Australia: Significant reforms to the gas market regime on the way

Last Updated: 28 December 2016
Article by Linda Evans and Sian-lee Ooi

The COAG Energy Council Ministers have asked Dr Vertigan to bring forward his recommendations to allow commencement on 1 May 2017.

2017 is shaping up to be an important year for those in the gas industry, with significant changes to the operation of the gas market regime. A number of these changes flow from the Vertigan report which was endorsed by COAG Energy Ministers on 14 December 2016.

In April, the ACCC released its East Coast Gas Inquiry Report, which called for significant changes to when a gas pipeline would need to have a formal access arrangement approved by the Australian Energy Regulator. Those proposals have been rejected by the COAG Energy Council.

Instead, some quite different proposals have been put forward to deal with the unequal bargaining power between pipeliners and their customers and the information asymmetry between the two. These proposals are much more targeted than the ACCC's proposals and have the benefit of being focused on the provision of information and encouraging commercial negotiations.

Pipeliners will be required to publish pricing and contract terms for the full range of pipeline services which are available. In addition, for any pipeline which is not subject to a form of exemption or non-coverage mechanism, anyone seeking to transport gas will be able to refer a dispute to arbitration if they cannot agree satisfactory terms with the pipeliner. This effectively bypasses the sometimes complex process for seeking formal regulation of pipelines.

Giving shippers better information to facilitate negotiations

One of the main problems users identified both in the ACCC East Coast Gas Inquiry and in the Vertigan review was the lack of information made available to them to help them to negotiate on a more level playing field.

There will now be more disclosure and transparency of pipeline service pricing and contract terms and conditions. The details are yet to be developed and, if these mechanisms are to be useful to shippers, it will be important that the right detail is provided as part of these information arrangements. So far, we know that under the reforms pipeline operators will need to provide:

  • enhanced information on the full range of services provided (not just forward haul services), including in relation to applicable pricing, terms and conditions;
  • pricing principles and/or information on the methodology used to determine prices for different services, including costs incurred, will need to be published. This is designed to enable shippers, or potential shippers, to better assess the reasonableness of the prices and terms offered; and
  • the principles for the process for expanding the capacity of a pipeline.

When negotiations break down

Coupled with addressing the information asymmetry is Vertigan's recommendation that binding arbitration is available to "all open access pipelines" if negotiations fail.

This represents a fundamental shift given that the existing dispute resolution framework is currently only available for pipelines once they have been determined to be appropriate for regulation, either light or full. Vertigan states that "it is not appropriate that access to dispute resolution be predicated on whether or not the pipeline is covered". What this means is that a much lighter intervention will cover a much larger collection of pipelines.

The arbitration framework is intended to have the following characteristics:

  • commercial negotiation between the parties would occur whenever any party sought pipeline services on an open access pipeline;
  • after negotiations had commenced, either party could signal a breakdown which would trigger the arbitration process;
  • arbitration would be commercially-based (as distinct from judicial or regulator-based), with the arbitrator appointed by mutual agreement of the parties, but with provision for imposition of an arbitrator where there is no agreement. The framework would be designed for expeditious resolution of the dispute with provisions to avoid delay and gaming. Structures such as "final offer arbitration" would be considered for inclusion;
  • the decision of the arbitrator would be binding on both parties;
  • oversight and maintenance of the framework will be required, including in relation to procedural rules, pricing principles and the power to appoint an arbitrator to a dispute in the absence of agreement between the parties. The Australian Energy Regulator is the logical institution to undertake that role.

Vertigan states that the design of the arbitration framework will need to be carefully considered to ensure the arbitration framework does not face the same challenges previously experienced by the telecommunications sector. That model was removed amid criticism that the regime was overly protracted, and vulnerable to gaming by parties with an incentive to delay or damage new entrants.

The pipeline coverage test remains unchanged for now

Vertigan recommended that no change be made to the current coverage test at this stage, but that the appropriateness of amending the coverage test be reviewed within five years after the arbitration framework is operational. This recommendation reflects the rapid changes to the gas market and the significance of proposed binding arbitration, capacity trading and transparency reforms. Vertigan also noted that the coverage criteria under the National Gas Law should continue to mirror the general access declaration provisions in Part IIIA of the Competition and Consumer Act . Those criteria (under the Act) are expected to be amended in 2017.

Preparing for the likely consultation in early 2017

The COAG Energy Council Ministers have asked Dr Vertigan to bring forward his recommendations to allow commencement on 1 May 2017, subject to the passage of amendments to relevant laws, with an update to the Council on progress in February 2017. Officials will review the subsequent measures two years following implementation.

In discussing the potential implementation of the recommendations, the Vertigan report specifically envisages consultation with industry, other stakeholders, the ACCC, the AER and the AEMC, prior to the Gas Market Reform Group developing the detailed design of the disclosure and transparency requirements and of the arbitration framework.

The Vertigan reforms are designed to fundamentally change the dynamics of gas transport negotiations. The ultimate effectiveness of these measures, and their workability, will depend on the detail of what is implemented. Given the compressed timetable for implementation, and that proposals received from market participants are likely to be very important in shaping the ultimate detail of the new provisions, it is advisable that pipeline owners, users and other stakeholders start thinking about issues raised by the Vertigan report, including:

  • the type and format of pipeline service information that should be published;
  • the development of pricing principles, and/or information on the methodology used to determine prices;
  • the parameters that determine when arbitration is available and ensure it is not overused;
  • the interaction of a binding arbitration outcome with the capacity trading arrangements;
  • what amendments to the existing regulatory structure would be required, such as if the option for light regulation should be extinguished;
  • the institutional arrangements required to ensure the arbitration framework has adequate oversight and accountability, and furthers the NGO and the objectives of the COAG Energy Council;
  • the development of guidelines for arbitrators, such as principles and objectives that should be considered during the arbitration process; and
  • ensuring the framework provides for expeditious dispute resolution and gaming by parties.

RELATED KNOWLEDGE

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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