Allens

Competition Law

Client Update: Pipelines, private profitability and prospects of access regulation

7 august 2012

In brief: In recommending that a pipeline be exempt from being a 'covered' pipeline, the National Competition Council has confirmed that pipeline infrastructure is likely to be exempt from third-party access if there are competing pipelines with surplus capacity or potential for expansion to meet foreseeable additional demand. Partner Jo Daniels (view CV) and Senior Associate John Hedge consider the council's reasoning and its implications for the future prospects of third-party access regulation of other gas pipelines and infrastructure.

Background

The APLNG joint venture proposes to develop a liquefied natural gas (LNG) facility at Curtis Island, Gladstone and a greenfield pipeline for transmission of coal seam gas (CSG) from the Surat Basin to supply the proposed LNG trains (the APLNG pipeline).

APLNG applied for a no-coverage declaration that would exempt the proposed APLNG pipeline from third-party access regulation for 15 years. The application was opposed by TriStar Petroleum Company (a CSG explorer in joint ventures with APLNG of tenements in the vicinity of the proposed APLNG pipeline).

The National Competition Council (the NCC) was required to consider whether the pipeline coverage criteria in the National Gas Law were satisfied, and recommend a no-coverage declaration if it was not satisfied that all of the criteria were met.1

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NCC no-coverage recommendation

On 17 July 2012, the NCC made a final recommendation that the Federal Minister grant the 15-year no-coverage declaration.2 (The Minister is required to use best endeavours to make a decision within 30 business days of receiving the NCC's recommendation.)

The NCC recommendation was based on not being satisfied that:

  • access to the APLNG pipeline would promote a material increase in competition;
  • access to the APLNG pipeline was not contrary to the public interest; and
  • it would be uneconomic to duplicate the services the APLNG pipeline provided.

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No material increase in competition

The NCC considered that the relevant markets in which competition might be affected by access were the upstream gas production market, within the scope of feasible interconnection with the APLNG pipeline; the downstream gas sales market centred on the Gladstone-Rockhampton-Wide Bay area; and the downstream global LNG market. While the NCC accepted TriStar's submissions that APLNG may have incentives to deny junior CSG producers access; to maximise the likelihood of having an opportunity to exploit the CSG reserves itself, the NCC considered access would not promote a material increase in competition in the two domestic markets because of:

  • the other existing pipelines (Roma via Gladstone to Rockhampton, Roma to Brisbane) and the three proposed LNG related pipelines from the Surat Basin to Curtis Island that could service the relevant markets; and
  • the potential for expansions or inclusion of additional capacity within those pipelines, such that they could be accessed by other upstream CSG producers.

The NCC accepted that access to the APLNG pipeline itself would not be of sufficient volume to promote a material increase in competition in the downstream global LNG market.

The determination that access would not promote a material increase in competition in any of the relevant markets was, in turn, critical to the NCC also determining access was likely to be contrary to the public interest, given that the costs of regulation would not result in any pro-competitive benefits. However, the NCC expressed scepticism about APLNG's arguments that the prospects of access would discourage investment. That scepticism confirms assertions from infrastructure owners that investments will not be made unless an exemption from regulation is granted may hold limited weight, particularly where an entity is vertically integrated and investment in the relevant infrastructure may well be justified by returns from other elements of the projects even if the relevant infrastructure was subjected to third-party access.


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Uneconomic to duplicate

This criterion essentially means that a pipeline will be exempt from access regulation if it can be shown that the pipeline is economic to duplicate.

This criterion is effectively the same as the 'uneconomic to duplicate' access criterion in the Competition and Consumer Act 2010 (Cth) that has come under scrutiny in the various Pilbara rail access disputes. Consequently, the NCC considered itself bound to follow the Full Federal Court's latest interpretation from Pilbara Infrastructure Pty Ltd v The Australian Competition Tribunal 3 that the pipeline would be economic to duplicate if it was privately profitable to duplicate. Based on an interpretation that involves 'looking at the facts of the market place',4 it was clear that the APLNG pipeline was economic to duplicate, given that the three other LNG proponents each propose similar pipelines for transmission of CSG to their respective Curtis Island LNG trains.

However, the NCC made it clear it continues to prefer its previous approach (regarding infrastructure with 'natural monopoly characteristics' as being uneconomic to duplicate) over the Full Federal Court's prevailing 'private profitability' interpretation.

Importantly, the NCC also went on to provide its views on how it considered this criterion would be applied if the High Court ultimately interpreted the equivalent access criterion in a way that centred on issues of natural monopoly or the broader social costs of duplication. In particular, the NCC considered that, in the context of a no-coverage application for a pipeline, it was necessary to consider more than just the foreseeable demand for the service provided by the pipeline and whether it had sufficient capacity to meet that demand (ie if a pipeline has spare capacity, this would generally indicate it would not be economic to duplicate).

The NCC was particularly concerned that constraining the analysis of this criterion to such an assessment could motivate investors to design pipelines with insufficient capacity to meet the total reasonably foreseeable demand, so as to ensure this criterion would not be satisfied (and thereby prevent access regulation).

Consequently, the NCC's preferred view on this criterion is that it does not require that it would be uneconomic to duplicate the actual pipeline in question, but that it would be uneconomic for anyone to develop another pipeline to provide the pipeline services. If that interpretation were to prevail, it would seem to open the way to a finding of it being uneconomic to duplicate a pipeline, even in circumstances where it had no capacity.

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Implications for prospects of regulation

The NCC's decision indicates that any future no-coverage declarations for the remaining pipelines related to the Gladstone-based LNG projects are likely to be successful, as the very existence of the four projects will continue to make it difficult for the NCC to be satisfied by the coverage criterion regarding access promoting competition for any of them.

However, the NCC's decision is a stark reminder of the defining impact the High Court's decision on the Pilbara rail disputes will have, not only on Part IIIA of the Competition and Consumer Act, but on the prospects of regulation of gas pipelines under the National Gas Law, and other infrastructure under the various state-based third-party access regimes – all of which use substantially equivalent 'uneconomic to duplicate' tests.

Finally, while this decision did not turn on the NCC's views on the additional requirements of the 'uneconomic to duplicate' test in the context of pipeline no-coverage applications, if the High Court was to alter the interpretation of 'uneconomic to duplicate' to a social rather than private profitability test, the NCC's views on the uneconomic to duplicate criterion will set the bar even higher for pipelines – making success in a no-coverage application more difficult.

Footnotes
  1. 154(2) National Gas Law (as applied in Queensland by the National Gas (Queensland) Act 2008 (Qld)).
  2. National Competition Council, APLNG no-coverage declaration, Recommendation to Relevant Minister, 17 July 2012.
  3. [2011] FCAFC 58, which is currently on appeal before the High Court. Allens acted for Rio Tinto in this matter. For further information on the Full Federal Court's decision, see our Focus: Full Federal Court decision on access.
  4. [2011] FCAFC 58 at [86].

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