UK: Gaining Access to a UK Gas Interconnector

In this article Anna Howell and Davinder Mann of Herbert Smith’s Energy Group look at the provisions of EU and UK legislation relating to third party access ("TPA") rights to UK gas interconnectors and, in particular, the procedure for TPA applications and the Secretary of State’s evaluation of them. Although the focus is on interconnectors, the TPA regime described is applicable to all gas and oil pipelines.

Directive 98/30EC (the "Directive") represents a major step by the EU to open up the internal market in natural gas to competition and provides a core set of rules relating to TPA to gas pipelines, which aim to ensure the maximum use of existing infrastructure and to prevent owners from reserving the capacity exclusively for their own use or the use of a select number of shippers without justification.

At the same time, however, the rules recognise the need to encourage investment in large infrastructure projects and recognise that granting TPA would not always be the most pro-competitive option. The rules, in principle, allow significant discretion to be exercised in this area by the individual Member States.

The Directive has been implemented in the UK by the Gas (Third Party Access and Accounts) Regulations 2000 (the "TPA Regulations"), which integrate its provisions, so far as possible, into existing primary legislation relating to gas pipelines (see Box 1).

What is an "interconnector"?

An "interconnector" is defined in the amended Pipelines Act 1962 as a pipeline "which is used to convey gas to or from a place outside Great Britain". There are currently three such UK interconnectors. The UK/Republic of Ireland, UK/Northern Ireland and UK/Belgium interconnectors all currently supply gas out of Great Britain, although in the case of the UK/Belgium interconnector, there is also the possibility of reverse flow to import gas into Great Britain.

The governing rules are contained in s17 of the Petroleum Act 1998 and s10 of the Pipelines Act 1962, as amended by the TPA Regulations. An interconnector falls within the definitions of "controlled pipeline" and "downstream pipeline" in the Petroleum Act 1998 and is included in the definition of a "gas pipeline" in the Pipelines Act 1962.

The Acts referred to in the preceding paragraph enable the Secretary of State to make an order that a proposed pipeline be constructed with increased capacity or that it follow a different route. s9(7) of the Pipelines Act 1962 (inserted by the TPA Regulations) and s17(7) of the Petroleum Act 1998 have the effect of applying the TPA regime and procedures, outlined below, to pipelines with regard to which such an order has been made by the Secretary of State under the relevant Act.

The DTI has not, to date, offered any guidance clarifying this issue. Generally, the provisions of the Pipelines Act are considered to apply to "on-shore" pipelines and the Petroleum Act to "off-shore" pipelines. As interconnectors are considered to be largely "off-shore" it could be argued that only the TPA rules contained in the Petroleum Act 1998 apply. However, perhaps in recognition of the fact that part of a cross-border interconnector is inevitably "on-shore", the Pipelines Act clearly envisages its application to interconnectors by specifically including interconnectors in the definition of a gas pipeline.

Nevertheless, an application to the Secretary of State by a company seeking TPA could be made under both Acts as, on a practical level, it makes little difference as to which is considered to apply as they both provide essentially the same set of rules relating to TPA to gas pipelines.

The issue of TPA applications in other Member States through which an interconnector may run is considered below. Jurisdictional issues are also considered in more detail in the article on International Law Regime of Transboundary Pipelines in the Public International Law Group section, previously.

The owners of the pipeline are under a statutory duty (s17B of the Petroleum Act and s10C of the Pipelines Act) to publish at least once every year their main commercial conditions relating to the cost and significant terms of TPA, and publish any changes to them, as well as ensuring that they do not discriminate against any third parties or potential third parties. (See Box 2 for the possibility of obtaining exemption from these regulatory requirements.) Having considered this information a company may apply to the owner by means of serving a notice for the right to have gas conveyed in the interconnector, specifying the kind of gas and quantities to be conveyed. Both parties are then bound to negotiate the terms of TPA in good faith.

Only if such negotiations fail would an application be made to the Secretary of State for TPA under s10(1) of the Pipelines Act 1962 and s17(1) of the Petroleum Act 1998.

Negotiations for TPA are carried out with, and applications to the Secretary of State for TPA are made against, the "owner" of the interconnector.

In recognition of commercial realities, the owner for this purpose is defined not only as the persons in whom ownership of the pipeline is vested, but includes shippers to whom capacity in the pipeline has been disposed of by the owner, so long as the rights to capacity are "capable of being assigned or disposed to another person". This extended meaning of owner is particularly relevant in the case of the UK/Belgium interconnector where the entire capacity of the interconnector was disposed of to a number of gas shippers.

To date, no such applications have been made, even in relation to the UK/Belgium interconnector. In the latter case this may be because, there being a number of "owners", it is already possible for a third party to gain access by direct application to an "owner". The DTI however states in its consultations on TPA that it has received indications of dissatisfaction with the level of tariffs set by owners for TPA and is concerned that potential applicants may be deterred by the perceived uncertainty regarding the application process and the exercise of the Secretary of State’s discretion. The DTI is, therefore, in the process of developing a set of guidance notes to clarify the procedure, on which two consultation documents have already been issued: Oil and Gas Infrastructure and Access Provision and Voluntary Arrangements (February 2001) and Proposals for Guidance on Use of Legal Powers to Settle Disputes over Third Party Access to Infrastructure (December 2002).

