regulatory arrangements for reticulated lpg …

The Essential Services Commission of South Australia Level 8, 50 Pirie Street Adelaide SA 5000

GPO Box 2605 Adelaide SA 5001 Telephone 08 8463 4444 Facsimile 08 8463 4449

E-mail [email protected] Website www.escosa.sa.gov.au

REGULATORY ARRANGEMENTS FOR

RETICULATED LPG NETWORKS

ISSUES PAPER

August 2008

REQUEST FOR SUBMISSIONS The Essential Services Commission of SA (the Commission) invites written submissions from interested parties in relation to the issues raised in this paper. Written comments should be provided by 3 October 2008. It is highly desirable for an electronic copy of the submission to accompany any written submission.

It is Commission policy to make all submissions publicly available via its website (www.escosa.sa.gov.au), except where a submission either wholly or partly contains confidential or commercially sensitive information provided on a confidential basis and appropriate prior notice has been given.

The Commission may also exercise its discretion not to exhibit any submission based on their length or content (for example containing material that is defamatory, offensive or in breach of any law).

Responses to this paper should be directed to:

Regulatory Arrangements for Reticulated LPG Networks

Essential Services Commission of SA

GPO Box 2605

Adelaide SA 5001

E-mail: [email protected]

Facsimile: (08) 8463 4449

Telephone: (08) 8463 4444

Contact Officer: Mr. R. Shannahan

Closing Date for submissions: 3 October 2008

Public Information about ESCOSA’s activities

Information about the role and activities of the Commission, including copies of latest reports and submissions, can be found on the ESCOSA website at www.escosa.sa.gov.au.

Issues Paper Regulatory Arrangements for Reticulated LPG Networks

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TABLE OF CONTENTS

Request for Submissions b

Public Information about ESCOSA’s activities b

Glossary of Terms ii

1 Introduction 1

1.1 Purpose 1

1.2 Scope 1

2 Background 3

2.1 Reticulated LPG Networks in South Australia 3 2.1.1 Impact of new mandatory requirements for Hot Water Services 3

3 Regulatory Framework 5

3.1 National Regulatory Developments 5 3.1.1 Natural Gas Network Regulation 5 3.1.2 Natural Gas Retail Regulation 5

3.2 Regulatory Requirements – Gas Act 1997 5 3.2.1 Relevant Definitions 6 3.2.2 Requirement for Licence 6 3.2.3 Exemptions 6 3.2.4 Technical Requirements 7 3.2.5 Essential Services Commission Act 8

4 Application of Regulatory Framework to reticulated LPG systems 9

4.1 Regulatory Issues 10 4.1.1 Licensing or Continued Use of Exemptions 11 4.1.2 Consumer Protections 14

4.2 Reticulated LPG Pricing Issues 18 4.2.1 Price Setting 1997 - 2004 18 4.2.2 Price Setting from 2005 18 4.2.3 Transparent Price Information 19

5 Summary 21

5.1 Next Steps 21

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GLOSSARY OF TERMS

AEMC Australian Energy Market Commission

AER Australian Energy Regulator

COMMISSION Essential Services Commission of SA

EIO Energy Industry Ombudsman

ESC ACT Essential Services Commission Act 2002

FSA Formal Safety Assessment

GAS ACT Gas Act 1997

LPG Liquefied Petroleum Gas

NGL National Gas Law

SRMTMP Safety, Reliability, Maintenance and Technical Management Plan


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1 INTRODUCTION

1.1 Purpose

The purpose of this Issues Paper is to consider future licensing arrangements under Part 3 of the Gas Act 1997 (Gas Act) to apply to distributors and retailers of liquefied petroleum gas1 (LPG) in domestic and industrial settings where the LPG is supplied to customers via a network of pipes connected to a storage tank which is periodically refilled - reticulated LPG networks.

Until recently, the supply of LPG to customers via reticulated distribution networks in South Australia was relatively limited.

However, there is an increasing interest in the establishment of reticulated LPG networks, particularly in new housing and small industrial developments in areas beyond the reticulated natural gas network operated by Envestra Ltd. Depending on the technical specification requirements of any given reticulated LPG system (i.e. locale, population), there is potential for, and strong arguments which favour, the design of such systems enabling their linkage to the natural gas distribution network in the future.

The Essential Services Commission of South Australia (Commission) is the licensing authority for the purposes of the Gas Act, a role which it assumed in July 2003. Prior to that date, the Technical Regulator established under Part 2 of the Gas Act had been the licensing authority.

