Alinta Asset Management Ltd v Essential Services Commission (No 2)
[2007] VSC 210
•22 August 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 8453 of 2006
| ALINTA ASSET MANAGEMENT PTY LIMITED | Plaintiff |
| v | |
| ESSENTIAL SERVICES COMMISSION | Defendant |
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JUDGE: | HOLLINGWORTH J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8-10, 14-17, 21-23 and 29-30 May 2007 | |
DATE OF JUDGMENT: | 22 August 2007 | |
CASE MAY BE CITED AS: | Alinta v Essential Services Commission (No 2) | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 210 | |
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Legislative interpretation – Regulation of gas industry – Licensing of distributors – Principles of interpretation – Policy considerations
Licensing of distributors under section 22(1) Gas Industry Act 2001 – Whether plaintiff a gas distribution company - “Services” – “By means of” – Whether licences are exclusive
Whether plaintiff an “operator” of distribution pipeline for the purposes of National Third Party Access Code for Natural Gas Pipeline - “Owner or operator” – Multiple service providers - Access arrangements – Ring fencing requirements
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Delany S.C. Mr P J Booth | Blake Dawson Waldron |
| For the Defendant | Mr C M Scerri QC Mr P R D Gray | Brand Partners as agents for Gilbert & Tobin |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
Overview of the natural gas industry in Victoria......................................................................... 3
Production and processing.......................................................................................................... 3
Transmission.................................................................................................................................. 3
Storage............................................................................................................................................ 5
Distribution.................................................................................................................................... 6
The Multinet system................................................................................................................... 7
The marketing of natural gas...................................................................................................... 8
Wholesale market........................................................................................................................ 8
Retail market............................................................................................................................... 9
Haulage services....................................................................................................................... 11
Gas industry reform......................................................................................................................... 11
National competition policy..................................................................................................... 11
Competition reforms.................................................................................................................. 14
Reform of the Victorian gas industry....................................................................................... 15
The current Victorian legislative regime...................................................................................... 19
Gas Safety Act 1997................................................................................................................. 20
Pipelines Acts........................................................................................................................... 21
MSO rules................................................................................................................................ 23
Retail rules................................................................................................................................ 23
The Distribution Code.............................................................................................................. 24
The GIA 2001..................................................................................................................................... 25
Overview of the licensing scheme............................................................................................ 25
The meaning of section 22(1)..................................................................................................... 26
Provide..................................................................................................................................... 27
Services..................................................................................................................................... 28
By means of.............................................................................................................................. 30
Distribution pipeline................................................................................................................. 31
Principal or agent..................................................................................................................... 31
The exclusivity argument......................................................................................................... 34
Deemed distribution contracts.................................................................................................. 39
Other relevant legislation.......................................................................................................... 40
The GSA.................................................................................................................................. 40
Pipelines Acts........................................................................................................................ 41
The Distribution Code.......................................................................................................... 42
The MSO and retail rules..................................................................................................... 42
The Access Law................................................................................................................................. 42
Overview of the Code................................................................................................................ 42
Access arrangements................................................................................................................ 45
Ring fencing............................................................................................................................. 47
Interpretation of the Code......................................................................................................... 48
The Code and “service providers”........................................................................................... 49
The scope of the dispute............................................................................................................ 49
“Operator”............................................................................................................................... 50
Services..................................................................................................................................... 52
The Mount Newman case........................................................................................................ 53
Industry meaning..................................................................................................................... 55
Multiple service providers........................................................................................................ 56
Ring fencing............................................................................................................................. 60
Access arrangements and efficiency carryovers....................................................................... 62
One or two access arrangements?............................................................................................ 64
Why the ESC says that the legislation applies to AAM............................................................ 65
AAM and the operating services agreement............................................................................... 68
AAM’s business........................................................................................................................... 68
The OSA........................................................................................................................................ 69
Multinet’s other contracts............................................................................................................... 74
PIES............................................................................................................................................... 75
AMP.............................................................................................................................................. 76
The gas field operations contracts............................................................................................ 76
Burwood and Moorabbin contracts.......................................................................................... 76
Current status of the gas field operations contracts.................................................................. 78
BBS alliance agreement............................................................................................................ 81
Other AAM contracts....................................................................................................................... 83
AMRS agreement........................................................................................................................ 83
UCMS agreement........................................................................................................................ 84
Short term project contracts....................................................................................................... 85
Dealing with retailers...................................................................................................................... 85
Execution of use of system agreements................................................................................... 85
Negotiation of UoSAs................................................................................................................. 87
Operational issues in relation to retailers............................................................................... 89
AAM’s other activities in relation to the Multinet system........................................................ 91
SCADA operation........................................................................................................................ 91
Routine operations..................................................................................................................... 92
Incident response...................................................................................................................... 93
Long term planning.................................................................................................................. 95
Conclusions....................................................................................................................................... 96
AAM provided and provides relevant services under section 22(1) of the GIA 2001...... 97
AAM is a “service provider” under the Code........................................................................ 98
General remarks.......................................................................................................................... 99
HER HONOUR:
Introduction
Until the reform of the gas industry in the late 1990s, gas distribution in Victoria was conducted by the Gas & Fuel Corporation, a state-owned body corporate, which operated a monopoly. During the late 1990s, there was extensive legislative reform, as the industry underwent a process of corporatisation and then privatisation.
The natural gas industry in Victoria is now regulated by two principal statutes, the Gas Industry Act 2001 (“GIA 2001”) and the Gas Pipelines Access (Victoria) Act 1998 (“GPAV”). The GPAV enacts the National Third Party Access Code for Natural Gas Pipeline Systems (“the Code”) and schedule 1 to the Gas Pipelines Access (South Australia) Act 1997 (“the Law”) (collectively, “the Access Law”) as laws of Victoria.
The defendant, the Essential Services Commission (“ESC”), is the independent regulator of prescribed essential utility services for the purposes of the Access Law and the GIA 2001.
The GIA 2001 imposes various licensing requirements. Under section 22(1) of that Act, it is an offence for a person to “provide services (other than the sale of gas by retail) by means of a distribution pipeline, either as principal or agent”, unless the person is either licensed to do so or exempt from the licensing requirements.
The Access Law forms part of a uniform national scheme for third party access to gas pipelines, which was adopted in order to promote the development of a competitive national market for natural gas. In respect of pipelines covered by the Access Law, a “service provider” is required to establish an access arrangement to the satisfaction of the relevant regulator. Service providers are also subject to other requirements designed to promote competition, including “ring fencing” requirements.
Since December 1997, a partnership comprising Multinet Gas (DB No 1) Pty Ltd and Multinet Gas (DB No 2) Pty Ltd (collectively, “Multinet”) has held a distribution licence under the GIA 2001 or its predecessors.
Multinet also has access arrangements under the Code, which have been approved by the ESC for the period to the end of 2007.
The plaintiff, Alinta Asset Management Pty Ltd (“AAM”), provides operations and management services to owners of infrastructure assets in various industries, including the gas industry. Multinet is one of its clients.
In July 2003, AAM entered into an operating services agreement (“the OSA”) with Multinet, under which Multinet appointed AAM to operate, construct and manage, or procure the operation, construction and management of, the entire Multinet gas distribution network (“the Multinet system”). AAM was given extensive powers under the agreement. The OSA was amended in late October 2006, so as to remove a power of attorney which AAM held for Multinet, and to put in place alternative arrangements for AAM to enter into certain contracts on behalf of Multinet.
The ESC asserts that the nature and range of services provided by AAM under the OSA in relation to the Multinet system are (or prior to the amendments in October 2006 were) such that AAM:
(a) Provides (or provided) services by means of a distribution pipeline, within the meaning of section 22 of the GIA 2001 and is (or was) therefore required to hold a licence under that Act[1];
(b) Is (or was) a “service provider” within the meaning of the Access Law and therefore is (or was) required to comply with the requirements of the Code.
[1]It is common ground that there is no applicable exemption from licensing requirements.
AAM disputes those assertions on various bases. As a matter of law, it argues that the relevant legislation should be construed far more narrowly than the ESC contends. As a matter of fact, AAM argues that its role is simply that of a contractor and is not as extensive as the ESC asserts.
In this proceeding, AAM and the ESC each seek declaratory relief which reflects their respective contentions.
Overview of the natural gas industry in Victoria
Before considering the relevant statutory provisions, it is necessary to have some understanding of how the natural gas industry operates in Victoria, and the history of its privatisation. Except where otherwise indicated, the matters set out in this section of the reasons were not the subject of any real dispute between the parties.
There are six stages in the gas supply and delivery system, namely production, processing, transmission, storage, distribution and retailing.
Production and processing
Production of natural gas generally uses the same techniques as those applied to oil production. When economically viable subterranean reservoirs of gas are discovered, production wells are drilled into the reservoir and gas flows to the surface under natural geological pressures, through the well-casing, to be interconnected with other production wells. The gas is channelled to a gas processing plant via various gathering systems.
When raw gas is produced from wells it contains various impurities and contaminants which need to be removed before the gas is suitable for industrial and domestic purposes. The removal of these contaminants is carried out in gas processing plants, like the one operated by ExxonMobil near Longford in eastern Victoria.
The end product of this process is “sales gas”. Sales gas is the gas that is ultimately transmitted by the pipeline systems and delivered to the consumer. It must meet strict statutory and contractual requirements in respect of its constituents.
Transmission
The principal transmission system (“PTS”) is Victoria’s primary high pressure gas transmission system. It transports gas in large volumes from processing plants via underground transmission pipelines, which typically operate at a maximum pressure of 7,000 kilopascals. The PTS comprises just over 1,930 kilometres of pipeline. The network passes through much of Victoria and has over 110 off-takes, supplying most of Victoria’s cities and regional centres.
Gas pipelines within the transmission and distribution systems are a means of transporting gas to end-users. The term “haulage” is used to describe the transport of gas. The different types of haulage are discussed later in these reasons.
The owners or operators of the pipelines do not necessarily own the gas in transit. Instead, there are contractual mechanisms by which the pipeline owner or operator takes custody of the gas on receipt from the user and then returns an equivalent amount of gas to the end-user on delivery.
