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Focus: Energy – June 2008

New national gas law to be introduced

In brief: The National Gas (South Australia) Act 2008, introducing the long-awaited National Gas Law, is in the final stages of its passage through the South Australian Parliament and will commence on 1 July 2008. Special Counsel Louise Thomson (view CV) and Articled Clerk Stephanie Salmon look at the key changes to the national gas access regime.

How does it affect you?

  • The Australian Energy Regulator will become the economic regulator for all covered pipelines outside Western Australia, replacing the Australian Competition & Consumer Commission and jurisdictional regulators. The National Competition Council will retain its existing role in relation to pipeline coverage applications.
  • There will be a single overarching national gas objective (corresponding to the equivalent national electricity objective). This contrasts with the list of potentially conflicting factors governing the old regime, and should reduce the scope for debate about the emphasis to be placed on individual revenue and pricing principles.
  • An alternative 'light' form of access regulation may be available for some covered pipelines, but the new regime will not affect the content of existing gas access arrangements until the next scheduled review.
  • The Australian Energy Regulator will have a specific power to direct third party service providers to maintain and provide information, if reasonably necessary for its economic regulatory functions.
  • System and market information will be published on a new national gas market bulletin board, to facilitate gas and capacity trading and assist in emergency management.

Background

Almost four years after the Productivity Commission's review of the gas access regime was published, the National Gas Law (the NGL) is about to come into effect. All jurisdictions except Western Australia are expected to adopt the NGL by 1 July. Western Australia will enact its own law in substantially the same terms, but will retain its own regulator. The National Gas Rules (the NGR) will be made with the commencement of the NGL.

The NGL and NGR, and the policy and principles underlying them, have been subject to extensive consultation and review under the ongoing energy market reform program of the Ministerial Council on Energy (the MCE). The new regime has developed out of the 2002 Parer Review, the Productivity Commission's 2004 review of the gas access regime and the 2006 report of an Expert Panel appointed by the MCE on energy access pricing. Two exposure drafts of the NGL and NGR were published for consultation in November 2006 and July 2007.

As the NGL and NGR are adopted in each jurisdiction, they will replace the existing national gas access regime comprised by the Gas Pipelines Access Law and Code. Key changes to the previous regime include:

  • a single national gas objective to guide both the Australian Energy Market Commission (the AEMC) as rule maker and the Australian Energy Regulator (the AER) as regulator;
  • the application of national energy market governance arrangements;
  • a revised coverage test and new 'light' regulation regime;
  • a revised regime for revenue and pricing regulation;
  • revised information gathering powers for the AER;
  • extended grounds for merits review of some AER decisions; and
  • provisions to allow for the operation of a new market information bulletin board.

Where practical, the new regime will align the objectives, governance, principles and procedures for the economic regulation of gas pipeline services with the recently revised National Electricity Law. We explain these changes in more detail below.

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National gas objective

A fundamental objective of the MCE's energy market reforms is to establish a regulatory framework that encourages efficient investment in energy infrastructure. By creating the right climate for investment, with appropriate safeguards, greater security and reliability of gas supply should be achieved at a fair price. This objective underlies the other key reforms described in this article. The national gas objective expressed in the NGL 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.

This single objective replaces the list of potentially competing objectives in the old gas access regime. It is to be interpreted as an economic concept that will guide the AEMC, AER and National Competition Council (the NCC) in the performance of their functions.

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New governance arrangements

The key bodies responsible for the economic regulation of gas transmission and distribution pipelines will be the AEMC, with rule-making and market development functions, and the AER as the national economic regulator.

Until now, jurisdictional regulators have been responsible for approving gas access arrangements for most distribution pipelines, while the ACCC performed the corresponding role for most transmission pipelines. The new arrangements will see the AER assuming all of these functions. In Western Australia, both transmission and distribution pipelines will continue to be regulated by the Economic Regulation Authority. However, the same regulatory objective and principles will apply.

This governance framework has already been adopted for network regulation in the national electricity market. It is intended to achieve a clear separation between the powers of rule making and enforcement, and greater consistency of regulatory decision-making through a single national regulator.

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Coverage test and 'light' regulation

Economic regulation will only apply where 'coverage criteria' are met. These criteria remain largely unchanged from the old access regime, except that a pipeline cannot be covered unless regulation would generate a 'material' increase in competition in a related market. This ensures consistency with the national access regime in Part IIIA of the Trade Practices Act, and is intended to ensure the increase in competition would be non-trivial.

