Annex 1: Avoidable Cost Allocation Methodology
113. Conceptually there are two approaches to ACAM: (a) a "bottom-up" approach which asks what would the pipeline owner's financial statements look like if it only provided network services; and (b) a "top-down" approach which asks what the pipeline owner's financial statements would like if it ceased operating its "incremental" services (assuming away transitional factors, such as redundancy costs and down-sizing of fixed assets). With the bracketed assumption in (b), the bottom-up and top-down approaches should provide identical financial statements.
114. ACAM consists of two mandatory principles:
- The stand-alone and incremental businesses would be defined in such a way that: (i) the stand-alone business is confined solely to provision of natural monopoly activities; and (ii) all contestable (and potentially contestable) activities are provided by the incremental businesses.
Explanatory note: Defining the stand-alone and incremental businesses in this way may mean they provide each other with goods and services. Transfer payments are made for any goods and services businesses provide each other. - The expenses, revenues, assets, and liabilities ("items") would be allocated to the stand-alone and incremental businesses in such a way that: (i) those items (and components of the items) that would not be avoided if the pipeline owner did not operate the incremental businesses are allocated to the stand-alone business; and (ii) those items (and components of the items) that would be avoided are allocated to the incremental businesses.
Explanatory note: Items that are directly attributable to one of the stand-alone or incremental businesses would be allocated to those businesses. Items that are shared amongst some or all of the businesses would be allocated amongst those businesses, by: - direct allocation of any components of these items which are directly attributable to one of the businesses; and
- for any components that are not directly attributable;
- assessing the proportions of these components which are avoidable and non-avoidable; and
- allocating these components amongst the businesses on the basis of those proportions (in a manner consistent with Principle I).
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