The licensing provisions of the Gas Act are typically applied to natural gas networks.2 Given the potential growth in the application of reticulated LPG networks in this State, the Commission believes it is necessary to clarify the application of these provisions to such networks. This Issues Paper outlines, and seeks feedback on, the Commission’s initial thinking on such matters.

1.2 Scope

This Issues Paper only considers future licensing arrangements for reticulated LPG networks and retailers of LPG in those networks. The views expressed in this paper would have equal application to any reticulated gas network (which is not a natural gas network) such as a Compressed Natural Gas network.

This paper does not relate to either bottles or cylinders of LPG which are widely used by households in South Australia or automotive LPG, as these do not come within the terms of the Gas Act for licensing purposes (refer section 3.2 of this paper).

1 LPG means a hydrocarbon fluid composed predominantly of one or more of the following hydrocarbons: propane (C3H8); propene

(C3H6); butane (C4H10); butene (C4H8) (refer Gas Regulations 1997). 2 Details of the Commission’s gas licensing activities are available from http://www.escosa.sa.gov.au/site/page.cfm?u=89.


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2 BACKGROUND

2.1 Reticulated LPG Networks in South Australia

Reticulated LPG distribution networks provide LPG to residential and small business consumers in a small number of non-metropolitan areas of South Australia.

LPG networks are located at:

Roxby Downs - 1145 customers;

Victor Harbor (Rosetta Retirement Village) - 384 customers;

Renmark (Jane Eliza Estate) - 95 customers;

Port Lincoln – 135 customers;

Wallaroo – 67 customers; and

Clare – up to 100 customers.

The new Cape Jaffa Anchorage development in the south east of South Australia also has a reticulated LPG network.

In addition to the existing LPG networks, the Commission has been approached by a number of parties interested in establishing new reticulated LPG networks of varying sizes in at least six other rural/regional areas of South Australia.

Some of those interested in the establishment of new systems have indicated to the Commission they are considering large scale new LPG networks, potentially servicing up to 1,000 customers.

Reticulated LPG is significantly more capital intensive than cylinder distribution, and thus a critical mass of customers among whom the higher fixed costs can be apportioned is required for the project to be feasible.

Accordingly, the interest in establishing reticulated LPG networks ordinarily arises in new green-fields housing developments or industrial estates. Interest in developing such networks also arises in areas in which it is not presently economic to extend the natural gas network. In such areas it may be viable to invest in a reticulated LPG network which, if appropriately constructed, can be connected to the natural gas system at a later time.

2.1.1 Impact of new mandatory requirements for Hot Water Services As part of the strategy to reduce greenhouse gas emissions and to tackle climate change, the State Government has introduced mandatory greenhouse gas performance standards for hot water services.

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These standards apply to hot water systems in all new dwellings, building modifications or extensions in South Australia, which are located in areas where there is a reticulated gas supply (either natural gas or LPG), available to a point in the street, an easement or the like, adjacent to the property.3

The standards effectively require the installation of solar hot water heating (with gas or electric boost), gas water heaters or electric heat pump water heating systems.

The Commission understands that some of the current interest in establishing new reticulated LPG networks in South Australia arises from the establishment of these new standards, as they effectively add water heating to the traditional in-home LPG uses of cooking and home heating.

However the Commission is also aware that there may be poor utilisation of reticulation assets where the primary usage of LPG is for cooking and water heating (particularly solar with gas boost) - heating load remains desirable to make reticulation systems worthwhile.

3 Refer Minister’s Specification: Greenhouse Gas Performance Standards for Heated Water Services

http://www.planning.sa.gov.au/download.cfm?DownloadFile=D8043189-F203-0D46-A1E6D8BD1758EBD0


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3 REGULATORY FRAMEWORK Discussions with the proponents of proposed new LPG networks have led the Commission to consider the future application of the regulatory framework established for the gas supply industry in South Australia to such networks.

3.1 National Regulatory Developments While significant changes have been made to the regulatory frameworks applicable to gas networks in Australia, as detailed below, these changes apply to, or will be applied only to natural gas networks.

3.1.1 Natural Gas Network Regulation The new National Gas Law (NGL), which came into effect on 1 July 2008, brings regulation of third party access of natural gas pipelines under the jurisdiction of the Australian Energy Market Commission (AEMC) as rule maker and the Australian Energy Regulator (AER) as the economic regulator and enforcement body.4 The AEMC and AER have similar roles in relation to economic regulation of electricity networks.

