Movements at COAG: Limited merits review and gas pipeline access arbitration

Among the numerous challenges with which Commonwealth and State/Territory energy ministers are presently confronted, the COAG Energy Council is progressing reforms on two contentious aspects of energy regulation.

W(h)ither merits review?

In August 2016, the COAG Energy Council initiated a review of the limited merits review (LMR) regime under the National Electricity and Gas Laws.  The review was to assess the effectiveness of the previous amendments to the LMR regime that had been made in 2013 to narrow rights of review of network revenue determinations and to enhance consumer participation in the reviews conducted by the Australian Competition Tribunal.

The timing of the review was early, as only 2 tribunal reviews had been completed, one of which was (and remains) subject to appeal (judicial review) in the Federal Court; however, COAG had foreshadowed a review within 3 years when it approved the 2013 amendments.

CommBar made a submission to the COAG consultation noting, among other matters, that any substantial further overhaul of the LMR regime is premature, given that the novel amendments made in 2013 have not had time to become bedded down through a succession of Tribunal decisions.  CommBar suggested some modifications to the criteria for the grant of leave to review by the Tribunal, but otherwise strongly endorsed the Competition Tribunal’s merits review role as promoting sound and well-reasoned regulatory decision-making and contributing to greater consumer participation in the regulatory process.  CommBar opposed a proposal that network revenue determinations should be left subject to judicial review only, as occurred for ACCC telecommunications access determinations by amendments made in 2010.

In December 2016, the COAG Energy Council announced that Ministers had not achieved consensus for the abolition of LMR, but that there was in-principle agreement on a package of further reforms, including:

• tightened grounds of review, and higher financial thresholds;
• reviews to be conducted on the papers, rather than through oral hearings;
• introducing a binding rate of return guideline, with relevant elements of the regulator’s decision not subject to merits review;
• a strengthened requirement to demonstrate that overturning the regulator’s decision would not be to the “serious detriment” of the long-term interests of consumers; and
• more flexible arrangements for consumer participation in reviews.

The introduction of a binding rate of return guideline is an important streamlining reform that was raised by a number of network and consultant submissions to the COAG consultation.  It is unclear from the December COAG communique whether a periodic rate of return guideline would be merits reviewable, or only subject to judicial review.

Taken as a whole, however, it is not obvious how the disparate reforms announced in December can be brought together into a workable, effective and improved LMR framework.  A poorly-drawn set of further reforms may ultimately see LMR wither on the vine.

COAG officials have been tasked with producing draft legislation in the first quarter of 2017.  In its most recent communique on 17 February 2017, the COAG Energy Council noted that officials are still working to develop key elements of the reform package.  Press commentary in the lead-up to the 17 February COAG Energy Council meeting suggested that Commonwealth proposals to abolish LMR are being resisted by NSW and Queensland, the remaining jurisdictions with government-owned networks.  It remains to be seen how far the roll-back of the Competition Tribunal’s merits review jurisdiction will go.

Broadening of gas pipeline access arbitration rights

At a more progressed stage is the COAG Energy Council’s response to the ACCC’s 2016 Inquiry into the East Coast Gas Market.  In response to concerns that unregulated pipeline operators were exercising market power to engage in monopoly pricing, the ACCC recommended that the pipeline coverage criteria should be broadened.  In the ACCC’s view, the onerousness of the pipeline coverage criteria and the difficulties facing non-operator parties in seeking to make a coverage application meant that existing pipeline operators were constrained by the threat of regulation in their negotiations with access-seekers.

In late 2016, having commissioned a report by Dr Michael Vertigan AC into the current test for regulation of pipelines, the COAG Energy Council rejected the ACCC’s proposal to broaden the coverage test.  Instead, COAG has proposed enhancements to the disclosure and transparency of pipeline service pricing and contract terms and conditions, and has proposed to introduce a framework for binding arbitration of access disputes for all unregulated pipelines.

Under the present National Gas Law, access seekers only have a right to seek arbitration (by the AER) of access disputes for pipelines that are subject to full or light coverage.  The proposed broadening of the arbitration framework is intended to provide a check on the use of market power by unregulated pipeline operators that is more accessible to access-seekers, and which will avoid the delay, cost and greater regulatory uncertainty that would be associated with broader use of formal regulatory processes.

The COAG Energy Council has now approved amendments to the National Gas Law to implement the arbitration framework for unregulated pipelines, which are intended to commence on 1 May 2017.  The draft Bill proposes that access disputes should be arbitrated under a commercial framework, by an arbitrator appointed by the parties (or, in default, appointed by the AER).  The draft Bill also sets out a broad framework for the arbitration process and the principles to be applied by the arbitrator in determining a dispute.

The draft Bill envisages more detailed rules to be made by the AEMC to flesh out the new commercial arbitration regime.  Dr Vertigan noted that the arbitration framework will need to be designed to avoid difficulties of delay and perceived gaming that were previously experienced in the arbitration of access disputes in the telecommunications sector, and observed that structures such as ‘final offer arbitration’ could be considered.