INSIGHT

Gas pipeline reforms update

By Ted Hill, Anne Beresford
Oil & Gas

Significant gas pipeline regulatory reforms proposed 6 min read

The Energy National Cabinet Reform Committee has released a Decision Regulation Impact Statement (DRIS) identifying a proposed package of reforms for gas pipeline regulation in Australia. Significantly, the preferred reform proposal (Preferred Option 3B) will, if implemented:

  • require all gas pipelines to provide third party access; and
  • regulate all gas pipelines, regardless of market power.

To implement Preferred Option 3B, amendments to the National Gas Law (the NGL), the Regulations made under the NGR (the Regulations) and the National Gas Rules (the NGR) will need to be agreed. A draft legislative amendment package is currently being prepared, with the aim of commencing consultation with industry stakeholders in 2021.

Key takeaways

  • Pipeline owners and shippers should consider providing submissions on the proposed legislation during the public consultation period. If the Preferred Option 3B is implemented for pipeline owners:
    • if your pipeline does not already have a no coverage determination, it will become subject to regulation and you will be required to provide access to third parties. Terms for third party access will need to be developed;
    • if you are developing a greenfield pipeline, careful consideration will need to be given to structuring development in a manner that may allow a greenfield exemption; and
    • you will need to ensure that you comply with the reporting requirements. This will be particularly important for pipeline owners not previously subject to regulation.
  • If the Preferred Option 3B is implemented for shippers:
    • the proposed reforms may result in enhanced access to pipelines; and
    • smaller shippers, in particular, will likely benefit from increased information availability (especially in relation to pricing information) and the enhanced dispute resolution provisions.

What does Preferred Option 3B do?

The key elements of Preferred Option 3B include:

  • Access to pipelines: All pipelines will be required to provide third party access and be subject to some form of regulation; however:
    • transitional arrangements will allow pipelines that have already obtained a 15-year no coverage determination under the NGL, and are not providing third party access, to remain exempt from the requirement to provide third party access for the remaining term of the granted exemption; and
    • a greenfield exemption will be made available for new pipelines, provided that the greenfield pipeline can demonstrate that it is unlikely to have substantial market power over the exemption period. A greenfield exemption may be available, for example, in circumstances where the pipeline has been developed as a result of a competitive process with the terms and conditions of that process made available to other users, or where there are some other expected constraints on the exercise of market power. This may apply, for example, in circumstances where a pipeline is built to service a single user in a remote location.
  • Forms of regulation: All pipelines will be subject to one of two forms of regulation, either:
    • a stronger form of regulation, which will be based on the current full form negotiate-arbitrate regulation, with reference tariffs approved by the relevant regulator (either the Australian Energy Regulator or Economic Regulation Authority) and a regulatory orientated dispute resolution mechanism; or
    • a lighter form of regulation, which will be based on the existing Part 23 of the NGR (ie a negotiate‑arbitrate model with information disclosures and a commercially orientated dispute resolution mechanism). This framework will be strengthened by building in additional safeguards that currently apply to the light regulation framework.
    • Implementation will result in:
      • pipelines currently subject to full regulation becoming subject to the stronger form of regulation;
      • pipelines currently subject to Part 23 becoming subject to the lighter form of regulation; and
      • pipelines currently subject to light regulation being transitioned to the lighter form of regulation unless the service provider elects to be subject to the stronger form of regulation.
  • Market power constraints:
    • Service providers will be required to comply with pipeline interconnection principles set out in the NGR and will be prohibited from increasing the charges payable by existing shippers to cross-subsidise the development of new capacity. There will be a requirement to disclose more information on extension/expansion costs.
    • The relevant regulator will be required to monitor the behaviour of service providers and refer pipelines for regulation assessments if it suspects market power is being exercised.
  • Regulation tests: The coverage test will be removed and the existing form of regulation test used to determine whether a stronger or lighter regulation should apply to a particular pipeline. The regulator would be responsible for making decisions in relation to the form of regulations that should apply.
  • Information disclosure requirements: Unless exempt, all market operators will be required to publish information.
    • Non-exempt market operators will be required to publish basic information (including pipeline service information, service availability and service usage information, as well as prices actually paid by other shippers for pipeline services) and historical and financial and demand information.
    • Limited exemptions to information disclosure requirements would be available where:
      • pipelines are not providing third party access; and
      • pipelines are providing third party access, but have a single user or have a nameplate capacity less than 10 TJ per day.
      If a pipeline no longer satisfies the exemption criteria, the exemption would be revoked.
  • Negotiation frameworks: A single negotiation framework will apply under both the stronger and lighter regulations.
  • Dispute resolution mechanism:
    • The current Part 23 commercially oriented information and arbitration framework will be maintained for the lighter form of regulation and the scheme pipeline regulatory‑oriented mechanism will be used for the stronger form of regulation.
    • The credibility of the threat of smaller shippers triggering a dispute will be strengthened by various mechanisms that include changing the dispute-related cost provisions and allowing user bodies to be joined to proceedings involving smaller shippers.
  • Exemptions: In summary, the available exemptions under the proposed new regulatory framework are:
    • pipelines that have already obtained a 15-year no coverage determination under the NGL and are not providing third party access would remain exempt from the obligation to provide third party access for the remaining term of the exemption period;
    • a greenfield exemption would be available to new pipelines where the pipeline is unlikely to have substantial market power over the exemption period;
    • pipelines that are not providing third party access would be able to obtain an exemption from publishing 'Basic Information' (ie pipeline information, service information, service availability and usage information, standing terms for services and prices actually paid by users) and historical financial and demand information; and
    • pipelines that are providing third party access, but have a single user or have a nameplate capacity less than 10 TJ per day, would be able to obtain an exemption from publishing historical financial and service usage information.

The regulator (ie the Australian Energy Regulator or WA Economic Regulation Authority) would make decisions in relation to exemptions.

What happens next?

Amendments to the NGL, NGR and Regulations will be prepared and made available for public consultation during 2021; feedback received will inform a final package of amendments. It is anticipated that the new regulatory framework will commence in 2022.

Once implemented, the effectiveness of Option 3B will be monitored by Energy Senior Officials, and the ACCC as part of its gas market inquiry. Market participants and other interested parties are able to submit a rule change request to the AEMC if the reforms are found not to be working as intended.