3.1.2 Natural Gas Retail Regulation Presently there is significant work being undertaken in relation to the development of a national energy customer framework.5 This framework will set out the contractual arrangements, minimum contractual terms and conditions and consumer protections to apply to both the supply of gas and electricity to consumers.

For gas, it is intended that the framework will be given effect by rules made under the NGL. Accordingly, the rules will only apply to the retailers and distributors of natural gas.

3.2 Regulatory Requirements – Gas Act 1997 The legislative requirements for reticulated LPG systems are found in the Gas Act, which regulates the gas supply industry in South Australia.

Under the legislative scheme, persons:

operating a reticulated LPG distribution network, and

retailing LPG transported via such systems

are required to be licensed by the Commission.

4 Refer http://www.mce.gov.au/index.cfm?event=object.showContent&objectID=DD2728BE-E23B-424C-EE069C364AA82050. 5 Refer http://www.mce.gov.au/index.cfm?event=object.showContent&objectid=7FD72378-A594-6EAA-01CE29ABE38F8A7F.

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3.2.1 Relevant Definitions For the purposes of this paper the following definitions in section 4 of the Gas Act are relevant:

customer: a person who has a supply of gas available from a distribution system for consumption by that person.

gas: a fuel consisting of hydrocarbons or predominantly of hydrocarbons that is in a gaseous or vapour form when it is at the pressure and temperature of its normal pipeline transportation and utilisation conditions, but does not include anything declared by regulation not to be gas;

retailing: the sale and supply of gas to a person for consumption (and not for resale) where the gas is to be conveyed (whether or not by the seller) to the person by a distribution system.

distribution system: the whole or part of a system of pipes and equipment for use for, or in connection with, the distribution or supply of gas to persons for consumption.

It is clear that the definition of “gas” includes LPG. Furthermore, the LPG reticulation system is a “distribution system” as defined by the Gas Act.

3.2.2 Requirement for Licence Section 19 of the Gas Act provides that a person must not carry on:

the operation of a distribution system or

the retailing of gas

unless the person holds a licence authorising the relevant operation (maximum penalty for non-compliance $1,000,000).

Sections 25, 26 and 26A of the Gas Act set out a number of mandatory licence conditions which the Commission must include in every licence authorising the operation of a gas distribution system and in every licence authorising gas retailing (maximum penalty for contravention of a licence condition $1,000,000).

3.2.3 Exemptions Section 77 of the Gas Act provides the Commission with the power to grant an exemption, with the approval of the Minister for Energy, from (amongst other provisions) the requirement under the Gas Act for relevant persons to be licensed.


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Such exemptions may be made subject to specified conditions as determined by the Commission, and may be varied or revoked by the Commission by notice in writing to the exemptee.

3.2.4 Technical Requirements The objectives of the Gas Act include the establishment and maintenance of a safe and efficient system of gas distribution and supply, and the establishment and enforcement of proper standards of safety, reliability and quality in the networks.

The Regulations made under the Act specify safety and technical standards to be applied in relation to LPG distribution networks.

The Technical Regulator is responsible, under the Gas Act, for the monitoring and regulation of safety and technical standards with respect to gas installations in South Australia.6 All reticulated network distributors (including operators of LPG networks) are required to provide a Safety, Reliability, Maintenance and Technical Management Plan (SRMTMP) to the Technical Regulator.

For LPG networks, the SRMTMP must provide assurance that distributors will manage and operate the LPG distribution systems so as to minimise as far as practicable:

the hazards and risks to the safety of the public and consumers arising from the system;

the hazards and risks of damage to property of the public and consumers arising from the system; and

the hazards and risks to the safety of the public and consumers arising from interruptions to the conveyance or supply of LPG and the reinstatement of an interrupted LPG supply.

The SRMTMP must comply with requirements set out in the Regulations and requirements specified by the Technical Regulator including a detailed description of the structure, assets, function and operation of the LPG distribution systems and a Formal Safety Assessment (FSA); together with the specification of systems and procedures to be used by the network operator to ensure that the design, construction, installation, commissioning, operation, metering, maintenance and decommissioning of each LPG distribution network:

are adequate for public safety and the safe operation of the network;

provide adequate means of achieving isolation of the entire network or any part of the network in the event of emergency;

6 Reports of the Technical Regulator on such matters are available from http://energy.sa.gov.au/working_safely_with_energy/gas.

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provide adequate means of gaining access for servicing and maintenance of the network and other equipment;

provide adequate means of maintaining the structure and operation of the network (including control systems such as alarm systems, temperature and pressure systems, emergency shut-down systems);

provide adequate means of measuring the consumption of gas at a consumer’s premises; and

take into account the results of the FSA.

