Gas Industry Governance

1
Gas Industry Governance

• 2004 New Zealand Petroleum Conference
• Presented by Dr Govind SahaCEO, Saha
  International Ltd9 March 2003

Contact details Govind Saha Saha International
Limited Level 4, Clayton Ford House The
Terrace Wellington 6001 NEW ZEALAND Tel. 64
(0)21 395 890 gsaha_at_sahainternational.com
Session Time 455pm 520pm
2
Topics

• Current Situation
• Viewpoints
• Government Policy Statement
• Industry viewpoint perspectives
• Governance Models
• Government Policy
• Industry Response
• Lessons from electricity
• Components of governance
• Options

3
Current Situation
4
The industry maintains a diversity of
organisations and interests
NGC
NGC
NGC
Shell Todd OMV
Maui
Genesis
Genesis
Nova
Nova
Wanganui Gas
Wanganui Gas
Swift Greymouth Southern Others
Methanex Contact 10 Large Users
Powerco Vector
5
A depleting gas supply puts pressure on lowest
value-added uses
250
200
150
Gas Delivered in 2002 (PJ)
Electricity Generation
100
50
Consumer energy
0
Source Energy Data File, MED (Calendar Year 2002
data)
6
Petrochemical manufacturers may not be able to
compete for higher priced gas

• Methanex announced in November 2003 it was taking
  a 130-million writedown on its assets in New
  Zealand and at Medicine Hat in Alberta as a
  result of a loss of natural gas feedstock at
  economical prices. (Toronto Globe Mail 27 Jan
  2004)
• Methanex has promoted its Atlas plant in Trinidad
  (63 JV with BP, 1.7mmtpa, coming onstream Q2
  2004) and its Chilean expansion (expected to be
  completed next year), which is expected to be
  completed in 2005, as part of a strategy to lower
  methanol production costs. (Reuters, 29 Jan 2004)
  

7
Gas is needed to meet electricity demand growth

• Was an increased role for
• Geothermal 6.7 ? 6.9
• Gas 1 ? 25.5
• Steam 0.1 ? 1.7
• Wind 0 ? 0.4
• Biogas 0 ? 0.2
• Was a decreased role for
• Hydro 75 ? 61
• Oil 9.6 ? 0
• Coal 6.5 ? 3.8
• Wood 1.5 ? 0.8

Source Energy Data File, MED
8
Hydro generation cant meet electricity needs
50,000
45,000
40,000
35,000
30,000
Electricity Generation GWh
25,000
20,000
Total Annual Generation
15,000
Hydro Generation
10,000
5,000
0
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source Energy Data File, MED. 2002 figures are
estimates. CAE Electricity Supply Demand to
2015. .
Calendar Year
9
Hydro generation cant meet electricity needs,
despite Project Aqua
50,000
45,000
6,900 GWh
40,000
35,000
30,000
Electricity Generation GWh
CAE 2012 forecast (expected)
25,000
20,000
Total Annual Generation
15,000
Hydro Generation
10,000
5,000
0
Z
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2012
Source Energy Data File, MED. 2002 figures are
estimates. CAE Electricity Supply Demand to
2015. .
Calendar Year
10
Gas is also used to balance hydro generation
fluctuations
30,000
Hydro generation
Gas-fired generation
25,000
20,000
Gas used for generation (PJ)
15,000
Hydro and gas-fired electricity generation GWh/yr
109.8
89.2
92.6
10,000
95.8
97.0
95.2
67.7
5,000
0
1996
1997
1998
1999
2000
2001
2002
Source Energy Data File, MED. 2002 figures are
estimates.
Calendar Year
11
Generators await fuel supply certainty before
building new capacity
10,000
9,000
8,000
7,000
Pre-Maui Peaking Capacity Removed 1997 Marsden
A 114MW Whirinaki 50MW 1998 Whirinaki
50MW 1999 New Plymouth 120MW 2000 Stratford
198MW Whirinaki 50MW
6,000
Net Installed Generating Capacity MW
5,000
4,000
3,000
MED Energy Data Files
2,000
CAE Electricity Supply Demand to 2015
1,000
0
1995
1996
1997
1998
1999
2000
2001
2002
As at March
12
Viewpoints
13
Government Policy Objectives for gas and
electricity are similar, but independent

• Gas
• The Government's overall policy objective for gas
  is to ensure that gas is delivered to existing
  and new customers in a safe, efficient, fair,
  reliable, and environmentally sustainable manner.
• The Government favours industry-led solutions
  where possible, but is prepared to use regulatory
  solutions where necessary.
• Electricity
• The Governments overall objective is to ensure
  that electricity is delivered in an efficient,
  fair, reliable and environmentally sustainable
  manner to all classes of consumer. Consumers
  electricity requirements should be met in a
  manner which is least-cost to the economy as a
  whole over the long term and is consistent with
  sustainable development.

