Package of reforms to overhaul gas pipeline regulation

Articles Written by Anthony Groom (Partner), Peter Rose (Partner)

A package of proposed reforms to the legislation regulating access to natural gas pipelines has been released for stakeholder feedback. The reforms, which are contained in the draft National Energy Laws Amendment (Gas Pipelines) Bill 2021, involve changes to the National Gas Law (NGL) and associated regulations, the National Gas Rules (NGR), and the National Energy Retail Law (NERL). They are intended to implement reforms that were agreed to by Energy Ministers in May 2021.

According to the Consultation Paper that accompanies the draft reform package, the agreed reforms provide for the implementation of a simpler regulatory framework to support the safe, reliable and efficient use of and investment in pipelines, while also:

  • posing a more effective constraint on exercises of market power by service providers;
  • facilitating better access to pipelines that would not otherwise provide such access;
  • providing greater support for commercial negotiations between shippers and service providers (through more transparency, including greater price transparency, and improvements to the negotiation framework and dispute resolution mechanisms); and
  • streamlining the governance arrangements.

The package also includes changes that have been developed to impose price reporting obligations on the operators of gas compression and storage facilities (to bring them into line with the reporting requirements that apply to gas pipelines).

The Consultation Paper identifies a number of specific matters about which stakeholder feedback is sought, as well as inviting feedback on the proposed changes more generally. The closing date for submissions in relation to the draft reform package is 5pm (AEDT) on Thursday 14 October 2021.

Following consideration of feedback received through the consultation process, the package of regulatory amendments will be finalised for enactment through the South Australian Parliament. Under the applied law regime the changes will then flow through to:

  • in relation to the NGL and NGR, all jurisdictions except Western Australia; and
  • in relation to the NERL, the jurisdictions that have adopted the National Energy Customer Framework (i.e. the ACT, NSW, Queensland and South Australia).

Western Australia has its own versions of the NGL and NGR under the National Gas Access (WA) Act 2009 and may give effect to the NGL and NGR changes by enacting amendments to this Act.

The key elements of the proposed reforms are summarised below.

Access to pipelines and forms of regulation

Under the current regulatory framework, pipelines which are classified as “scheme pipelines” are subject to either full regulation or light regulation (if a light regulation determination is in place), whereas pipelines classified as non-scheme pipelines are subject to the provisions of Part 23 of the NGR, or fully exempt from regulation if the pipeline does not provide third party access. Under the agreed reforms, all pipelines will be required to provide third party access if it is sought.  “Scheme pipelines” will be subject to a stronger form of regulation based on the existing full regulation (i.e. negotiate-arbitrate with reference tariffs approved by the regulator and a regulatory oriented dispute resolution mechanism). “Non-scheme pipelines” will be subject to a lighter form of regulation based on Part 23 (i.e. a negotiate-arbitrate model with information disclosure and a commercially oriented dispute resolution mechanism), which will be strengthened through the inclusion of a number of safeguards that currently apply to light regulation (but not the prohibition on inefficient price discrimination).

Greenfields pipeline incentive

An exemption will be available to new pipelines, where it can be demonstrated that the pipeline is unlikely to have substantial market power over the exemption period. This exemption will replace the existing competitive tender and 15 year “no coverage” determination frameworks. It will provide the new pipeline with an exemption from being a “scheme pipeline” and therefore subject to the stronger form of regulation for a period of up to 15 years. However, the pipeline will be considered to be a “non-scheme pipeline” and accordingly will be subject to the lighter form of regulation. Notably, under the proposed amendments to the non-scheme pipeline access dispute provisions in the NGR, where a pipeline is subject to a greenfield incentive determination and it is determined by the  relevant  regulator that the pipeline was constructed as a result of a competitive tender process between two or more service providers, then the relevant regulator may approve prices and price escalation mechanisms for that pipeline. These are to be applied in any arbitration proceedings.

Pipeline expansions

The draft legal package provides for expansions of both scheme and non-scheme pipelines to be treated as part of the same pipeline for regulatory purposes. Previously the regulatory framework provided service providers and the relevant regulator with some discretion as to whether expansions of a pipeline are to be treated as part of a scheme pipeline.