The Technical Regulator is responsible for monitoring compliance with the SRMTMP.

3.2.5 Essential Services Commission Act The Essential Services Commission Act 2002 (ESC Act) requires the Commission, in performing its functions, to have as its primary objective the protection of the long term interests of South Australian consumers with respect to the price, quality and reliability of essential services.

The Commission must, at the same time, have regard to the need to:

promote competitive and fair market conduct;

prevent misuse of monopoly or market power;

facilitate entry into relevant markets;

promote economic efficiency;

ensure consumers benefit from competition and efficiency;

facilitate maintenance of the financial viability of regulated industries and the incentive for long term investment;

promote consistency in regulation with other jurisdictions.

The Commission assesses all applications for licences and exemptions against the primary objective and other objectives set out in the ESC Act.


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4 APPLICATION OF REGULATORY FRAMEWORK TO RETICULATED LPG SYSTEMS

Existing LPG networks in South Australia operate under a variety of licensing and exemption arrangements in accordance with the Gas Act, as outlined below:

RETICULATED LPG RETAIL

LICENCE EXEMPTION

ORIGIN ENERGY RETAIL LTD

Roxby Downs

Victor Harbor (Rosetta Retirement Village)

Renmark (Jane Eliza Estate)

Port Lincoln

Wallaroo

Cape Jaffa (Cape Jaffa Anchorage)

ELGAS LTD

Clare (Hamlin Rise)

RETICULATED LPG DISTRIBUTION

LICENCE EXEMPTION

ORIGIN ENERGY LPG LTD

Roxby Downs

Victor Harbor (Rosetta Retirement Village)

Renmark (Jane Eliza Estate)

Port Lincoln

Wallaroo

Cape Jaffa (Cape Jaffa Anchorage)

ELGAS LTD

Clare (Hamlin Rise)

Prior to 1 July 2003, Origin Energy LPG Ltd had been exempted from the requirement to be licensed as a distribution network operator by the Technical Regulator, the then licensing authority. In February 2004, the Commission re-issued the exemption. In June 2008, the Commission varied the exemption to specifically list each of the Origin Energy reticulated LPG networks covered by the exemption - Roxby Downs, Victor Harbor, Renmark, Port Lincoln, Wallaroo and Cape Jaffa Anchorage.

Origin Energy Retail Ltd retails to the customers in each of the Origin Energy LPG exempt networks under its general retail licence issued by the Commission.

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In March 2008, Elgas Ltd was exempted by the Commission from both the requirement to be licensed as a distribution network operator and a retailer under the Gas Act, for a limited period until 31 December 2008, in relation to a reticulated LPG network at Clare. This limited period was established to ensure that the distribution network operated by Elgas was appropriately authorised under the Gas Act whilst the Commission undertook the present review.

The exemptions for both the Origin Energy LPG and Elgas distribution networks are subject to conditions designed to ensure the application of and compliance with the safety and technical standards set out in the Gas Act and Regulations, in addition to a number of other conditions.

4.1 Regulatory Issues

There are various regulatory issues which arise when large scale (in customer numbers or length of pipeline or both) LPG networks are considered. This section discusses some of those issues and identifies areas in which the Commission has formed a preliminary view and is seeking feedback.

In considering the extent to which LPG networks should be regulated and the form of regulation to apply, the Commission considers the following questions to be relevant:

Do operators of LPG network possess market power and is there the potential for misuse of any such market power? Key issues relevant to this question include whether or not consumers within the LPG network are able to switch away to other sources of gas (eg. bottled gas) or alternative fuels (eg. converting from gas heating to electric heating).

Given the extent of market power, and the potential consequences that might arise from the misuse of market power, what form of regulation is appropriate? There are a range of regulatory options available to the Commission within its licensing and price regulation powers and the decision what to apply will depend on the particular circumstances of the relevant market.

Will the benefits of regulation outweigh the associated costs? The Commission acknowledges that regulation imposes costs on regulated businesses (eg. compliance and reporting costs). The design of the regulatory framework should therefore balance the benefits to consumers from regulation with the costs that it imposes.

In considering these questions, the Commission must have regard to its objectives under the ESC Act, as discussed in 3.2.5. In particular, the regulatory approach to LPG networks should be designed to protect the long term interests of South Australian consumers with respect to the price, quality and reliability of LPG network and retailing services.