There is no formal means of application. A company seeking access could simply write to the Secretary of State outlining the applicant’s request and making reference to s10(1) of the Pipelines Act 1962 and s17(1) of the Petroleum Act 1998. The Secretary of State will then give notice to the owner that he proposes to consider the application and will give them an opportunity to be heard within 21 days, after which he will consider the application.

As a cross-border interconnector inevitably cuts through more than one jurisdiction, the TPA rules implemented in the "other" Member State would be of particular significance, especially if it operates the more onerous system of "regulated access" under the directive as opposed to "negotiated access" in the UK.

It is not clear whether there would always be in practice, a co-ordinated application procedure or whether the Member States would decide between themselves as to which State’s procedure should be utilised. It does however appear that, to date, a co-ordinated approach has been adopted in relation to interconnectors through bilateral agreements – see article on International Law Regime of Transboundary Pipelines .

One of the first points made in the draft guidance concerns the Secretary of State’s duty in the case of an interconnector to consult the relevant authorities of the "other" government, with whom it will liaise very closely when making a decision relating to TPA, as well as to abide by the provisions of any relevant international agreement.

It is understood that, both Member States would pay particular attention to the view point of the European Commission It is understood that the DTI considers that where competition is concerned, the conditions imposed in relation to import of gas into a country deserve more careful consideration and are likely to supersede those imposed on export, as they are more likely to affect factors such as price and availability of the product. Currently, it is more likely that the UK will be the gas exporter through interconnectors and that the "other" government will be the importing country, and therefore have a more influential viewpoint. However, the UK/ Belgium Interconnector is already periodically used for the import of gas into the UK when operated in reverse flow and it is generally understood that the UK will become a net importer of gas within the next 10 years.

The provisions of the Petroleum Act 1998 and Pipelines Act 1962 (both as amended by the TPA Regulations) do not clearly state the factors the Secretary of State will take into account when reaching a decision. s17(3) of the former and s10(3) of the latter merely state that the Secretary of State should ensure that a notice granting TPA does not "prejudice the efficient operation" of the pipeline in relation to the substances which the owner wishes to convey and in the quantities which he may require.

Nevertheless, the Secretary of State is under a general duty of administrative law to take into account all relevant factors and the Secretary of State will consider, where appropriate, the factors for consideration listed in the legislation (see Box 3) relating to "upstream petroleum pipelines" s10E(8) of the Pipelines Act 1962 and "controlled petroleum" pipelines s17F(8) of the Pipelines Act 1998. Although these terms do not in their definitions encompass interconnectors, it is likely in practice that similar considerations will be relevant.

In terms of general commercial certainty, this consideration is of significant importance for a company seeking TPA. Could the owner be forced to give TPA even though there is physically limited space available in the pipeline or, more importantly, all of the capacity in the pipeline has already been contracted out to others? The former state of affairs is distinct from the latter as it includes the possibility that the full physical capacity is not being utilised.

The DTI considers in the draft guidance that the "owners of infrastructure are entitled to make reasonable provision of capacity for their own future use". "Reasonable" is stated to include anticipated ups and downs in their own requirements for capacity and new field developments planned in the near future or which were foreseen at the time the infrastructure was put in place. However, there are no guidelines as to whether ‘capacity’ in the Gas Directive means physical capacity alone or whether it also encompasses contractually committed capacity.

In any event, it is clear from principles governing the legislation that an owner could not refuse access for the purpose of disadvantaging a competitor or on the ground of some unidentified purpose, and, that such activities could infringe Articles 81 and 82 EC.

It is possible that the ECT, to which the UK is a signatory and which includes "energy materials and products" in its scope, could provide for TPA rights to gas pipelines. Arts 3, 6 and 7 place an obligation on Contracting Parties to promote competition and the free transit of goods. If TPA does come within the scope of these articles, a private entity could, under Art 26, commence arbitration against the UK government for failing to ensure those rights are available.

Considering that the overriding purpose of the provisions of UK legislation outlined is to enable TPA, the Secretary of State’s discretion in granting TPA to an applicant may well be exercised to this end. However, it is understood that the DTI would be sympathetic to strong economic argument that TPA could prejudice the efficient operation of the pipeline or would discourage owners from making investments in such projects in the future.

The legislation allows a broad discretion with regard to the factors to be taken into account when granting TPA to an interconnector, and it appears that technical questions, such as those raised with regard to the geographical scope of the Petroleum Act 1998 and the Pipelines Act 1962, and, relating to contractual capacity, will be resolved if and when they arise. Most importantly, the viewpoint of the importing Member State and, ultimately the assessment made by the European Commission, will be extremely influential in the exercise of discretion by the Secretary of State in relation to granting TPA to an applicant.

© Herbert Smith 2002

For more information on this or other Herbert Smith publications, please email us.