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Allens Arthur Robinson

Focus: Energy – June 2006

Greenfields gas pipeline incentives

In brief: In May, the Ministerial Council on Energy formally responded to the Productivity Commission's 2004 review of the gas access regime. The response included measures to promote investment in new pipeline infrastructure by providing regulatory certainty for the first 15 years of a pipeline's operation. Specific legislation to implement those greenfields pipeline incentives has been passed. Senior Associate Louise Thomson and Articled Clerk Victoria Wark look at some of the details.

Introduction

The Gas Pipelines Access (South Australia) (Greenfields Pipeline Incentives) Amendment Bill 2006 (the Bill) was passed by the South Australian Parliament on 8 June 2006 and at the time of publication was awaiting Royal Assent. The proposed new National Gas Law and Rules, which will represent the Ministerial Council on Energy's (the MCE) comprehensive gas reform package, are currently scheduled for release in late July and may be subject to lengthy consultation. A review of the MCE's announced changes to the gas access regime is available on our website. (See Focus: Energy – May 2006.) 

The Bill fast-tracks greenfields pipeline incentives by amending the existing national gas legislation. The amendments will automatically be incorporated into the corresponding law of the Commonwealth and each state and territory (except Western Australia).

The Bill introduces a new Part 3A into schedule 1 of the Gas Pipelines Access (South Australia) Act, known as the Gas Pipelines Access Law. Part 3A allows the proponent (or service provider) of a greenfields pipeline project to apply to the National Competition Commission (NCC) for:

  • a binding determination that the pipelines will not be subject to any access regulation ('no-coverage') for 15 years; and/or
  • a 15-year exemption from price and revenue regulation (international pipelines only).

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Eligibility for incentives

These incentives relate to 'greenfields pipeline projects', and an application must be made before the commissioning of a pipeline. A greenfields pipeline project is a new pipeline construction project (whether transmission or distribution):

  • where the proposed pipeline is to be structurally separate from an existing pipeline;
  • for a major extension of a pipeline that is not 'covered' under the existing Gas Pipelines Access Law; or
  • for a major extension of a 'covered' pipeline, where the extension will not be included in the existing access arrangement.

The price regulation exemption will only be available to greenfields pipeline projects for 'international pipelines'. That is, pipelines bringing gas from sources outside Australia and its territorial waters.

Each incentive has different assessment criteria and timeframes, which are outlined below. In theory, it would be more difficult to meet the criteria for no-coverage declarations, although in practice the differences may not be significant. The timeframe for a no-coverage determination, however, is up to three months longer. The Bill allows international projects to seek a price regulation exemption as an interim measure and also pursue a no-coverage determination. Conversely, a project may apply for a no-coverage determination and, if unsuccessful, request the application to be considered as an application for a price regulation exemption.

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Application processes

The Bill provides that for both incentives, applications would be made to the NCC for assessment. The NCC will engage in public consultation and make a recommendation to the federal minister. The minister must then make a decision on the application which must consider, but need not follow, the NCC's recommendation. Importantly, there is no provision in the Bill for the minister not to make a decision, and no specific power to extend the decision period.

The process for a no-coverage determination will involve public consultation, a draft recommendation by the NCC, further consultation and a final recommendation. The minister's decision would be made within 42 days after the NCC's final recommendation, with the overall assessment period for the application being up to about 140 days. For a price regulation exemption, that time may be 56 days or less. In that case, the period for public consultation is at the discretion of the NCC and there is no provision for a draft recommendation.

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No-coverage determinations
Assessment criteria

The Bill states that the NCC must recommend, and the minister must issue a no-coverage determination, if they are not satisfied that the pipeline project would meet all the pipeline coverage criteria in Part 3A (ie if just one criterion is not met the no-coverage determination will be issued). The criteria are that:

  • access to the pipeline would promote a material increase in competition in another market;
  • it would be uneconomic to develop another pipeline to provide the services to be provided by the pipeline;
  • access to the services could be provided without undue risk to human safety; and
  • access to the services would not be contrary to public interest.

