Gas Pipeline Information

Disclosure and Arbitration

Framework

Final Design Recommendation

June 2017

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Contents

Abbreviations ......................................................................................................... ii

1. Introduction and Summary ...................................................................... 1

1.1 Objective of the new framework ................................................................. 2

1.2 Work on the development of the new framework ........................................ 2

1.3 Final recommendation on design of the new framework ............................. 6

1.4 Forward process ...................................................................................... 15

1.5 Implementation and transitional arrangements ......................................... 15

1.6 Structure of the report .............................................................................. 17

2. Objectives of the new framework .......................................................... 18

2.1 Problem to be addressed by the new framework ...................................... 18

2.2 Objective of the new framework ............................................................... 19

2.3 Assessment framework ............................................................................ 21

3. Design options and stakeholder feedback ........................................... 22

3.1 Options for the new framework ................................................................. 22

3.2 Stakeholder feedback .............................................................................. 25

3.3 GMRG’s consideration of stakeholder feedback ....................................... 43

4. Final recommendation on the design of the new information

disclosure arbitration framework .......................................................... 55

4.1 Final design of the new framework ........................................................... 56

4.2 Consistency of the new framework with the NGO and Vision ................... 78

5. Implementation and transitional arrangements ................................... 80

5.1 Implementation of the information disclosure requirements ...................... 80

5.2 Implementation of the arbitration mechanism ........................................... 81

5.3 Expected timing........................................................................................ 83

Appendix A Options canvassed in the Options Paper .................................. 84

Appendix B Interactions with other reviews and reforms ............................ 88

Appendix C List of stakeholder submissions ................................................ 93

Appendix D APA’s proposed negotiate/arbitrate model ............................... 94

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Abbreviations Term Definition

ACCC Australian Competition and Consumer Commission

AEMC Australian Energy Market Commission

AEMO Australian Energy Market Operator

AER Australian Energy Regulator

Amendment Bill National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill

2017

APGA Australian Pipelines and Gas Association

APPEA Australian Petroleum Production and Exploration Association

CA Conventional Arbitration

CAAs Commercial Arbitration Acts

CCA Competition and Consumer Act 2010 (Commonwealth)

COAG Council of Australian Governments

Council COAG Energy Council

CPA Competition Principles Agreement

East Coast Review AEMC’s Eastern Australian Wholesale Gas Market and Pipelines Framework

Review (May 2016)

ENA Energy Networks Australia

ERA Economic Regulation Authority

EUAA Energy Users Association of Australia

Examination Dr Vertigan’s Examination of the current test for the regulation of gas

pipelines (December 2016)

FOA Final Offer Arbitration

GMRG Gas Market Reform Group

GTA Gas Transportation Agreement

HLA High-low arbitration

Inquiry ACCC’s Inquiry into the East Coast Gas Market (April 2016)

MEU Major Energy Users Inc

NCC National Competition Council

NER National Electricity Rules

NGL National Gas Law

NGO National Gas Objective

NGR National Gas Rules

Package COAG Energy Council’s Gas Market Reform Package

SCO Standing Committee of Officials

Vision COAG Energy Council’s Australian Gas Market Vision (December 2014)

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1. Introduction and Summary

On 19 August 2016, the COAG Energy Council (‘the Council’) directed the Independent

Chair of the Gas Market Reform Group (GMRG), Dr Michael Vertigan AC, to examine the

current regulatory test for the regulation of gas pipelines, in consultation with

stakeholders, and make recommendations on any further actions.

This direction was prompted by the ACCC’s Inquiry into the East Coast Gas Market

(Inquiry), which found that while pipeline operators had responded well to the changes

underway in the market, there was evidence a large number were engaging in monopoly

pricing. The ACCC also found that the ability of pipeline operators to engage in this

behaviour was not being constrained by the threat of regulation, so recommended

changes to the coverage test.1

Dr Vertigan undertook the Examination of the current test for the regulation of gas

pipelines (Examination) in the latter half of 2016. Two of the key observations from the

Examination were that:

the operators of existing pipelines have market power and, in some instances, the

exercise of this power was resulting in inefficient outcomes that did not promote the

National Gas Objective (NGO), or facilitate the achievement of the Council’s Australian

Gas Market Vision (Vision);2 and

the test for regulation (the coverage test) did not appear to be posing a credible threat

to pipeline operators.3

While a change to the coverage test was explored with stakeholders during the

Examination, most shippers made it clear they were not looking for a traditional regulatory

solution. Rather, most shippers wanted to find a way to reduce the imbalance in

bargaining power they can face when negotiating with pipeline operators.4 The

Examination therefore recommended that a new information disclosure and arbitration

framework be introduced, to reduce the information asymmetry and imbalance in

bargaining power that shippers can face when negotiating with pipeline operators.

Specifically, the Examination recommended that steps be taken to strengthen the

bargaining power of shippers by:5

requiring pipeline operators to publish the information that shippers need to make an

informed decision about whether to seek access to a pipeline service and to assess

the reasonableness of an offer made by the pipeline operator; and

introducing a binding commercially oriented arbitration mechanism into the National

Gas Law (NGL) that would be available to parties as a backstop if commercial

agreement cannot be reached.

These recommendations were endorsed by the Council on 14 December 2016 and work

on the development of the new framework commenced shortly thereafter.