Sales gas from a processing plant is injected into the PTS via a custody transfer station, which measures the quantity and quality of the gas transferred. It is at this point that the sales gas is usually sold to large industrial customers, gas retailers, gas traders and firms whose demands for gas are large enough for the purchase of wholesale gas supplies. The distribution of natural gas to most consumers occurs through distribution networks, also called distribution systems.
The point at which gas from a processing plant enters the PTS is known as an injection point. There are seven such injection points for the PTS.
The PTS is now owned by GasNet Australia (Operations) Pty Ltd (“GasNet”), a wholly-owned subsidiary of the APA group of private companies.
The PTS is operated by VENCorp from a control room at Southbank in Melbourne. VENCorp is a statutory body that was established on 11 December 1997 by the Gas Industry Act1994 (Vic) (“GIA 1994”). The functions and powers presently exercisable by VENCorp are contained in Part 8 of the GIA 2001 and include controlling the operation of the PTS, operating and administering a competitive wholesale gas market within Victoria, and facilitating competition in the retail market for gas.
VENCorp is responsible for the operation of inlets, outlets and compressors in the PTS. It monitors pressure and gas flows utilising information technology systems, including the supervisory control and data acquisition system (“SCADA”). SCADA controls and monitors all the devices on the gas network, such as valves, regulators and major meters, to regulate the flow of gas, pressure and temperatures. Most of these critical facilities are equipped with remote terminal units, which measure critical variables such as pressure and whether the facilities are faulty. This information is transmitted to central computer-based control rooms, where remedial action is determined.
VENCorp is responsible for scheduling gas injections into, and withdrawals from, the PTS. It provides and maintains delivery pressures to the gas distribution networks which are connected to the PTS, within limits specified in the system security guidelines and systems connection deeds.
VENCorp maintains pressures at the point at which a gas distribution network connects with the PTS. This point is called a connection point or a custody transfer point. The injections of gas at the connection point happens by virtue of the pressure difference between the upstream PTS pipelines and the distributors’ pipelines. Connection point facilities, which include custody transfer meters, valve data loggers and telemetry, are owned and maintained by GasNet and controlled and operated by VENCorp. There are 15 major connection or transfer points. The GasNet custody transfer meter records the flow of gas at each connection point and this information is provided to VENCorp. There are custody transfer meters at each off-take on the PTS.
Storage
The gas demand profile of Victoria is unlike any other in Australia, in that consumption patterns follow seasonal changes very closely. Thus, the demand for gas greatly increases during the winter months. Rather than increasing the capacity of gas processing plants and major pipelines at great expense, this gas demand profile has lead to the installation of two gas storage facilities, the Dandenong liquefied natural gas storage facility and the Western underground storage facility located on the depleted Iona gas field near Port Campbell.
In both cases, surplus gas is taken from the PTS during periods of low gas demand. Underground storage simply involves the gas being pumped back into empty subterranean reservoirs and then recovered and re-processed and put back into the PTS during periods of increased demand. The alternative method involves the surplus gas being liquefied and stored in insulated tanks each of which hold up to 12,000 tonnes of liquefied natural gas. During periods of high demand, the liquefied natural gas is pumped from these tanks, vaporised in a gas fired heater and injected back into the PTS.
Stored gas is available through the wholesale gas market in Victoria and via commercial arrangements between gas retailers and the owners of the storage facilities.
Distribution
Gas distribution systems complete the gas delivery chain to most end-users. Distribution systems generally comprise of a network of underground distribution pipelines used to distribute gas from the PTS to hundreds of thousands of individual customers across Victoria. They consist of a few large trunk pipelines along the main thoroughfares in a gas distribution area, which are connected to a large number of progressively smaller and smaller branch pipelines, which operate at lower pressures, eventually running into residential streets to supply individual customers.
These distribution pipelines typically operate at pressures that do not exceed 515 kilopascals. However, in Victoria each distribution system includes pipelines that operate at gas transmission pipeline pressures in excess of 1050 kilopascals. These high pressure pipelines are governed by the Pipelines Act2005 (Vic), an Act which will be discussed later in these reasons.
Gas is supplied through a system which consists of a complex arrangement of components including transmission pressure pipelines, high pressure pipelines, high to low pressure mains, regulator stations, service pipes, customer regulators, custody transfer meters and valves. Gas physically flows through all of the above components. Cathodic protection equipment and the SCADA system ensure the safe operation and maintenance of the network.
Given that gas naturally flows from high pressure regions to low pressure regions, the PTS operates at higher pressures than distribution pipelines. The point at which gas moves from the PTS into the distribution system is known in Victoria as the withdrawal point. At any such point, the two pipelines are separated by a gas pressure regulator. Regulators can also be used to adjust gas flow rates into or out of pipelines, where users require gas to be received at a particular rate of flow.
Regulator stations within a distribution network include city gates, field regulators and district regulators. Each of these regulator stations is responsible for receiving gas from pipelines operating at a particular pressure.
Customer regulators serve to reduce the pressure of gas received from sub-networks of the distribution network and inject gas into the customer’s fitting line for its gas appliances.
The point at which a distribution network connects with the premises of a customer is known as a customer supply point. There are two classes of supply point within Victoria: class A supply points and class B supply points, depending on the volumes of natural gas. They are metered and billed differently.
There are three principal gas distribution systems in Victoria, namely:
(a) The Multinet system;
(b) A distribution system now owned by Envestra Limited (“Envestra”); and
(c) A distribution system now owned by SPI Networks (Gas) Pty Limited (“SPI”).
The Multinet system
Multinet is the largest distributor of natural gas in Victoria, supplying almost 640,000 connections to gas supply. The Multinet system supplies gas to Melbourne’s inner and outer eastern and south eastern suburbs, in adjacent areas of the Dandenong Ranges, and some parts of Gippsland and the Yarra Ranges region.
The Multinet system comprises a grid of supply pipelines, gas reticulation mains and services of varying sizes. There are 9,316 kilometres of gas distribution pipeline, covering an area of 1,603 square kilometres.
The PTS supplies the Multinet system through custody transfer meters which measure gas quantities connected to PTS pipeline sections at Dandenong/Brooklyn, Morwell/Dandenong and Pakenham/Wollert. Gas supplied through the Multinet system can also originate from the Dandenong liquefied natural gas facility, or via the Envestra gas distribution network at Templestowe, when Multinet’s gas supply in that region is supplemented during periods of high gas demand.
The marketing of natural gas
There are approximately 1.6 million retail and wholesale customers of natural gas throughout Victoria.
Wholesale market
VENCorp is the manager and administrator of the Victorian wholesale gas market. The operation of the wholesale gas market is governed by the Market and System Operator Rules (“the MSO rules”), which provide the framework for an efficient, competitive and reliable wholesale market for natural gas and regulate the administration of and participation within that market.
The wholesale gas market operates as a spot market, which allows licensed market participants to competitively bid for the surplus production of gas not otherwise committed under existing gas sales contracts.
Wholesale market participants include:
(a) Producers, who operate gas production facilities;
(b) Traders, who arrange for gas to be transported through the PTS and either “export” the gas into other pipelines or on-sell to other parties, but do not sell directly to end-use customers in Victoria; and
(c) Retailers, who, by way of a Victorian gas retail licence, buy gas from producers or traders and sell gas directly to end-use customers.
Wholesale market participants submit offers or bids to VENCorp at various times every day, to inject or withdraw gas at specified locations and prices. VENCorp assembles these various bids in ascending price order into a “bid stack”, which it then optimises in order to meet the forecast daily demand profile at the lowest overall cost. This process schedules the injections and withdrawals of gas and sets a clearing price for gas.
VENCorp administers the wholesale metering and settlement functions for gas flowing through the PTS, informing market participants on pricing, gas demands and forecasts.
Retail market
There is also a retail gas market. Full retail contestability was introduced by the Victorian Government in October 2002. Full retail contestability allows all Victorian consumers of natural gas to choose their gas retailers from the range of gas retail businesses competing in Victoria. Since the introduction of full retail contestability, numerous retailers of natural gas have commenced operation within Victoria, including Origin, AGL, TRUenergy and Victoria Electricity.
The retail gas market is governed by a set of processes, responsibilities and obligations which ensure customers can transfer from one retailer to another. These are specified in the Victorian Gas Market Retail Rules (“retail rules”), which are given effect through the GIA 2001.
VENCorp has primary responsibility for developing the retail rules, which are approved by the ESC under the GIA 2001. VENCorp also facilitates the development of the Gas Interface Protocol (“interface protocol”), which describes technical standards and business protocols to be followed by VENCorp, retailers and distributors when transferring information between each other electronically. All participants in the retail gas market must comply with the retail rules and the interface protocol.
VENCorp also operates the FRC hub, an information technology system which supports business activities associated with full retail contestability. The FRC hub is a fully-automated electronic business-to-business infrastructure, based around a central message-handling facility, which allows information to be shared in the retail market. VENCorp, each market participant and distributors can deliver and receive structured transactions through this network facility using the interface protocol. The FRC hub supports business activities and transactions associated with full retail contestability, including custody transfers, meter data delivery, service orders, network billing and basic meter installation. Each transaction is sent to and from a participant’s interface gateway via the FRC hub, which routes the transaction to the intended recipient within the retail market.
The FRC hub was originally developed by VENCorp; it is now owned and maintained by the National Electricity Market Management Company (“NEMMCO”).
Most end-users acquire gas through a retailer. Retailers sell gas to customers at customer supply points, which are typically located in or adjacent to the customer’s premises. In order to do so, retailers must acquire natural gas from producers or gas traders, transmission services through the PTS, and distribution services from a distributor to whose distribution system the customer’s gas supply pipeline is connected.
Gas retailers are the primary buyers and sellers of natural gas. They buy gas directly from the producers, from storage facilities or from traders, and then sell gas to end users using the transmission and distribution networks. The owners and operators of the transmission and distribution systems simply transport the retailers’ gas through their respective network of pipelines (this is known as haulage) and charge the retailer a haulage tariff for that service.
Haulage services
Several different types of haulage are referred to in the legislation relevant to this case, including firm haulage, interruptible haulage, spot haulage and backhaul.
