Significant reforms to gas pipeline regulation agreed by the Commonwealth, State and Territory Energy Ministers in May 2021 are now one step closer.

This follows the completion of stakeholder consultation on the draft National Energy Laws Amendment (Gas Pipelines) Bill 2021 (Bill), which closed on 14 October 2021.

The Bill contains an array of proposed changes to the National Gas Law (NGL), the National Gas Rules (NGR), and the National Energy Retail Law (NERL).

The reforms are intended to:

• simplify the gas pipeline regulatory framework;
• impose more effective constraints on the market power of pipeline operators (in particular, curb perceived monopoly pricing);
• improve the quality of commercial negotiations between shippers and service providers by tackling imbalances in bargaining power; and
• streamline governance arrangements.

In many respects, the proposed reforms will result in fundamental changes to Australia's gas pipeline regulatory framework. This would have a far greater impact on the industry than the last major reforms in 2016, which resulted in the introduction of a new information disclosure and negotiate-arbitrate access regime for non-scheme pipelines (referred to as 'Part 23' of the NGR).

The reforms reflect a policy decision by the Energy Ministers that more regulation is required. They will trigger a step change in the regulatory environment for Australia's gas pipelines. Once implemented, the reforms will create a much greater role for the AER and increase the level of regulatory intervention for gas pipelines in Australia.

We set out a summary of the key reforms below.

The major changes

Change in the test and regulator for imposing regulation

The biggest proposed reform is the overhaul of the test for full economic regulation.

The AER will replace the National Competition Council (NCC) as the decision-maker for form of regulation determinations.

The existing coverage test, which focuses on whether declaration will promote competition in dependent markets, will be replaced with a form of regulation test. In contrast, the form of regulation test focuses on the potential market power of the pipeline, and its ability to exercise that power by imposing monopoly prices and/or degrading service quality. If implemented, the new test for regulation will increase the risk of full economic regulation for certain gas transmission pipelines.

The new test for regulation is designed to identify those pipelines where the regulator considers full economic regulation is needed to prevent pipeline operators from exercising market power through monopoly pricing above levels one would expect in a workably competitive market.

The ACCC and AER have both expressed concerns that the existing coverage test has been directed at the wrong market failure (i.e. denial of access, rather than monopoly prices). It may be resulting in the under-regulation of pipelines, leaving shippers more exposed to exercises of market power by service providers. As a result, it doesn't provide a threat of regulation sufficiently material to effectively constrain the behaviour of pipelines currently subject to light regulation or the negotiate-arbitrate regime in Part 23.

Forms of regulation – Reducing from 3 to 2 options

Under the current regulatory framework, there are three forms of regulation which can apply to pipelines that provide third party access: full regulation, light regulation, and Part 23. That regime is to be simplified with the proposal that there just be two forms of regulation:

• Full regulation ('scheme pipelines'): based on the existing full regulation approach (negotiate-arbitrate with reference tariffs set by the relevant regulator and a regulatory-oriented dispute resolution mechanism).
• Lighter form of regulation ('non-scheme pipelines', which will include greenfields pipelines): based on a strengthened Part 23 (negotiate-arbitrate with a commercially-oriented dispute resolution mechanism plus the safeguards currently available under light regulation).
  While this proposal is intended to simplify the regulatory framework and reduce unnecessary overlap and complexity between different forms of regulation, it will increase the baseline level of regulation of all non-scheme pipelines across the board.

Greenfields pipeline exemption

To address concerns that the existing greenfields pipeline exemption is too narrowly formulated, the Bill includes a new exemption. Whereas the existing exemption is only available for pipelines developed as a result of an approved competitive tender process, the new exemption will be available for greenfields pipelines which are developed following the more loosely formulated 'competitive process'.

Where the pipeline developer agrees to offer the price and non-price terms and conditions agreed with foundation shippers to future users of the pipeline, the AER must specify terms and conditions as to price for a greenfields incentive determination. This must then be given effect to by an arbitrator in any dispute. The new greenfields exemption will provide the pipeline with an exemption from the stronger form of regulation for 'scheme' pipelines for up to 15 years. Importantly however, a pipeline with a greenfields exemption will nonetheless be a 'non-scheme pipeline' and will be subject to the lighter form of regulation.

While the intention of the new exemption is to expand the range of new pipelines eligible for the greenfields exemption, there is a question as to whether the proposed statutory drafting will achieve the stated objective. The new exemption will apply where the development of a new pipeline is the result of a 'competitive process' involving 'genuine competition' between two or more prospective service providers.