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1 ACCC, Inquiry into the East Coast Gas Market, April 2016, pp. 18-20. 2 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 9-10. 3 Ibid, pp. 12-13. 4 ibid, p. 78. 5 Ibid, pp. 13-15.

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Further detail on the objective of the new framework, the work that has been carried out

on the new framework and the GMRG’s final recommendations on the design of the new

framework is provided below.

1.1 Objective of the new framework

The overarching objective of the new information disclosure and arbitration framework is

to facilitate access on reasonable terms to services provided by non-scheme pipelines,

which is taken to mean at prices and on terms and conditions that, so far as practical,

reflect the outcomes that would occur in a workably competitive market.

To that end, in order to reduce the imbalance in bargaining power that shippers can face

when negotiating with pipeline operators and to pose a constraint on the exercise of

market power by pipeline operators, the new framework is intended to:

provide for the publication and exchange of information to facilitate timely and effective

commercial negotiations;

provide an effective and binding commercially oriented arbitration process to resolve

disputes about proposed terms of access in a cost-effective and efficient manner; and

set out the principles an arbitrator would be required to have regard to when

determining disputes, which should be consistent with the outcomes that would be

expected in a workably competitive market.

While the arbitration mechanism is a key element of the new framework, it is intended that

commercial negotiation will continue as the primary means by which access terms and

conditions are determined and that the arbitration mechanism will rarely be triggered. That

is, it is intended that greater transparency and the threat of arbitration will be sufficient to

encourage the parties to reach a commercial agreement.

Detail on the objectives of the new framework is provided in Chapter 2.

1.2 Work on the development of the new framework

In late 2016 Council officials commenced work on the legislative changes required to give

effect to the new framework, which are set out in the National Gas (South Australia)

(Pipelines Access-Arbitration) Amendment Bill 2017 (Amendment Bill). The draft

Amendment Bill was agreed by Council on 17 February 2017 and tabled in the South

Australian Parliament on 29 March. The Amendment Bill is expected to be passed by the

South Australian Parliament by mid-June.

The GMRG’s work on the detailed design of the new information disclosure and arbitration

framework commenced in early 2017 and on 21 March 2017 an Implementation Options

Paper (Options Paper) was published. The Options Paper identified a number of options

for the information disclosure requirements, the arbitration mechanism and principles to

guide the arbitrator’s decision making, which are summarised in Table 1.1. The Options

Paper also provided an indication of the GMRG’s preliminary view on the package of

options that should be implemented, which are highlighted in grey in Table 1.1.

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Table 1.1: Options Paper design options Option Description

Information Disclosure

Information to enable shippers to

determine whether to seek access

Information to enable shippers to assess

reasonableness of an offer

Option 1 Base level of information on:

o the services offered by the pipeline and

the availability of those services;

o the standing offers for the services

provided by the pipeline;

o the technical characteristics of the

pipeline that may affect access; and

o the negotiation framework that will apply

if the shipper requests access.

n.a.

Option 2 Financial reports + demand information

Option 3 Financial reports + demand information +

detailed cost information

Option 4 Financial reports + demand information +

prices paid by other shippers

Option 5 Financial reports + demand information +

detailed cost information + prices paid by other

shippers

Arbitration Mechanism

Option 1 Conventional arbitration that more closely reflects commercial arbitration

Option 2 Conventional arbitration limited to disputes regarding price

Option 3 Conventional arbitration with additional procedural protections and partial transparency

Option 4 Final offer arbitration

Option 5 Combined arbitration (elements of conventional arbitration and final offer arbitration)

Arbitration Principles

Option 1 Broad discretion in pricing principles supplemented by other guiding principles

Option 2a Pricing principles based on price payable for comparable pipeline services supplemented by

other guiding principles (including principles on how the prices of derivative and ancillary

services should be determined).

Option 2b Pricing principles based on the cost of service provision (including a commercial rate of return,

which reflects the level of risk borne by the pipeline operator) supplemented by other guiding

principles (including principles on how the prices of derivative and ancillary services should be

determined).

Option 3a Option 2a with further guidance in the pricing principles on how the comparison of the prices of

comparable services is to be carried out.

Option 3b Option 2b with further guidance in pricing principles on how the actual cost of service provision

(including the commercial rate of return) is to be determined.

Stakeholders were provided over three weeks to provide written feedback on the options

presented in the Options Paper and were also invited to attend a series of industry

roundtable discussions. The roundtables were attended by 24 organisations with interests

in non-scheme pipelines, upstream production, retailing, generation and industrial gas

use. Written submissions were also received from 27 organisations with interests across

the supply chain and from both the Australian Competition and Consumer Commission

(ACCC) and the Australian Energy Regulator (AER).6 Feedback on the design of the new

framework has also been provided through extensive bilateral discussions with

stakeholders.

In general, stakeholders were supportive of the development of the new framework. Mixed

views were, however, expressed about the design of the framework and, in particular, the

information disclosure requirements and the arbitration principles. This can be clearly

seen in Figure 1.1 which provides a snapshot of the feedback stakeholders provided on

the design options.

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6 Public submissions can be accessed on the GMRG website: http://gmrg.coagenergycouncil.gov.au/publications/gas-pipeline-information-disclosure-and-arbitration-framework-implementation-options.

