions. Therefore the same analysis and conclusions can be made about mergers and acquisitions. They are a legitimate cost of each of the businesses.
Proposed Allocation
59. The Ministry proposes that the cost of take-over defences be treated as a common cost, and allocated to each business on the basis of ACAM Principle II (see Annex 1). The amount that should be allocated to the Pipeline business should be the amount that would have been incurred if the business only provided Pipeline services, and the remainder of the costs should be allocated to the Other business.
Investments, Losses/Gains on Sale of Investments and Returns (Dividends/Interest) on Investments.
Definition and Background
60. There are three components to investments: the assets themselves, losses/gains from the sale of the investments and the return earned (eg dividends and interest) from the investments. These components should all be treated in a consistent manner.
Assessment against Criteria
61. Two categories of investment are considered below.
62. Short-term investments may substitute for holding cash in the bank. It may be efficient to hold money, needed for working capital purposes, in short-term investments rather than in the bank to earn a higher return. Therefore, holding short-term investments is legitimate for each of the businesses.
63. Long-term investments are not a necessary part of natural monopoly activities. Note that some such investments may be held in anticipation of future capital expenditure. Without commenting on the appropriateness of such practices, the investment should be treated as part of the Other business activities, with a transfer to the Pipeline business when the finance is required.
Proposed Allocation
64. The Ministry proposes that short-term investments be treated as a common cost, and allocated to both the Pipeline and Other business on the basis of ACAM Principle II (see Annex 1). Long-term investments would be allocated to the Other business.
Allocation of Items between Gas Distribution and Gas Transmission
65. Under the proposed gas ACAM rules, gas utilities (only NGC, in practice) will be required to disclose separate financial statements for their gas distribution and gas transmission businesses, in addition to combined gas distribution plus transmission financial statements (option 2 in the discussion paper entitled "Proposals for Amending the Gas (Information Disclosure) Regulations 1997").
66. The boundary between transmission and distribution therefore needs to be defined. The criterion used to determine which items should be allocated to the network and which to the Other business is not helpful in this regard, because both the transmission and distribution businesses are to be treated as stand-alone and limited to natural monopoly activities. To determine the boundary between distribution and transmission it is necessary to define what transmission and distribution mean. The following clarifies the demarcation between the two systems:
- The Gas Act 1992 defines transmission as including high pressures pipelines operated at a pressure exceeding 2,000 kPa, and distribution as being the pipework under the control of a gas distributor from the boundary of the gasworks or gate station outlet flange supplying gas for distribution to the outlet of the gas measurement system.
- The Gas (Information Disclosure) Regulations 1997 define transmission system as that part of a system that conveys gas from the point where gas leaves a gas processing facility to the boundary of the gasworks or gate station outlet flange supplying gas for distribution, or to a customer where gas does not enter a distribution system.
- NZS 5258 Gas Distribution covers systems operating at distribution pressures which are defined as low pressure or LP (< 7 kPa), medium pressure or MP (7 - 700 kPa), and intermediate pressure (700 - 2000 kPa). Systems above 2000 kPa are referred to as high pressure or HP systems and are covered by NZS 5223:Part 1.
- Although the recent Health and Safety in Employment (Pipelines) Regulations 1999 have further refined the definition of pipelines requiring special treatment as for HP pipelines (includes pipelines conveying both gas and other than natural gas), the definitions above serve adequately to define the different systems for the purposes of disclosure.
67. The major difference between transmission and distribution systems therefore is pressure (2000 kPa). The Ministry proposes that the distinction between transmission and distribution be defined on this basis.
Gate Stations and Metering at Transmission System Delivery Points
68. The gate station compounds and meters at transmission system delivery points are owned by NGCT. The pipework within the compound is mostly NGCT's up to the custody transfer point between the transmission system and distribution system (generally a flange containing an electrical isolation device).
Proposed Allocation
69. The Ministry proposes that these assets be allocated to transmission.
Pressure Reduction from Transmission to Distribution
70. Pressure reduction from transmission to distribution is an integral part of the gate station and therefore part of the transmission system.
Proposed Allocation
71. The Ministry proposes that these assets be allocated to transmission.
Load/Flow Control at Gate Stations
72. Load/flow control at gate stations is part of transmission, although the distributor may also have additional equipment installed for their own purposes.
Proposed Allocation
73. The Ministry proposes that these assets be allocated to transmission.
Cathodic Protection
74. Both transmission and distribution networks require cathodic protection for protecting pipelines.
Proposed Allocation
75. The Ministry proposes that these assets be allocated to both transmission and distribution - cathodic protection assets used to protect distribution pipelines are to be allocated to transmission and cathodic protection assets used to protection transmission pipelines are to be allocated to transmission.
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