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Australian Gas Shipper Fined for Non-Compliance with Gas Rules

Written by RegTrail | Jun 5, 2024 5:02:00 PM

This week the Australian Energy Regulator (AER) announced (click here) an enforcement action against Santos Direct Pty Ltd (Santos) for recordkeeping failings with regard to gas capacity renominations in the Australian gas market. Under Australian gas market rules, renominations can only be made in limited circumstances and firms must maintain detailed records of material renominations that clearly state the reason for each renomination. The judgement from the Federal Court of Australia can be found here. The salient facts of the case and penalties are summarised below:

  • Santos Limited is one of Australia’s largest domestic gas suppliers with interests in the production of natural gas and the operation of various plants, facilities and pipelines – they also acquire transportation services on gas pipelines in relation to contracts for services it has with gas facility operators;
  • Rule 666 (1) to (3) of the National Gas Rules (NGR) requires that "A transportation facility user for an auction facility who makes a material renomination as defined in subrule (2) for use on a gas day of a transportation service must make a contemporaneous record in relation to the renomination."
  • The records that must be captured and kept for five years by the company under the NGR include:
  1. The material conditions and circumstances giving rise to the renomination;
  2. The transportation facility user's reasons for making the renomination, which must be verifiable and specific;
  3. The time at which the event or other occurrence giving rise to the renomination occurred; and
  4. The time at which the transportation facility user first became aware of the relevant event or other occurrence.
  • Santos admits that during the period 1 March 2019 to 5 June 2021 it contravened rule 666(1) of the NGR on 4,701 occasions by making 4,701 material renominations, for use on 717 gas days of a transportation service, without making a contemporaneous record in relation to the renominations;
  • The ruling justice made this comment in relation to this case, "..the failure to comply with r 666(1), which has a substantive role in protecting the proper functioning of the capacity auction, heightens the need for deterrence in respect of this conduct."
  • The following penalties were ordered against Santos for these failings:
  1. Santos was fined AUD $2,750,000;
  2. An Independent Reviewer was appointed to undertake an assurance programme to ensure compliance with rule 666(1) of the NGR and to provide information to the AER in connection with that assurance programme (see further details below);
  3. Legal costs to be paid by Santos of AUD $100,000 in respect of the legal proceedings.
  • In setting the penalties, the judgement notes that Santos had cooperated with the AER at all stages during its investigation and subsequent proceedings, and Santos had admitted the contraventions alleged by the AER at an early stage in the proceeding and prior to the filing of any evidence or submissions;
  • Presciently, the court also considered Santos’ “compliance culture” as an additional factor noting that prior to July 2021 Santos did not have a formal compliance framework or a manager responsible for compliance within the business (Santos has since rectified these shortcomings including appointing a Senior Manager Compliance and establishing a Santos Compliance team);
  • With regard to the Independent Reviewer - within 30 days from the date of the order, Santos must appoint a suitably qualified Independent Reviewer to be agreed between the AER and Santos;
  • The Independent Reviewer must address the following:
  1. Identify the processes which Santos has in place to comply with rule 666(1);
  2. Assess Santos’ processes and their robustness to ensure compliance with the rule 666(1);
  3. Assess the operating effectiveness of Santos’ processes to comply with rule 666(1); and
  4. Make recommendations for any action to be taken by Santos having regard to the above assessments.
  • Further, within 12 months from the date of the order, Santos must provide to the AER:
  1. A written assurance certification report from the Independent Reviewer which describes how the steps described above have been completed and the outcome of the review; and
  2. A written report signed by the Chief Commercial Officer (or equivalent) of Santos that states what steps Santos has taken in response to any action recommended by the Independent Reviewer and, if any recommendation has not been accepted, the reasons why.

RegTrail Insights

The clarity of the judgement and the transparency of the judgement in this case are a model that other national regulators should seek to emulate. For those wishing to understand more about the case you are advised to read the judgement in full. It is also noteworthy that the appointment of an external monitor is not a practice limited only to the US.