A pipeline that meets the coverage criteria will be regulated in one of two ways: up-front price assessment and control (the current regime), or 'light' regulation (essentially a price monitoring regime). Pipelines that are 'designated' by regulations are not eligible for light regulation. Initially, the existing covered pipeline networks in South Australia, Victoria and Western Australia are expected to be designated. For non-designated pipelines, the decision to apply light regulation will be based on an assessment of how each form of regulation will affect the provision of access to services and the costs incurred by both service providers and users.

Services provided by a light regulation pipeline will not be subject to economic regulation, although service providers must publish the price for those services and report to the AER on access negotiations. They may choose to submit a 'limited access arrangement' containing non-price terms for the AER's approval, or simply publish those terms and conditions on their websites. However, in determining access disputes for light regulation pipelines, the AER can specify price terms.

The NCC must make a determination on the form of regulation at the same time as it makes a coverage recommendation for any non-designated pipeline. For an existing covered pipeline with an access arrangement in place, an application for light regulation may be made and decided at any time, but will only take effect on the expiry of the current access arrangement.

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Revised pricing principles

Consistent with the National Electricity Law, there are six revenue and pricing principles in the NGL, which aim to balance energy consumers' short-term interest in price benefits with their long-term interest in a reliable supply, service enhancements and timely investment in new capacity. In summary, the principles are:

  • service providers should have a reasonable opportunity to recover at least their efficient costs;
  • service providers should have effective incentives to promote efficient investment in, and use of, pipelines;
  • the AER should have regard to the capital base adopted by any previous determination by the ACCC or jurisdictional regulator;
  • prices and charges should allow for a return commensurate with the commercial and regulatory risks involved;
  • the AER should have regard to the economic costs and risks of the potential for under and over investment in the pipeline; and
  • the AER should have regard to the economic costs and risks of the potential for under and over utilisation of the pipeline.

The NGR include detailed principles and criteria to determine each element of a service provider's revenue requirement and tariff calculations. Importantly for existing pipelines, the opening capital base is to be calculated on the same basis as the old regime. For specified elements of a service provider's revenue determination, the AER will have only a 'limited discretion' to reject the service provider's proposal. Limited discretion means that the AER must approve that element if satisfied that it is consistent with the applicable criteria.

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Information gathering powers

Regulatory information requirements can create considerable tension between regulators and regulated businesses. The AER needs adequate information to assess efficient price outcomes for energy services, while service providers are concerned to protect commercially sensitive information and avoid unnecessarily high administrative costs.

The information gathering powers in the NGL directly address the outsourcing of services by regulated businesses, both to related companies and external providers. Any person who supplies a service that 'contributes in a material way' to the provision of a regulated pipeline service is defined as a 'related provider', and can be required to maintain and provide the same information as a regulated business.

The AER can issue general information orders (applicable to a class of service providers and related providers) or specific regulatory information notices. Both types of instrument can require a provider to give specified information and to prepare, maintain or keep information in a specified manner and form.

There are a number of restraints on the AER's information gathering powers. For example, the AER must be satisfied that its information requirements are reasonably necessary for the performance of its functions. Compliance costs are one of the factors to be taken into account in that assessment. The NGL also prohibits the use of information orders or notices solely for compliance monitoring or investigation purposes.

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Merits review

The NGL includes a process for limited merits review by the Australian Competition Tribunal of decisions relating to coverage, light regulation, associate contract approvals, ring-fencing requirements, greenfields incentives (15-year no coverage rulings and price regulation exemptions), and final access arrangement approvals.

The main changes from the old regime relate to the grounds for review. Merits review will only be available on the grounds that the original decision involved:

  • a material error of fact;
  • 'incorrect exercise of discretion in all the circumstances'; or
  • an unreasonable decision in all the circumstances.

In addition, the Tribunal must be satisfied that there is a serious issue to be heard. For revenue-related errors, the amount in issue must exceed $5 million, or 2 per cent of average annual regulated revenue. If quantification is not readily possible, the amount in issue must be material in terms of an entity's regulated revenue.

There is a relatively wide scope for jurisdictions and others with a sufficient interest in the original decision to make submissions in merits review proceedings. User and consumer associations and interest groups may also intervene with leave of the Tribunal.

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Bulletin board

The NGL establishes a natural gas services bulletin board for the publication of certain operational and market information. The operators of significant pipelines, storage facilities and production facilities will provide specified capacity and operating information to the bulletin board operator on a daily basis. Participants will be able to post details of spare gas or capacity requirements or availability to facilitate trading. The bulletin board will also include demand forecasts and emergency information.

The NGL includes immunities from liability for providing and publishing information in accordance with the NGR and bulletin board procedures.

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