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Epic wait for gas pipeline decision

Much is at stake for Western Australia’s energy industry and its major customers as they wait for Ken Michael’s draft decision on third party access to the Dampier to Bunbury natural gas pipeline.

As WA’s Independent Gas Pipelines Access Regulator, Dr Michael has been considering submissions for what a Chamber of Minerals and Energy spokesperson described as one of the most complicated decisions the Office of Gas Access Regulation has had to make.

Both Western Power and the CME said the two major issues to be decided were the calculation of the value of the pipeline and the rate of return the pipeline’s owner, Epic Energy, could achieve.

The pipeline’s asset value can be valued either on depreciation on actual cost, or depreciation on optimised replacement cost. Technologies available since the initial purchase render the optimised replacement cost less than the actual cost and, in its submission, Epic has favoured an actual cost calculation.

The calculations have a direct bearing on the tariffs deemed appropriate for customers including AlintaGas, Western Power, South West Cogeneration, Mission Energy and industrial heavyweights Worsley Alumina, WMC, Hamersley Iron, CSBP and Robe River.

The tariff price appears a significant sticking point for customers. In its submission to the regulator, AlintaGas has described Epic’s proposed tariff as “excessive”, while Western Power has expressed concern that regulated users “could be paying a disproportionate share of the return on capital”.

But Epic public relations and government affairs manager Melissa Smith said the company bought the 1,530 kilometre Dampier to Bunbury line under conditions not imposed on any other pipeline sale in Australia.

Ms Smith said Epic had pointed out to the regulator that it had satisfied all three “policy outcomes sought by the government from the sale”.

Epic, along with customers and other interested parties, has waited 17 months for a decision since submitting original submissions, and was keen to get a draft result, Ms Smith said. “It’s difficult to run a business without knowing what you will be allowed to charge customers,” she said.

Structured gas pricing was the first of the three pipeline purchase conditions Epic said it had satisfied. The company reduced its price from the initial $1.27 per gigajoule when the pipeline was first purchased, to $1.19 and then submitted $1.00.

In its submission to the regulator, AlintaGas stated there was no such condition or commitment at the time of the pipeline purchase, either between Epic and the government or Epic and AlintaGas, then still a public utility.

Epic said its price had been linked to the pipeline purchase, which the company viewed as the second “policy outcome” the (then) Government had imposed on the sale.

Ms Smith said the “maximum” purchase price required by the Government had allowed it to retire debt, put more computers in schools and advance plans for the proposed convention centre.

The third purchase condition, to expand the pipeline’s capacity by $800 million over 10 years, is being addressed, with Epic already having invested $125 million to expand capacity by 78 terajoules per day.

“The tariff price is only one aspect, really. There are lots of things in terms of service conditions and Epic will evaluate all of it,” Ms Smith said.

However, with customer submissions between 80 and 90 cents per gigajoule, Epic has expressed concerned at the regulator’s draft decision earlier this year to require owners of the goldfields pipeline to reduce proposed tariffs by 30 per cent.

The proposed pipeline extension has been another factor under consideration, and not only by potential customers.

While Epic’s feasibility study on a Bunbury-Albany-Esperance extension revealed it not to be commercially viable without government subsidy, the company remains keen to provide further gas to industry in the region.

But preferred bidder status given to Burns and Roe Worley to construct a gas-fired power station at Esperance means the Burns proposal to extend the gas pipeline network from Kambalda to Esperance is likely to prohibit an Albany-Esperance extension.

Nonetheless, Epic’s focus is not only on the south of the state, with two Pilbara deals due to be finalised this month.

Moreover, with 4,000 kilometres of pipeline in three Australian states, Epic is sure not to be an insignificant player in the overall Australian gas market. One-third shareholder El Paso Energy Corporation supplied Epic’s new chief executive Sue Ortenstone at the beginning of the year and is certain not to confine its Australian activities to one or two options.

However, if by the end of the year a final Dampier-Bunbury access decision does not go Epic’s way, it remains to be seen whether the company will transfer any proposed South West investment to its $1.5 billion project with Phillips to bring gas from Darwin to South Australia.

That venture, for which Epic has submitted a proposed amendment to the National Gas Pipelines Access Code, has received ‘major project facilitation status’ from the Federal Government. This is something, no doubt, which the WA Government will consider.

Ms Smith said Epic was optimistic it could grow its business in WA with confidence.

“But the company will study every bit of the regulator’s decision,” she said.

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