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Epic’s limbo threatens investment

The extended wait for a decision on tariffs for Epic Energy’s Dampier to Bunbury pipeline is having a negative effect on the State’s investment climate, as Susan Bower reports.

AS court battles go, Epic Energy’s fight against lower gas tariffs for the Dampier to Bunbury Natural Gas Pipeline may not have captured the public’s imagination, but many in business are citing it as one of the biggest issues facing WA.

Hanging like a pall of smoke over our economy is a significant financial threat to investment that has already put in jeopardy an estimated $800 million.

The extended wait for a final decision on tariffs for the line owned and operated by Epic Energy is affecting the plans of many, spawning uncertainty and fuelling speculation.

Hotly debated in private, yet publicly tackled by just a few, concerns over the tariffs Epic Energy can charge are linked to essential services, national policy, future foreign investment and industry opportunities across at least four Australian States.

Elements of the WA Independent Gas Pipelines Access Regulator’s draft decision on the tariffs, announced last June, were challenged by Epic Energy in the WA Supreme Court in October, and many had hoped for a decision by the end of last week.

The legal action challenged the regulator’s interpretation of the National Third Party Access Code for gas pipelines and sought an order from the court for a new draft decision.

Whatever the ruling, some are saying the formulation of either a new draft or a final tariffs decision could take a further 12 months.

In the meantime, as the process lengthens, there is talk, not only of the plans on hold of major and potential customers, but also of pipeline equity and Epic’s economic viability.

Following on from the talk are the questions of contractual or legislative arrangements to ensure security of supply to the Perth and South West markets.

But while there is plenty of talk in private business circles, major customers and industry groups are coy in their official comments and all formal responses from government departments and agencies are being coordinated from the Deputy Premier’s office.

In early February, AlintaGas reported an expected court ruling for the first quarter 2002 in its six-month results to December 31 2001 statement, factoring in a “neutral or positive” result for the company.

Stating its position under the heading “significant issues/sensitivities”, AlintaGas reported paying $1.00 per gigajoule against a draft decision range of $0.78 to $0.89 and an Epic argument for up to $1.08.

AlintaGas is in dispute with Epic over invoices for $1.18 per gigajoule it says it has been receiving since January 2000, and says it has consequently been processing payments for only $1.00 per gigajoule and excluding the disputed $0.18 portion from its accounting records.

In its initial submission to the regulator, before the draft decision was formalised, AlintaGas described Epic’s proposed tariff as “excessive”. Now it is not commenting publicly, other than to say “it is business as usual until the decision comes out”.

So while for AlintaGas, and everyone else in the gas industry, it is business as usual, the court ruling obviously could not come quickly enough to help with forward planning.

Alcoa also would be hoping for a sooner-rather-than-later determination to advance aspects of its planning. The industry giant with substantial energy requirements has a long-term contract for supply from the pipeline, but this is up for re-negotiation within the next couple of years.

Alcoa, however, will not publicly comment on any aspect of the contract.

While the tariff range, a direct result of the method of calculating the value of the pipeline and then assessing this against the rate of return the owner could achieve, is a sticking point for customers, it is crucial to Epic.

Epic submitted its proposed tariffs two years ago, in early 2000, after purchasing the pipeline for $A2.4 billion in 1998.

Almost 80 per cent of the price was put up by Epic’s bankers.

Hence, carrying large debt, and with the pipeline’s expansion and other investments in the Northern Territory and the south west Queensland pipeline also in limbo, Epic, its lenders and major shareholders are more than keen for some movement towards a resolution of this issue.

In submissions to the regulator, shareholders have warned of the impact on Epic. One-third stakeholder El Paso Corporation – the world’s largest pipeline company – said four months ago it would reconsider its investment strategy in Australia if the WA draft decision were to be upheld.

And while Epic has repeatedly said it is constrained rather than at risk, there is talk this could put most of the company’s plans, and by extension its viability here, in question.

Epic has invested almost $4 billion in Australia, and in a $1.5 billion project to bring gas from the Timor Sea to its Moomba to Adelaide pipeline, and also across into Queensland and New South Wales.

Indefinite delay or a negative result for Epic’s WA investment and its other tariff dispute for the Queensland pipeline, most certainly would impact on banker and shareholders’ support for such a large further commitment.

Adding to the uncertainty, initial plans with Phillips Petroleum to use Bayu-Undan gas have been thwarted and Epic is now reassessing all alternative options to get gas to shore in Darwin.

Australian Pipeline Industry Association executive director Allen Beasley said a resolution of the issue could be a long time coming.

Investment, as well as regulation, was a matter of government policy, Dr Beasley said, and $800 million worth of proposed investment in WA was evaporating in the wait for an acceptable tariff decision.

Epic says it has reduced its initial $1.27 per gigajoule tariff at time of purchase to $1.19.

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