1) THE HONOURABLE CHRIS PEARCE MP Parliamentary Secretary to the Treasurer Federal Member for Aston 17 Jut 2006 The Hon Peter Beattie MP Premier ofQueensland Executive Building 100 George Street BRISBANE QLD 4000 Dear Premier t am writing in regard to your Government's application to the National Competition Council (NCC) for a recommendation that the Queensland third party access regime for natural gas pipeline services is an effective access regime under the Trade Practices Act 1974 (TPA). On 21 November 2002, I received the NCC's final recommendation that the regime should not be certified as effective. I note that, in January 2003, a copy ofthe NCC's final recommendation was provided to the relevant Queensland Minister and made publicly available. In accordance with Section 44N ofthe TPA, I have decided that the regime is not an effective access regime. Enclosed is my statement ofreasons for this decision and copy ofthe NCe's final recommendation. CHRIS PEARCE encs Parliament House, Canberra ACT 2600 • Telephone (02) 62772088 Facsimile (02) 6277 4408 TRADE PRACTICES ACT 1974, SECTION 44N QUEENSLAND ACCESS REGIME FOR GAS PIPELINE SERVICES DECISION ON EFFECTIVENESS OF ACCESS REGIME REASONS FOR DECISION Introduction The certification of state access regimes 1. Under Part IIIA of the Trade Practices Act 1974 (TPA), if a State or Territory that is a party to the Competition Principles Agreement (CPA) has established at any time a regime for access to a service, the responsible Minister for the State or Territory may make a written application to the National Competition Council (NCC) asking the NCC to recommend that the Commonwealth Minister decide that the regime for access to the service is an effective access regime (section 44M (1) and (2) of the TPA). 2. The NCC must recommend to the Commonwealth Minister that he or she decide that the access regime is either an effective access regime for the service, or not an effective access regime for the service. 3. Section 44N of the TPA provides: Ministerial decision on effectiveness of access regime (1) On receiving a recommendation, the Commonwealth Minister must: (a) decide that the access regime is an effective access regime for the service or proposed service; or (b) decide that the access regime is not an effective access regime for the service or proposed service. (2) In making a decision, the Commonwealth Minister: (a) must apply the relevant principles set out in the Competition Principles Agreement; and (b) must, subject to section 44DA, not consider any other matters. (3) The decision must specify the period for which it is in force. (4) The Commonwealth Minister must publish his or her decision. At the same time, the Commonwealth Minister must give his or her reasons for the decision, and a copy of the Council's recommendation, to the responsible Minister for the State or Territory who applied for the recommendation. 4. The Queensland Government (Queensland) has sought certification of its third party access regime (the Queensland regime) as it applies to services provided by natural gas pipelines that are ‘covered’ under the National Third Party Access Code for Natural Gas Pipeline Systems (the National Gas Code), including pipelines specified in Schedule A of 2 the Gas Pipelines Access Law (GPAL), and pipelines that subsequently become covered by the Queensland regime. The Queensland regime does not apply to foundation contracts or other pre-existing contractual arrangements. 5. This document sets out my reasons for the decision that the Queensland regime is not an effective access regime. History of the application 6. Queensland asked the NCC pursuant to section 44M of the TPA in September 1998 to recommend to the Commonwealth Minister that he or she decide that the Queensland access regime for pipeline services was effective. 7. In February 2001, the NCC forwarded a recommendation on the effectiveness of the Queensland access regime to the Commonwealth Minister. Subsequently, the then Commonwealth Minister notified the NCC that he had received a substantial amount of further material from the Queensland Government and the owners of four gas pipelines subject to derogations under the regime. 8. The NCC withdrew its February 2001 recommendation and informed the Commonwealth Minister that it would forward a fresh recommendation once it had given full consideration to the further materials. 9. In February 2002, the NCC released a draft recommendation for comment from interested parties. Further submissions were received from interested parties. 10. In November 2002, the NCC forwarded its final recommendation to the Commonwealth Minister pursuant to the terms of section 44M of the TPA. The NCC recommended that the Queensland regime not be certified as effective on the basis that it does not satisfy the relevant CPA principles. 