Pipeline classification mechanism

The definitions of “distribution pipeline” and “transmission pipeline” in the NGL are to be amended to make clear that a pipeline is to be classified in accordance with the licence or authorisation granted in respect of the pipeline under jurisdictional gas legislation, unless the relevant regulator has classified it differently under relevant provisions of the NGL and NGR. This change is intended to address the potential for pipelines to self-classify in order to avoid certain obligations under the NGR (such as reporting obligations) or provisions such as the Short Term Trading Market provisions (which only apply to distribution pipelines) or the capacity trading reform package (which only applies to transmission pipelines).

Form of regulation test

The coverage test that is currently applied to determine whether a pipeline should be classified as a “scheme pipeline” will be removed, as will the current form of regulation test that is used to determine whether a scheme pipeline should be subject to full regulation or light regulation. Instead, the form of regulation test will be modified as described below and used to determine whether a pipeline will be a “scheme pipeline” or a “non-scheme pipeline”. The body responsible for making form of regulation decisions will be the “relevant regulator’, being the AER in eastern Australia and the Northern Territory and the ERA in Western Australia (rather than the National Competition Council as is currently the case.)

The principles to be applied by the relevant regulator in making a “scheme pipeline” determination (and a greenfields incentive determination) will be based on the test currently contained in s. 122 of the NGL (which governs the making of light regulation determinations), amended as follows:

  • the matters that the regulator can have regard to will be amended to allow it to consider any information obtained in the course of performing any of its functions (including the new monitoring function – see below) and any reporting by a mediator through an access dispute process;
  • the regulator will be allowed to draw an adverse inference (and impliedly to determine that a pipeline should be a scheme pipeline) if the service provider has not provided any required information in a timely manner and to the reasonable satisfaction of the regulator; and
  • the form of regulation factor in the NGL which refers to the extent to which information is available will be removed.

In the case of a greenfields incentive determination, the regulator will also have to have regard to the extent to which the form of regulation factors are likely to pose an effective constraint on the exercise of market power for the period that the determination is in effect.

Provision will also be made for service providers to elect for their pipeline to become a “scheme pipeline” (replacing the operation of the current voluntary access arrangement mechanism).

Extension of safeguards

As mentioned above, the lighter form of regulation which is to apply to “non-scheme pipelines” (based on the current Part 23 of the NGR) will be strengthened by applying additional safeguards that currently apply to “scheme pipelines”. These safeguards include:

  • the prohibition on preventing or hindering access;
  • the prohibition on bundling services unless reasonably necessary;
  • the ring fencing and associate contract provisions; and
  • measures relating to queuing, extensions and expansions, capacity trading and changes to receipt and delivery points.

Note however that service providers of non-scheme pipelines that are exempted from the information disclosure obligations (discussed below) because they are not a third party pipeline will also be able to obtain an exemption from the ring fencing requirements and the associate contract provisions.

Pipeline interconnection requirements

The draft legal package provides for pipeline interconnection principles to be set out in the NGR. These principles will apply to any form of interconnection to both “scheme pipelines” and “non-scheme pipelines” and are intended to enable any person to connect with a pipeline where it is technically feasible and consistent with the safe and reliable operation of the pipeline to do so, and where the person is prepared to fund the interconnection in its entirety. Service providers will be required to develop an interconnection policy containing information to be prescribed in the NGR, which will form part of the user access guide.

Prohibition on cross subsidisation of developments

Under the agreed reforms, service providers of transmission pipelines (other than market carriage pipelines within a ‘declared transmission system such as the Victorian DTS) will be prohibited from increasing the charges payable by existing shippers to cross-subsidise the development of new capacity. The prohibition will not apply to distribution pipelines. The prohibition will be subject to certain limited exemptions which will be available if the relevant regulator is satisfied as to certain matters which are to be set out in the NGR.

Information disclosure requirements

The agreed reforms aim to address differences and inconsistencies between the reporting requirements applicable to different classes of pipelines, and deficiencies in the information reported by Part 23 pipelines. The draft legal package requires all service providers to publish the following information unless they obtain an exemption:

  • a set of Basic Information, which includes:
    • pipeline service and access information;
    • standing terms for each service offered by the pipeline; and
    • information on the individual prices actually paid by shippers for pipeline services (including key terms and conditions; in particular those that may affect prices, such as imbalance and overrun allowances); and
  • historical financial and demand information and the service provider’s cost allocation methodology.

The draft legal package sets out the new information disclosure requirements in a new Part 10 of the NGR, which is modelled on the current Part 23 of the NGR, modified in various ways, and extended to apply to both “scheme pipelines” and “non-scheme pipelines”.

