Plaintiff v Defendant

Supreme Court of Victoria|2007-08-22|Before: HOLLINGWORTH J

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

1 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.

2 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.

3 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.

4 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.

5 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.

6 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.

7 Multinet also has access arrangements under the Code, which have been approved by the ESC for the period to the end of 2007.

8 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.

9 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.

10 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.

11 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.

12 In this proceeding, AAM and the ESC each seek declaratory relief which reflects their respective contentions.

Overview of the natural gas industry in Victoria

13 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.

14 There are six stages in the gas supply and delivery system, namely production, processing, transmission, storage, distribution and retailing.

15 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.

16 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.

17 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.

18 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.

19 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.

20 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.

21 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.

22 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.

23 The PTS is now owned by GasNet Australia (Operations) Pty Ltd ("GasNet"), a wholly-owned subsidiary of the APA group of private companies.

24 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 Act 1994 (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.

25 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.

26 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.

27 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.

28 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.

29 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.

30 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.

31 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.

32 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 Act 2005 (Vic), an Act which will be discussed later in these reasons.

33 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.

34 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.

35 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.

36 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.

37 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.

38 There are three principal gas distribution systems in Victoria, namely:

(b) A distribution system now owned by Envestra Limited ("Envestra"); and

39 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.

40 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.

41 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.

42 There are approximately 1.6 million retail and wholesale customers of natural gas throughout Victoria.

43 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.

44 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.

(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.

46 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.

47 VENCorp administers the wholesale metering and settlement functions for gas flowing through the PTS, informing market participants on pricing, gas demands and forecasts.

48 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.

49 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.

50 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.

51 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.

52 The FRC hub was originally developed by VENCorp; it is now owned and maintained by the National Electricity Market Management Company ("NEMMCO").

53 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.

54 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.

55 Several different types of haulage are referred to in the legislation relevant to this case, including firm haulage, interruptible haulage, spot haulage and backhaul.

56 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.

57 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.

58 Spot haulage service is, for all relevant intents and purposes, the same as interruptible haulage service.

59 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.

60 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.

61 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.

62 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.

63 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.

64 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.

65 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".

66 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.

67 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".

68 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.

69 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.

70 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.

71 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.

72 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.

73 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.

(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.

75 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.

76 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.

77 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.

78 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.

79 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.

80 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.

81 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.

82 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

83 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.

84 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.

85 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.

86 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.

87 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.

88 It was amended again by the Gas Industry (Further Amendment) Act 1997 (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.

89 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.

90 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.

91 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.

92 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.

93 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

94 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.

95 The regulatory framework governing the gas industry in Victoria now has the following principal components relevant to this proceeding:

(d) The Pipelines Act 2005 (Vic);

(e) The Victorian Gas Distribution System Code ("the Distribution Code");

96 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.

97 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.

98 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.

99 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).

100 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")).

101 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.

102 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.

103 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".

104 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).

105 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."

106 It is common ground that AAM has not been declared a gas company pursuant to section 5 of the GSA.

107 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.

108 These Acts apply to high pressure gas pipelines, with operating pressures greater than 1,050 kilopascals; this includes some of the Multinet system.

109 The Pipelines Act 1967 imposed a permit regime. Section 8 provided:

(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.

110 "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.

111 "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".

112 The Pipelines Act 2005 repealed and re-enacted, with amendments, the Pipelines Act 1967. It came into operation on 1 April 2007.

113 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.

(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;

(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.

115 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.

116 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.

117 The MSO rules were made on 2 February 1999 under the GIA 1994, and continued in force under the GIA 2001.

118 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.

119 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.

120 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.

121 The retail rules are also made under the GIA 1994 and continued under the GIA 2001.

122 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).

123 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).

124 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.

125 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.

126 The Distribution Code was promulgated by the ESC's predecessor, the ORG, with effect from 1 December 1997.

127 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.

128 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.

129 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.

130 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.

131 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]

132 Section 22(1) is central to the proceeding. It provides:

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].

133 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.

134 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.

135 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.

136 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.

138 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).

139 Section 22(1) contains a number of concepts which are critical in this case:

140 There is no dispute between the parties that the ordinary or natural meaning of "provide" is "to furnish or supply".[4]

141 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.

142 Obviously, to be a provider or supplier, a person has to have an actual ability to deliver the services, whatever they are.

143 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.

144 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).

145 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."

146 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.

147 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.

148 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.

150 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).

151 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]

152 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.

153 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.

154 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.

155 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.

156 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".

157 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.

At a glance

Court

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Before

Source

Judgment (742 paragraphs)

Parties

Legislation Cited (112)

Cases Cited (1)