Firm haulage is the most common service provided by means of a pipeline. It is a transportation service provided by the pipeline owner or operator to the shipper of the gas, for the carriage of a quantity of gas from an injection (or receipt) point to a withdrawal (or delivery) point on the same pipeline. It gives the shipper the right to “capacity” on the pipeline, that is, the right to transport gas at a specified flow rate between the two points. “Firm” means that the service is guaranteed to always be available to the shipper, except for force majeure events or other contractually-agreed circumstances. Firm haulage contracts are usually entered into for a minimum period of 12 months. The shipper is usually required to pay for the capacity, even if it is not used, on a “take or pay” basis.
Interruptible haulage service is the second most common service provided by means of a pipeline. “Interruptible” means that the service is not guaranteed to always be available to the shipper, and can be interrupted or curtailed if a higher priority service, such as firm haulage, is demanded by a shipper. Contracts for interruptible haulage service are often entered into on a day-to-day basis. The shipper is only required to pay for the service when it is available and only for the amount actually used.
Spot haulage service is, for all relevant intents and purposes, the same as interruptible haulage service.
Backhaul is the transport of gas contrary to the normal flow of gas in the pipeline. The technical details of how it works are not relevant for our present purposes.
Gas industry reform
National competition policy
In 1992, the Council of Australian Governments (“COAG”) commissioned an independent committee of inquiry, led by Professor Fred Hilmer, into a national competition policy. The committee reviewed all infrastructure sectors dominated by public providers, who were usually operating at all levels of the production chain, including the gas industry. The report produced by the committee (“Hilmer report”) recommended a number of reforms, including a national access regime to address the denial of access by vertically-integrated operators.
The recommendations in the Hilmer report went beyond addressing the denial of access to essential facilities and raised the possibility of additional safeguards to increase the contestability of the market in industries such as electricity and gas. In particular, the Hilmer report proposed requirements to provide cost data relevant to the application of pricing principles.
Acting on the Hilmer report’s recommendations, a number of reforms were drawn together to form a package called the National Competition Policy. These reforms included the development of a national access regime to enable competing businesses to use nationally significant infrastructure (like airports, electricity cables, gas pipelines and railway lines), and specific regulatory reforms to the gas, electricity, water and road transport industries.
In April 1995, each of the Australian governments entered into the following agreements, collectively comprising the National Competition Policy:
(a) Competition Principles Agreement, which provided, amongst other things, for the reform of public monopolies and established arrangements for access by third parties to services provided by significant infrastructure facilities;
(b) Conduct Code Agreement, which extended prohibitions against anti-competitive conduct in the Trade Practices Act 1974 (Cth) (“TPA”) to almost all businesses in Australia; and
(c) Agreement to Implement the National Competition Policy and Related Reforms, which set out the reform obligations covering national markets in electricity and gas, water reform and national road transport regulations, and provided for payments to be made by the Commonwealth to the States and Territories where satisfactory progress in implementing the National Competition Policy and related reforms was achieved.
Pursuant to the Competition Principles Agreement, the Commonwealth was required to establish a regime for access by third parties to services provided by significant infrastructure facilities. These arrangements are provided for in part IIIA of the TPA and were capable of applying to the gas industry.
In support of its argument that only Multinet, as the asset owner, was intended to be covered by the legislation, AAM pointed to numerous references in the early competition reform documents to the policy objective of facilitating the provision of access to natural monopoly infrastructure by “owners” of that infrastructure. But, I agree with the ESC that such references to “owners” must be read in the context of the COAG Communiqué of 25 February 1994, which foreshadowed the imposition of obligations not only on owners, but on “pipeline owners and/or operators”.
Further, and in any event, in spite of focus initially being placed in the Hilmer report and the Competition Principles Agreement on ownership, when it came to the drawing of legislation, there was evidently a conscious choice on the part of the drafters and legislatures to move to a broader programme of regulating operators as well as owners, as is indicated by the inclusion of “operator” in each significant successive piece of relevant access regulation legislation, including those discussed later in these reasons.
Part IIIA of the TPA was enacted in 1995 by the Competition Policy Reform Act 1995. In section 44B of the TPA, “service” was (and is) defined as “a service provided by means of a facility” including “the use of an infrastructure facility such as a road or railway line” and “handling or transporting things such as goods or people”. The term “provider” was (and is) defined in relation to a service as “the entity that is the owner or operator of the facility that is used (or is to be used) to provide the service”.
Competition reforms
Consistent with the objectives of the National Competition Policy, federal, state and territory governments took steps to implement a policy of national competition within the natural gas industry.
In 1995, the Gas Reform Task Force was established to develop and implement reforms for achieving competition in the natural gas industry. The task force was later renamed the Gas Reform Implementation Group, with membership including Commonwealth, State and Territory governments, the Australian Competition and Consumer Commission and industry groups.
The task force focused on ways to facilitate competition in supply, transmission, distribution and marketing of natural gas, through the provision of third party access to the natural monopoly segment of the industry, namely the downstream pipeline system.
In 1997, the task force released for public consultation a draft uniform national regulatory framework to govern third party access to natural gas pipeline systems.
On 7 November 1997, the members of COAG entered into the Natural Gas Pipelines Access Agreement (“NGPAA”) under which the parties formally agreed to establish a uniform national framework for third party access to natural gas pipelines. The NGPAA provided for South Australia to act as the lead legislator by passing the legislation annexed to the NGPAA.
The legislation annexed to the NGPAA and passed by South Australia is the Gas Pipelines Access (South Australia) Act 1997 (SA), and contains the Access Law.
The Access Law is made up of two parts:
(a)Schedule 1 is Third Party Access to Natural Gas Pipelines which is the Law; and
(b)Schedule 2 is the National Third Party Access Code for Natural Gas Pipelines which is the Code.
Together, the Law and the Code comprise the industry-specific regime for third party access to natural gas transmission and distribution pipelines.
In accordance with the provisions of the NGPAA, each State and Territory in Australia has enacted its own legislation incorporating the Access Law. In Victoria, this law is the GPAV.
Reform of the Victorian gas industry
Until December 1994, gas distribution in Victoria was conducted by the Gas & Fuel Corporation (“GFC”), a state-owned body corporate. It was a vertically-integrated monopoly utility, supplied primarily by the primary producer under restrictive long-term gas supply contracts. A process of corporatisation and then privatisation was implemented over the next few years, governed by an interim regulatory environment.
The stated purpose of the first of these regulatory instruments, the GIA 1994, was to restructure the gas industry; establish two public authorities, namely the Gas Transmission Corporation (“GTC”) and GASCOR (which used the trading name “Gas & Fuel”); provide for the transfer of property and rights from GFC to GTC and GASCOR; and provide for the technical regulation of the gas industry.
GASCOR and GTC were formed through the separation of the distribution and transmission functions of GFC. In broad terms, GTC became responsible for the transmission functions of GFC, and GASCOR became responsible for the distribution and retail functions. GTC and GASCOR were entitled to charge tariffs (which were fixed by the relevant Minister) for their respective services.
The next stage of the reforms occurred in 1997. The key features of this stage were the separation of GASCOR’s retail and distribution functions, into three “stapled” (or joined) businesses, each comprising a gas distribution business and a gas retailer business. Initially, the retailers were to be allocated customers based on their geographic area of operation, with full retail contestability to be introduced progressively over the next four years.
In December 1997, GASCOR’s distribution functions were allocated to three new gas distribution businesses, each of which covered a separate area:
(a) The Westar business, which covered, broadly, the inner west and north-western Melbourne metropolitan regions, and south-western Victoria, including Geelong, Portland, Horsham, Ballarat and Bendigo;
(b) The Multinet business, which covered Melbourne’s inner south-eastern and eastern suburbs, and some of the Yarra Ranges; and
(c) The Stratus business, which covered, broadly, the north-eastern Melbourne metropolitan area and Mornington Peninsula, Gippsland (including Moe and Sale) and north-eastern Victoria, including Shepparton, Benalla, Echuca and Albury.
In fact, two companies were incorporated for each of the three distribution businesses. One company (in the case of the Multinet business, Multinet (Assets) Pty Ltd (“Multinet Assets”)) was the owner of the physical gas distribution assets, including pipelines and related facilities. The other company (in the case of the Multinet business, Multinet Gas Pty Ltd (“Multinet Gas”)) was the lessee of those assets and operated the distribution business. In each case, the lessee/operating company was granted a distribution licence for an unlimited term, with effect from 11 December 1997.
At the same time, three new gas retailers were created, “stapled” as follows:
(a) Kinetik Energy Pty Ltd (“Kinetik”) was stapled to the Westar business;
(b) Ikon Energy Pty Ltd (“Ikon”) was stapled to the Multinet business; and
(c) Energy 21 Pty Ltd (“Energy 21”) was stapled to the Stratus business.
Initial licences under the GIA 1994 to sell gas by retail were granted to Ikon, Kinetik and Energy 21, as well as GASCOR and Esso Australia Resources Ltd (“Esso”). These licences had effect from 11 December 1997. Each licence entitled the holder to retail gas:
(a) Exclusively to non-contestable customers within a designated part of a distribution network; and
(b) Non-exclusively to “contestable” customers throughout Victoria.
Although the businesses were “stapled” for the purpose of privatisation, the retailers’ designated geographic customer bases were structured to avoid exact alignment with the gas distribution areas. The areas overlapped in such a way that, in some areas, gas distributors serviced both their stapled retailer and the neighbouring retailer.
Also on 11 December 1997, VENCorp was established and took on some of the functions of GTC, namely, responsibility for balancing the transmission system, managing the spot market and operating the transmission system.
GTC, which was renamed Transmission Pipelines Australia, maintained ownership of and responsibility for maintenance of the PTC. Whilst the functions of Transmission Pipelines Australia and VENCorp were customarily integrated in other gas transmission markets, the planned implementation of third party access facilitated a new requirement for balancing arrangements in Victoria, to allow multiple shippers of gas to utilise the system in a safe, secure and efficient manner.
The GIA 1994 was amended by the Gas Industry (Amendment) Act 1997 (Vic) to provide for the restructure and reform of the gas industry and the creation of the Office of Gas Safety (“OGS”) to ensure the safety and security of gas supply and to control gas safety standards.