These are the revised criteria that the MCE has decided to implement for decisions on pipeline coverage generally. Their application, however, will be limited to Part 3A until the implementation of the wider gas reform package mentioned earlier.

In deciding whether the criteria are satisfied, the NCC and the minister must consider the new national gas objective. The national gas objective is 'to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas'.

Effect of no-coverage determination

A no-coverage determination means that the proposed pipeline does not meet the amended pipeline coverage criteria and will not be subject to access regulation under the Gas Pipelines Access Law (or, presumably, under a subsequent regime). The determination takes effect when made and is binding for 15 years from the commissioning of the pipeline. The Bill provides that early termination is only possible in limited circumstances, namely if:

  • the pipeline is not commissioned within three years of the determination (although this period may be extended by regulation);
  • requested by the service provider; or
  • the application misrepresented, or failed to disclose, material information required by Part 3A.

Where a no-coverage determination applies, a third party cannot apply for the pipeline to be covered unless it is seeking coverage after the end of the no-coverage period.

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Price regulation exemption for international pipelines
Assessment criteria

The assessment by the NCC and the minister of an application for price regulation exemption will essentially be a public benefit/detriment analysis. In its analysis the relevant decision-maker must have regard to the new national gas objective (see above) with particular reference to:

  • the implications of the exemption for relevant markets (including the effect on market power); and
  • other possible effects on the public interest,

and may also have regard to any other relevant matter.

MCE's policy statements indicate that the consumer emphasis is on 'long term'. In the absence of particular market power factors or efficiency concerns, it is likely that investment in a pipeline with the capacity to bring significant additional supplies to Australia would satisfy the objective.

Effect of price regulation exemption

An exempt pipeline will not be subject to price or revenue regulation under the Gas Pipelines Access Law for 15 years from the commissioning of the pipeline. However, the access rules on ring-fencing, provision of information to access seekers, timelines for access negotiation, regulatory approval of contracts with related parties, and rules against preventing or hindering access will apply to the exempt service provider. In addition, the service provider must:

  • maintain a register of spare capacity;
  • report to the Australian Competition and Consumer Commission (the ACCC) and the federal minister annually, and whenever requested by either of them, on access negotiations and their outcomes; and
  • not engage in price discrimination contrary to the undertaking in its limited access arrangement.

Early termination of a price regulation exemption will only be possible in the same limited circumstances as a no-coverage determination.

Limited access arrangements

A price regulation exemption will be ineffective unless a limited access arrangement, submitted within 90 days of the exemption, is in force and approved by the ACCC. The Bill gives little guidance on the content of a limited access arrangement – simply that it must not contain any provision for price or revenue regulation and that it must include an undertaking by the service provider not to engage in price discrimination unless the discrimination:

  • is conducive to efficient service provision; or
  • can be justified on some other rational economic basis.

A breach of this undertaking will be a breach of the conditions of exemption.

There are no time limits for the ACCC to publish its draft and final decisions on a limited access arrangement, although there are fixed periods for public consultation. The final decision must approve the proposed access arrangement with or without amendment. The assessment criteria will be the same as for other access arrangements under the Gas Code, requiring the ACCC to take into account the legitimate business interests of the service provider and users and, importantly, the existing contractual rights of any foundation users of the pipeline.

Once approved, the limited access arrangement will remain in place for the period of the exemption, with only the service provider being entitled to initiate revisions.

Conversion to no-coverage determination

If a price regulation exemption has been granted for an international pipeline, the Bill allows a service provider to apply for a no-coverage determination at any time before the exemption expires. If that application is successful, the no-coverage determination will supersede the exemption (and any limited access arrangement) for the unexpired period of the original exemption.

We will continue to monitor the impact of the legislation on the industry and will keep you informed. If you have any questions relating to this or any other energy issue please feel free to call.

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