Given the proposed requirements for a 'competitive process' in the proposed reforms, we consider that in the absence of additional guidance, there is a risk that the new test will be applied in such a way that it only applies to those situations where a formal tender type process has been conducted. As a result, those pipelines which are to be developed following a less structured but no less competitive process may continue to be excluded from the exemption. Therefore, they may be potentially deferred, or not proceeded with, due to a perceived risk of regulatory intervention.

Increased AER powers

Under the proposed reforms, the AER will take on a more proactive role scrutinising the behaviour of pipeline operators. It would have greater regulatory oversight of the historical financial information reported by service providers and information on the prices paid by shippers.

The AER will have new monitoring functions in relation to specified matters and be required to publish a report of its monitoring activities every two years.

Critically, the AER will be able to refer pipelines for form of regulation assessment on its own initiative if it suspects market power is being exercised. Put another way, the AER's new monitoring power will increase the threat of full economic regulation.

Dispute resolution

A single negotiation framework under new Part 11 of the NGR will apply to all pipelines under both forms of scheme and non-scheme regulation. This is largely modelled on the existing Part 23 negotiation framework with certain new requirements.

The dispute resolution mechanism for both scheme and non-scheme pipelines will be consolidated into a new Chapter 5 of the NGL and Part 12 of the NGR. Proposed refinements for both scheme and non-scheme pipelines are aimed at improving the effectiveness and efficiency of the dispute resolution process. Specific proposed reforms will strengthen the credibility of the threat of arbitration by smaller shippers (under the current regime, all shippers are subject to the same requirements regardless of their size).

Extension of safeguards

A range of existing safeguards which currently apply to scheme pipelines will be extended to non-scheme pipelines. These are designed to address concerns regarding denial of access and discriminatory behaviour where a service provider is vertically integrated.

The following safeguards currently applicable to scheme pipelines will also apply to non-scheme pipelines:

• ring fencing and associate contract provisions.
• compliance with the pipeline interconnection principles.
• the prohibition on cross-subsidisation of expansions (does not apply to distribution pipelines).
• the prohibition on preventing or hindering access.
• the prohibition on bundling a service with a non-gratuitous service unless reasonably necessary.
• compliance with the queuing requirements in the NGR or an applicable access arrangement.

Stronger information disclosure requirements

The proposed reforms streamline and strengthen the information disclosure obligations that all service providers will be subject to under both scheme and non-scheme regulation. The information disclosure requirements are modelled on the existing Part 23 provisions (with strengthened requirements).

All service providers will be required to provide additional information such as:

• the inputs used to calculate standing prices,
• historical demand information,
• the cost allocation methodology,
• actual prices paid by users (replacing weighted average prices) and non-price terms and conditions.

The stronger information disclosure requirements are intended to improve the ability of shippers to negotiate access to services and reduce search and transaction costs.

Exemptions from certain information disclosure requirements are available where a pipeline does not provide third party access or only has a single user or a nameplate rating less than 10 TJ/day.

Transitional arrangements

Pipelines which currently hold a 15 year no coverage determination will be granted transitional protection as a greenfields incentive determination. The transitional protection will extend for a period of 15 years from the commissioning day of the pipeline. During that period, the pipeline will not be regulated by Chapters 4 and 5 of the NGL and therefore will not be subject to either form of regulation, unless the pipeline voluntarily starts offering or providing services to third parties.

As a result, the transitional protection afforded to such pipelines is greater than that offered by a new greenfields incentive determination obtained after the amendments take effect.

Otherwise, all pipelines which currently hold exemptions from the negotiate-arbitrate framework in Part 23 of the NGL (eg on the basis that they are not third party access pipelines) will lose those exemptions with the repeal of Part 23.

However, for those pipelines which hold exemptions from the information and disclosure requirements of Part 23 (i.e. a 'Category 2' exemption), those exemptions will be transitioned to a new 'Category 1' exemption under Part 10 of the NGR. This means they will be exempt from the information disclosure requirements in Part 10 for so long as they qualify for the exemption (eg for so long as they are not third party access pipelines).

Next steps

If implemented, the proposed reforms will trigger a major shift in the regulatory environment for Australia's gas pipelines. Subject to final amendments arising from stakeholder feedback, the proposed legal package will be progressed through the South Australian Parliament and the new measures are expected to take effect in 2022.

Note that Western Australia did not adopt the 'applied law' scheme for the NGL but implements the NGL by the operation of the National Gas Access (WA) Act 2009. This Act will need to be amended by the Western Australian Parliament to implement these reforms.

Contact us to discuss with you the impacts and potential changes your business may need to consider in response to the proposed reforms.