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Figure 1.1: Stakeholder feedback on preferred design options

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As this figure highlights, the majority of stakeholders supported the GMRG’s proposal to

utilise a conventional arbitration mechanism with additional procedural protections and

partial transparency (Option 3). Differing views were, however, expressed about:

Information disclosure requirements: In this case, stakeholders agreed with the

proposal that pipeline operators publish a base level of information on their website.

There was, however, debate about the information that should be provided to shippers

to enable them to assess whether an offer is reasonable.

o On the one side of this debate were shippers, the ACCC and the AER who noted

that the information should be consistent with the information the arbitrator would

require to apply the arbitration principles (i.e. so parties can assess their likely

success). In keeping with this principle, some stakeholders suggested that detailed

cost information should be provided (Option 3), while others suggested the full

suite of information should be provided (Option 5).

o On the other side of this debate were pipeline operators, who in most cases were

opposed to releasing financial or cost information. They did, however, suggest the

publication of a weighted average price for each service. One pipeline operator

also suggested that pipeline operators publish both their pricing methodology and

sufficient information to enable shippers to determine whether the standing offer

reflected the application of this methodology.

Arbitration principles: In this case, the debate centred on the effect that the pricing

principles could have on the incentives parties have to negotiate and reach a

commercial agreement, with:

o some shippers stating that the likelihood of reaching a commercial agreement

would be higher if the pricing principles were well specified, because parties would

have greater certainty about the outcome; and

o pipeline operators stating that the likelihood of reaching a commercial agreement

would be increased if the principles were higher level, because it would create

more uncertainty about the arbitration outcome and incentivise parties to reach

agreement.

There was also debate about whether the pricing principles should be cost- or price-

based, with:

o shippers, the ACCC and the AER advocating the use of cost reflective principles,

with some of these stakeholders suggesting that a high-level cost based test was

sufficient (Option 2b), while others thought that greater guidance on how to apply

this principle was required (Option 3b); and

o a number of pipelines advocating the use of price-based pricing principles (Option

2a), while others suggested the arbitrator should have broad discretion to assess

the reasonableness of the pipeline operator’s offer (Option 1). Some pipeline

operators also suggested the arbitrator should be required to have regard to the

shipper’s willingness or capacity to pay.

While not shown in Figure 1.1, a number of stakeholders suggested a staged approach to

information provision and the negotiation and arbitration processes. Some stakeholders

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also suggested the arbitration be carried out on the papers and that the arbitrator’s

decision be confined to the bounds set by the parties’ final offers.

Further detail on the options that were identified in the Options Paper is provided in

Appendix A. The feedback provided by stakeholders is outlined in Chapter 3.

1.3 Final recommendation on design of the new framework

Having regard to the overarching objectives of the new framework and the feedback

provided by stakeholders, the GMRG has developed its final recommendations on the

design of the new information disclosure and arbitration framework. In developing these

recommendations, the GMRG has had regard to:

the rule making test the AEMC is required to consider when exercising its rule making

functions, which requires consideration to be given to the NGO;7 and

where relevant, the Council’s Vision.8

The GMRG has also been cognisant of the feedback shippers provided during the

Examination, which was that they had little appetite for heavy-handed regulatory solutions

and were looking for a mechanism that would reduce the imbalance in bargaining power

and pose more of a constraint on the behaviour of pipeline operators.9 The final design of

the new framework is not therefore intended to replicate the prescriptive rules that apply to

pipelines subject to full regulation. It is intended to support commercial negotiations and

outcomes that are consistent with what would prevail in a workably competitive market.

It is worth noting in this context that the GMRG has been greatly assisted by a number of

parties in designing the recommended framework, including:

Incenta Economic Consulting, with regard to the pricing principles;

Johnson, Winter & Slattery, with regard to the arbitration mechanism, the Rules

requirements and the overall design; and

Dr Gavan Griffith AO QC (Barrister, commercial arbitrator and former Solicitor-General

of Australia), with regard to the arbitration mechanism and associated processes to

ensure the arbitration can be carried out in a cost-effective and efficient manner.

Detail on the key elements of the framework is provided below and summarised in Table

1.2.

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7 The NGO is set out in section 23 of the NGL. 8 COAG Energy Council, Australian Gas Market Vision, December 2014. 9 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78.

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Table 1.2: Final recommendation on the design of the information disclosure and arbitration framework

Information disclosure and arbitration framework

Objective

The overarching objective of the new information disclosure and arbitration framework is to facilitate access on reasonable terms to services provided by non-scheme pipelines – which for the purposes of the framework, will be taken to mean at prices and on terms and conditions that so far as practical to reflect the outcomes of a workably competitive market. To that end, in order to reduce the imbalance in bargaining power that shippers can face when negotiating with pipeline operators and pose a constraint on the exercise of market power by pipeline operators, the framework will:

provide for the publication and exchange of information to facilitate timely and effective commercial negotiations;

provide an effective and binding process to resolve disputes about proposed terms of access in a cost-effective and efficient manner; and

set out principles for determining disputes consistent with the outcomes reasonably to be expected in a workably competitive market. Information disclosure requirements Arbitration mechanism Arbitration principles

Purpose Reduce the information asymmetry shippers can face in negotiations and, in so doing, facilitate more timely and effective negotiations.

