Alcoa is the state's largest user of energy, and until recently owned a slice of DBP.

Return cut in DBP decision

Dampier to Bunbury Natural Gas Pipeline owner-operator DBP Transmission says pricing for the gas transmission line set by the Economic Regulation Authority today won’t be enough to earn a rate of return suitable for prevailing market conditions.

That pipeline supplies the majority of Perth’s domestic gas demand, linking production fields up north, including the North West Shelf Venture, to the city.

Sydney-based listed entity Duet Group owns the operator.

The new access arrangements are an improved offer for DBP, however, and will only cover 15 per cent of the company’s volume, with the remaining 85 per cent locked away in August 2014 through supplier agreements.

The provisions will begin today and conclude at the end of the 2020 financial year.

Compared with the ERA’s original proposal, DBP has scored a few wins.

For example, revenue allowed under the new access arrangement will be 6 per cent higher in real terms than the previous December 2015 draft proposal, while capital expenditure allowed will be 35 per cent higher for the five-year period.

Operating expenditure allowed is 1 per cent higher.

That means that if DBP is able to ratchet down costs further, it has more room to earn a return.

But the ERA did reduce the company’s weighted average cost of capital allowed compared with its draft decision, largely due to a lower return on equity.

The draft decision had pinned a return on equity rate of 7.28 per cent, while the new decision came in at 6.98 per cent, both well below DBP’s proposed 10.84 per cent.

DBP chief executive officer Stuart Johnston said he was pleased that the ERA allowed about 95 per cent of the $262 million in capital expenditure incurred by DBP since in the past five years, although he had concerns about other aspects of the decision.

“While we continue to review the detail in the final decision, the rate of return applied by the ERA is not commensurate with prevailing conditions in the market and the risks involved in providing pipeline services,” he said.

A lack of appropriate return would mean it was more difficult to continue investment in pipeline infrastructure, Mr Johnston said.

Perth’s increasing urban sprawl created an additional problem, he said, expressing concern that the decision did not allow for adequate expenditure to deal with the cost of managing risks to the integrity of the pipeline in areas not designed for residential land use.

Longer term
The series of agreements announced nearly two years ago, which covered 85 per cent of haul capacity, included the state’s largest energy user, Alcoa of Australia, which has bauxite refining and mining operations.

Alcoa had previously owned a 20 per cent stake in the pipeline, with Duet purchasing that portion earlier this year.

Those agreements were a reduction of about 9.5 per cent on the existing standard contracts, although DUET Group had the benefit of revenue certainty until 2025 to 2033 for various contractors.

That move gave the company an opportunity to reset its hedge book, it said at the time, locking in low forward base interest rates.

Shares in DUET Group fell 2.5 per cent to $2.48 at the time of writing.

Add your comment

BNiQ Disclaimer