The AER approves sub-clause 12.1 as proposed by Envestra. Sub-clause 12.1 provides for Envestra to set gas specifications and make reasonable variations from time to time by notice given to the Network User. The AER considers that:
Envestra's approach has benefits because it provides certainty to Network Users, rather than permitting Envestra to refuse or cease delivery of gas that it considers contains deleterious material, with no prior notice.
setting out defined specifications ensures that Network Users know what gas will and will not be accepted and can take positive steps to ensure that gas does not contain deleterious material, because any such material will be set out in the specifications.
a clause that sets specifications and provides certainty is reasonable and consistent with the NGO. It acts to prevent harmful material being injected into Envestra's network. This could cause damage and outages, which would not be in the long term interests of consumers with respect to price, reliability or security of supply.
certainty also avoids situations where Network Users are suddenly informed that their gas contains deleterious material and is released or flared. Such a situation would not be in the long term interests of consumers with respect to price, reliability or security of supply.
The AER also notes that the inclusion of this provision does not preclude negotiation on this clause. The AER's decision is based on the information before it. The AER acknowledges that commercial circumstances may develop where a different approach may be agreed by a Network User and Envestra.
In its draft decision, the AER in revision 12.8 required Envestra to amend sub-clause 12.1 by removing a qualification requiring gas injected into Envestra's network to meet any specifications, beyond those imposed by law, reasonably specified by Envestra.987
Envestra did not adopt the AER's required amendment in its revised proposal. Envestra made submissions in support of its proposed approach. These submissions are discussed below.
Envestra submitted that Victorian and NSW regulations provide that the prescribed Australian standard is Australian Standard 4564 'Specifications for general purpose natural gas'. This standard is not intended to be exhaustive.988 Envestra submitted that AS 4564 is intended to be general and does not address all the issues that are relevant to the composition of natural gas. In particular, AS 4564 does not specify a temperature element. Envestra submitted that temperature is important because it may have adverse effects on the network's structural and operational integrity.989
Envestra stated that AS 4564 is generic in its application and does not attempt to define specific limits or levels for compounds or other substances that might occur in gas. The specifications imposed by law do not address all of the issues that might render gas unsuitable for transportation through Envestra's network. Envestra considered that the term it proposed enables detailed specifications that overcome the generality of the specifications of the law.
In addition to Envestra's revised proposal, the AER considered AGL's submission. AGL submitted that Envestra should not be able to impose higher specifications than those imposed by law. The specifications should cover gas quality sufficiently and that is what is referenced in the upstream agreements.990
The AER has reviewed the specifications under the laws of Victoria as applied to Envestra's Victorian network and NSW as applied to Envestra's Albury network.
The Victorian law that relates to gas specifications is s. 6 of the Gas Safety (Gas Quality) Regulations 2007. The law states that the prescribed standard of quality for natural gas conveyed through a distribution pipeline is set out in AS 4564.
The NSW law that relates to gas specifications is s. 22 of the Gas Supply (Safety and Network Management) Regulations 2008. The law provides that a reticulator must not convey non-compliant natural gas through a distribution network. Non compliant natural gas is gas that is not compliant natural gas. Compliant natural gas is defined in s. 21 as gas that complies with the standard set out in AS 4564.
The AER considers that the law in both NSW and Victoria requires gas to comply with AS 4564. The AER considers that this is, as submitted by Envestra, a general specification that seeks to specify gas standards for a range of potential uses. The AER notes that AS4564 states that 'General purpose natural gas is subject to contractual requirements between buyer and seller".991 The AER understands that there is a range of substances that could potentially harm gas distribution networks. The network owner is best placed to understand what substances cause risk.
Given the relevant laws set standards that do not cover all possible harmful substances, and because Envestra is best placed to know what substances may harm its network, the AER considers it is reasonable and consistent with the NGO for Envestra to set additional specifications.
Envestra submitted that it has no control over gas that is produced upstream and accepted by transmission pipeline operators. Envestra submitted that, for this reason, it should not be placed in a position where it is forced to accept gas that, on an objective and reasonable basis, is not safe or suitable for its network.992
The AER agrees that Envestra has no control over the gas that is produced upstream and accepted by transmission pipeline owners. Envestra's only control is through its contractual terms and conditions with Network Users. It is important to the integrity and efficient operation of Envestra's network that gas that has the potential of causing harm to the network is not injected into the network. Envestra has a legitimate interest in seeking to ensure that this does not happen. The AER considers that, to the extent that there is material that could harm Envestra's network which is not covered by the general AS 4564, it is appropriate for Envestra to set specifications that exclude such material.
The AER considers this clause is not substantially different from clause 4.4(c) in Envestra's 2008-12 access arrangement. The two clauses operate in a different manner but have the same practical effect. That is, Envestra can unilaterally decide what the specifications are or what substances may be harmful or deleterious to its network. The current approach is preferable because it provides certainty around the specifications, rather than allowing Envestra to suddenly refuse to accept delivery of gas because it considers it to contain material that is harmful or deleterious to the network.
The AER recognises Network Users (such as AGL) are the contracting parties with upstream producers. They purchase large volumes of gas from those producers (particularly some of the larger Network Users such as AGL and Origin). However, in relation to AGL's submission, the AER considers that the Network Users are free to negotiate the terms of supply agreements. Their position as large volume purchasers provides them with a degree of commercial power when conducting negotiations. Accordingly, the AER does not accept that Network Users have no control over the setting of specifications in their supply agreements.