Provide a credible threat of intervention to constrain the exercise of market power by pipeline operators during commercial negotiations. To pose a credible threat, arbitration must provide for the final resolution of commercial disputes without unnecessary delay or expense.

Detail

Non-scheme pipeline operators would be required to publish the following information on their website:

The base level of information shippers require when considering whether to seek access, which is to include information on the pricing methodology and the inputs used to calculate the standing offers for each service offered by the pipeline

The weighted average price paid for each service (published on an annual basis).

Independently verified financial reports for each pipeline (prepared on an individual pipeline basis), and a breakdown of demand (by service). This information would be published on an annual basis four months after the end of the financial year and include information on the methods or principles the pipeline operator has used to determine the value of the assets, depreciation allowance and cost allocation.

If access is sought, the pipeline operator would be incentivised to provide the shipper with information on the cost of providing the service as the information exchanged during negotiations will form the basis for any arbitration.

The information disclosure requirements would be subject to a reporting standard and classified as civil penalty provisions.

The arbitration mechanism is to be based on the conventional arbitration with partial transparency model. Key design elements include:

Arbitration could be used to settle disputes in relation to all aspects of access to all types of services offered (excluding extensions).

Arbitration would be ‘on the papers’ using information exchanged by parties in negotiations (Stage 2). The arbitrator would have the discretion to conduct hearings and request further information if required, but the parties would not have the right to introduce additional information on their own volition.

If the dispute is price-related, the parties would be required to provide their final offers to the arbitrator and the respective offers would become the bounds of the arbitrator’s determination.

The arbitrator may seek administrative support from the AER.

Information on the existence of the arbitration would be published on the AER website.

Pricing principles:

Firm transportation services, ancillary services and augmentations: When assessing the reasonableness of the offer for these types of services, the arbitrator is to have regard to the cost of providing the service, which is to include a commercial rate of return that reflects the risks the pipeline operator faces in providing the service. When determining the value of any assets used in the provision of the service, the arbitrator can have regard to any asset valuation techniques it considers are consistent with the workably competitive market objective, including those that take into account past recoveries of capital.

Derivative services (i.e. services that utilise the capacity of the pipeline but are priced as a multiple of, or discount to, the firm transportation service): When assessing the reasonableness of the offer for these services, the arbitrator is to have regard to the opportunity cost and/or benefit of providing the service relative to the firm service (taking into account effects on cost and/or capacity) and provide a reasonable contribution to joint and common costs.

Non-price terms and conditions principles:

When assessing the reasonableness of any non-price terms and conditions of the pipeline operator’s offer to provide a service or services, the arbitrator is to have regard, as far as practicable, to what would likely prevail in a workably competitive market.

Guiding principles:

The arbitrator will also be required to have regard to the pipeline operator’s legitimate business interests, the interests of other persons who have rights to use the service, the value to the providers of extensions including expansions of capacity whose cost is borne by someone else, the value to the provider of interconnections to the facility whose cost is borne by someone else and the operational and technical requirements necessary for the safe and reliable operation of the facility.

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1.3.1 Information disclosure requirements

During the Examination, concerns were raised about the information asymmetries

shippers can face in negotiations with pipeline operators and the detrimental effect this

can have on their bargaining power and ability to readily identify exercises of market

power.10 To address this imbalance and facilitate more timely and effective commercial

negotiations, the final design provides for greater disclosure and transparency of the

information shippers require when:

Considering whether to seek access to a pipeline: To enable shippers to make an

informed decision about whether to seek access, the final design provides for pipeline

operators to publish on their websites the base level information outlined in Table 1.1.

Assessing the reasonableness of a pipeline operator’s offer: To enable shippers

to assess the reasonableness of the standing offer, the final design provides for non-

scheme pipeline operators to publish on their websites independently verified financial

reports and demand information (by pipeline), the weighted average prices received

for each service and the inputs used in the calculation of the standing offers. Pipeline

operators will also be expected to provide shippers with information on the cost of

providing the specific service sought by a shipper during negotiations.

In keeping with the suggestion made by a number of shippers, the ACCC and the AER,

the final design provides for greater alignment between the information to be disclosed to

the shipper during the negotiations with the information that an arbitrator would require if

negotiations fail and the arbitration mechanism is triggered.

1.3.2 Arbitration mechanism

In the Examination, concerns were also raised about the absence of any constraint on the

behaviour of pipeline operators during negotiations.11 To address this issue, the final

design provides for a binding commercial arbitration mechanism that will be available in

the event a dispute arises when:

a prospective shipper is seeking access to a service;

an existing shipper seeks to add a new service to their existing contract; and

an existing shipper is negotiating a new contract.

The arbitration mechanism will be available to resolve disputes on any matter, including

price or other terms and conditions, associated with seeking access to the following types

of services:

services that require the use of the existing capacity of the pipeline, including

transportation (firm, as available, interruptible, backhaul (if not operating on a bi-

directional basis), park and loan and ancillary services (e.g. in-pipe trading services,

capacity trading services, redirection services, separate compression services); and

services that require further augmentation of the pipeline, which may occur if:

o an expansion is required;

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10 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 10. 11 ibid, p. 80.

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o the pipeline needs to be converted to a bi-directional pipeline;

o a new receipt or delivery point is required (or points need to be expanded); or

o an interconnection with another pipeline or pipelines is required.