It was amended again by the Gas Industry (Further Amendment) Act1997 (Vic), which provided for further disaggregation of the industry, creation of the retail and licensing regime, the establishment of VENCorp and the implementation of a Victorian Access Code. It also outlined the MSO rules applicable to the transmission system.
An access code called the Victorian Third Party Access Code for Natural Gas Pipeline Systems (“the Victorian Access Code”) was established with respect to third party access to transmission and distribution pipelines, with effect from 11 December 1997. It was established pursuant to section 48U of the GIA 1994 (as amended). The introduction to the Victorian Access Code acknowledged that its regime was intended to be short-lived, as it would be succeeded by the proposed national scheme.
One feature of the interim regulatory package was that it largely prescribed the component parts of the access arrangements, including tariffs, which were included in the access arrangements. These provisions have been superseded by reason of the application of the Access Law to Victoria.
In December 1998, the then-regulator of the Victorian gas industry, the Office of the Regulator-General (“ORG”), approved the access arrangement for the Multinet business under the Victorian Access Code. The parties to that access arrangement were Multinet Assets, as asset owner and the holder of relevant licences and permits, and Multinet Gas (then called Multinet Energy) as lessee and operator of the pipeline.
Part 4B of the GIA 1994, as inserted by the Gas Industry (Further Amendments) Act 1997 (Vic), utilised a definition of “service provider” in terms similar to the definition later adopted in the Access Law, and which is central to this case.[2] Part 4B of the GIA 1994 was repealed by section 25(g) of the GPAV, with effect from 1 December 1998.
[2]Section 4 defined “service provider” as “in relation to a pipeline or proposed pipeline, means a person that, within the meaning of the Access Code, is, or is to be, the owner or operator of the whole or any part of the pipeline or proposed pipeline”.
In the first quarter of 1999, the distribution and retail businesses were sold by the Victorian government to private interests:
(a) Westar/Kinetik was sold to Texas Utilities Australia Limited for $1.617 billion;
(b) Ikon/Multinet was sold to Energy Partnership Pty Ltd for $1.97 billion; and
(c) Energy 21/Stratus was sold to a consortium comprising Boral Energy Limited and Envestra for $1.67 billion.
On 24 February 1999, the Multinet partnership (defined earlier in these reasons as “Multinet”) purchased the assets and undertaking of the Multinet distribution business and became the holder of the Multinet distribution licence.
The current Victorian legislative regime
The regulatory framework governing the gas industry in Victoria now has the following principal components relevant to this proceeding:
(a) The GIA 2001;
(b) The Access Law;
(c) The Gas Safety Act 1997 (Vic);
(d) The Pipelines Act 2005 (Vic);
(e)The Victorian Gas Distribution System Code (“the Distribution Code”);
(f)The MSO rules; and
(g)The retail rules.
The GIA 2001 is to be read and construed as one with the Gas Industry (Residual Provisions) Act 1994 (Vic). That latter Act contains what remains of the GIA 1994 as subsequently amended.
Part 8 of the GIA 2001 provides for VENCorp to continue, and confers certain functions and power on VENCorp, including powers concerned with facilitation of reliability and security of the gas supply, operation of equipment and control of the flow of gas.
The GIA 2001 and the Access Law will be discussed in detail later in these reasons. The following is a brief description of the other relevant legislation and rules.
Gas Safety Act 1997
The main purpose of the Gas Safety Act 1997 (“GSA”) is to “make provision for the safe conveyance, sale, supply, measurement, control and use of gas and to generally regulate gas safety” (section 1).
Energy Safe Victoria (“ESV”), the relevant gas safety monitor, has, as one of its principal objectives, the obligation to ensure the safety of the conveyance, sale, supply, measurement, control and use of gas. The functions of ESV and of its predecessor, the OGS, include those conferred by the GSA and the regulations under the GSA (relevantly, the Gas Safety (Safety Case) Regulations 1999 (“safety case regulations”)).
Division 1 of Part 3 of the GSA imposes various obligations on gas companies, including obligations to manage and operate their facilities to minimise hazards and risks to people and property, and to ensure that the gas which they convey complies with any prescribed requirements.
Importantly, division 2 of Part 3 of the GSA contains a framework of provisions for the submission, acceptance and review of management plans (known as safety cases) for the safe operation of facilities, including distribution pipelines, and for compliance with accepted safety cases. “Facility” includes a pipeline or a facility or service for the control of the conveyance of gas.
Regulation 7 of the safety case regulations provides that a safety case must specify the title of the position and the business address of a person who has “management or control of the facility” and who has “general responsibility for the safe operation of the facility”.
A “gas company” is required to lodge a safety case with ESV for each of its facilities (section 37), and must manage and operate each of its facilities in accordance with its accepted safety case (section 44(2)). A revised safety case must be submitted at the end of each period of five years (section 46).
A “gas company” is defined in section 3 of the GSA to mean, amongst other things: a “gas distribution company” within the meaning of the GIA 2001; “a person who is an owner or operator of a facility or service for the control of the conveyance of gas, being a person declared under section 5 to be a gas company for the purposes of this Act”; or “a person who is an owner or operator of a pipeline, being a person declared under section 5 to be a gas company for the purpose of this Act.”
It is common ground that AAM has not been declared a gas company pursuant to section 5 of the GSA.
If the ESC is right in its interpretation of the GIA 2001, then AAM will be a “gas distribution company” under that Act, and therefore a “gas company” and subject to the obligations imposed on gas companies under the GSA.
Pipelines Acts
These Acts apply to high pressure gas pipelines, with operating pressures greater than 1,050 kilopascals; this includes some of the Multinet system.
The Pipelines Act 1967 imposed a permit regime. Section 8 provided:
No person shall own or use a pipeline unless –
(a) the pipeline is constructed along the authorized route in respect of that pipeline; and
(b) he holds a permit granted under this Part entitling him to own and use the pipeline.
“Pipeline” was defined in the 1967 Act as “a pipe or system of pipes for the conveyance of anything through the pipe or pipes, and includes all apparatus and works associated with the pipe or pipes” (section 3), but did not include certain matters which are not relevant for our purposes.
“Own and use” was defined to mean “in relation to a pipeline, the owning and being entitled to convey an authorized thing through the pipeline”.
The Pipelines Act 2005 repealed and re-enacted, with amendments, the Pipelines Act 1967. It came into operation on 1 April 2007.
The 2005 Act replaced the permit system with a licensing regime. It created specific offences, including the following (section 15):
A person must not operate a pipeline unless a licence to construct and operate that pipeline has been issued under this Act.
Penalty: In the case of a natural person, 120 penalty units;
In the case of a body corporate, 600 penalty units.
The 2005 Act has the following objectives:
(a)to facilitate the development of pipelines for the benefit of Victoria;
(b)to create an effective, efficient and flexible regulatory system for the construction and operation of pipelines;
(c)to establish sound consultative processes relating to the construction and operation of pipelines;
(d)to establish processes to determine the most efficient and suitable route for each pipeline;
(e)to protect the public from environmental, health and safety risks resulting from the construction and operation of pipelines;
(f)to ensure that pipelines are constructed and operated in a way that minimises adverse environmental impacts and has regard for the need for sustainable development.
There is some overlap with the subject-matter of the GSA, the main purpose of which is to make provision for the safe conveyance, sale, supply, measurement, control and use of gas and to generally regulate gas safety. This is recognised by certain provisions of the 2005 Act, which require a licensee to give ESV a safety management plan before carrying out any pipeline operation, for acceptance by ESV of that plan, and for the licensee to ensure that in carrying out a pipeline operation, the operation is carried out in accordance with the accepted plan. Section 208 provides that a safety case accepted under the GSA at the commencement of the 2005 Act is deemed for the purposes of the 2005 Act to be a safety management plan accepted by ESC on the commencement day under the 2005 Act.
It is worth noting that the prohibition on the “unlicensed” construction or operation of a pipeline in the 2005 Act is structured in quite a different way to the prohibition in section 22(1) of the GIA 2001. The 2005 Act does not require the person undertaking the relevant activity to be licensed; rather, it requires rather that there be a licence in respect of the pipeline. That is apparent from sections 14 and 15, as well as other provisions like section 109 of the 2005 Act, which provides that the licensee must “ensure that the pipeline to which the licence applies” is operated in accordance with any applicable standards prescribed or included in the licence.
MSO rules
The MSO rules were made on 2 February 1999 under the GIA 1994, and continued in force under the GIA 2001.
The purpose of the MSO rules is to provide an efficient, competitive and reliable market for gas and to regulate the operation and administration of the market and the activities of market participants. It is also to regulate the operation of the gas transmission system by VENCorp in a way which minimises threats to system security, enables access to the transmission system and the market, and encourages achievement of the market objectives.
The MSO rules apply to all owners, operators and users of the transmission system, including transmission pipeline owners, producers, storage providers, distributors and retailers, each of whom must register with VENCorp as a “participant”. However, some of the rules only apply to “market participants”- a concept which does not include distributors.
A “distributor” is defined in the MSO rules (chapter 11) as “a person who owns (whether legally or equitably) or operates the whole or any part of” a distribution pipeline. The Multinet system is a distribution pipeline within the meaning of the MSO rules.
Retail rules
The retail rules are also made under the GIA 1994 and continued under the GIA 2001.
VENCorp is required to develop retail gas market rules for the gas transmission and gas distribution systems, which are approved by the regulator (section 62).
The GIA 2001 also requires a gas distribution company to develop retail market rules for any part of a distribution pipeline in respect of which it is a licensee, and to which the rules developed by VENCorp do not apply (section 63).
The retail rules impose numerous obligations on distributors. “Distributor” is defined as “a person authorised to provide services by means of a distribution pipeline under a Distribution Licence” issued under the GIA 2001.
The obligations imposed on distributors by the retail rules include: the registration of unique numbers assigned to supply points (known as metering installation registration numbers); access to customer meter data; the processes for the transfer of customers between retailers; and the provision, installation and maintenance of metering installations for the purposes of the retail gas market.
The Distribution Code
The Distribution Code was promulgated by the ESC’s predecessor, the ORG, with effect from 1 December 1997.
