1. Overview of the Contract Carriage Gas Markets in Eastern Australia James Mellsop Director 4 December 2012 Presentation to PEA

2. 1 Presentation outline  Features of the contract carriage regime  The nominations regime (and comparison with Maui nominations regime)  Management of physical congestion

3. Features of the contract carriage regime

4. 3 Contract carriage operates in (parts of) NSW, Queensland, SA and ACT Source: AEMO (2011), “Overview of the Short Term Trading Market for Natural Gas”.

5. 4 Nature of the contracts (1)  Gas producers contract with shippers for gas supply –Long-term, take-or-pay  Shippers contract for capacity with pipeline operators (“haulage contracts”) –Provides right to transport gas to a hub  Gas users contract for capacity with distribution networks (“distribution contracts”) –Provides right to transport gas from hub to final consumers

6. 5 Nature of the contracts (2): haulage contracts  Haulage contracts may be either firm-capacity or as- available (interruptible) capacity  Contract duration tends to be at least 10 years –Sometimes longer: Origin Energy contract with Epic Energy on Moomba to Adelaide Pipeline is 22 years with option to extend for further 10 years  Contracts are tradable –Notifications to buy or sell capacity can be placed on an online bulletin board

7. 6 Nature of the contracts (3): haulage contracts  No use-it or lose-it rules –Was considered as part of a 2003 Productivity Commission inquiry –But many were strongly opposed to use-it or lose-it, mainly on the grounds that it might undermine existing property rights –Productivity Commission also found gas legislation at the time prevented capacity hoarding (by imposing penalties if access to capacity is hindered) Current gas legislation has the same provisions

8. 7 Nature of the contracts (4): haulage contracts  Charging is typically a two-part tariff: capacity charge and a throughput charge –But differs on some pipelines e.g., Eastern Gas Pipeline has monthly service charge per delivery point and zonal capacity charge  Excess demand for capacity typically allocated first- in first-served –But other methods currently being considered e.g., auctions on Roma to Brisbane pipeline

9. 8 Nature of the contracts (5)  Haulage and distribution contracts are registered with the Australian Energy Market Operator (AEMO) and parties to the contracts participate in the Short Term Trading Market (STTM)

10. 9 The STTM: overview  The STTM works in parallel with bilateral long-term gas contracts –All gas traded through a hub is transacted in the STTM (i.e., participation is mandatory) –Allows short-term gas purchases without need for contracts –Allows parties to manage short-term variations to contracted quantities –Provides pricing signals –Is intended to facilitate secondary trading –Is intended to facilitate demand-side response

11. 10 The STTM: market-clearing  Users place bids to buy gas, shippers place offers to sell gas –Offers and bids are placed for gas already contracted, at the contracted price –Offers and bids are also placed for any additional (non- contracted) short-term gas  AEMO determines the market-clearing price a day- ahead of the actual gas day –Price is only used to settle short-term gas transactions –Gas under long-term contracts is traded at contract price

12. 11 The STTM: scheduling  AEMO prepares market schedules of gas flows through transmission pipelines to hubs –Market scheduling is based on offer price (lowest offer price scheduled first)  After schedules are prepared, shippers make nominations to pipeline operators  Pipeline operators then schedule the actual gas flows based on shipper nominations –Actual scheduled flows may differ from market scheduled flows, but this will have a settlement consequence in STTM

13. The nominations regime

14. 13 The nominations regime in Australia  Shippers make nominations to pipeline operators  Nominations occur outside of the STTM (and existed prior to introduction of STTM) –There is no requirement for nominations to match the day- ahead market schedules prepared by AEMO –But actual flows that deviate from scheduled flows expose the user to deviation charges  Shippers can also make intra-day nominations –Can avoid deviation charges if shipper also submits a market schedule variation to AEMO

15. 14 Comparison with Maui nominations MauiAustralia Who nominates to whom Shipper nominates to pipeline operator What is nominated Gas injected and injection point, and gas withdrawn and delivery point Nomination timing Provisional (due Fri 4pm for following Mon-Sun) Changed provisional (due 4pm for following day) Occur after AEMO releases market schedules (1pm for following day), but exact timing depends on pipeline operator (e.g., Moomba to Sydney pipeline due by 2.30pm) Intra-day nominations 4 cycles: 10pm previous day 5am, 11am, 5pm on the day Timing depends on pipeline operator

16. Management of physical congestion

17. 16 Pipeline priority (1): AEMO market schedules  AEMO’s market scheduling is based on gas offers: lower-priced offers scheduled ahead of higher-priced offers –I.e., capacity is rationed via the gas offer prices in times of physical constraint  Haulage priority is not taken into account –On a physically constrained pipeline, a (lower-offer) shipper with as-available haulage rights can be scheduled ahead of a (higher-offer) shipper with firm-capacity haulage rights –But actual pipeline scheduling can override this

18. 17 Pipeline priority (2): actual pipeline operator schedules  Pipeline operators schedule actual gas flows based on shipper nominations –Recall that these may differ from AEMO market schedules  Capacity is rationed in pipeline operator schedules according to haulage contracts –Firm-capacity has priority over as-available capacity  If pipeline operator schedules differ from AEMO market schedules, then deviation charges are paid

19. 18 Capacity payments  If AEMO’s market schedules apply, and firm-capacity is displaced by as-available capacity: –capacity payment is used to compensate firm-capacity  As-available shipper pays capacity payment to the (displaced) firm-capacity shipper  Capacity price is difference between market-clearing price and highest offer price on the constrained pipeline  Capacity price is applied to amount of firm-capacity shipper’s displaced gas

20. 19 Capacity payments example Shipper A Firm capacity = 10GJ Offer = 10GJ @ $2.90/GJ Scheduled = 5GJ @ $3/GJ Shipper B As-available capacity = 5GJ Offer = 5GJ @ $2.50/GJ Scheduled = 5GJ @ $3/GJ Hub Pipeline capacity = 10GJ Market-clearing price = $3/GJ (determined with other hubs) Capacity payment = $3/GJ - $2.90/GJ Capacity payment $0.10/GJ on 5GJ

21. Contact Us Name James Mellsop NERA—Auckland +64 9 928 3290 James.Mellsop@nera.com © Copyright 2012 NERA Economic Consulting Limited All rights reserved.