It will not, however, be available for extensions.12

While the arbitration mechanism is a key element of the new framework, it is intended that

commercial negotiation will continue as the principal means by which access terms and

conditions are determined and that the arbitration mechanism will rarely be triggered. That

is, it is intended that the threat of arbitration will be sufficient to encourage the parties to

reach a commercial agreement.

The arbitration mechanism will take the form of a conventional arbitration model with

partial transparency. While this arbitration model is similar in many ways to the preferred

option in the Options Paper, some refinements have been made to ensure that it can

facilitate the timely, cost-effective and efficient resolution of any dispute that does arise.

Consistent with the suggestion made by a number of stakeholders, the final design

provides for the arbitration to be conducted ‘on the papers’ using information provided in

negotiations (unless the arbitrator determines otherwise) and will specify the bounds

within which the arbitrator’s decision can fall, which will be between the pipeline’s final

offer and the shipper’s counter offer.

1.3.3 Arbitration principles

The arbitration principles are a key element of the new framework, because they establish

the basis on which shippers should expect to be able to access the services provided by

non-scheme pipelines. As noted in section 1.1, the objective of the new framework is to

pose a constraint on the exercise of market power by pipeline operators by facilitating

access to the services provided by these pipelines on reasonable terms. The term

‘reasonable’ is taken in this context to mean at prices and on terms and conditions that, so

far as practical, reflect the outcomes of a workably competitive market.

In a workably competitive market, rivalry between competing firms can be expected in the

longer-run to drive prices down to a cost reflective level, where firms are covering their

costs plus a rate of return that reflects the risk faced by the firm. In keeping with this

concept, the final design provides for the adoption of cost reflective pricing principles

(which the arbitrator will be left to determine how to apply) and a number of other

subordinate guiding principles. In the GMRG’s view, the cost reflective pricing principles

(which provide for the recovery of a commercial rate of return that reflects the risks faced

by the pipeline operator) are consistent with what would occur in a workably competitive

market. They should also preserve incentives for investment and innovation in pipelines,

which shippers have made clear is of considerable importance to the market. While some

pipeline operators have characterised the adoption of cost reflective pricing principles as a

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12 This exclusion is consistent with rule 118 of the NGR. It is understood that this exclusion exists because there can be competition for the construction and operation of extensions from a range of parties, whereas, expansions can only be provided by the pipeline operator. Therefore, the market power that can be exercised in negotiations for extensions should be constrained by competition from other parties, similarly to the development of new pipelines. Consistent with rule 118, the GMRG recommends excluding disputes in relation to pipeline extensions from being eligible to access the arbitration framework under the Rules.

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“quasi regulatory” approach, it is consistent with what would occur in a workably

competitive market.

While some pipeline operators suggested the reasonableness of an offer could be

assessed by reference to the prices payable for comparable services, the fact that most

pipelines are likely to have market power means that in most cases the observed prices

cannot be relied upon to assess the reasonableness of an offer. Some pipeline operators

have also suggested the reasonableness could be established having regard to range set

by the pipeline operator’s opportunity cost and the shipper’s walk away price. The GMRG

is not, however, satisfied this option reflects what would occur in a workably competitive

market and nor that it would pose a constraint on the exercise of market power.

The GMRG has also considered the suggestion by some stakeholders that greater

guidance be provided to the arbitrator on how the cost-reflective pricing principles are to

be applied. While the GMRG can see merit in providing the arbitrator with some additional

guidance on asset valuation, the intention is not, as noted above, to mirror the regulatory

arrangements applying to full regulation pipelines. The GMRG is not therefore

recommending the adoption of prescriptive pricing principles and will allow the arbitrator to

have some discretion on how it applies the principles.

1.3.4 How the new framework will operate

The final design of the new framework provides for a staged approach to information

disclosure, the negotiation and arbitration processes. The introduction of these stages is

intended to provide parties with greater clarity about their obligations in each stage and

the processes to be followed. It is also intended to incentivise parties to negotiate and to

limit the reliance that may otherwise be placed on arbitration. Table 1.3 outlines what each

stage will involve, while Figure 1.2 depicts the stages at a high level.

Figure 1.2: Stages for information disclosure, negotiation and arbitration

Stage 1: Shipper considers whether to seek access having

regard to basic information

published by pipeline operator

Stage 2: Shipper requests access and

enters into commercial negotiations with pipeline operator.

Negotiations informed by further information

exchanges

Stage 3: If negotiations fail, either party may

seek arbitration. Arbitrator to make

decision having regard to the arbitration

principles

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Table 1.3: Staged approach to information disclosure, negotiations and arbitration

Stage Detail

Stage 1:

Shipper considers whether to seek access

In this stage, non-scheme pipeline operators would be required to publish the following information on their website unless it is subject to an exemption:

the base level of information that shippers require when considering whether to seek access to a pipeline, including the pipeline’s standing offer for each service;

the pipeline’s financial reports and demand information; and

the weighted average price received for each service if there are more than two shippers using the pipeline (this limitation is required to maintain confidentiality).

This information would allow shippers to make an informed decision about whether to seek access and to carry out a high-level assessment of whether the pipeline operator’s standing offers are reasonable, having regard to the pipeline’s financial reports, the weighted average price per service and information published by the pipeline operator on how the standing offers for each of the services offered by the pipeline have been calculated.