It is essentially concerned with the nature of the operations surrounding the conveyance of gas through the distribution system. It sets minimum standards for the operation and use of the distribution system, including requirements for: connection to and augmentation (the expansion or enhancement) of distribution pipelines; disconnection and reconnection; the provision of metering installations and testing, and meter reading and data; curtailment (the interruption of delivery of gas to a supply point due to planned maintenance or emergencies); customer dispute resolution; and deemed distribution contract requirements (including deemed obligations which extend to both customers and distributors). It also sets benchmarks for, amongst other things, unaccounted for gas and service levels for residential gas customers.
The Distribution Code, version 5 (24 February 2000), applied at the time of the commencement of the GIA 2001, and is referred to in section 48(3) of the GIA 2001. The current version of the Distribution Code is 8.1 (which came into effect on 30 March 2007). Version 5 may assist in the interpretation of the GIA 2001, as regards the question of what services are comprehended by the expression “services” used in section 22(1) of the GIA 2001.
The Distribution Code operates and has effect as a condition of a distributor’s distribution licence. Distributors and “large customers” (being those customers who have taken, or are likely to take, an aggregate supply from a distribution supply point of more than 5,000 gigajoules in any year) can vary their respective rights and obligations under the Distribution Code by agreement.
The GIA 2001
Overview of the licensing scheme
The GIA 2001 provides the general regulatory framework for the gas industry in Victoria. Its main purpose is stated to be to regulate the gas industry.
Many of the provisions of the GIA 2001 impose requirements on persons who are a “gas company”, which relevantly includes a “gas distribution company”. A “gas distribution company” is a person holding a licence to provide services by means of a “distribution pipeline” (section 3).[3]
[3]Defined terms in the GIA 2001 mentioned in these reasons are all found in section 3.
Section 22(1) is central to the proceeding. It provides:
22 Offence to distribute or retail gas without licence
(1)A person must not provide services (other than the sale of gas by retail) by means of a distribution pipeline, either as principal or agent, unless the person—
(a)is the holder of a licence authorising that person to provide those services; or
(b)is exempt from the requirement to obtain a licence in respect of those services because of an Order under section 24.
Penalty:1200 penalty units and 120 penalty units for each day after the day on which a notice of contravention of this sub-section is served on the person by [the ESC].
Section 22(2) sets out an equivalent prohibition on the sale of gas by retail unless the person is the holder of a relevant licence or exempt from doing so.
Section 25 provides for applications for licences, and section 26 for the grant or refusal of licence applications. Section 27(1)(a) provides that under section 26 the ESC may grant an application for a licence to provide services by means of a distribution pipeline in a particular area on an exclusive basis. As there is a dispute as to whether all distribution licences under the GIA 2001 are exclusive, sections 26 and 27 will be considered in detail later in these reasons.
A licence is subject to such conditions as are decided by the ESC (section 28). This section contemplates the grant of a licence, for the purpose of carrying on activities authorised by the licence, to two or more persons in partnership or as an unincorporated joint venture.
Section 29 provides that, without limiting the generality of section 28, conditions of various kinds may be imposed upon the licensee. The subject matter of potential conditions includes the maintenance of specified accounting records, compliance with industry codes, and preventing the licensee from engaging in or undertaking specified business activities.
Licenses may be transferred under section 40.
The ESC may appoint an administrator to the business in respect of which a licence is issued if it considers that a contravention by a licensee of the licence conditions threatens the security of the gas supply, and any other remedies to enforce compliance are not adequate (section 41).
The meaning of section 22(1)
Section 22(1) contains a number of concepts which are critical in this case:
(a) Provide;
(b) Services;
(c) By means of;
(d) A distribution pipeline;
(e) Either as principal or agent.
Provide
There is no dispute between the parties that the ordinary or natural meaning of “provide” is “to furnish or supply”.[4]
[4]Macquarie Dictionary (4th edition): “to furnish or supply”; Compact Oxford English Dictionary (2nd edition, 1991): “to supply or furnish for use; to yield, afford”.
Thus, section 22(1)(a) applies to a person who supplies/provides relevant services. However, the parties differ as to what makes somebody a supplier or provider, and as to whether there can be more than one provider in respect of the same distribution pipeline. Whether there can be more than one provider will be considered later in these reasons.
Obviously, to be a provider or supplier, a person has to have an actual ability to deliver the services, whatever they are.
But AAM says that to be a supplier, one must also furnish or provide services under a contract with the person to whom the services are provided. On the other hand, the ESC argues that contractual relationships are not important, and the section is addressed to functional or factual activity.
In its ordinary and natural meaning, the concept of providing or supplying services does not connote any particular contractual or legal relationship. The concept is not, as AAM contends, ordinarily limited to selling those services. Nor does the concept require that the supplier receive payment for its services from a particular source (in this case, retailers).
AAM argues that the purpose of a licence is to protect the regulated monopoly and to control “access” to the monopoly infrastructure. AAM argues that “access” can only be provided via contracts with retailers, therefore only the person who is a party to such contracts who can provide the relevant services. This argument is misconceived, primarily because there is no basis for believing that the purpose of a licence under the GIA 2001 is to protect monopolies. That would be directly contrary to the whole purpose of the industry reform, which was to encourage competitive behaviour in the gas industry. This does not provide a reason to read down the meaning of “provide”, so as to limit it to “provide under a contract with a retailer.”
At one point in its submissions, AAM put forward a rather curious argument based on the definition of “operation” in section 3 of the GIA 2001, which includes “the maintenance, removal and alteration of the pipeline”. As best I could understand it, the argument seemed to be that section 22(1) does not require the licensing of a pipeline operator, being the person who undertakes pipeline maintenance, removal and alteration functions.
I agree that the concepts of “operator” and “provider” are not synonymous, although one person may fit both descriptions. But it does not follow that a person who undertakes pipeline operations need not be licensed.
The definition in question is “operation”, not “operator”. “Maintenance, removal and alteration” are inclusive extensions of the natural meaning of operation. The main purpose of the definition of “operation” in the GIA 2001 is to support the compulsory land and easement acquisition powers in sections 142 and 143, and the offence in section 150 of obstructing the lawful operation of a pipeline. Section 150 would be broad enough to include the obstruction of a person engaged by a maintenance sub-contractor; and the sub-contractor would not need to be licensed under section 22 for the offence to be committed. For these reasons, no conclusion should be drawn from the definition of “operation” that a true operator was intended to be beyond the licensing requirements of section 22.
Services
“Services” is not defined in the GIA 2001.
Dictionary definitions of “service” are of little help here. For example, the Macquarie Dictionary (4th ed.) defines service as “the supplying or supplier of any articles, commodities, activities, etc., required or demanded”. That definition provides no assistance in giving content to the meaning of the word in section 22(1).
The heading to section 22, which forms part of the GIA 2001,[5] is “Offence to distribute or retail gas without a licence.” Section 22(1) is concerned with services other than the sale of gas by retail (retail sales being dealt with in section 22(2)), that is to say, with the distribution of gas. “Distribute” is in turn defined to mean “in relation to gas, means convey gas through distribution pipeline”. I agree with the ESC that this is, in ordinary language, a description of a functional activity.[6]
[5]Section 36(2A) of the Interpretation of Legislation Act (1984) Vic.
[6]This conclusion is supported by other indications in the GIA 2001, including sections 3 (definitions of pipeline and apparatus and works), section 23, section 29(2), the recognition of the Distribution Code in section 48(3).
AAM argues that “services” has the same meaning as in the Code (section 10.8). Even if that is so, it does not mean that services are narrowly confined to haulage services and interconnection rights, as contended for by AAM. As explained later in these reasons, the Code definition is inclusive, not exhaustive. It applies to all services provided by means of a covered pipeline (other than the production, sale or purchasing of gas), including without limitation the two specified services. It also includes all services ancillary to such services. The Code definition does not limit the concept of services to services provided under a contract.
Section 22(1) does not identify to whom the services are to be provided. AAM focused primarily on the provision of services to retailers. It is not clear whether AAM says that “services” also includes services provided to end-users, such as retail customers; in some places in its submissions it seems to be arguing that they are, in others that they are not. By focussing as it does on services provided to retailers, AAM highlights the contractual relationship which exists between Multinet and the retailers.
Whether “services” means the distribution of gas, or has the same meaning as in the Code, such services are capable of being provided to retailers and end-users.
As a matter of fact, AAM contends that it does not provide any “services” to retailers or end-users, and that the only services it provides are to Multinet. That contention will be considered later in these reasons.
By means of
AAM argues, by reference to a High Court decision on income tax, that “by means of” means “by the instrumentality of” or “through the intervention of”.[7] The income tax context is quite different from the present inquiry, and seems to be of little, if any, assistance. AAM argues that the services that occur “by the instrumentality” of the pipeline occur “due to pressure differential”. That may be so as a matter of physics, but hardly helps one understand what services are provided “by means of”.
[7]Hughes (Commissioner for Income Tax Queensland) v Munro (1909) 9 CLR 289.
I agree with the ESC that the ordinary and natural meaning of “by means of” is “using”. AAM argues against the adoption of such a meaning, without really explaining how that differs from “by the instrumentality of”. At one point, AAM does so on the basis that the only person who “uses” the pipeline is the retailer whose gas is transported to the customer. But there is no reason to adopt such a limited concept of “use” or “using”. There are many other possible ways of providing services using or by means of a distribution pipeline. Indeed, elsewhere in its submissions, AAM itself acknowledges that Multinet provides services to retailers “by means of” the distribution pipeline.
AAM seeks to rely on the decision of the Australian Competition Tribunal in Re Duke Eastern Gas Pipeline Pty Ltd and Others.[8] Whilst that case did involve a consideration of the phrase “services provided by means of a pipeline”, it did so in the context of that phrase as it appears in the coverage provisions of the Code. In fact, the Tribunal said nothing about “by means of” which is inconsistent with that phrase meaning “using”.
[8][2001] ACompT 2.
AAM also points out that it does not own the pipeline or any pipeline assets with which it can offer services; Multinet owns the pipeline. That is beside the point. The GIA 2001 is not concerned with who owns the infrastructure. The concept of “by means of” in section 22(1) certainly does not impose any requirement of pipeline ownership. Nor does it impose any requirement that the service provider be entitled to exclusive possession of the pipeline, as AAM also contends.