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In developing its preliminary views on such regulatory arrangements, the Commission has identified two threshold questions. First, given the legislative provisions in the Gas Act, which give primacy to the licensing regime, should the Commission move to requiring all reticulated LPG distributors and retailers to be licensed? Second, what consumer protection arrangements should apply to customers within reticulated LPG networks?

4.1.1 Licensing or Continued Use of Exemptions

Network design and customer impacts

There are some key differences between reticulated LPG networks and the natural gas network operated by Envestra Ltd in South Australia.

Customers served by the Envestra network are able to choose to purchase gas from among eight gas retailers licensed by the Commission. (In fact only four of those retailers actively market to residential customers.)

Each of these retailers offers market contracts with differing terms and conditions. Customers can choose from a variety of price, contract length and incentive offerings. Alternatively, customers can remain with Origin Energy Retail Ltd on a standing contract on terms and conditions (including price) that are regulated by the Commission.

Unlike customers serviced by the natural gas network, customers connected to a reticulated LPG network are not able to choose their own gas retailer, although they are contestable customers under the Gas Act.

The design of a reticulated LPG network and the contractual arrangements between the distribution network owner/operator and the retailer is such that customer choice is not possible. A customer cannot choose price/contract length/incentive offerings from different gas retailers, as gas retailers do not have a guaranteed right of access to the LPG network. 7

The retailer in an LPG network will be either:

the network operator itself - acting as retailer to customers connected to the LPG network, or

the party with whom the network operator has contracted for the supply of gas to the storage tank and for the retail supply of that gas to customers connected to the LPG network.

Unlike the natural gas distribution system, customers are locked into exclusive retail arrangements – with the only option for avoiding unfavourable price/service outcomes being to change fuel sources. For the reasons outlined below

7 Under the NGL, natural gas distribution network owners are required to have an approved Access Arrangements which detail the

policies, terms and conditions under which third parties (retailers) may access the network.

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changing fuel sources is unlikely to be a cost effective option for most consumers.

Changing fuel sources

Reticulated LPG ↔ bottled LPG

Reticulated LPG networks are constructed in the same way as reticulated natural gas networks with underground network piping to the meter, underground piping to the house and in-wall piping though the house.

Provided such networks are constructed to the necessary technical standard, its is the Commissions view that there is potential for, and strong arguments which favour, the design of these networks such that they can be linked to the natural gas system at a later time, should it be viable to do so.

However, the construction and configuration of a reticulated LPG network is generally such that it is not possible for the customer to switch from the reticulated network to bottled LPG without incurring costs (including disconnection costs and reconfiguration of pipework).

Reticulated LPG ↔ other fuel sources

If a developer installs a reticulated LPG distribution network in a green fields residential development, consumers have opportunities to select energy sources (electricity and gas and/or solar) at the point when they are acquiring appliances. Subsequent choice of energy source(s) generally arises only on the replacement of appliances.

Once the appliance choice is made, customers are effectively locked in to the chosen fuel source(s), usually for the life of the appliance. For example, if reticulated LPG was the initial chosen fuel source for cooking, water heating and general heating, switching away from that fuel source would require investment in appliances using alternative fuel sources such as solar water heating with electric boost, electric cooking appliances and electric home heating.

While the example given is for LPG, the general principle applies to all consumers and all energy sources. Changing energy sources requires investment in new appliances and may also require alteration to in-home infrastructure - thus such changes occur infrequently.

Licensing regime or continued use of exemptions

Origin Energy LPG is exempt from the requirement to be licensed as a LPG distribution network operator in relation to reticulated LPG networks at Roxby Downs, Victor Harbor, Renmark, Port Lincoln, Wallaroo and Cape Jaffa


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Anchorage. Origin Energy Retail Ltd retails to the customers of those networks under its general retail licence issued by the Commission.

Elgas has been exempted by the Commission from both the requirement to be licensed as a distribution network operator and a retailer under the Gas Act, for a limited period until 31 December 2008, in relation to a reticulated LPG network at Clare.

The exemptions for both the Origin Energy LPG and Elgas distribution networks are subject to conditions primarily focussed on ensuring the application of and compliance with the safety and technical standards set out in the Act and Regulations, together with other conditions.

In the electricity supply industry, the Commission issues licences to remote area/off grid electricity retailers, distributors and generators. These entities are not subject to the full licence and code compliance regime established by the Commission; instead they must comply with modified requirements appropriate to the scale and scope of regulated activity undertaken by the entity. It is possible that a similar licensinf regime could be adapted for use in the regulation of LPG distributors and retailers.

The regime set out in the Gas Act is one which clearly presupposes that the primary regulatory control of participants in the gas supply industry will be by way of a licence issued under the Act.

