Pipeline regulation in Australia: Is it broken or just misunderstood? - Oil, Gas & Electricity

Since April 2016, when the Australian Competition & Consumer Commission (ACCC) published its findings in the East Coast Gas Inquiry¹ (Gas Inquiry) the media has been abuzz with discussion about whether the existing regulatory regime for pipelines is effective.² The interest has been heightened in recent days with reports of the recent meeting of the Council of Australian Governments (COAG) on the Gas Inquiry.

One of the issues COAG has been considering is the ACCC's finding that the coverage criteria in the National Gas Law (NGL) (which determine the presence and level of regulation) need to be amended to prevent monopoly rents being extracted. A working group has reportedly been formed to formulate a new coverage test before the next COAG meeting this year.³

However, what many commentators on the Gas Inquiry seem to ignore is the impact of a recent decision by the Australian Competition Tribunal (in Application by Glencore Coal Pty Ltd [2016]) to impose regulation on the shipping channel and wharfage services at the Port of Newcastle.⁴ This decision (which was based on statutory criteria similar to those in the NGL) shows that it is possible for the current regulatory regime to be applied in a way that constrains and guards against the exercise of monopoly power.⁵

The impact of the Glencore decision

In Glencore, the Australian Competition Tribunal found that declaration of the service (which is similar to coverage under the NGL) met all the criteria under the National Access Regime, including (most contentiously in that case) 'criterion (a)'.⁶ Under the Competition and Consumer Act 2010, criterion (a) requires that access (or increased access) will increase competition in an upstream or downstream market.⁷

In a manner consistent with earlier court decisions,⁸ the Tribunal decided that it doesn't matter whether or not access is currently being provided or whether it is being provided on reasonable terms.

If the Tribunal's reasoning in the Glencore decision is applied to the findings in the Gas Inquiry, it suggests that the ACCC's concerns about the coverage criteria in the NGL may be unwarranted. This is important because the legislative change recommended by the ACCC in this area could result in an outcome which is less effective at constraining exercise of monopoly power, not more.⁹

What does this mean for the future of pipeline regulation in Australia?

Amongst all this discussion, an important question must be asked: if the coverage criteria aren't the problem, what is?

The answer appears to be information, or lack thereof. In network industries with high fixed (and often sunk) costs, it is notoriously difficult for access seekers (and even regulators) to understand the infrastructure owners' 'true' cost of supply. Yet a negotiate/arbitrate model like the one that exists under the NGL relies heavily on an understanding of these costs. Without such an understanding, it is very difficult for gas shippers to know when they should challenge pricing and file a dispute with the Regulator.

This is why the ACCC's East Coast Gas Inquiry report is so important. It shines a light on these issues and enables shippers to make informed decisions about whether to trigger regulatory processes.

Maybe we don't need changes to the NGL after all. Perhaps what we need is for shippers to see whether there are opportunities to reduce pricing within the existing regulatory framework.

Footnote

¹ Australian Competition & Consumer Commission, Inquiry into the east coast gas market, April 2016.

² See Mark Ludlow and Angela Macdonald-Smith, 'States target gas pipeline monopolies', The Australian Financial Review, 20-21 August 2016; Tony Wood, 'COAG lays groundwork for national energy reform', The Australian

Financial Review, 22 August 2016; 'Energy Ministers must sort priorities: APGA', The Australian Pipeliner, 22 August 2016 < https://www.pipeliner.com.au/2016/08/22/energy-ministers-must-sort-priorities-apga />.

³ Ludlow and Macdonald-Smith, above n 2.

⁴ Application by Glencore Coal Pty Ltd [2016] ACompT 6.

⁵ Ibid at [91].

⁶ Ibid.

⁷ Competition and Consumer Act 2010 (Cth) s 44H(4)(a).

⁸ See for example Sydney Airport Corporation Limited v Australian Competition Tribunal [2006] FCAFC 146, in which the court noted that the necessary comparison is not between the current level of access and some future level of access post-declaration, but rather between access and no access.

⁹ Above n 1, 129-132.

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