AAM argues that, at its highest, it provides services “in respect of” the pipeline or “to” Multinet, not “by means of” the pipeline. The ESC does not suggest that “by means of” means “in respect of” or “to”. However, the ESC argues that AAM provides services using the pipeline. I will consider later in these reasons whether, as a matter of fact, AAM does provide relevant services by means of the pipeline.
Distribution pipeline
A distribution pipeline relevantly means “a pipeline for the conveyance of gas”, which is not a transmission pipeline. A “pipeline” relevantly means “a pipe or system of pipes for or incidental to the conveyance of gas and includes all apparatus and works associated with the pipe or system of pipes, and includes a part of such a pipe or system”.
“Apparatus and works” are defined as meaning:
(a)apparatus for inducing or facilitating the flow or movement of anything through the pipeline;
(b)apparatus or structure for giving protection or support to the pipeline;
(c)apparatus for transmitting information or instructions with regard to the operation of the pipeline;
(d)valves, valve chambers, manholes, inspection pits and other similar works annexed to or incorporated in the course of the pipeline;
(e)storage, loading and all ancillary facilities and installations required for the pipeline or used in connection with, or incidental to, the pipeline; and
(f)prime movers for the operation of any apparatus or works mentioned in paragraph (a), (d) or (e).
“Prime movers” are not defined, but I agree with the ESC that this expression means or includes the control mechanisms for the operation of any apparatus or works mentioned in paragraph (a), (d) or (e) of the definition.
Principal or agent
Section 22(1) applies to the provision of relevant services “either as principal or agent”.
Section 22 was first incorporated as section 48B of the GIA 1994 by way of amendment in 1997. Section 22 is in identical terms to section 48B, save for references to the ORG having been changed to references to the ESC, and penalties having been increased. Neither the explanatory memorandum nor the parliamentary debates for the 1997 Act provide an explanation as to the inclusion of the words “either as principal or agent”. Nor do the equivalent extrinsic materials for the GIA 2001 provide any assistance; the explanatory memorandum simply notes that section 22 is in the same terms as section 48B of the GIA 1994, save that the penalties have been increased.
AAM argues that there was an historical purpose to the inclusion of the words in section 48B, but they have no real role to serve in section 22. It argues that the words have remained in the provision only by legislative oversight and ought effectively to be ignored.
Historically, only one entity owned all the pipelines and supplied all customers as non-contestable customers. Arrangements were needed to provide for the transition to a de-regulated industry, and full retail contestability was introduced in stages.
On 11 December 1997, a retail licence was issued to GASCOR as licensee. The licence authorised GASCOR to sell gas to every franchise customer in the relevant franchise area, and required all such sales to be made “by an agent who is separately licensed” by the ESC’s predecessor. One such licensed agent appointed by GASCOR was Kinetik. Kinetik in fact sold gas in two different capacities: to non-contestable customers as agent for GASCOR, and to contestable customers as principal. So far as the non-contestable customers were concerned, the agency agreement provided that Kinetik derived the revenue from sales and bore the ultimate credit risk for the GASCOR agency customers.
AAM argues that if GASCOR had not itself been a retailer, then it would have been sufficient for the purposes of section 48B if its agent, Kinetik, were licensed. I do not agree with that argument. If GASCOR’s agent was selling gas on its behalf, then GASCOR would have been the principal in respect of those retail sales, irrespective of the parties’ contractual arrangements as to remuneration of the agent. That is to say, both the principal and the agent would have required a retail licence under section 48B.
Even if regard could be had to the GASCOR and Kinetik retail licences in order to construe section 22 (which may be doubted), it is not clear why the particular facts surrounding those licences should be taken to limit the operation of section 22.
In looking at the historical context, AAM argues that unless the prohibition in the predecessor of section 22(1) had referred expressly to “either as principal or agent”, then persons would have been able to subvert the licensing regime by appointing an agent who was not licensed to provide the relevant services. I agree that that would have been a problem, but that is as much a current problem as an historical one. By requiring the licensing of any person who provides relevant services, in any capacity, the legislature has clearly sought to prevent persons from subverting the Act by simply appointing an agent. Therefore, the words “either as principal or agent” remain as relevant in the GIA 2001 as they were in the previous legislation.
In the alternative, AAM contends that the GIA 2001 only requires that either the principal or the agent be licensed, but not both. AAM argues that if it is Multinet’s agent (which it denies) then, because Multinet has a licence, there is no need for it to also have one.
AAM argues that in the usual case, there will only be one service provider of a bundle of retail services or, in the distribution context, one provider of distribution services via a single distribution pipeline. However, even if that is the case as a matter of fact (about which I am unable to express an opinion), that does not entitle me to ignore the express wording of section 22.
AAM contends that the licensing regime under the GIA 2001 is about imposing responsibility for the supply of services and “there cannot be responsibility imposed upon two persons for the same activity.” It does not explain why that must be the case as a matter of general principle, nor do the other Victorian statutes and rules support such a bald proposition.
There is nothing in the terms of section 22(1) which suggests that where an agency relationship exists, only one of the principal or agent needs to have a licence. The section creates an offence for a person who does the prohibited act “either as principal or agent”. The words “either as principal or agent” indicate the breadth of the offence, namely that it applies to any person who provides relevant services in any capacity.
This is consistent with the general structure of the provision: section 22(1) contains a general prohibition on the provision of services by an unlicensed person, not a prohibition unless there is a licence in relation to the pipeline.
By prohibiting the provision of services either as a principal or agent, the legislature has emphasised that the prohibition applies irrespective of whether the person concerned is a party to a contract which confers the benefit of those services on another person (such as a retailer or customer). The language confirms that the legislature intended the prohibition to operate on a person who is providing the stipulated services in a functional or factual sense.
The exclusivity argument
AAM argues that a distribution licence issued pursuant to the GIA 2001 is an exclusive licence. It says that, unlike the position under the GIA 1994 (as amended), the GIA 2001 does not allow for two licences to be granted in the one geographic area or over the same pipeline. This argument is based on AAM’s interpretation of sections 25, 26 and 27 of the GIA 2001.
The ESC says that although it has a discretion to grant an exclusive licence, it is not the case that the GIA 2001 only allows for exclusive licences.
Applications for licences, including licences to provide services by means of a distribution pipeline, are made to the ESC under section 25.
Sections 26 and 27 relevantly provide as follows:
26. Determination of application
(1) [The ESC] may grant or refuse an application for the issue of a licence for any reason it considers appropriate, having regard to the objectives specified in section 18.
(2)[mandatory procedure for public consultation about licence applications]
(3)Subject to this section and any requirements specified in regulations made for the purposes of this section under section 236, [the ESC] may determine the procedures that are to apply to in respect of the issue of licences.
(4)[The ESC] must notify an applicant in writing of its decision to grant or refuse to grant the application and, in the case of a decision to refuse to grant the application, of the reasons for its decision.
27. Grant of licence for exclusive franchise
(1)[The ESC], under section 26, may grant an application for a licence–
(a)to provide services by means of a distribution pipeline in a particular area on an exclusive basis; or
(b)to sell gas by retail in a particular area or on an exclusive basis.
(2)[The ESC], under section 38, may vary a licence to permit the licensee–
(a)to provide services by means of a distribution pipeline in a particular area on an exclusive basis; or
(b)to sell gas by retail in a particular area on an exclusive basis.
(3)[The ESC] may only grant an application for a licence of a kind referred to in sub-section (1) in accordance with the criteria determined by Order under this section for the grant of a licence.
(4) [The ESC] may only vary a licence for a purpose referred to in sub-section (2) in accordance with the criteria determined by Order under this section for the variation of a licence.
(5)If–
(a)an application for a licence to provide services by means of a distribution pipeline is granted, in accordance with this section, in relation to a particular area; or
(b)a licence is varied to permit the provision of services by means of a distribution pipeline in a particular area on an exclusive basis–
In the past when the Andrew Schilles of the world have represented [United Energy] and AAM, we could argue that they report to David and me on these issues but it gets much harder to mount that argument when it when it is Bob [Browning] and Murray [King] who sign.
Mr Reardon agreed in cross-examination that the removal of the power of attorney was done at least in part due to the issues in these proceedings. Mr Gleeson did not give evidence.
I agree with AAM that, at the end of the day, the motives of Mr Gleeson or Multinet in relation to the use of the power of attorney by AAM, are irrelevant to the question of statutory construction.
AAM argues that the execution of UoSAs by AAM under power of attorney for Multinet did not constitute AAM as the “provider of services by means of a distribution pipeline”.
In support of that argument, AAM makes a number of uncontroversial submissions about the legal effect of the power of attorney clause. It points out that the execution of a document pursuant to a power of attorney does not create any liability between the third party and the attorney, and that execution under the power of attorney equates to execution by Multinet itself. By executing the UoSAs under power of attorney, AAM was not exposing itself to action for breach or to perform the contractual obligations of Multinet. Multinet alone is so exposed to liability. With the ability and obligation to supply the services, Multinet both bears the responsibility to provide the service and the ability to derive the financial benefits. Signing as attorney for Multinet gives none of these obligations or rights to AAM.
The ESC does not suggest that the execution of the UoSAs under power of attorney in fact made AAM a party to the contracts or liable in respect of them. Rather, for the reasons already discussed, it says that the strict contractual rights are irrelevant to a consideration of the GIA 2001 and the Code. I agree.
Negotiation of UoSAs
Considerable time was spent examining witnesses as to the extent to which AAM did, or did not, negotiate the terms of any of the UoSAs.
AAM argued that the UoSAs were standard-form agreements, and the only issue for discussion was as to how the retailer was to satisfy certain credit support requirements. AAM urged the court to conclude that its role in relation to UoSAs was administrative only. It merely facilitated the transactions between Multinet, as principal, and the retailers, as third parties. It says the court should conclude that AAM does not and did not “negotiate” any term of the UoSAs.
Whilst agreeing that many of the UoSA terms are standard (and approved by the ESC), the ESC argued that insofar as there is any negotiation of the terms, that negotiation is undertaken by AAM, not Multinet.
