Scheme or non-scheme? Australian Energy Regulator’s review of gas pipeline regulation

The Australian Energy Regulator (AER) will review the form of regulation – a ‘scheme’ or ‘non-scheme’ – of gas pipelines around Australia (excluding Western Australia). The outcome of a review has the potential to influence access to pipelines, the tariffs pipeline owners can charge and investment more generally in the Australian gas market.

Gas pipeline regulation – a (recent) history

The National Gas Law (NGL) was amended last year to create a new regulatory framework for gas pipelines.

The NGL has for some time drawn a distinction between scheme pipelines and non-scheme pipelines. Historically, non-scheme pipelines were subject to less strict regulation than scheme pipelines, but the new framework has extended most scheme pipeline obligations to non-scheme pipelines.

The key remaining distinction? Scheme pipelines are subject to regulation through an access arrangement, meaning the reference tariffs they may charge are set through a determination made by the AER. Non-scheme pipelines operate on a negotiate/arbitrate model by which tariffs are set by agreement or, failing agreement, by an arbitrator.

Like scheme pipelines, non-scheme pipelines must now publish extensive information, including the prices actually payable under gas transportation agreements. In any arbitration, an arbitrator must apply a cost-based approach to determining the tariff which should be payable by a user. Therefore, even at a pricing level, the difference between the two forms of regulation is less pronounced than was previously the case.

That said, a scheme pipeline must, in effect, provide reference services at the reference tariff, and so the pricing flexibility of a scheme pipeline is much more limited than that of a non-scheme pipeline.

Previously, the relevant Minister received a recommendation from the National Competition Council and would determine whether a pipeline should be regulated as scheme or non-scheme.^[1] The new regulatory framework removes this responsibility from the National Competition Council and the relevant Minister and vests it in the AER.

Further, the new framework entitles the AER to at any time initiate the process of considering whether it should vary the regulatory classification of a pipeline.

AER’s form of regulation review

The AER proposes to review the form of regulation of up to two gas pipelines every year. The purpose of these reviews is to ensure the appropriate regulation of pipelines and that the long term interests of gas consumers are served.

As part of this review process, in February this year the AER commenced its first form of regulation review. The review is of the APA owned South West Queensland Pipeline (SWQP), which is currently regulated as a non-scheme pipeline. The AER expects to conclude its review in November 2024.

The AER selected the SWQP as the first pipeline for review because of its importance to the East Coast gas market. The AER has not decided which pipelines are to be reviewed next, however it has indicated the pipeline’s market importance and a service provider’s market power will be taken into account in determining the order of priority.

Making a scheme pipeline determination

In making a scheme pipeline determination, the AER must consider the effect of the form of regulation on:

1. the promotion of access to pipeline services; and
2. the costs that are likely to be incurred by an efficient service provider, efficient user or prospective user and end users.

In undertaking its analysis, the NGL requires the AER to have regard to:

1. the national gas objective, which includes promoting efficient investment in, and efficient operation and use of, gas services for the long term interests of consumers;
2. the extent of any barriers to entry in a market for pipeline services;
3. relevant network externalities;
4. the extent to which a service provider’s market power can be mitigated by a user or prospective user’s countervailing market power;
5. any substitute and elasticity of demand for pipeline services in the relevant market;
6. any substitute for and elasticity of demand in a market for gas; and
7. any other matters that the AER considers relevant.

The AER has indicated in its discussion paper for the SWQP review that it will consider:

• the ability to negotiate access, and price and non-price terms that may be offered or negotiated;
• how a market participant’s regulatory costs will differ between the two forms of regulation;
• structural legal, regulatory or other barriers to market entry;
• how gas or non-gas services provided by the relevant service provider may affect its market power in providing services in the relevant pipeline;
• whether users can switch to a viable substitute service, the number and size of existing pipeline users and the extent of available pipeline capacity;
• the availability of transportation of gas along another pipeline or alternative gas transportation methods; and
• a user’s ability to consume another form of energy as an alternative e.g. electricity.

Appeal of scheme pipeline determination

The NGL does not provide an express right to appeal a scheme pipeline determination. Consequently, rights of appeal are limited to a review of the determination on administrative law grounds, such as, for example, that in making the determination, the AER failed to take into account relevant factors or took into account irrelevant factors.

Timetable

In its discussion paper, the AER invited interested parties to make submissions on whether it should determine the SWQP to be a scheme pipeline. These submissions were due on 27 March 2024. Additionally, stakeholders will be able to make submissions on the AER’s draft decision, expected to be published sometime in September 2024.

The approach of the AER in this first review will be critical in providing an insight to the energy industry as to how the AER will approach future reviews.

^[1] There were other circumstances where a pipeline may be a scheme pipeline.