Source Government Policy Statement Development
of New Zealand's Gas Industry, Hon Pete Hodgson,
Minister of Energy, March 2003
Source Draft Government Policy Statement on
Electricity Governance, Hon Pete Hodgson,
Minister of Energy, September 2003
14
Gas Industry Government Policy Statement
Requirements

• Production and Wholesale Markets
• protocols, standards and conventions for
  quality,balancing, reconciliation
• a secondary market
• capacity trading arrangements
• Transmission and Distribution Networks
• an open access regime across all
  high-pressuretransmission pipelines
• standards and protocols across alldistribution
  pipelines
• measurement arrangements
• Retail Markets
• standardised upgraded protocols relating to
  customer switching
• consumer complaints handling
• model consumer contracts
• Gas Safety
• effective, internationally consistent safety
  standards conventions.
• ensuring competency of all those undertaking gas
  work
• effective self-audit, monitoring and reporting on
  compliance
• Open Access to the Maui Pipeline

Source Government Policy Statement Development
of New Zealand's Gas Industry, Hon Pete Hodgson,
Minister of Energy, March 2003
15
Commerce Commission Gas Control Inquiry

• Before reaching a view on whether control should
  be introduced, the Minister has asked for the
  Commission to provide, by 1 November 2004,
  specific advice on
• whether gas pipeline services may be controlled
  in terms of section 52 of the Act
• the methodology that the Commission considers
  appropriate for valuation of pipeline assets for
  the purposes of its advice (on the matters
  covered in the Minister's letter)
• the net benefits to the public of control and
• any other matter that the Commission may think
  relevant to a decision on whether control should
  be introduced.

Source Commerce Commission Terms of Reference
letterfrom Hon Pete Hodgson, Minister of Energy,
30 April 2003
16
Industry work programme

• In response to the Gas Industry Government Policy
  Statement the industry formed an interim Gas
  Governance Establishment Group (GGEG), and
  subsequently formed the Gas Industry Steering
  Group (GISG), to facilitate the establishment of
  the work programme and structures referred to in
  the Government Policy Statement.
• the GISG will continue the various work streams
  already initiated by the GGEG to meet other
  expectations for the sector. These are focused
  on the areas of
• open access to gas pipelines,
• wholesale gas balancing
• retail customer switching
• gas contingency planning
• consumer complaints arrangements.(Source Phil
  James, Deputy Chairman GISG, as reported in
  National Gas Review Sept 2003)
• So, from its inception, the governance
  arrangements do not attempt to meet all the
  requirements of the Governments policy.

17
Governance Models
18
Government Policy on Governance

• The governing entity must
• be representative of all stakeholders, including
  consumers
• have an independent chair
• have a majority of independent persons (any
  director, employee or significant shareholder of
  the supply side of the industry does not meet the
  test of independence)
• have the independent members appointed after
  consultation with the Minister of Energy
• not operate in the interests of individual
  participants, and
• have the power to develop and enforce
  arrangements consistent with the Government
  Policy Statement.
• The Government expects the Electricity
  Commission, and the Energy Commission if it is
  formed, to use persuasion, promotion and the
  provision of information and model arrangements
  to achieve policy objectives wherever possible.
  The regulation-making powers are there as an
  incentive for reaching voluntary agreements, to
  be used only if necessary.

Source Government Policy Statement Development
of New Zealand's Gas Industry, Hon Pete Hodgson,
Minister of Energy, March 2003
Source Speech introducing the Electricity and
Gas Industries Bill - first reading, Hon Pete
Hodgson, Minister of Energy, 6 November 2003
19
Government Policy on Governance (cont)

• Provisions establishing the Energy Commission
  will not be brought into force with the rest of
  the Electricity and Gas Industries Act. They
  will be held in abeyance for use only if the
  Government decides that the gas industry has
  failed to deliver industry rules that meet the
  Governments expectations.Advantages of
  locating both electricity and gas regulatory
  functions in an Energy Commission are that the
  interrelationships between the two sectors can be
  better addressed and the skills and experience of
  the regulatory staff are likely to span both
  sectors.

Source Electricity and Gas Industries Bill28
October 2003 No. 86-1
20
Gas Industry Responses

• Maui Mining Companies
• 31 January 2003 Document Release Maui will seek
  to provide a pro-competitive and flexible gas
  transport regime developed on the principles
  expressed in the Access Code and good
  international practice.
• January 2004 An open access regime on the Maui
  pipeline is still to be agreed.
• NGC
• January 2004 Details of NGCs post-Maui
  transmission regime have still to be announced
• Gas Industry Steering Group
• 18 June 2003 Media Release The formation of
  the GISG is consistent with the Governments
  expectation of a governing entity that is
  independently chaired and is representative of
  all stakeholders, including consumers. However,
  the Group is keen to see further representation
  from upstream participants, given the importance
  of the exploration and production sector to the
  overall future development of the industry.
• So, from inception there are concerns about the
  degree of representation
• GISG is reportedly proposing a co-regulatory
  model, whereby rule-making is undertaken by the
  industry and rule enforcement based on a
  government-regulated licencing arrangement. The
  rule coverage would include pipeline access, but
  would exclude tariff setting. Only minor changes
  are expected to be required to the Bill currently
  under consideration.

