INTERNATIONAL PIPELINES LEGISATION & REGULATION

Arthur DykesConsultant

SOURCES OF INFORMATION

• International Energy Agency surveys• International Gas Union technical

committees• European Union e.g. Madrid Forum• Energy Information Administration• National sources e.g. FERC

NETWORK LEGISLATION

• Economic regulation• Technical regulation• Health, safety and environment regulation• Security

KEY ELEMENTS OF ECONOMIC REGULATION(Deregulation, liberalisation)

• Mandatory third party access to networks• Controls on prices/tariffs for non-

competitive segments• Unbundling• Regulatory structure

APPLICATION OF ECONOMIC REGULATION (1)• Electricity, gas, petroleum pipelines as well

as other networks (telecommunications, transport)

Highly developed for gas and electricity Petroleum pipelines less complicated as

distribution and retail sales not included directly• Geographically: North & South America,

EU, Australia, Asia, Africa

APPLICATION OF ECONOMIC REGULATION (2)• Existing private industry – USA• New private industries – Northern Ireland• Privatisation of state monopolies – UK,

Argentina• Regional gas industries – European Union• Federal systems – Australia• Industrialised/developing – USA, UK,

Bolivia, Mozambique

THIRD PARTY ACCESS

• Regulated TPA Explicit rules for requestsSet operational and financial conditions

• NegotiatedNegotiations normally based on formal code &

indicated prices, with arbitration mechanism• Phasing (derogations, eligible customers)• Open season (Bolivia/Brazil consortium)

NON-COMPETITIVE SEGMENTS

• Price control Natural monopoly Efficiency

• Rate of return Book value versus replacement value

• Price cap e.g.ArgentinaAdjusted for inflation 6 monthlyReviewed every 5 years

PRICE TRADE-OFFSCoal Gas Franchises (start 1849) • Gas companies wanted:

Eminent domain (servitudes);Protection against competition;Municipal contracts.

• Municipalities wanted:Reasonable prices;Safety;Obligation to supply.

• Currently used to establish energy networks

GENERAL PRINCIPLESOF REGULATION

• Rule of law - appeal to the judiciary• Transparency – consultation & accessibility• Neutrality• Predictability and consistency• Independence – adequate skills, resources,

information• Accountability – especially for general

management

UNBUNDLING

• Vertical integration facilitates new projects• Vertically integration & competition

Denying or restricting access, raising prices, lowering service standards.

• Phasing Accounts and managementOperation and investment decisionsOwnership

REGULATORY INDEPENDENCE

• Ensures transparency and a level playing field

• Regulatory capture:By stakeholders (particularly monopolies),

problem of information, selection, no financial interests or revolving door with industry

By politician – must comply with government policy (not instructions), irrevocable mandate

INDEPENDENCE SAFEGUARDS

• Fixed periods of appointment• No conflicts of interest – financial or

revolving door• Stable and reliable funding• Competitive salaries• Transparent decision making process• Review by courts

REGULATORS’ QUALIFICATIONS

• “Integrity, competence, the ability to exercise independent judgement, and the strength to resist pressure are indispensable to regulators, while technical experience in the regulated industry is generally considered to be of secondary importance.” (Regulatory Institutions – IEA)

ENERGY versus GAS REGULATORS

• Energy regulators the norm in industrialised countries:Better co-ordination (gas-fired power stations)Cost effectiveBetter utilisation of resources

• Gas regulators common in new industries:FocusedQuick start

IGU: AIMS OF REGULATORS

• Transparency and efficiency;• Tariff mechanisms;• Ensuring non-discriminatory access;• Fostering competition;• Encouraging the growth of transport capacity and

interconnections;• Promoting adequate infrastructure investment;• Contributing to long-term security of supply.

PETROLEUM PIPELINESUSA

• John D. Rockefeller’s Standard Oil Company formed a national petroleum monopoly, partly by controlling access to pipelines

• The Hepburn amendment (1906) to ICA:Interstate oil pipelines became common carriers

with rate regulationGas and water pipelines were excluded

COMMON CARRIERS

• A pipeline company obliged by law to provide service to all interested parties without discrimination to the limit of the pipeline’s capacity. Once the pipeline’s capacity is reached the service must be offered to all shippers in proportion to the amounts tendered for shipment.

OVER-BOOKING

• In Canada the 3 700 km Interprovincial Pipeline (IPL) carries two thirds of western Canada’s oil production to eastern Canada

• April 1995 shippers’ nominations were twice the oil production of western Canada

• Penalties of $2.70/barrel imposed• Penalty funds used to lower overall tariffs,

thus rewarding responsible nominators

UK ADVICE TO INDIA ON PETROLEUM PIPELINES

• All new petroleum pipelines on common carrier principle

• Establish an independent regulator to:Regulate tariff structureLay down technical standardsPromote the optimal utilisation of pipelinesLay down safety and environmental standards

SAFETY & ENVIRONMENT

• USA – FERC does NOT oversee:Construction of pipelinesAbandonment of servicesSafety

• Canada – National Energy Board oversees:Construction of pipelinesAbandonment of servicesSafety and environment

USA RATE MAKING

• Indexing: maximum rate set by cost of service or sworn affidavit. Rate adjusted annually by PPI-1

• Cost of service: revision of the index based on a “just and reasonable rate”

• Settlement rate: all existing customers agree to a rate change

• Market-based rates: the pipeline must not have significant market power