The Economic Regulation Authority (ERA) – the independent economic regulator in Western Australia – is responsible for regulating monopoly infrastructure including gas pipelines, electricity transmission and distribution lines and rail services. It actively regulates three main gas pipelines – the Dampier to Bunbury Natural Gas Pipeline, the Goldfields Gas Pipeline and the Western Australia Gas Networks System – which “all have monopoly characteristics,” according to Mr Rowe.

The ERA as an independent statutory authority determines the terms and conditions under which third parties can access gas pipeline services. “The aim is to encourage competition both in the upstream services and the downstream services,” Mr Rowe says. The regulated tariffs and terms and conditions operate as a backstop if the parties fail to reach a commercial agreement.

The main method by which the ERA encourages this competition is through setting the price and conditions for using pipeline services and making sure that they represent efficient practice. “We need to ensure that the owner of the pipeline has sufficient revenue to cover its costs, but we need to check to make sure that what they propose to spend is efficient.”

Mr Rowe says that regulators across Australia adopt a standard approach, which involves the pipeline owner submitting an access arrangement. This submission outlines what the pipeline owner thinks the price, terms and conditions for using the pipeline should be for the next five years based on an estimated operational and capital expenditure.

Mr Rowe says that a fairly detailed public consultation process follows, which can take up to 12 months. The ERA will release an issues paper listing the pipeline owners’ proposed terms and invite public comment. Taking into account the pipeline owner’s application and submissions and the public’s response, the ERA will then issue a draft decision, giving the pipeline owner, in addition to the general public, a chance to respond. Eventually, the ERA will release a final decision, which will determine the regulated tariffs and terms and conditions for users over the next five years.

According to Mr Rowe, the ERA’s main challenges are how to determine what an efficient operating expenditure, capital expenditure and rate of return is. To do this, the ERA asks companies to submit a detailed analysis of their operating and capital expenditure for the next five years as part of their access arrangement. The ERA then seeks to ensure that what is proposed to be spent is consistent with a prudent and efficient operator.

The ERA also uses engineering and economic consultants to independently assess whether the companies’ proposals are appropriate or not.

Mr Rowe says that this process can be lengthy because there is sometimes a disagreement between the parties involved. “For example, one of our roles is to make an assessment of what we think – given the risk in the industry – is an appropriate return on the investment by the pipeline owners. Often providers will have a view that they need a higher rate of return than what we might think they need,” he says.

If the ERA does not agree with what the pipeline owner initially proposes, it will publish in the draft decision a series of amendments, which must be made in order for the access arrangement to be accepted. If these amendments are not accepted by the provider, the ERA will issue its own access arrangement, which is subject to appeal by any party.

Mr Rowe explains that this was not always the case. “There was a review of the legislation two or three years ago. Under the old code, if the provider had put forward a complying access arrangement – that is, if it had accepted the recommendations of the regulator, or at least made satisfactory changes – then that was the end of the story. No one could appeal. However, under the new legislation, it’s open to any party to appeal the decision. If a user thought we were being too generous, they could appeal our decision too.”

Another recent change in monopoly infrastructure regulation is the appeal body. In Western Australia, the appeal body used to be state-based, but now appeals are made through the Australian Competition Tribunal. “I think there are a number of reasons for this,” Mr Rowe says. “One is streamlining, the other is consistent decision-making given that regulators are ruled by the same legislation across Australia.”

Mr Rowe says that the recent multitude of gas discoveries within Western Australia has not affected state economic regulation. “It is possible that if you had a situation where multiple gas sources led to more competing gas pipelines, you might eventually argue there is no need for economic regulation,” he says. “But I think that we are far from that right now.”