21 December 2006
Key Points:
The key focus of the NGL is economic efficiency.
The Ministerial Council on Energy ("MCE") has this month released a draft legislative package as a preliminary step toward the implementation of the National Gas Law ("NGL"). The Legislative Package provides the framework for the transfer of regulation of distribution (non-economic) and retail (non-price) functions to the Australian Energy Regulator ("AER") and Australian Energy Market Commission ("AEMC"). Retail price control will remain with the states unless they choose to transfer such control to the AER and AEMC. The Package also introduces the regulations for the NGL, as well as the National Gas Rules. This article will explore the Package, highlighting the most relevant changes and introducing some of the key concepts underpinning the NGL.
Regime change
The current legislative regime operates on a co-operative basis involving the Commonwealth and all the States and Territories. The lead legislation, the Gas Pipelines Access (South Australia) Act 1997, is established in South Australia and applies as law in all other States and Territories, with the exception of Western Australia, which enacts its own concurrent legislation.
The new regime under the proposed National Gas (South Australia) Act 2007 will be similarly enacted in South Australia. New laws will be required to implement the regime in each jurisdiction, and the Commonwealth will make appropriate amendments to the Australian Energy Market Act 2004, the Trade Practices Act 1974, the Administrative Decisions (Judicial Review) Act 1977, and the Petroleum (Submerged Lands) Act 1967. The Commonwealth will also repeal the Gas Pipelines Access (Commonwealth) Act 1998. Western Australia has stated that it will implement mirror legislation consistent with the NGL.
Objectives of the NGL
The objective of the NGL is "to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas". The key focus of the NGL is economic efficiency. The promotion of efficient investment and efficient operation is aimed at encouraging productive efficiency, allocative efficiency and dynamic efficiency, with the long term interests of consumers as the primary purpose. A critical element to this long-term objective is the impact of decisions on investment in gas infrastructure and services. To this end there are a number of changes that attempt to ensure certainty and consistency in decision-making.
Certainty and consistency?
One feature of the NGL is the articulation of a uniform guiding principle intended to apply to decisions made at the exercise of a discretion. The NGL will require administrative bodies and ministers to ensure that regulatory decisions are consistent with the stated objectives of the NGL. An appreciation of what factors will be taken into consideration will no doubt increase certainty and create an environment for consistent decision-making. The guiding principles will go some way to minimise the impact of any regulatory risk, a significant issue in the highly regulated energy industry. Consistency and predictability are also driving factors of revenue and pricing principles, established by section 20 of the NGL. This section outlines the principles to be considered by the AER when exercising an economic regulatory function or power.
Also of significance in the NGL are the access regimes in relation to covered pipelines. The decision to regulate a pipeline and turn it into a covered pipeline is a discretionary one, left up to the relevant Minister, upon the recommendation of the National Competition Council ("NCC"). The decision whether or not to regulate is based upon the coverage criteria. The factors constituting the coverage criteria are:
The new coverage criteria extend the requirement under section 1.9 of the National Third Party Access Code for Natural Gas Pipeline Systems ("Gas Code") from requiring coverage if access would "promote competition" in at least one market to one that promotes a "material increase in competition". This means that to obtain any grant of coverage, the expected increase in competition must be non-trivial.
Different forms of regulation factors will be applied to different pipelines based on a "market power test" to be applied by the AEMC to determine the appropriate form of regulation for a particular pipeline. One such regime is the light regulation regime, which is a negotiate/arbitrate framework that does not require any prior price or revenue regulation. The light regime is aimed at providing a light handed form of regulation. The AEMC will be charged with the responsibility of deciding whether or not a covered pipeline can be a light regulation regime. In doing so the AEMC must have regard to a list of "form of regulation" factors, contained in section 13. These factors include:
These factors will provide the framework upon which any submission to the AEMC for light regulation status will be formulated. The factors to be considered require an analysis of the market and market power, presumably with the light regulation regime being applicable in instances where the degree of market power is not significant. It is important to note that the AEMC will also need to have regard to the NGL objective, as outlined earlier. Again, the disclosure of these factors goes some way to creating a predictable and consistent decision making environment, although the "form of regulation" factors are adapted from factors already considered by the ACCC and the courts in assessing the degree of market power for the purposes of promoting economic efficiency through competition. The effect is that the existence of greater competition will have a result in a reduction in compliance requirements and therefore compliance costs.
If the extension and expansion requirements under an applicable access arrangement will operate to apply to pipeline services of the extended or expanded pipeline, then the NGL will treat the extended or expanded pipeline as part of the covered pipeline. Therefore, there will not be any access arrangements detailing applicable expansion or extension requirements.
There are also international greenfields pipelines exemption including a provision to apply for 15 years exemption from price regulation. This exemption will give certainty to investors knowing that once approved, and with knowledge of what is required to get approval, that 15 years will be free from regulation. This is a boost for investment in large scale projects, aimed squarely at providing the incentive for investment.
Conclusion
This second stage of the reform process will involve the "2007 legislative package" focusing on non-price distribution and retail regulation. The MCE intends to implementing the revised legislative framework by 1 July 2007. We will keep you updated on any progress to that end.
For further information, please contact Andrew Smith.