11. The Commonwealth Minister provided a copy of the NCC’s final recommendation to the Queensland Government and other interested parties on 6 January 2003. Further submissions were received from interested parties. Submissions received and considered 12. The following written submissions were received after the making of the recommendation by the NCC in November 2002: — Letter dated 19 February 2003 from the Hon Terry Mackenroth MP, the then Treasurer of Queensland, together with copies of: – Queensland’s submission to the NCC dated November 2000; – the original NCC decision, February 2001; – Queensland’s submission to the Commonwealth Minister dated April 2001; and 3 – Queensland’s submission to the NCC dated May 2002. — Joint letter dated 28 February 2003 from Duke Energy, Epic Energy and the Australian Pipeline Trust, together with attached submission. — Email dated 7 May 2003 from Mr Curtis Evans, Queensland Treasury, containing information in response to questions from the Australian Treasury. — Letter dated 12 March 2004, from the Australian Pipeline Industry Association. 13. Oral submissions were also made by representatives of the Queensland Treasury at a meeting with Australian Treasury officials on 28 March 2003, and by representatives of Epic Energy, Duke Energy, the Australian Pipeline Trust and Agility on 2 April 2003. 14. I considered all of these submissions in reaching my decision. Overview of the Queensland regime 15. The Queensland regime establishes a regulatory framework allowing third parties to negotiate access to services provided by natural gas transmission and distribution pipelines located in Queensland and provides a mechanism for dispute resolution. The basic framework which is applied to pipelines is the National Third Party Access Code for Natural Gas Pipeline Systems (the National Gas Code). The National Gas Code has been applied as a law by the States and Territories. Each jurisdiction has implemented its own jurisdiction-specific features of the Code. 16. The Gas Pipelines Access (Queensland) Act 1998 (Qld) (QGPAA) establishes the Queensland regime and commenced operation in May 2000. The QGPAA applies the GPAL and the National Gas Code, which set out the rights and obligations of parties involved in the Queensland regime. 17. A central feature of the National Gas Code is a requirement that the owner/operator of a covered pipeline submit an access arrangement to the relevant regulator for approval. That arrangement must include ‘reference tariffs’ for ‘reference services’. These are benchmark prices for specified services likely to be sought by a significant part of the market. Third parties are then entitled to access to those reference services on the terms and conditions set out in the (approved) access arrangement. However, parties are free to negotiate access to ‘reference’ and ‘non-reference’ services on terms and conditions other than those set out in the (approved) access arrangement (except in respect of the queuing policy). Any dispute about access can be notified to the relevant regulator to be resolved by arbitration, with the arbitrator being bound to apply the provisions of the relevant access arrangement (including the reference tariffs). 18. Under the National Gas Code, an access arrangement must first be approved by the relevant regulator before it can come into effect. The National Gas Code sets out principles that reference tariffs should be designed around. 4 19. In 1997, the NCC undertook a review of the National Gas Access regime, including GPAL and the National Gas Code, to determine whether it was consistent with the relevant principles set out in clause 6 of the CPA. The NCC took the view that the broad framework of the regime satisfied the relevant principles. 20. Subsequently, the NCC has considered the gas pipeline access regimes of several States and Territories. In each case, the state or territory regime was substantially consistent with the terms of the National Gas Access regime the NCC had considered in 1997. The NCC recommended to the Commonwealth Minister in each case that the Minister decide that the regime was an effective access regime, and in each case, the Commonwealth Minister did so.1 21. The NCC considers that generally, the Queensland regime is consistent with the National Gas Code. However, the operation of the Queensland regime is modified for pipelines which are subject to ‘derogations’ by the operation of section 58 of the QGPAA (‘section 58 pipelines’). Section 58 pipelines 22. Section 58 of the QGPAA provides: 58 Reference tariffs for certain pipelines (1) This section applies to the following pipelines— (a) the pipeline mentioned in pipeline licence no. 2 (Wallumbilla to Brisbane); (b) the pipeline mentioned in pipeline licence no. 24 (Ballera to Wallumbilla); (c) the pipeline mentioned in pipeline licence no. 30 (Wallumbilla to Rockhampton via Gladstone); (d) the pipeline mentioned in pipeline licence no. 32 (Gatton to Gympie);2 and (e) the pipeline mentioned in pipeline licence no. 41 (Ballera to Mt Isa). (2) The local Minister may once only, by gazette notice made within 30 days after this section commences, approve a tariff arrangement for each pipeline.