Project teams’ consideration of the options While pipeline operators did not put forward a proposal to operate the capacity trading platform(s), the Capacity Trading and Day-Ahead Auction project teams still assessed the relative merits of an AEMO operated platform and a pipeline operated platform(s) using the ‘platform of choice’ evaluation criteria outlined in Chapter 2. The table below provides a summary of this evaluation. 3.2: Evaluation of the capacity trading platform(s) options Evaluation criteria AEMO Operated Platform Pipeline Operated Platform(s) Single Platform Multiple Platforms Operation of platform: Operated by independent and experienced operator Could be independent if a Joint Venture is established Operated in a predictable and reliable manner Untested but expected to be operated in this manner Untested but expected to be operated in this manner Operation of platform underpinned by a robust governance framework (Already established in NGL, NGR and Exchange Agreement) Would need to be established need to be established Transparency in costs and operation of platform Could be mandated Could be mandated be mandated Trading System Features: Provides for low transaction costs and quick and effective execution of trades (while transaction costs were considered relatively low, some concerns were raised about the barrier the annual licence fee may pose to small players) Untested Untested Integrated with pipeline operators’ nominations and scheduling processes Separate processes required Separate processes required Separate processes required Co-ordination benefits: Shippers can readily co-ordinate trades across pipelines Shippers can readily co-ordinate trades with other services on the Gas Supply Hub Scale and scope benefits and adaptability: Capable of capturing scale and scope benefits (e.g. new capacity and other gas services can be added over time and shippers can aggregate prudential requirements across the GSH) Potentially but not to the same extent as the AEMO operated platform Potentially but not to the same extent as the AEMO operated platform Future scalable and adaptable Potentially Potentially Implementation Costs: Est. $90,000-$140,000 No estimate provided but expected to be higher than the AEMO option because new exchange trading platform and matching algorithm, settlement, prudential, reporting
systems to incorporate the auction results into the pipeline scheduling process; and reporting system if they don’t already have one, to allow information on the capacity available for auction and results of the auction to be published on the Bulletin Board. To ensure a consistent approach is employed across pipelines, APGA has proposed the development of a common standard for key elements of the auction that pipeline operators would be required to comply with. APGA has estimated that it cost $2.2 million to implement this option across all the pipeline operators that could be captured by the auction, of which: $1 million would be spent on installing auction interfaces and algorithms; $1 million would be spent on system integration; and $0.2 million would be spent on reporting. The implementation cost is estimated to be $1.35-$1.45 million lower than the centralised auction, because the data exchange infrastructure that is required to support a centralised auction will not be required under this option. On the of cost recovery, APGA noted that pipeline operators would absorb the implementation costs and any ongoing costs of operating the auction. While this was considered a point of distinction between APGA’s proposal and AEMO’s proposal, the AEMC has subsequently advised that it had intended the costs of running the auction to be recovered from the auction proceeds with any residual revenue to then be provided to pipeline operators. This intention is reflected in the following statement from the Stage 2 East Coast Review: “The preferred method of allocating auction revenue is to give it to pipeline owners, the costs of running the auction have been recovered.” the proceeds of the auction would be used to recover the costs incurred under AEMO’s proposal, some pipeline operators claimed that AEMO would not have the same incentive they have to minimise costs. Some pipeline operators also noted that if the auction proceeds were insufficient to cover the costs, then market participants would bear the additional costs under an AEMO operated auction. Project consideration of the options Table 4.1 provides a summary of the key features of the proposals that AEMO and APGA presented to the project teams. Table 4.1: Day-ahead auction: Options considered by the project teams Key features AEMO Centralised Auction Pipeline Operated Auction Platforms
Table 4.2: Evaluation of the options Evaluation criteria AEMO Centralised Auction Pipeline Operated Auction Platforms Operation of platform: Operated by independent and experienced operator Operated in a predictable and reliable manner Requires a common auction standard to be developed Requires common auction standards to be developed and implemented by all pipelines Operation of platform underpinned by a robust governance framework A new governance framework would need to be established Transparency in costs and operation of platform Could be mandated Could be mandated Platform System Features: Provides for: low transaction costs quick and effective execution of the auction The use of existing systems is expected to result in low transaction costs, although the implementation costs are estimated to be higher. The use of the SRA algorithm is also expected to result in the effective execution of the auction. Data exchange requirements are, however, expected to result in the auction be conducted later than a pipeline operated auction. Some project team members noted that AEMO would not have the same incentives to minimise costs as a pipeline operator. Pipeline operators have proposed to absorb transaction Because data exchanges are not required under this option, the auction is expected to be executed relatively quickly. Integrated with pipeline operators’ nominations and scheduling processes Separate processes required Separate processes required benefits: Shippers can co-ordinate trades across pipelines Possible across all pipelines that are subject to the auction, regardless of ownership Co-ordination of auction products only possible when pipelines are operated by the same pipeline operator Shippers can, however, with primary products. Shippers can co-ordinate trades between the capacity trading platform and the auction Shippers can readily trades with other services on Gas Supply Hub (The GSH and auction would be housed on the same web portal, EMMS) Scale and scope benefits and adaptability: Capable of capturing scale and scope benefits (in so far as it relates to other services offered by the pipeline operator) Future proof, scalable and adaptable This option is expected to be future proof and scalable, but questions were raised about Depending on the governance arrangements that are put in place, this option may be future