James Wong gave evidence that during the period from April 2001 to March 2005, he was a key customer and retailer manager at AAM, with responsibility for the administration of UoSAs, including arranging their execution. Mr Wong understood the position to be that if no amendments were to be made to the standard UoSA, then approval need not be sought from Multinet prior to the agreement being executed by AAM’s representatives in Perth under power of attorney. If amendments were to be made to the standard UoSA, he understood he needed to seek approval from Multinet prior to the agreement being executed by AAM under power of attorney. In fact, no amendments were made to terms of the UoSAs for which Mr Wong was responsible and therefore he did not seek Multinet’s approval prior to arranging for the execution of the agreements by AAM under power of attorney.
During 2001 to 2004, Rod Collins worked alongside Mr Wong in a very similar role. Mr Collins dealt with and administered the UoSAs for Origin, TXU, AGL and Energex. Mr Collins did not give evidence during this proceeding. However, correspondence between Mr Collins and Ms Hanna, who worked at AGL at the relevant time, demonstrated a significant level of negotiation between AAM and AGL on a number of issues in relation to the AGL UoSA, including connection charges, unaccounted for gas, disconnection at the request of the user and liability of supply. Ms Hanna confirmed that evidence in her cross-examination.
Ms Pollock confirmed in cross-examination that she had negotiated credit support with retailers. Mr Eskrigge also confirmed that he negotiated credit support with Mr Wong in relation to the UoSA for Victoria Electricity.
Ms Pollock gave evidence that when credit support issues were raised which did not conform with the standard UoSA, Multinet approval was sought and obtained.
I accept that the UoSAs were largely standard form contracts and that there was little scope for a retailer to renegotiate their terms. I conclude that, insofar as there was any negotiation of the terms of UoSAs, it was undertaken by AAM, not Multinet. Multinet clearly retained the legal power to approve or reject proposed amendments.
Operational issues in relation to retailers
There is no real dispute that AAM has, at all material times since 23 July 2003, dealt with retailers in relation to all operational and relationship issues. The following are examples:
(a) The primary means of communication necessary for the operation of the retail market is the B2B transaction process, conducted through VENCorp’s FRC hub and the interface protocol developed by VENCorp. Ms Pollock acts as the point of contact within AAM when retailers are unable to resolve particular issues through the normal B2B process. Ms Pollock confirmed that there are many communications between herself and retailers “about all sorts of different day-to-day matters”.
(b) AAM notifies retailers when the UoSAs are to cover new geographic areas;
(c) AAM deals with retailers in relation to administration of the UoSAs;
(d) AAM attends operational meetings with retailers to discuss various issues including gas interval meter installations and reading of gas meters;
(e) AAM controls or directs customer connections and disconnections. As confirmed by Mr Beech, there is a standard economic feasibility test that must be passed before someone can be connected. The test is set in the access arrangements by the ESC and is applied by AAM personnel. The physical connection itself is managed by AAM;
(f) AAM informs retailers of new connection procedures and/or changes in connection procedures;
(g) AAM controls or directs metering issues;
(h) Guaranteed service level payments are made by AAM (or by contractors to AAM’s account) to customers where the relevant failure to meet the guaranteed service level fits the description of the exception referred to in clause 12.4(a) of the OSA. AAM has in fact made guaranteed service level payments;
(i) Since November 2003, all gas connection advices contain a Multinet and an Alinta logo and all state “[t]his offer is made by Alinta Network Services on behalf of Multinet Gas pursuant to its obligations under Part 3 of the Gas Distribution System Code”;
(j) AAM informs retailers if meters are to be replaced;
(k) Invoices from AAM to retailers are sent by AAM and retailers pay to an account called “Multinet Gas Distribution Partnership”; and
(l) AAM deals with retailers in relation to overdue payments and tariff notification.
AAM does not contest that it has many dealings with retailers. It is required to do so under the terms of the OSA. However, it says that at all times its activities are the subject of KPIs and reporting obligations and that Multinet retains ultimate control of all aspects of the Multinet system through KPIs and reporting requirements.
As already mentioned, the KPIs and reporting requirements are very weak mechanisms for monitoring and controlling AAM’s activities. In any event, for the reasons expressed earlier, the functional/factual interpretation does not require a detailed examination of the contractual position.
AAM’s other activities in relation to the Multinet system
AAM either does, or directs others to do, the following categories of activity which must be performed in order to facilitate the flow of gas through the Multinet system:
(a) Operation of the SCADA system;
(b)Routine operations, including maintenance, replacement, expansion and upgrading;
(c) Incident response, including the implementation of a safety case; and
(d) Long term planning.
The evidence is that these activities are necessary, in a technical sense, for the distribution of gas to occur.
AAM also carries out all of the functions set out in section 1.2 of the Distribution Code which, overlapping with schedule 1 to the OSA, includes connection and augmentation; disconnection and reconnection; provision of metering installation; metering installation testing; meter reading data; curtailment; customer dispute resolution and deemed distribution contract requirements.
SCADA operation
The Multinet system is controlled by SCADA. SCADA monitors gas flows, pressures and temperatures. It collects, collates and stores data and makes decisions between pre-programmed choices. It is used in the pressure management of gas and reduces the risk of leakage by increasing gas pressure during periods of high demand and decreasing pressures during off peak periods.
SCADA is operated and monitored by AAM employees. Maintenance of SCADA is coordinated by AAM’s field services and carried out by subcontractors under the direction of AAM.
AAM argues that SCADA is, for practical purposes, an automated monitoring system and does not constitute an operational control system of the Multinet system. For example, AAM points to the fact that although SCADA reports on the Multinet system, there is little that co-ordinators can do when a low pressure alarm is recorded. What occurs if nothing is done is that the system goes to “failsafe”, that is, maximum pressure.
The fact that the monitoring system has been automated does not reduce the importance of SCADA to the operation of the Multinet system. In so far as any decisions are made about the parameters of operation, they are made by AAM.
Routine operations
Maintenance and replacement strategies are produced within the asset services group at AAM.
In respect of substantial construction and maintenance work, AAM prepares a business case and makes recommendations to Multinet. Such work is either approved or otherwise by Multinet and carried out by contractors pursuant to Multinet’s standards and specifications.
However, run of the mill maintenance and construction tasks do not require Multinet approval and are not reported to Multinet.
All construction and maintenance work is undertaken by AAM, or contracted workforces under the direction of AAM, not Multinet. Where third party contractors are used, AAM conducts the necessary tender processes and enters into the contracts.
AAM also does, or subcontracts for others to do, at least the following additional routine things:
(a) Co-ordination of security and protection of the transmission pipelines;
(b) Regulator and valve maintenance;
(c) System protection and leakage pinpointing.
AAM also deals with VENCorp in relation to its annual review of certain gas quantity and minimum pressure stipulations referred to in the relevant agreements between VENCorp and Multinet.
AAM is also responsible for reviews and alterations of the Multinet engineering standards, which cover how pipes are installed, minimum cover requirements, offsets and when risk assessments are required. Although the engineering standards are those of Multinet, they are maintained and assessed by AAM.
Incident response
AAM prepares and submits the Multinet safety case. The safety case describes AAM’s operation of the network and the various functions that must be performed from time to time including: control equipment; meters; pipeline renewal and rehabilitation; modification control; gas quality; permit to work systems; and competencies.
Although it prepares and lodges the safety case on behalf of Multinet, the last revision of the safety case was prepared and sent by AAM and did not even go to Multinet for approval.
There is no dispute that the obligations in the Multinet safety case are imposed on Multinet under the GSA, but the fact of the matter is that it is AAM who in fact discharges all of these obligations. At the very least, this is illustrative of the extent to which AAM in is charge of all aspects of the Multinet system.
The safety case contains a section entitled “AAM Safety Management Policy”. Pursuant to that section, Peter Magarry, Chief Operating Officer at AAM, undertakes that all AAM personnel and contractors fully support this safety policy and will be fully accountable for their safety performance. Mr Magarry is also the only person nominated in the safety case as having management of the facility and being responsible for the safe operation of the facility (pursuant to regulation 7, division 2 of the safety case regulations).
The Multinet safety case includes a safety management system which sets out the response process for managing incidents. Such incidents may be advised by control room operators, field operations staff, other authorities staff and members of the public.
Incidents include gas escapes due to damaged pipes, mains or equipment, restricted gas supply to customers, water in mains, limits to network capacity under high load conditions or insufficient gas being supplied into the network. Responses affecting network operation may require:
(a) Adjustment to regulator set pressures;
(b) Valve closures so that network sections can be isolated for repair;
(c) Laying of temporary mains to provide continuing supply during repairs; and
(d) Customer load curtailment in accordance with safety management system rules.
Responsibility for managing the response depends on the severity of the incident as outlined in emergency response levels specified in the safety case.
AAM is effectively responsible for the safe operation of the Multinet system as well as dealing with all network incidents and coordinating incident responses.
The main activities of the AAM Co-ordination Centre in relation to the Multinet system is to monitor and overview the network, as well as operating an after hours communication hub, a first line emergency response centre and information dispersal service for management.
AAM performs or sub-contracts for the performance of the following functions set out in the Multinet safety case: system design, construction, maintenance and repair, control and protection; leakage pinpointing; pipeline management; regulator and valve maintenance; meter calibration, testing, maintenance and repair; public contact; incident notification; information systems; and meter supply.
Long term planning
Long term planning is carried out to ensure the distribution network can deliver forecast gas loads to customers at required pressures. System design services are provided by external design consultants. The construction of new and replacement mains and services is performed by contractors through a selective competitive tendering process.
AAM has a contractual obligation pursuant to the OSA to submit asset management plans to Multinet. Their primary purpose is to set out the capital requirements for the Multinet system for the following five years, such that the required service standards, safety and reliability can be maintained.
The asset management plan therefore is concerned mainly with capital expenditure (“capex”), which includes AAM providing limited operational information needed to make decisions, such as limited information about forecast operating expenditure (“opex”), but it does not contain any information as to actual opex.
Asset management plans are approved or not approved, as the case may be, by Multinet. Thereafter, AAM must prepare a business case, which complies with the financial feasibility requirements and undertakes the work.