Exemptions: Pipelines that are not providing third party access (i.e. the service provider and shipper are related parties) or are servicing a single shipper will be able to apply for an exemption from the information disclosure requirements in Stage 1. An exemption from the requirement to publish financial reports will also be available to pipelines with a nameplate capacity rating of less than 10 TJ/day. If any of these conditions change, the exemption will be extinguished.

Stage 2: Request for service and commercial negotiation

This stage is designed to facilitate timely and effective commercial negotiations and minimise the reliance on arbitration. It involves two key steps:

Access request and response

The Rules would set out the general requirements that would apply to a shipper making an initial access request, as well as a pipeline operator in responding to an access request, with further detail to be required to be outlined in a pipeline operator’s access policy (published in Stage 1)

Negotiation

The pipeline operator and the shipper would exchange information to try to reach a negotiated outcome. During negotiations, the parties would be required to disclose all of the information, including expert reports, that they would seek to rely on in an arbitration to demonstrate the pipeline’s offer or the shipper’s counter offer is reasonable. Thus, the pipeline operator would be incentivised to provide the shipper with detailed information on the cost of providing the service sought by the shipper. The Rules would contain provisions to incentivise the parties to articulate their case and disclose all relevant information before the dispute is referred to the arbitrator. If the parties cannot reach an agreement then they can proceed to Stage 3.

Stage 3: Arbitration

The arbitration mechanism provides a backstop, or last resort, for overcoming disputes that cannot be settled through negotiation (Stage 2).

Availability: Arbitration would be available when: a shipper is seeking access; when an existing shipper is seeking to add a new service to an existing contract; or when an existing shipper seeks a new contract to take effect on expiry of the existing Gas Transportation Agreement (GTA). Arbitration would not be available for disputes about services already contracted under a GTA or for variations to the service terms for those services and would not be available for extensions

Documentation: Arbitration would be ‘on the papers’ using information exchanged in Stage 2. The arbitrator may request further information and conduct a hearing if required.

Determination: The arbitrator would make a determination with respect to the access sought by the shipper; within the bounds of the final offers put forward by the parties if it is a price-related dispute, and having regard to the pricing and other guiding principles outlined in the Rules.

Timeframe: The arbitrator would have 50 business days to make a determination, or a maximum of 90 days on the agreement of parties to extend.

Binding nature: The shipper must notify the pipeline operator and the AER within 30 days if it intends to proceed with access on the basis determined by the arbitrator. A shipper declining access may seek access at any future time but cannot seek arbitration for a substantially similar service for a period of one year following the determination.

Partial confidentiality: Information on the existence of the arbitration would be published on the AER website after the arbitration has concluded, including: the non-scheme pipeline involved; the parties to the arbitration (subject to the consent of the shipper); the name of the arbitrator; and the time taken for the arbitration.

Exemption: Non-scheme pipelines that do not provide third party access (i.e. the service provider and shipper are related parties) would be exempt from arbitration. If third party access is provided the exemption would be extinguished.

AER role: The AER would provide oversight and administration of the framework, including establishing the panel of arbitrators, providing administrative support to the arbitrator and/or parties, publishing information about the arbitration, and publishing a non-binding procedural guide providing for arbitrators and parties to disputes. The AER would also be responsible for granting exemptions, compliance and enforcement.

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1.3.5 Consistency of the new framework with the NGO and the Vision

In the GMRG’s view, the final design outlined in Table 1.2 and Table 1.3 is fit for purpose,

targeted and proportionate to the issues it is intended to address and will not impose an

excessive burden on non-scheme pipeline operators. The final design is also expected to:

support and improve the timeliness and effectiveness of commercial negotiations

between pipeline operators and shippers;

provide a credible threat of intervention if a dispute arises, which when coupled with

greater transparency, should pose a constraint on the behaviour of non-scheme

pipeline operators and discourage the exercise of market power; and

preserve the incentives for investment and innovation in the provision of services by

adopting a commercially oriented disclosure and arbitration framework and by allowing

pipeline operators to recover a commercial rate of return that reflects the risks the

pipeline operator faces in providing the service.

The new framework can therefore be expected to result in:

more efficient investment in, and efficient operation and use of, natural gas services

than would be the case if the status quo was maintained; and

the prices charged for pipeline services better reflecting the cost of service provision

and the prices that would prevail in a workably competitive market.

The ultimate beneficiaries of these improvements will be consumers of natural gas. The

introduction of the new framework into the NGL and NGR can therefore be expected to

promote the NGO and contribute to the Council’s Vision. Relative to the other options that

were canvassed in the Options Paper and by stakeholders, the final design is also

expected to promote the NGO in a more cost-effective and targeted manner and make a

greater contribution to the Council’s Vision and the next phase of gas market reforms.

Finally, it is worth noting that while the GMRG has sought to strike the right balance in its

final recommendations, it understands that some stakeholders may think that the final

design does not go far enough in terms of information provision and the pricing principles,

while others may think it goes too far. In the GMRG’s view, the review that SCO is

scheduled to carry out two years after the implementation of the new framework will

provide the opportunity for market participants and policy makers to step back and

consider whether the new framework is achieving its stated objectives, or whether more

fundamental changes to the coverage test, or this new framework are required.