The Commission notes that licensees pay licence fees which are designed in some way to off-set the costs of the regulatory regime, whereas exemptees pay no such fees. The amount of those fees is set by the Minister for Energy under the Gas Act, having regard to various matters including administrative costs arising under the Gas Act and the Essential Services Commission Act. It is noted that both Commission staff and staff of the Technical Regulator have considerable involvement with proponents of reticulated LPG networks regarding safety, technical and consumer protection issues.

The Commission believes that there should be a consistency of approach in relation to each entity and the outcomes for each customer - a customer’s rights should not vary depending on the manner in which the LPG retailer or distributor is dealt with under the Gas Act for regulatory purposes.

While the Gas Act does make provision for exemptions, and exemptions can be made subject to a range of conditions, it is the Commission’s view that these should be used in more exceptional or unusual circumstances. Moreover, it is important to recognise that an exemption is not of the same status as a licence. The effect of an exemption is simply to remove the requirement to hold a licence for such time as the conditions of the exemption continue to be met. Where the

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conditions of the exemption are no longer met, a person must thereafter be licensed.

The Commission’s preliminary view is that a licensing regime, with licences specifically tailored to the scale and scope of reticulated LPG operations, should be implemented in South Australia. This would require that the Commission revoke the current exemptions held by Origin Energy LPG and Elgas, and issue licences to these entities in accordance with the licensing provisions of the Gas Act.

The preliminary view of the Commission is that:

reticulated LPG distributors and retailers should be licensed under the Gas Act

a modified licensing regime appropriate to the scale and scope of reticulated LPG operations should be applied.

4.1.2 Consumer Protections All energy retailers and distribution network operators licensed by the Commission must comply with licence conditions, including Code requirements, as established by the Commission. As noted previously, many of these licence conditions are specified in the Gas Act.

Energy Industry Ombudsman Scheme

Under the licensing regime established under the Act, it is a requirement that gas retail licensees and gas distribution licensees participate in the Energy Industry Ombudsman (EIO) Scheme, which provides an independent process to resolve disputes between customers and members of the scheme (including licensed gas retailers and distributors).

The present regulatory arrangements for reticulated LPG systems mean that retail customers serviced by Origin Energy Retail have access to the scheme, while distribution customers of Origin Energy LPG Ltd do not have such access. Neither retail nor distribution customers of Elgas can access the EIO Scheme.

The Commission considers it desirable for all customers in reticulated LPG systems to have access to an external and independent dispute resolution process. These customers have a particular vulnerability because they are “captive” customers who do not have access to the gas retailer of their choice.


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While access to independent dispute resolution is important, the cost of such access is also a consideration.8 For the remote area/ off-grid electricity licensees, the Commission has imposed a licence condition under which the licensee must join the EIO Scheme if required to do so by the Commission. At present the Commission has not activated this licence condition for any of these licensees, but it should be noted that most of these licensees retail to very small numbers of customers.

The Commission will review the most cost effective way for retailers in small reticulated LPG networks to become members of the EIO scheme.

The preliminary view of the Commission is:

customers connected to reticulated LPG networks should have access to external, independent dispute resolution processes.

ideally, such access should be through the EIO Scheme.

the cost to LPG distributors and retailers of joining the EIO scheme will be a factor which influences the final decision of the Commission on this matter.

Code Requirements

The Commission has established a comprehensive consumer protection framework for both energy retail customers (in the Energy Retail Code) and customers of the natural gas distribution system (in the Gas Distribution Code)9. These Codes also set out key contractual conditions.

Among the key obligations established by the Commission’s Energy Retail Code are requirements for:

Standard contract terms and conditions

Customer enquiry, complaints and dispute resolution processes

Billing processes and procedures - including information as to frequency of billing, method of calculation of the bill, particulars to be included on bills and processes by which a customer can have a bill reviewed;

Tariff information including: - the manner and frequency of advice regarding tariff changes - retail and distribution components of the bill

8 The EIO Scheme Constitution specifies the payment of a joining fee and an annual levy. 9 Such Codes, available from http://www.escosa.sa.gov.au/site/page.cfm?u=124, are made by the Commission under Part 4 of the

ESC Act; the requirement to comply with the provisions of these Codes is imposed as a licence condition.

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Security deposits: circumstances in which these can be required, amount of security deposit and repayment of such deposits

Payment terms and conditions including: payment options, time to pay, installment plan and hardship obligations

Disconnection and reconnection processes

Meter reading processes and procedures

The Gas Distribution Code and Gas Metering Code deal with matters such as physical disconnection and reconnection from the network, meter issues (accuracy and reading) and a number of technical and safety issues.