Multinet is not informed of AAM’s opex pursuant to a policy, implemented by AAM, which ensures that AAM keeps its opex information from Multinet.
The ESC argues that this shows that, although representatives of Multinet may be consulted and may make decisions on matters related to capex and regulatory strategy, consistent with being the owner of an asset, AAM, as well as bearing opex, in fact directs and controls all day-to-day operational issues.
AAM offers a different perspective, stating that the insistence that Multinet is not aware of its opex demonstrates the arm’s length relationship between Multinet and AAM. Contractors do not normally disclose profits and margins to the other contracting party. It is not necessary that the other contracting party is aware of the profits and losses of the contractor in performing the contract obligations.
There are other examples of AAM’s involvement in long term planning. For example, AAM also tendered, on Multinet’s behalf, for the Yarra Valley gas reticulation project. The tender was submitted by Mr Schille, an employee of AAM, on Multinet letterhead. Mr Schille confirmed that in communicating with government agencies regarding the Multinet distribution network, or extensions to it, he has standing authority to write on behalf of Multinet on Multinet letterhead, even though he is an AAM employee.
Conclusions
The following conclusions of fact are of critical importance to the questions under both the GIA 2001 and the Code:
(a) The OSA appoints AAM exclusively to operate and manage, or procure the operation or management of, the entire Multinet system;
(b) Multinet has agreed to deliver up, and has in fact delivered up, operating control of the system to AAM, or as AAM directs;
(c) AAM in fact operates and manages, or procures the operation and management, of the Multinet system. The contractual mechanisms of KPIs and other reporting obligations, and the limited amount of actual involvement by Multinet through meetings and the like, do not detract from that essential position;
(d) The operation of the Multinet system undertaken, or caused to be undertaken, by AAM is what facilitates the flow of gas through the system;
(e) Sub-contractors and other third parties who contribute to, or assist AAM with, the functioning of the Multinet system, do so under AAM’s management or control;
(f) In performing its obligations to provide the services under the OSA, AAM has extensive decision-making functions about incurring operating expenditure in order to meet the requirements of the OSA and the asset management plan (as proposed by AAM and approved by Multinet from time to time);
(g) Under the OSA, AAM negotiates on Multinet’s behalf in connection with UoSAs, and deals with or manages dealings with system users on all other matters;
(h) Prior to October 2006, AAM had an irrevocable power of attorney from Multinet to perform the services, enter into any UoSA, and do anything necessary or desirable to deliver the services. It is irrelevant that AAM was not a party to the UoSAs which it executed under the power of attorney. The nature and extent of the power of attorney clause further confirmed the extent to which AAM was in fact operating and managing the entire Multinet system;
(i) Although since October 2006 the power of attorney clause has been deleted, and AAM is declared not to be AAM’s agent, no other provision in the OSA has been amended. Most importantly, no practical change has occurred in performance of AAM’s functions under the OSA, save that Multinet now signs UoSAs itself.
AAM provided and provides relevant services under section 22(1) of the GIA 2001
Section 22(1) requires the application of a functional or factual approach to the question of whether a person provides services by means of a distribution pipeline, either as principal or agent. It does not require that the person provide all the relevant services which are provided by means of the pipeline. There can be more than one person who provides distribution services in respect of the same pipeline. A person may provide some of those services as principal and some as agent.
The critical issue in determining whether a person provides services is not whether they are a party to the relevant haulage contracts, or who owns the pipeline, it is whether the person in fact uses the distribution pipeline to distribute gas, according to the ordinary and natural meaning of those concepts. A person such as AAM who undertakes, controls and directs the activities constituting the distribution of gas is providing those services.
The extent of the contractual powers conferred on AAM under the OSA, and actually exercised by AAM, are such as to bring it within the ordinary and natural meaning of a person who provides services by means of a distribution pipeline. The fact that subcontractors undertake some of the particular activities, under the direction and control of AAM, does not diminish that conclusion.
At all material times (including since October 2006), AAM has in fact provided sufficient relevant services by means of the Multinet system, either as principal or agent, to bring it within section 22(1) of the GIA 2001.
AAM is a “service provider” under the Code
The Code is not concerned with whether a person is acting as principal or agent. It is concerned with whether a person is the owner or operator of a covered pipeline.
The Code clearly conceives of the possibility of there being a separate owner and operator for some or all of a covered pipeline.
Where it appears that the owner has handed over the operation of some or all of the pipeline, there is a need to undertake a factual enquiry to determine who is in fact the operator of the pipeline. This involves an inquiry as to the functions actually performed by the parties, not merely an inquiry as to who is a party to contracts with third parties.
The extent of the contractual powers conferred on AAM under the OSA, and actually exercised by AAM, are such as to bring it within the ordinary and natural meaning of the “operator” of the pipeline. The fact that subcontractors undertake some of the particular activities, under the direction and control of AAM, does not diminish that conclusion.
Those conclusions are not affected by the amendment to clause 32 of the OSA in October 2006. That is to say, AAM was the operator of the pipeline at all relevant times before and after October 2006.
AAM therefore fell and falls within the definition of “service provider” for the purposes of the Code.
As such, AAM is required to comply with the access arrangement provisions in respect of the Multinet system. How it chooses to comply with that obligation is a matter for it and Multinet to determine. One obvious possibility would be for AAM and Multinet to submit a joint access arrangement.
In any event, AAM is required to comply with the ring fencing requirements of the Code.
General remarks
The effect of my decision is not that all persons who perform discrete functions necessary for the operation of a distribution network will be “the operator” under the Code, or will need to be licensed under the GIA 2001. In each case, it will be necessary to undertake a detailed examination of the relevant facts, including the terms of any relevant contract with the network owner, to determine the extent to which the operation and management of the network has in fact been handed over to another person.
What has happened here is that Multinet has effectively handed over all the functions which are required to be performed to operate and manage the Multinet system. It is the aggregation of all the contractual responsibility under the OSA that leads to the conclusion that AAM is and has, at all material times since 23 July 2003, been the operator of the Multinet system. Those same facts lead to the conclusion that AAM is providing services by means of the distribution pipeline.
I will hear from the parties as to the precise form of declarations and as to costs.
GLOSSARY OF TERMS AND ABBREVIATIONS
| AAM | Alinta Asset Management Pty Ltd |
| AAM (2) | Alinta Asset Management (2) Pty Ltd |
| AMP | AMP Henderson and Global Investors Ltd |
| AMP agreement | Agreement between AMP and MGH, Multinet and other companies in the Multinet Group dated 14 July 2003 |
| AMRS | AMRS (Aust) Pty Ltd |
| AMRS agreement | Agreement between AMRS and AAM dated 14 April 2004 |
| ANS | Alinta Network Services Pty Ltd |
| BBS | Bilfinger Berger Services (Australia) Pty Ltd |
| BBS alliance agreement | Agreement between BBS and AAM made in August 2006 |
| COAG | Council of Australian Governments |
| Distribution Code | Victorian Gas Distribution System Code |
| Energy 21 | Energy 21 Pty Ltd |
| Envestra | Envestra Limited |
| ESC | Essential Services Commission |
| Esso | Esso Australia Resources Pty Ltd |
| ESV | Energy Safe Victoria |
| Fluor Daniel | Fluor Daniel Gas Services Pty Ltd and Fluor Daniel Power & Maintenance Services Pty Ltd |
| GasNet | GasNet Australia (Operations) Pty Ltd |
| GFC | Gas & Fuel Corporation |
| GIA 1994 | Gas Industry Act 1994 (Vic) |
| GIA 2001 | Gas Industry Act 2001 (Vic) |
| GPAV | Gas Pipelines Access (Victoria) Act 1998 (Vic) |
| GSA | Gas Safety Act 1997 (Vic) |
| GTC | Gas Transmission Corporation |
| Hilmer Report | The report produced by the independent committee of inquiry, led by Professor Hilmer and commissioned by COAG. |
| Ikon | Ikon Energy Pty Ltd |
| Interface protocol | Gas Interface Protocol |
| Kinetik | Kinetik Energy Pty Ltd |
| KPIs | Key performance indicators |
| MGH | Multinet Group Holdings Pty Ltd |
| MSO rules | Market and System Operator rules |
| Multinet | Multinet Partnership comprising of Multinet Gas (DB No 1) Pty Ltd and Multinet Gas (DB No 2) Pty Ltd |
| Multinet Assets | Multinet (Assets) Pty Ltd |
| Multinet Gas | Multinet Gas Pty Ltd |
| Multinet system | Multinet gas distribution network |
| NCC | National Competition Council |
| NEMMCO | National Electricity Market Managements Company |
| NGPAA | Natural Gas Pipelines Access Arrangement |
| NPS | National Power Services Pty Ltd |
| NPS (WA) | National Power Services (Western Australia) Pty Ltd |
| OGS | Office of Gas Safety |
| ORG | Office of the Regulator-General |
| OSA | Operating Services Agreement |
| PIES | Pacific Indian Energy Services Pty Ltd |
| PIES agreement | Agreement between MGH and PIES dated 14 July 2003 |
| PTS | Principal transmission system |
| Retail rules | Victorian Gas Market Retail Rules |
| Safety Case Regulations | Gas Safety (Safety Case) Regulations 1999 (Vic) |
| SCADA | The Supervisory Control and Data Acquisition system |
| SPI | SPI Networks (Gas) Pty Ltd |
| The Access Law | Schedules 1 and 2 to the Gas Pipelines Access (South Australia) Act 1997 (SA), which have been incorporated into Victorian law |
| The Code | National Third Party Access Code for Natural Gas Pipeline Systems, being schedule 2 to the Gas Pipelines Access (South Australia) Act 1997 (SA) |
| The Law | Schedule 1 to the Gas Pipelines Access (South Australia) Act 1997 (SA) |
| TPA | Trade Practices Act 1974 (Cth) |
| UCMS | United Customer Management Solutions Pty Ltd |
| UCMS agreement | Agreement between AAM and UCMS dated 19 March 2004 |
| UoSAs | Use of Service Agreements |
| Victorian Access Code | Victorian Third Party Access Code for Natural Gas Pipeline Systems |
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