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Allens Arthur Robinson

Focus: Energy – May 2006

Gas access regime: the MCE response to the Productivity Commission's review

In brief: The Ministerial Council on Energy has indicated that significant changes will be made to the national gas access regime in response to the Productivity Commission's 2004 review. An exposure draft of the new National Gas Law and Rules is now scheduled to be released in late July. Senior Associate Louise Thomson reviews the announced changes to the gas access regime in the context of the wider energy market reforms.

Introduction

The Ministerial Council on Energy (MCE) formally responded in May to the review of the gas access regime conducted by the Productivity Commission and completed in June 2004. In the interim period, several high-level energy reforms have been implemented or are under way, and the MCE has formulated its objectives and priorities for the gas reform agenda. The MCE's response to the Productivity Commission review is consistent with its policy decisions and an integral part of the overall energy reform agenda. The announcement of measures intended to increase regulatory certainty for new pipeline projects should provide a timely boost for the PNG-Australia pipeline project in particular.

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The gas reform agenda

New national energy market governance arrangements have already been put in place for the electricity industry with the establishment of the Australian Energy Regulator (AER) and the Australian Energy Market Commission (AEMC) and the introduction of a new National Electricity Law and Rules. These reforms have been undertaken as part of the MCE's commitment to strengthen governance systems, streamline and improve the quality of regulation (while lowering its cost and complexity), lower energy costs, and improve services. In line with this commitment, the MCE has identified as two key priorities for the natural gas industry:

  • the investigation of measures to accelerate the development of a reliable, competitive and secure gas market; and
  • the development of a national approach to energy access, covering electricity and gas transmission and distribution.

These priorities and the underlying reform objectives form the basis for the MCE's response and have shaped the key policy changes proposed for the gas access regime.

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Key changes to the gas access regime

The MCE's response to the Productivity Commission's recommendations focuses on four key policy areas:

  • the inclusion of an objects clause in the new national gas legislation;
  • the revision of the current 'coverage' tests to determine which pipelines will be subject to access regulation;
  • the introduction of 'light-handed' regulation in the form of price monitoring; and
  • measures to enhance regulatory certainty for new pipeline projects.

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Objects clause

The MCE has agreed that the new National Gas Law will have the following stated objective:

'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 objective is consistent with the current market objective in the National Electricity Law and, in general terms, with the objective proposed for the national access regime that is embodied in Part IIIA of the Trade Practices Act.

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Coverage test

The MCE has endorsed the Productivity Commission's recommendation to revise the 'coverage' test so that a gas pipeline will only be subject to economic regulation if it would generate a material increase in competition in a related market. This contrasts with the existing criterion of the promotion of competition and is consistent with the changes that are to be made to the corresponding criteria under the national access regime.

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'Light-handed' regulation

The MCE has decided to introduce a modified form of the price monitoring regime which was proposed by the Productivity Commission with a view to limiting full regulatory price control to pipelines with a 'substantial' degree of market power. As the MCE noted, there was concern that the two-tier coverage and form of regulation tests originally proposed by the Productivity Commission could in fact lead to increased regulatory complexity. 

Under the MCE's model, pipelines that meet the new, higher threshold for coverage will either be regulated by way of up-front price assessment and control (the current regime), or under a light-handed monitoring regime. This light-handed regime is based on a negotiate-arbitrate model, using existing dispute resolution procedures if access terms cannot be negotiated. It will be supported by information disclosure requirements and other regulatory measures such as ring-fencing, open access and associate contract restrictions.

A key departure from the Productivity Commission's original recommendation is the separation of the coverage determination from the decision on the form of regulation. The decision to apply light-handed regulation will be based on a 'net benefit' test which will need to be clearly defined in the new national gas legislation. While the MCE response does not set out the net benefit test in detail, the test will be based on an assessment of the costs of each form of regulation against the relative benefits of that regulation in relation to each pipeline.

The AEMC will decide the form of regulation to apply to a covered pipeline in consultation with the AER. For an existing covered pipeline with access arrangements in place, this decision may be made at any time and take effect on the expiry of the current arrangement. Where the light-handed option is applicable, the service provider would not need to submit access arrangement revisions. For pipelines being covered for the first time, the form of regulation will be decided before a service provider is required to submit an access arrangement.

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Measures to enhance regulatory certainty for pipeline projects

In line with its policy focus on the long-term security and reliability of gas supply, the MCE will implement two measures designed to encourage investment in new pipeline projects. The first will adopt the Productivity Commission's recommendation to permit up-front binding 'no coverage' rulings. Such rulings would be given for an initial 15-year period, following the same assessment process as for coverage applications. If it is determined that a proposed pipeline does not meet the revised coverage criteria, the proponent will obtain certainty that the pipeline will remain unregulated for at least 15 years. Importantly, the ruling cannot be revoked or reopened due to changes in market conditions.

The MCE's second measure is a new initiative not previously considered by the Productivity Commission and is specific to international pipelines. Based on the known proposals to bring gas into Australia from East Timor, Indonesia and – most immediately – Papua New Guinea, the MCE considers that the length of the coverage assessment process may prevent these projects from proceeding to financial close. While the option to apply for a no-coverage ruling still exists, international pipelines may also qualify for a 15-year exemption from price regulation under a streamlined assessment process. The criteria for assessment will include market power, public interest, benefits and costs, but at a higher level and within a shorter period than is the case for the assessment of domestic pipelines. The MCE proposes that the total assessment and determination period for international pipelines will be no more than 40 business days from the time of application.

An international pipeline that is exempt from price regulation will remain subject to the non-price elements of access regulation, similar to the light-handed regulation option. In addition, the pipeline service provider will be required to adopt non-discriminatory pricing principles and have an approved access arrangement covering the non-price aspects of regulation.

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Additional responses

The MCE also formally responded to the Productivity Commission's other recommendations and, where relevant, will incorporate those responses (and the key changes described above) in the draft National Gas Law and Rules. The exposure draft of that legislation, originally scheduled for late May, is now due in late July. The industry will need to wait until then to find out how the MCE will address the recommendations of its expert panel. The panel was given the task of advising the MCE on the establishment of a consistent approach to economic regulation across gas and electricity networks, as well as the highly contentious issue of price regulation methodologies and approaches. The MCE has published the expert panel's final report (delivered on 13 April), but has not yet indicated its position on the majority of the panel's recommendations.

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Further developments

The measures for binding no-coverage rulings and international price regulation exemptions are to be introduced in the South Australian Parliament as amendments to the existing Gas Pipelines Access Law. The MCE seems to have accepted that those measures are sufficiently important for the timely realisation of existing projects to justify their introduction ahead of the full package of measures.

Exposure drafts of the new National Gas Law and Rules, together with revisions to the National Electricity Law, are expected to be issued for consultation in late July, for introduction to the South Australian Parliament around November. This legislative package will implement all of the policies and measures outlined above, consistent price regulation provisions across energy infrastructure and a revised regulatory review and appeal model. The MCE is due to release its decision on the appeal model shortly.

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

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For further information, please contact:

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