03-01-2019

On December 18, 2018, the Presidency of the Republic published Decree No. 9,616 to amend certain provisions of Decree No. 7,382/2010, which regulated the Gas Law (Law No. 11.909/2009).

Background

From June 2016 to mid-2018, with the launch of the “Gas to Grow” program by the Ministry of Mines and Energy, the leading agents and representative entities of the natural gas industry discussed legislative proposals to solve political deadlocks, regulatory issues and untangle investments. The proposals were included in the Amendment to Bill No. 6,407/2013 (“Amendment”), which, if approved, would materially change specific articles of the Gas Law.

However, in view of the lack of a political agreement to approve the Bill in Congress and the need to progress with some essential  points for the opening of the sector, the alternative found by the Federal Government was the publication of Decree No. 9,616,  to regulate specific issues which would not require a formal law to be put into practice.

The proposals envisaged by the new Decree are far less ambitious compared to the “Gas to Grow” initiatives and reflect dissent on crucial issues to untangle the sector, especially in a market environment characterized by Petrobras´ divestments in the natural gas transportation activity.

The main changes brought by the new Decree are detailed below:

Gas Pipelines Classification

The new Decree confirms the ANP competence to classify “atypical” gas pipelines, which connect gas processing, treatment and storage units to transportation or distribution facilities and do not fall within the definitions of “Transportation Gas Pipeline”, “Transfer Gas Pipeline” and “Outflow Gas Pipeline”, as established in the legislation, without prejudice to paragraph 2 of art. 25 of the Federal Constitution. The caveat to the constitutional provision makes it clear that the classifying authority delegated to the ANP does not cover gas distribution pipelines, which are under the jurisdiction of the states of the Federation.

In recent years, the ANP has been applying its residual competence to promote ad-hoc classification based on the features of the project presented to the agency. Often, in complex infrastructure projects, the classification of pipeline interconnected facilities have raised doubts among the agents of the industry since they did not fit in any of the classifications brought by the legislation. Therefore, the ANP regulations may bring greater legal certainty to regulated agents. According to the new Decree, the ANP may authorize the interconnection of processing units to gas pipelines, without such facility being classified as a transportation pipeline. This provision will also allow the connection of processing units to gas distribution networks.

PEMAT

Another  significant aspect brought by the new Decree is the attempt to simplify the process for the construction and  expansion of gas transportation pipelines, revoking the requirement to elaborate the Decennial Pipeline Transport Expansion Plan – Plano Decenal de Expansão da Malha de Transporte Dutoviário (“PEMAT”) by the Ministry of Mines and Energy, which unnecessarily bureaucratized the concession regime. The new Decree, however, could have gone further, to make the open season and bidding procedures more efficient, especially when the pipeline construction or expansion is proposed by an agent.

Transportation Systems, “entry and exit” model and the preservation of tariffs

The new Decree also introduced, still in an incipient way, some of the initiatives of the Federal Government to create a more flexible and open transportation system based on a model for contracting capacity by entry and exit points with multiple shippers. Due to the complexity of the new system, especially regarding tariffs, the solution found by the Federal Government was to delegate to the ANP the authority to deal with the matter  and regulate the migration of the current postal tariff regime to a model based on the entry and exit of the volumes, which may be contracted independently.

Decree No. 7,382/2010, as amended by Decree No. 9.616/2018, provides that the pipeline transportation grid can be organized in systems of interconnected pipelines and other facilities, in accordance with ANP  regulations.

The good news for the pipeline companies is the confirmation brought by the Decree that the new modalities of gas transportation services will not harm the vested rights of the transporters resulting from transportation agreements in force. A similar provision was included in the Amendment.

In our opinion, this confirmation favors the divestment of gas transportation assets by Petrobras and clarify the doubts on the tariff model applicable to an eventual migration from the postal regime to the “entry and exit” regime. Incidentally, this statement is in line with the provisions of Article 31 of the Gas Law, which preserved the transportation tariffs and the revision criteria already defined up to the date of its publication.

Access to Gas Pipelines and LNG-REGAS Terminals

Article 45 of the Gas Law and Article 62, caput, of Decree No. 7,382/2010 set forth that gas pipelines treatment and processing facilities, as well as liquefaction and regasification units, are not obliged to grant third-party access.

In an attempt to curb excesses, the new Decree stated that the “refusal of access based on anti-competitive conduct would subject the agent to applicable sanctions, according to the provisions of Law No. 12,529, dated November 30, 2011.”

Article 62-A  authorized the ANP to issue the guidelines “for the elaboration of common access codes grounded on best international practices by the agents holding or operating outflow or processing facilities and LNG terminals, aiming at the overall efficiency of infrastructures and the mitigation  of environmental impacts.” In the event of a controversy, “the ANP shall define the procedures to be adopted for the settlement of disputes between economic agents in cases where negotiations are not successful, with an emphasis on conciliation and arbitration.”

It seems to us that, again because of the failure of the negotiations in the political-legislative sphere, the Federal Government suggested the possibility that the new rules being interpreted as a way of forcing third-party access to those facilities, while  the Gas Law does not oblige it, except by mutual agreement between the interested parties (negotiated access).

The final publication of a normative act by the ANP contrary to the provisions of the Gas Law may trigger discussions regarding its legality. It should be recalled that the Amendment contains a provision amending Article 45 of the Gas Law, which would ensure third-party access to outflow pipelines, gas treatment/processing facilities, and LNG/REGAS terminals.

Coordination with the states of the Federation 

Subject to several discussions in the scope of the Gas to Grow program, the regulatory discrepancy between the various state regulations applicable to the gas distribution services was also addressed by the new Decree.

Under Article 74-A, the Federal Government, through the Ministry of Mines and Energy and the ANP, will articulate with the states and the Federal District the harmonization and improvement of gas regulations, including the role of “free consumers”, whose definition is not uniform in each state legislation. The Amendment contains a similar rule, and it should be stressed that the success of such coordination will depend on the adherence of the states, given their exclusive constitutional competence to regulate the local distribution services of piped gas.