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Gas Industry Governance. 2004 New Zealand Petroleum Conference Presented by Dr Govind Saha CEO, Saha International Ltd 9 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

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gas industry governance

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@sahainternational.com

Session Time 4:55pm – 5:20pm

topics
Topics
  • Current Situation
  • Viewpoints
    • Government Policy Statement
    • Industry viewpoint & perspectives
  • Governance Models
    • Government Policy
    • Industry Response
    • Lessons from electricity
    • Components of governance
    • Options
the industry maintains a diversity of organisations and interests

Production

Transmission

Distribution

End-Use

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

a depleting gas supply puts pressure on lowest value added uses

Petrochemicals

Cogeneration

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)

petrochemical manufacturers may not be able to compete for higher priced gas
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)
gas is needed to meet electricity demand growth

In 1974, hydro & gas fuelled 76% of generation

Gas1.0%

Geo6.7%

Coal6.5%

Hydro75%s

Other24%

Oil9.6%

Wood 1.5%

Steam 0.1%

Biogas 0.0%

Wind 0.0%

In 2002, hydro & gas fuelled 86% of generation

Coal3.8%

Steam 1.5%

Wood 0.8%

Gas

26%

Wind 0.4%

Geo6.9%

Biogas 0.2%

Oil 0.0%

Other14%

Hydro70%

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

hydro generation can t meet electricity needs
Hydro generation can’t 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

hydro generation can t meet electricity needs despite project aqua
Hydro generation can’t 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

gas is also used to balance hydro generation fluctuations
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

95.2

97.0

67.7

5,000

0

1996

1997

1998

1999

2000

2001

2002

Source: Energy Data File, MED.

2002 figures are estimates.

Calendar Year

generators await fuel supply certainty before building new capacity
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

government policy objectives for gas and electricity are similar but independent
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 Government’s 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

gas industry government policy statement requirements
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

commerce commission gas control inquiry
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

industry work programme
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 Government’s policy.
government policy on governance
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

government policy on governance cont
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 Government’s 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

gas industry responses
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 NGC’s 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 Government’s 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.
lessons from electricity 1 four years after the inquiry governance is still not fully established
Lessons from electricity:1. Four years after the inquiry, governance is still not fully established
slide22
Lessons from Self Governance in Electricity:2. 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
components of a governance regime
Components of a Governance Regime
  • Rule making
  • Rule enforcement
  • Rule coverage
  • Rule implementation & operation
  • Funding
interests of the parties
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).
components of a governance regime issues
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.
industry wide self governance
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.
legislated governance
Legislated governance
  • May be slower to implement than industry-led governance
  • Design phase will require external experts rather than industry members
  • New Zealand’s supplies of consumer energy are arguably in as precarious a position as they were during the 1970’s 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.
conclusions
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 70’s, which led to the establishment of a dedicated Energy Ministry.
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