Given that customers within a reticulated LPG network may be relying on LPG for hot water, cooking and heating, it is important that the consumer protections which apply to the purchase of energy are clear and transparent and that dispute resolution processes are readily accessible.

The consumer choice and consumer protections afforded to gas retail and distribution customers within the natural gas distribution system do not apply to many reticulated LPG customers (although, as noted above, the LPG customers of Origin Energy Retail Ltd do have access to such protections by virtue of the fact that Origin Energy retails to reticulated LPG customers under its general retail licence).

As noted previously, the Commission licenses remote area/off grid electricity retailers, distributors and generators. These entities are not subject to the full licence and code compliance regime established by the Commission; instead they must comply with modified requirements appropriate to the scale and scope of regulated activity undertaken by the entity.

The Commission’s preliminary view is that such a scheme could be adapted for use in the regulation of LPG distributors and retailers.


clear and transparent consumer protection obligations should be imposed on LPG retailers similar to those specified in the Energy Retail Code

Minimum requirements should cover matters such as: - Standard contract terms and conditions - Customer enquiry, complaints and dispute resolution processes


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- Billing processes and procedures - including information as to frequency of billing, method of calculation of the bill, particulars to be included on bills and processes by which a customer can have a bill reviewed;

- Tariff information – including advice regarding tariff changes, bill components (retail and distribution components)

- Security deposits: circumstances in which these can be required, amount of deposit and repayment of such deposits

- Payment terms and conditions including: payment options, time to pay, installment plan and hardship obligations

- Disconnection and reconnection processes

Meter reading processes and procedures would be dealt with in either a distribution or retail licence depending on which entity was responsible for the meter reading assets.

Same licensed entity - retail and distribution

The Electricity Act 1996 (s. 17(2) (ac)) prevents the Commission from issuing a licence to a person where that action would result in the same person holding both a distribution and a retail licence.

The Gas Act contains no such legislative prohibition. Nevertheless, where the same person holds both retail and distribution licences (or is exempt from holding such licence(s)), customers may suffer a special disadvantage, particularly when they are “captive” customers as described above.

The Commission is aware that there are varying configurations of reticulated LPG networks. In some reticulated LPG networks the distributor owns not only the pipeline but also the meters and the storage tanks – in these networks the distributor can exert some competitive pressure on the retailer (i.e. the distributor can select from a number of retailers for the supply of gas into the network on a competitive basis from time-to-time; the Commission acknowledges, however, that in such circumstances there may be no equivalent incentive on the distributor to pass on resulting efficiencies to end-use customers). In other networks, the tanks and the meter assets belong to the retailer so that there will be no competitive discipline in the selection of the retailer.

At present, the Commission believes there is no reason to require that the holder of a licence to retail and to distribute in a reticulated LPG system be different legal entities.

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there is no reason to prevent the same legal entity holding both a distribution and a retail licence for the sale and supply of gas in a reticulated LPG network.

4.2 Reticulated LPG Pricing Issues

As outlined above, a key issue for customers in a reticulated LPG network is that they are captive to the particular retailer in the LPG network, unlike customers in the natural gas system who may choose from several gas retailers.

For some years in South Australia, prices in reticulated LPG systems were regulated under the Gas Act.

4.2.1 Price Setting 1997 - 2004 From its enactment in 1997, the Gas Act provided that the then Pricing Regulator (the Minister to whom the Act was committed) “may” fix a maximum price or range of maximum prices for gas.

While the Pricing Regulator had discretion as to whether or not to set prices and the type of gas which would be covered by the Pricing Order, from 1997 – 2002 it was the practice of the Minister for Energy, as the Pricing Regulator, to set both the price for natural gas and reticulated LPG.10 In 2003 the Minister set only the price for natural gas.11

In 2004 the Minister again set only the price for natural gas12, this time utilizing special transitional provisions contained in Schedule 2 of the Gas Act. These provisions were incorporated as amendments to the Gas Act in that year in preparation for full retail competition in the gas supply industry and to transition the gas supply industry to the regulatory oversight of the Commission.

