Client Update: Energy – 25 July 2007

MCE releases second exposure draft of the National Gas Law

In brief: On 19 July, the Ministerial Council on Energy's Standing Committee of Officials released the second exposure drafts of the National Gas Law and National Gas Rules. Special Counsel Louise Thomson and Lawyer Damian Jacobs outline the key changes from the initial exposure drafts.

• Provisions moved from the NGL to the NGR
• Light regulation services
• Access arrangements (full regulation)
• Other issues
• Further developments

Provisions moved from the NGL to the NGR

The release of these drafts follows the Ministerial Council on Energy's Standing Committee of Officials' (the SCO) response to submissions on the initial exposure drafts (the Response) (see AAR Focus: Energy – March 2007). As foreshadowed in the Response, the SCO has moved a number of provisions that were in the initial exposure draft of the National Gas Law (the NGL) into the National Gas Rules (the NGR). The rationale is to set out the broad principles for the regulatory framework in the NGL, but allow flexibility to amend the detailed aspects of the framework through the NGR without recourse to Parliament.

Most of the provisions that have been moved deal with the detailed procedural aspects of application and approval processes. These include applications for coverage, revocations, light regulation determinations, access arrangement approvals and greenfields pipeline incentives. While the NGR address the specifics of information to be included in applications and the regulatory consultation procedures, the fundamental principles and criteria for making regulatory determinations remain in the NGL.

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Light regulation services

The SCO has decided that the National Competition Council will be responsible for determining whether a covered pipeline provides 'light-regulation services' and therefore is not subject to full revenue and tariff regulation under the NGL. Under the first exposure draft of the NGL, the Australian Energy Market Commission (the AEMC) was to perform this function. The timeframe for a 'light regulation determination' application has also been clarified and is currently set at four months after the date of the application.

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Access arrangements (full regulation)

The revenue and pricing principles that the Australian Energy Regulator (the AER) must take into account in exercising its powers relating to the tariffs and charges that a pipeline operator can charge for access to a fully regulated pipeline have been clarified. In particular, section 23(5) of the NGL now provides that a tariff should allow for a return that reflects the regulatory and commercial risks involved in providing the pipeline service. This aligns the NGL with the pricing principle in section 44ZZCA(a)(ii) of the Trade Practices Act 1974 (Cth).

The SCO has reaffirmed its policy of adopting a 'fit-for-purpose' decision-making model in the new gas regulatory regime. As the access arrangement approval process has been moved from the NGL to the NGR, the provisions that establish the decision-making model have also been moved to rule 39 of the NGR. Significantly, the AEMC is no longer expressly prevented from applying 'total factor productivity' as a decision-making methodology.

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Other issues

In addition to the matters discussed above, the second exposure drafts now reflects amendments to address a number of other issues that were foreshadowed in the Response. Some of these involve reverting to definitions consistent with the corresponding provisions of the existing Third Party Access Code for National Gas Pipelines (the Gas Code), which will be superseded by the NGL and NGR.

The changes include:

• The AER's information-gathering powers have been clarified. The NGL now sets out the factors that the AER must take into account in deciding whether the issue of a regulatory information instrument is necessary for the performance or exercise of its functions. The AER is also now expressly prevented from issuing a 'regulatory information instrument' solely for the purpose of investigating possible breaches of the gas regulatory regime or conducting proceedings in relation to such breaches (NGL, section 47).
• The 'ring fencing' requirements have been clarified. In particular, the SCO has adopted the definition of 'marketing staff' set out in the Gas Code and clarified the AER's obligations in carrying out a 'ring fencing' determination (NGL, sections 132 and 137). Further, rule 30 of the NGR provides that a service provider is to be exempt from the 'ring fencing' requirements if the cost of compliance outweighs its public benefit.
• The prohibitions in relation to associate contracts have been simplified and the definition of 'associate contract' is now consistent with the definition in the Gas Code (NGL, sections 2, 141 and 142). The NGR now provides that the AER may approve an associate contract if the resulting public benefit would outweigh any public detriment (NGR, rule 31(3)).
• The AER's discretion to designate services as 'reference services' has been narrowed, the relevant test being whether services are likely to be sought by a significant part of the market (NGL, section 2, NGR rules 50 and 65).

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Further developments

The SCO will now consult with stakeholders who made substantive submissions on the first exposure draft. The SCO has been careful to emphasise that this round of consultation is not intended to result in significant changes to its previously published policy on the national gas framework, and will instead focus on whether the second exposure draft implements that policy.

Further, the SCO has indicated that the gas regulatory regime will make provision for the establishment of a gas bulletin board to '... facilitate trade in gas... through the provision of system and market information which is readily available to all users, potential users and other interested parties.'¹ To ensure a timely release, the second exposure drafts did not contain such provisions. The SCO has indicated that the majority of the bulletin board provisions will be included in the NGR, with only a minimum of amendments to the NGL.

We will keep you informed of further developments in this area. In the meantime, if you would like further information, please contact one of the people below.  

Footnotes

1. Bulletin Board Working Group, 'Bulletin Board Business and Data Requirements', 7 June 2007, 5.

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For further information, please contact:

Grant Anderson Partner, Melbourne Ph: +61 3 9613 8928 Grant.Anderson@aar.com.au		Ted Hill Partner, Melbourne Ph: +61 3 9613 8588 Ted.Hill@aar.com.au
John Greig Partner, Brisbane Ph: +61 7 3334 3358 John.Greig@aar.com.au		David Maloney Partner, Sydney Ph: +61 2 9230 4724 David.Maloney@aar.com.au
Angus Jones Partner, Perth Ph: +61 8 9488 3709 Angus.Jones@aar.com.au

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