Focus: Energy – March 2007

National gas law update

In brief: In March, the Standing Committee of Officials of the Ministerial Council on Energy released its response to submissions on the exposure draft of the National Gas Law. Senior Associate Louise Thomson and Lawyer Damian Jacobs discuss the proposed reforms and their ongoing evolution.

• Introduction
• Governance
• National gas objective
• Which pipelines are covered by the new regime?
• Light regulation services
• Access arrangements (full regulation)
• Other issues
• Further developments

How does it affect you? Access to gas pipelines will be regulated at a national level by the Australian Energy Regulator as the independent industry regulator for both transmission and distribution pipelines, and the Australian Energy Market Commission as the rule-maker and market development body. Western Australia will retain its own regulator. A materiality threshold will apply when judging whether increased competition will flow from coverage by the national access regime. Some pipelines can be classified as providing 'light regulation services'. The Australian Energy Regulator will not regulate access price or revenue for these pipelines, but will arbitrate access disputes.  New revenue and pricing principles will apply to fully regulated pipelines. The recently-introduced exemptions for greenfields pipelines and international pipelines will continue to apply.

Introduction

The Standing Committee of Officials (SCO) of the Ministerial Council on Energy (MCE) has released its Response to Issues Raised in Submissions on the National Gas Law.

The response follows the release of exposure drafts of the National Gas Law (NGL) and the National Gas Rules (NGR) in November 2006, which in turn were the result of an extensive review of the existing Gas Pipelines Access Law that commenced in 2003. For further discussion of this process, refer to our Focus: Energy publications of May, June and August 2006. The NGL and NGR are part of a reform package that also includes a series of amendments to the National Electricity Law (NEL) and National Electricity Rules (NER). The SCO's recent response only addresses submissions on the NGL.

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Governance

As foreshadowed, the new regime draws the gas access governance arrangements together under a national energy (ie electricity and gas) framework, overseen by the Australian Energy Regulator (AER) (as regulator) and the Australian Energy Market Commission (AEMC) (as rule-maker and market development body). Western Australia will retain its own institutional framework. The submissions raised several issues in relation to the division of functions between the AER and the AEMC, which the SCO has acknowledged require clarification.

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National gas objective

The draft NGL includes a 'national gas objective', which is similar to the revised national electricity objective proposed for the NEL:

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.

The SCO has indicated that the explanatory material for the NGL will clarify that the primary objective of the new regime is 'economic efficiency in investment in, and use of, natural gas infrastructure.' This clarification is significant because it suggests that consumer interests per se should not be given the same or greater priority than efficiency. The assumption is that economic efficiency will work in the long-term interests of consumers. 

The AEMC, AER and the National Competition Council (NCC) are all required to have regard to the national gas objective in carrying out their functions under the NGL. The inclusion of a single guiding principle is intended to promote consistency and certainty in regulatory decision-making, creating a more attractive environment for investment. For this reason, the SCO has rejected submissions calling for retention of the current list of (sometimes conflicting) factors to be taken into account by regulators.

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Which pipelines are covered by the new regime?

A pipeline will be covered by the new regime if:

• the relevant Minister, taking into account the recommendations of the NCC, determines that the pipeline should be covered on the basis that it meets all four of the 'pipeline coverage criteria' in section 11 of the draft NGL (namely, that access would promote a material increase in competition in another market, it is uneconomic to duplicate the pipeline, access is consistent with safety and access is not contrary to the public interest);
• the pipeline is developed following a competitive tender process approved by the AER under the new regime; or
• the service provider voluntarily submits an access arrangement in respect of the pipeline to the AER.

Any person can apply to the NCC to have a pipeline covered by the regime (or for the revocation of coverage) except where the pipeline is subject to a 15-year 'greenfields' exemption (see our Focus: Energy June 2006). The SCO's response indicates that any further changes to the coverage criteria are unlikely.

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Light regulation services

One of the major features of the new regime is the availability of 'light handed' regulation for certain covered pipelines. This may include some pipelines that are regulated under the existing regime. The current draft of the NGL contemplates that a service provider can apply to the AEMC for a determination that a pipeline provides 'light regulation services'. In determining the application, the AEMC must assess the degree of market power of the service provider and the potential for abuse of that market power (these concepts are embodied in the 'form of regulation factors' contained in section 13 of the draft NGL). As a result of the recent consultation process, the MCE is being asked to reconsider whether the AER, AEMC or NCC should determine light regulation applications. The SCO has indicated that the NGL will direct the relevant decision-maker to focus on which form of regulation (light handed or full regulation) is most likely to achieve the national gas objective.

If the application is granted, services provided by the pipeline will not be subject to price or revenue regulation by the AER unless the service provider voluntarily submits an access arrangement. However, the NGL will require providers of light regulation services to publish the price for those services and the terms and conditions of access on their websites.