4.2.2 Price Setting from 2005 Commencing in June 2005, the Commission has set the standing contract price able to be charged by Origin energy Retail Ltd for the sale and supply of natural gas to small standing contract customers under the Gas Act. 13 A standing contract customer is a customer with an annual consumption of <1 TJ that has not entered

10 Refer Government Gazettes 1999 page 1438; 2000 page 3456; 2001 page 2393 & 2825; 2002 page 2856. Available from

http://www.governmentgazette.sa.gov.au/. 11 Refer Government Gazette 2003 page 2060 12 Refer Government Gazette 2004 page 2629 13 Refer http://www.escosa.sa.gov.au/webdata/resources/files/080624-2008GasStdgContract_FinDec_PartAB.pdf


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into market contract either with Origin Energy Retail Ltd or another licensed gas retailer.

Section 33 of the Gas Act provides the Commission with broad price setting authority which could be used to establish various pricing regimes for reticulated LPG ranging from price setting to price monitoring or reporting; but the Commission has not used its powers in this regard.

4.2.3 Transparent Price Information The Commission is of the view that pricing information should be provided to customers when they first enter into a market contract and on a systematic basis when prices change.

For natural gas customers, initial information about market contracts is provided by means of a Written Disclosure Statement required by the Energy Marketing Code.14

The Disclosure Statement must provide a customer with a range of information including:

the date of commencement of the customer sale contract;

the prices, charges, tariffs and service levels that will be applicable in respect of the customer sale contract;

if the prices, charges, tariffs or service levels are able to be changed by the retailer under the customer sale contract, the manner in which any such change may be effected;

the costs to the small customer associated with entering into the customer sale contract, outside of the prices, charges and tariffs payable (including any costs associated with the provision of infrastructure such as meters);

the type and frequency of bills which will be rendered under the customer sale contract;

the payment methods and options which are available in respect of the customer sale contract;

the termination charges which may apply in the event that the customer terminates the contract and the method of calculation of those charges;

the dispute resolution options which are available to small customers.

Systematic information is provided to customers by giving notice of changes to price, tariffs and service levels as these changes occur.

14 Refer http://www.escosa.sa.gov.au/webdata/resources/files/040227-C-EnergyMarketingCodeFinal.pdf

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In addition, the Commission also has an Energy Price Disclosure Code15 which requires each energy retailer, amongst other things, to publish on its website a price factsheet for each market contract that it offers to residential customers. The Commission is currently consulting on amendments to the Code to ensure that price factsheets are more accessible on retailer websites.

The preliminary view of the Commission is that there is merit in requiring transparent information about pricing in LPG networks. This pricing information should be provided direct to customers at the time of the initial contract and on an on-going basis as prices change. The Commission also considers there is merit in a requirement to publish on the retailer’s website a price fact sheet for reticulated LPG.

The Commission is considering whether or not it should establish a price monitoring regime for reticulated LPG – as noted above the Commission has broad price setting authority which could be used to establish a price monitoring regime for reticulated LPG. However, it may be that such a regime is not be necessary if transparent information about price is provided direct to customers on entering a market contract for LPG and on a regular basis thereafter, and is available from the retailer’s website.

The Preliminary view of the Commission is:

customers in a reticulated LPG network should receive a Written Disclosure statement at the initial entry into a contract specifying information similar to that required by the Energy Marketing Code and information on a systematic on-going basis as prices change.

retailers should be required to publish fact sheets specifying LPG charges on their websites in a similar manner to that required by the Energy Price Disclosure Code.

15 Refer http://www.escosa.sa.gov.au/webdata/resources/files/041223-D_EnergyPriceDisclosureCode.pdf


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5 SUMMARY As reticulated LPG networks become more common in South Australia, and as they service greater numbers of customers, the regulatory framework under which distributors and retailers are supervised and customers protected needs to be reviewed.

Issues which require attention include those addressed in this paper such as:

Should the primary regulatory instrument be a licence rather than an exemption?

Should retailers be required to comply with a basic set of consumer protections for customers within reticulated LPG networks?

How extensive should those protections be?

Should retailers and distributors be required to participate in the EIO Scheme?

Is regulatory oversight of reticulated LPG pricing required and how should pricing information be provided to customers?

There may be other issues which are also relevant to this matter and the Commission invites submissions which are broader and beyond those canvassed here.

5.1 Next Steps

The Commission invites submissions on the preliminary views expressed in this paper by 3 October2008.

It is the Commission’s intention to release a draft report on the regulatory arrangements for reticulated LPG networks in October 2008 and to finalize its review with the release of a Final Report in early 2009.

Following the release of the Final Report, the Commission will commence a process to give effect to its findings and conclusions; for example, varying/issuing exemptions or commencing a licensing process. In the interim, and noting that current exemptions expire at the end of calendar year 2008, the Commission will move to extend the period of current exemptions to fit within this timeframe.

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