21
Lessons from electricity1. Four years after
the inquiry, governance is still not fully
established
22
Lessons from Self Governance in Electricity2.
Governance projects need funding and proponents
to succeed

• MARIA Metering and Reconciliation Information
  Agreement
• Very successful
• Precursor to all others. Established
  reconciliation, enabled title tracking.
• Proponents funding ECNZ, Transpower
  significant industry input
• NZEM New Zealand Electricity Market Agreement
• Relatively successful
• Generator dominated, relied on industry structure
  that merged upstream downstream interests in
  Gentailers
• Proponents funding ECNZ, Transpower
  significant industry input
• MACQS Multilateral Agreement on Common Quality
  Standards
• Never really got going.
• Proponents funding Transpower significant
  industry input
• EGB Electricity Governance Board.
• Failed
• Not complete commonality of interest
• Commercial interests could not be compromised
• Proponents funding Electricity generating
  industry significant industry input

23
Components of a Governance Regime

• Rule making
• Rule enforcement
• Rule coverage
• Rule implementation operation
• Funding

24
Interests of the parties

• Industry Members
• Maintain existing property rights existing
  contracts
• Improve future prospects (raise barriers to
  competition, not take on excessive risk etc)
• Maintain a sustainable market position
• Avoid taking on responsibility without control
• Seek a fair allocation of risk, costs etc
• Consumers
• Improve future prospects (reduce future prices
  and improved service product quality)
• Government
• Be seen to be ensuring that the product is
  delivered in an efficient, fair, reliable and
  environmentally sustainable manner
• Minimise risk
• Satisfy political constituents
• An extremely low propensity for risk means that
  it is often prepared to pay to avoid non-supply
  (taking on the Maui ToP contract, responsibility
  for the funding of electricity reserve
  generation).

25
Components of a Governance Regime Issues

• Rule making
• Requires more funding than an industry is often
  prepared to allocate. Free-rider issues may
  occur.
• May require one or more strong proponents
• Industry and consumers were not able to agree on
  market governance rules for electricity, so
  Government intervened
• Rule enforcement
• Through legislation if the rule-making is by
  Government
• Through multilateral contracts if the rule-making
  is by industry consumers. Requires that
  contracts are agreed and signed by all.
  Ultimately, the signatory may need to be excluded
  if the contract is breached.
• Rule coverage
• The wider the industry coverage, the less likely
  self governance will work.
• Rule implementation operation
• Can be contracted out, especially if rules are
  fully proscribed.
• Funding
• Ultimately is funded by the customer or the tax
  payer
• Arrangements should minimally distort investment
  and consumption behaviours.

26
Governance of Gas versus Electricity
27
Industry-wide self-governance

• It has been widely believed that the industry can
  prepare better governance rules than the
  government
• Outcome will depend on funding, commitment,
  objectives of the proponents, and time-frames.
  Government is committed but has little appetite
  for funding. A fragmented industry has mixed
  commitment and issues with funding.
• The short time-frames may result in industry
  participants being asked to take on more risk
  than they would like. This may be alleviated by
  improved metering.
• A major problem with self governance is to get
  all players to sign up to the arrangements.
  Options include
• licensing requirements imposed by Government to
  make self-governance mandatory (as reportedly
  proposed by the GISG)
• a contractual cascade (for example, initiated by
  a transmission contract from a monopoly SOE)
• constrain the coverage of the self-governance
  arrangements to parties with like interests.

28
Legislated governance

• May be slower to implement than industry-led
  governance
• Design phase will require external experts rather
  than industry members
• New Zealands supplies of consumer energy are
  arguably in as precarious a position as they were
  during the 1970s oil crisis. Legislated
  governance provides an opportunity for
  coordinating an infrastructural response to the
  risk of gas and electricity non-supply, covering
  gas exploration and alternatives such as LNG
  imports.

29
Conclusions

• Governance structures take a considerable amount
  of time to establish. The gas industry does not
  have the luxury of time.
• Industry-led arrangements require strong
  proponents with deep pockets.
• For an essential service, some government
  oversight of the governance arrangements is going
  to be likely (especially if there are no major
  state owned players in the market?).
• While a fully centralised energy planning
  approach may no longer be needed, it could be
  noted that the energy issues now facing the
  country are similar to those we faced in the
  70s, which led to the establishment of a
  dedicated Energy Ministry.