Light regulation service providers can also choose to submit a 'limited access arrangement' for approval by the AER. The purpose of a limited access arrangement is to set out the non price terms and conditions of access to the relevant pipeline services, which the AER must apply when arbitrating an access dispute. However, in such an arbitration, the AER will also have the power to set the price for access to the pipeline in accordance with the revenue and pricing principles (outlined in the section below) and the national gas objective.

The SCO's response highlights some difficulties with the current timeframes surrounding light regulation determinations. These should be corrected in the final version of the NGL, but it appears that light regulation determinations will generally have to be made within four months of the date of the application.

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Access arrangements (full regulation)

Generally, service providers of fully regulated pipelines will be required to submit an access arrangement to the AER for approval, including the price and other terms and conditions of access to regulated services. The approval process will involve public consultation, a draft decision and a final decision by the AER within prescribed timeframes. The provision in the current law for a 'further final decision' will be removed. If the AER makes a final decision not to approve the service provider's proposed access arrangement, the AER must make an access arrangement itself within two months of the final decision.

In making decisions on tariffs and charges, the AER must take into account the revenue and pricing principles established in section 21 of the draft NGL, in addition to the national gas objective. In summary, the proposed revenue and pricing principles are:

• a service provider should have a reasonable opportunity to recover at least the efficient costs incurred in providing reference services and complying with regulatory obligations;
• a service provider should have effective incentives to promote economic efficiency in providing reference services;
• allowance should be made for the value of the relevant pipeline;
• regard should be had to any pipeline valuation set out in a previous access arrangement or regulatory decision;
• regard should be had to the economic costs and risks of the potential for under and over investment in the pipeline by a service provider; and
• regard should be had to the economic costs and risks of the potential for under and over utilisation of the pipeline.

The SCO is seeking specific advice on the use of the terms 'value' and 'valuation' in these principles and has noted that further clarification will be provided if necessary.

In relation to regulatory decision-making, the NGL will establish a 'fit for purpose' model. Under this model, subject to the revenue and pricing principles, the AEMC will be responsible for developing suitable assessment criteria in the NGR for alternative forms of regulation (noting that the AEMC is precluded from mandating a total factor productivity methodology unless permitted by regulations made under the NGL). Different criteria may involve different degrees of regulatory discretion. This represents a significant shift from the current judicial interpretation of the Gas Pipelines Access Law, which requires regulators to adopt a 'propose-respond' approach to decision-making. In other words, there is currently a presumption in favour of accepting an element of a proposed access arrangement, even if it does not represent the optimum or most appropriate outcome, provided that it is reasonable. Section 24 of the draft NGL effectively rejects this presumption by stating that the AER is not obliged to approve any element of a proposed access arrangement unless required by the NGR. Some submissions questioned whether aspects of the draft NGL are consistent with the proposed 'fit for purpose' decision-making model, and the SCO has indicated that clarifications will be made to address some of these issues.

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Other issues

The SCO has accepted the need to change a number of definitional and procedural aspects of the draft NGL, including in relation to ring-fencing, the approval of associate contracts, the definition of reference services and the expiry of access arrangements. In some cases, this will involve reinstating provisions that are in the Gas Code under the existing Gas Pipelines Access Law. The final version of the NGL will also include changes in relation to certain timeframes and regulatory functions and powers. For example, the information gathering powers of the AER will be clarified in relation to their application to persons other than the service provider who 'significantly contribute' to the provision of pipeline services. This is an extremely topical area, which has recently featured in the press¹.

The SCO has also accepted submissions that the draft NGL contains significant procedural detail that should be contained in the NGR, with the NGL intended to address high-level principles. As a result, a fairly substantial amount of drafting will now need to be 'moved' to the NGR.

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Further developments

A further response from the SCO on issues raised in submissions on the NGR is expected shortly. The SCO has flagged that this response will look at the possibility of amending the 'new facilities investment' criteria for transmission pipeline expansions. In this regard, the SCO will consider whether the regulatory risk for such projects could be reduced by modifying these criteria. However, the SCO does not accept that the 'greenfields' incentives should apply to extension projects.

The MCE is then expected to proceed to a final version of the NGL and NGR, together with amendments to the NEL and NER, for introduction to the South Australian Parliament. Once the legislative package has been passed in South Australia, other jurisdictions will need to pass legislation adopting the NGL and NGR.

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

Footnotes

1. See, eg., The Australian Financial Review 'Gas regulation at flashpoint' (28 February 2007, p.61), 'Bidders in three-for-all to take over WA's Alinta' (15 March 2007, p.15), 'Alinta in fight with utilities regulator' (20 March 2007, p.17).

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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
David Maloney Partner, Sydney Ph: +61 2 9230 4724 David.Maloney@aar.com.au		John Greig Partner, Brisbane Ph: +61 7 3334 3358 John.Greig@aar.com.au
Angus Jones Partner, Perth Ph: +61 8 9488 3709 Angus.Jones@aar.com.au

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