The following exemptions from disclosure will be available:

  • Pipelines that are not providing third party access will be able to obtain an exemption from the requirement to publish the information described above (as well as from the obligation to publish a user access guide).
  • Pipelines that are providing third party access, but which have a single user or a nameplate rating (or in the case of a distribution pipeline, the maximum daily capacity of the pipeline under normal operating conditions) less than 10 TJ/day will be able to obtain an exemption from the obligation to publish historical financial and demand information and cost allocation methodology.

Single negotiation framework

A single access negotiation framework, representing a hybrid of the regulatory-oriented model applicable to “scheme pipelines” and the commercially-oriented model under Part 23 of the NGR, will apply to all pipelines. The key elements of the proposed framework are as follows:

  • a preliminary enquiries process;
  • timeframes for initial response, access offer and negotiations
  • information disclosure; and
  • access dispute trigger.

The only circumstance under which a service provider will not be required to make an offer is if it is not technically feasible or consistent with the safe and reliable operation of the pipeline to provide the service.

Dispute resolution mechanisms

To address deficiencies that have been identified with the dispute resolution mechanism applicable to “scheme pipelines” under full regulation, the mechanism will be amended to:

  • require the dispute resolution body to have regard to a range of prescribed matters;
  • provide additional guidance on the role of the dispute resolution expert and the process for appointing and using the evidence of such an expert;
  • better facilitate joint dispute hearings by requiring the existence of a dispute to be made public and setting out the process for joining parties;
  • introduce a 50 business day fast track option and specify a maximum period of time (eight months) which the dispute resolution body has to make a decision;
  • provide that:

-an access determination is only binding on the parties if the shipper decides to enter into a contract that reflects the access determination; and

- if the shipper decides not to enter into such a contract, it is prohibited from seeking arbitration for the same or a substantially similar service for 12 months.

  • require the dispute resolution body to publish the access determination, statement of reasons, relevant financial calculations and where appropriate (and subject to confidentiality provisions in the NGL) information provided in the course of the dispute.

To address gaps that have been identified in the “non-scheme pipeline” dispute resolution mechanism, the draft legal package provides for:

  • arbitrators in non-scheme pipeline access disputes to take into account past contributions of capital by the user when making access determinations; and
  • the extension to non-scheme pipelines of the requirement for a service provider to give a safety of operation notification if it refuses to provide a service on safety grounds.

To remove some of the duplication that currently exists between the regulatory oriented and commercially oriented dispute resolution mechanisms, the dispute resolution provisions in the NGL and the NGR will be consolidated (into a new Chapter 5 of the NGL and a new Part 12 of the NGR).

Disputes involving small shippers

To strengthen the threat of dispute by smaller shippers, the draft legislative package:

  • amends the dispute related cost provisions to prevent costs being awarded against small shippers and to prevent them from having to pay more than half the costs of the dispute resolution body or the arbitrator;
  • permits user associations to be joined to proceedings involving smaller shippers; and
  • allows smaller shippers to have a dispute mediated by a regulator appointed mediator (who will be required to report back to the regulator).

The term ‘small shipper’ is not intended to refer to low volume gas users; it refers to shippers that are large enough to contract with service providers, but are small relative to other shippers that transport larger volumes of gas and have a greater degree of bargaining power. For the purpose of defining the term, the draft legal package adopts a capacity threshold of 5 TJ/day (across all services that a shipper has contracted or proposes to contract).

Governance arrangements for the new regulatory framework

Under the agreed reforms, the relevant regulator (rather than the NCC/relevant Minister) will be responsible for:

  • making or revoking a scheme pipeline determination;
  • making pipeline classification and reclassification decisions; and
  • deciding whether or not to grant a greenfields pipeline incentive.

The relevant regulator will also be required to more actively monitor the behaviour of service providers and to refer pipelines for a form of regulation assessment if it suspects that market power is being exercised.

Transitional arrangements

The legislative package includes an extensive range of transitional provisions in the NGL and NGR to provide for an orderly transition to the new regulatory framework. These include provisions dealing with how, from the commencement of the reforms:

  • various classes of pipeline will be treated
  • pipelines will be classified
  • pending applications of various kinds will be treated;
  • pre-existing information requests, access requests and access disputes will be dealt with; and
  • exemptions from information disclosure and ring-fencing requirements will be treated.
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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