The ACCC’s inquiry into the eastern Australian gas market and the AEMC’s review of

Parts 8-12 of the NGR will also provide opportunities to address some of the other gaps

that have been identified through this process, both in relation to information disclosure

and the arbitration mechanism. The GMRG intends therefore to work closely with the

ACCC and AEMC to address identified gaps through their respective reviews. Further

detail on these reviews is provided in Box 1.1 and Appendix B.

13

Box 1.1: Other reviews

SCO review of subsequent measures

At the 14 December 2016 Council meeting, it was agreed that Council officials would review the need for subsequent measures two years after the implementation of the new information disclosure and arbitration framework. As part of this review, Council officials are likely to consider whether the coverage test should be amended and if the light regulation option should be retained.

This review will also provide Council officials and other stakeholders the opportunity to stand back and take stock of whether:

the new information disclosure requirements that are implemented through this process have gone far enough to address the information asymmetries faced by shippers, or if greater transparency and information disclosure is required; and

the arbitration mechanism, as implemented, is providing a credible threat and posing a constraint on the behaviour of the pipeline operators, or if further changes need to be made to the mechanism or the test for regulation.

This review is likely to be informed by the recently announced ACCC inquiry into eastern Australian wholesale gas market (see below).

ACCC and GMRG transparency related reforms

On 15 March 2017, the Prime Minister, the Hon Malcolm Turnbull MP, and the gas industry agreed to a number of measures that are intended to provide for cheaper and more reliable gas supplies to the domestic market.13 One of these measures involves the ACCC and GMRG working together on options to improve transparency in the gas market, to facilitate competition between producers and information for purchasers.

On 19 April 2017, the Treasurer, the Hon Scott Morrison MP also directed the ACCC to hold an inquiry into the eastern Australian wholesale gas market pursuant to subsection 95H(1) of the Competition and Consumer Act 2010 (CCA).The inquiry is intended to improve the transparency of, and support the efficient operation of, the gas market and monitor the compliance of producers with their commitments to make gas available. While the ACCC has not yet released any information on what it intends to publish through this process, it has indicated in its submission to this process that:14

“…publication of gas transportation prices is likely to fall within the ambit of the gas market transparency measures announced by the Prime Minister on 15 March 2017. Accordingly, disclosure of pricing information (including appropriate levels of aggregation to protect commercial confidentiality), is likely to be further explored and developed by the ACCC and GMRG in their broader review of mechanisms to promote transparency and orderly market processes in the gas industry.”

AEMC Part 8-12 Review

The AEMC’s Review of Parts 8-12 of the NGR is now underway with the terms of reference provided to the AEMC on Friday, 5 May 2017. The Review has been commissioned by the Council in response to the ACCC’s Inquiry, which found that even if a pipeline is subject to full regulation, the way in which the regulatory arrangements operate mean that pipeline operators may still be able to exercise market power.

The terms of reference for this review, require the AEMC to consider whether the access dispute resolution mechanism in the NGL and NGR that currently applies to full and light regulation pipelines should be amended to provide a more effective constraint on the exercise of market power by pipeline operators, including making dispute resolution more accessible to shippers.

The terms of reference for this review request the AEMC to “work closely with the GMRG to ensure consistency with all future gas market reform measures and avoid duplication of efforts, particularly in relation the development of a framework for binding arbitration”.

_________________________________

13 The Hon Malcolm Turnbull, Prime Minister of Australia, ‘Measures agreed for cheaper, more reliable gas’, Media Release, 15 March 2017, https://www.pm.gov.au/media/2017-03-15/measures-agreed-cheaper-more-reliable-gas.

14 ACCC, submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 8.

14

1.3.6 Where the new framework sits in the spectrum of access regimes

Figure 1.3 provides an indication of where the new information disclosure and arbitration

framework sits within the spectrum of access regimes applying to pipeline services,

ranging from commercially-oriented outcomes to full regulation.

Figure 1.3: Spectrum of access regimes applying to pipelines

Notes: * Subject to exemptions.

15

1.4 Forward process

The GMRG has commenced work on the development of a draft set of initial Rules.

Following review and agreement by officials to release the draft Rules, stakeholders will

have three weeks to provide their feedback. The stakeholder consultation period is

expected to commence in late June.

Following the incorporation of stakeholder feedback, the final set of initial Rules will then

be provided to Council for its consideration and approval. The significant divergence of

stakeholder views on key elements of the new framework and the late provision of an

alternative proposal by APA Group (APA) has required the GMRG to devote additional

time to consultation and consideration. As a consequence, Council consideration is now

expected to take place out-of-session in early August, rather than at the mid-July meeting

as previously advised. Further information on timeframes is provided in Table 1.4.

Table 1.4: Timeframes

Date Process

21 March 2017 Release of Options Paper

3-5 April 2017 Roundtable discussions by industry sector

13 April 2017 Stakeholder submissions on the Options Paper due

Early June 2017 SCO review and approval of framework design

Mid-June 2017 Officials review and approval of draft Rules to reflect the agreed design

Late June 2017 Draft Rules released for public consultation (open for three weeks)

Late July SCO consideration of the final Rules

Early August 2017 Rules presented to Energy Council Ministers

1.5 Implementation and transitional arrangements

If Council approve the final set of initial Rules, the Rules will be made by the South

Australian Minister for Mineral Resources and Energy. Table 1.5 provides an indication of

the proposed timelines for the implementation of the new framework, which includes the

time it is expected to take:

(1) non-scheme pipeline operators to publish the base level information on their websites

and to start publishing independently verified financial reports and weighted average

prices; and

(2) a number of guidelines and guides to be prepared, including:

(a) a binding guideline on the preparation of financial reports; and

(b) non-binding guides15 for the arbitrator and disputing parties on the arbitration

process.

