AEMC final report on the scope of economic regulation of covered pipelines

On 2 July 2018, the Australian Energy Market Commission (AEMC) released its final report in response to the Council of Australian Governments’ (COAG) Energy Council request to undertake a review of Parts 8 – 12 of the National Gas Rules (NGR) to address various concerns expressed by AEMC, the Australian Competition and Consumer Commission (ACCC), and other stakeholders with respect to the economic regulation applied to covered pipelines (Report).

The AEMC considers that its 32 recommended changes to the NGL and the NGR will make it easier and cheaper to move gas around Australia to where it is most valued, helping to keep gas and electricity prices for consumers as low as possible.

Key recommended changes include a qualitative increase in regulation with the objective of ensuring:

• more pipeline services being subject to regulated terms and conditions, including as to price;
• access charges for full regulation and light regulation pipelines being set at more efficient levels by a greater regulatory focus on capital and operating costs;
• contract terms for access to pipeline services can be more balanced; and
• arbitration can act as a credible back-stop if negotiations fail.

The AEMC’s recommendations are likely to be adopted by the COAG Energy Council and implemented as amendments to the National Gas Law (NGL) and the NGR in due course. 

Western Australia is a participating jurisdiction in the national gas regulatory scheme and applies the NGL and the NGR, with certain modifications, in Western Australia by way of the National Gas Access Act.¹ 

Lavan recommends that pipeline owners, operators and users as well as large consumers of gas:

• consider the implications of these impending changes on their operations and current or future growth strategies; and
• prepare for any identified risks or opportunities in respect of infrastructure operations or commodity sale and purchase arrangements, including where this may require adopting a new regulatory strategy or a renegotiation of legacy contractual arrangements.

In summary, the AEMC’s key recommendations are:

Expansions and extensions

Include all existing and future pipeline expansions as part of the relevant covered pipeline and allow service providers to include existing pipeline extensions as part of the relevant covered pipeline. 

This reform is intended to support effective negotiations between service providers and users.  It would also group related pipeline assets under one regulatory framework, thereby reducing the regulatory burden for some service providers.

Reference services

The pipeline services that should be specified as reference services in a full access arrangement will be specified by establishing new criteria for determining appropriate reference services that allows for greater user input. 

This reform is intended to avoid stakeholder concerns that in some circumstances reference services offered under a full access arrangement did not meet user requirements.

Access arrangements

A full access arrangement is mandatory for fully regulated pipelines, which must outline reference tariff and non-tariff terms and conditions for each reference service on that pipeline. 

The recommendations include:

• allowing regulators to develop financial models for use by service providers;
• adjusting the timeframes specified for the access arrangement assessment process (including clarifying that the interval of delay is part of the access arrangement period, and extending the revision period from 15 to at least 30 days);
• removing the limited and no discretion regulatory framework which applies to particular elements of an access arrangement, allowing the regulator to make decisions consistent with achieving the NGO;
• clarify in the NGR that the regulator must consider the allocation of risks when determining the outcome of an access arrangement proposal; and
• clarification on the operation of revenue caps.

This reform is intended to lower regulatory costs and improve the transparency of decision making for pipeline service providers, regulators, pipeline users and consumers.

Determining efficient costs

For full regulation pipelines, increased regulation in relation to capital base determination and the assessment of capital and operating expenditure in order to:

• enable the addition of existing extensions and expansions to the opening capital base;
• require allocation of expenditure between covered and uncovered parts of a pipeline; and
• amend the definition of “rebateable services” and “rebate methodology” to allow the rebate of revenues from the rebateable services in the reference tariff variation mechanism.

This reform is intended to increase scrutiny on capital base determination and operating expenditure. 

Further, the applicable regulator (either the Australian Energy Regulator or the Economic Regulation Authority of Western Australia) set an initial capital valuation for light regulated pipelines within 6 calendar months of the commencement of the amendments.  This reform will have the effect of establishing an independent threshold for price negotiations on light regulated pipelines, which will also provide a baseline for arbitration arising out of those negotiations.

Negotiation and information

Pipeline operators in respect of light regulated pipelines will be required to publish more detailed capacity and utilisation information, which may in turn increase access seeker bargaining power during negotiations. 

Further, the AEMC recommends:

• the introduction of a financial and offer information disclosure regime for light regulation pipelines;
• requiring transmission pipeline service providers to disclose augmented Bulletin Board informationrequiring distribution pipeline service providers to disclose capacity and usage information; and
• renaming the Scheme Register to the “Pipeline Register”, and updating its required contents to include additional, non-scheme pipeline information, including a description of the pipeline for inclusion in the register whenever a new pipeline is built or when it is affected by an extension or expansion.

In addition to users being sufficiently informed in the course of their access negotiations, the AEMC considers that the publication of accurate and relevant information in a timely manner by service providers will enable well-informed regulatory and policy decisions to be made.

Arbitration

Central to many of the recommendations is the idea that the negotiate/arbitrate model can only be effective if arbitration is a “credible threat” sitting behind negotiations. 

Further, several AEMC recommendations respond to concerns that both the NGL and NGR require more robust dispute resolution processes, including:

• explaining the negotiation process and the trigger for the dispute resolution process;
• clarifying the role of the dispute resolution expert;
• establishing a reference framework for the dispute resolution body;
• introducing an accelerated dispute resolution process;
• requiring the dispute resolution body to publish dispute resolution commencement, outcome, and other information, including initial opening capital base (if applicable) and any pertinent financial calculations; and
• enabling joint dispute resolution hearings.

The AEMC predicts that the revised dispute resolution framework will assist users in achieving access to pipeline services that are provided on an efficient basis, and that is consistent with the NGO.

Lavan comment

The COAG Energy Council is likely to support the AEMC’s recommendations and seek their implementation by means of amendments to the NGL and the NGR.

We consider that pipeline owners, operators and users, as well as large gas consumers should:

• consider the implications of these impending changes on their operations and current or future growth strategies; and
• prepare for any identified risks or opportunities in respect of infrastructure operations or commodity sale and purchase arrangements, including where this may require adopting a new regulatory strategy or a renegotiation of legacy contractual arrangements.

If you have any queries, or any other issue in this space, please do not hesitate to contact Energy & Infrastructure partner, Luke O’Callaghan on 08 9288 6843 or luke.ocallaghan@lavan.com.au.