_________________________________

15 Note that while the Rules will set out the procedural requirements of the arbitration, the GMRG thinks there would be value having guides that the arbitrator and disputing parties can have regard to so that they have a better understanding of the steps and processes involved. The guides are expected to provide:

the arbitrator with procedural information on the arbitration framework, key steps, timeframes and the

determination form/content and provide links to relevant arbitration rules; and

16

The GMRG’s expected implementation time frames are outlined in Table 1.5.

Table 1.5: Expected implementation time lines

Date Process

1 September 2017 New Rules come into effect.

Arbitration mechanism commences.

Procedural arbitration guides for the arbitrator and disputing parties are made

available on the AER website.

GMRG, in consultation with the AER, progresses work on financial report

guideline.

1 February 2018 Pipeline operators publish base level information required by shippers on their

websites and weighted average prices.

30 October 2018 Pipeline operators publish first half yearly financial reports (for the period 1

January 2018 – 30 June 2018).

30 October 2019 Pipeline operators publish first full year financial reports (1 July 2018 – 30 June

2019).

As this table highlights, the arbitration mechanism will commence before any information

is expected to be disclosed. Rather than delaying the commencement of the arbitration

mechanism until this information is available, the GMRG recommends that:

the mechanism come into effect immediately (1 September 2017); and

the arbitrator be provided with the ability to request parties provide any additional

information it requires to apply the pricing principles and make a determination,

including cost and financial information.16

The GMRG has considered a number of potential transitional issues associated with the

implementation of the arbitration mechanism, including if the arbitration mechanism

should be available to parties immediately in the absence of parties having met the

requirements that will be set out in the Rules. The GMRG recognises that a transitional

arrangement will likely be required in the Rules to deal with disputes that commenced

before the new framework comes into effect, the details of which need to be considered

further during the development of the Rules.

The GMRG expects that a fast-track arbitration could apply, which would waive the

requirement for shippers and pipeline operators to comply with any requirements in stages

1 and 2 of the framework. Under such an arrangement, the arbitrator would likely be

required to request, potentially significant, additional information from parties to apply the

arbitration principles in the absence of the information published in Stage 1 and the

exchange of cost and other relevant information in Stage 2. More time may also be

required for the determination to be made.

_________________________________

the disputing parties with information on the eligibility for arbitration, including on how an access proposal must be

made, the dispute notice provided, the process for selecting the arbitrator, the steps, procedural rules and

timeframes involved and how costs will be treated. 16 While the pipeline operator may not be in a position to provide information in the manner specified in the AER’s

guideline, it should still be in a position to provide the arbitrator with the information it requires to apply the pricing principles.

17

The other point to note from Table 1.5 is that the commencement date for financial

reporting by pipeline operators is linked to the publication of the financial reports guideline.

If this guideline was prepared by the AER using the standard consultation procedures in

the NGR, then it could take at least nine months to prepare the guideline, which would

delay the publication of the first financial reports. The GMRG therefore proposes to

accelerate the development of the guideline by commissioning the assistance of a

consulting firm with expertise and experience in financial reporting requirements. It is

intended that the consulting firm would work closely with the GMRG and the AER on the

development of the guideline. This approach would allow financial reporting to commence

as early as 30 October 2018.

To this end, the GMRG intends to commission the assistance of a suitably experienced

consulting firm to start working with the AER and GMRG to draft the guideline as a matter

of priority. Once the guideline is finalised, the AER would be responsible for monitoring

the compliance of non-scheme pipeline operators with the guideline and for making any

future changes to the guideline that may be required.

Further information on the implementation and transitional arrangements is provided in

Chapter 5.

1.6 Structure of the report

Further detail on how the GMRG has come to its view on the design of the new

information disclosure and arbitration framework is provided in the remainder of this

report, which is structured as follows:

Chapter 2 outlines the objectives of the new framework;

Chapter 3 describes the options for the key elements of the new framework that were

identified in the Options Paper and provides an overview of the feedback stakeholders

provided on these options as well as the GMRG’s view on the issues raised by

stakeholders;

Chapter 4 sets out the GMRG’s final recommendation on the design of the new

information disclosure and arbitration framework; and

Chapter 5 sets out the implementation and transitional arrangements that would be

required to implement the recommendations set out in Chapter 4.

It is worth noting that throughout this paper the following terminology is used:

the term ‘shipper’ is used to refer to existing and prospective shippers and is used

interchangeably with the term user;

the term ‘pipeline operator’ and ‘service provider’ are used interchangeably; and

the term ‘AER’ has been used to jointly refer to both the Australian Energy Regulator

and the Economic Regulation Authority (ERA) when discussing the roles that the

relevant economic regulator would play under the new framework.

18

2. Objectives of the new framework

The design of the new information disclosure and arbitration framework has been

developed having regard to the problems that were identified during the Examination and

the outcomes sought by the new framework. These issues are discussed, in turn, in this

chapter, which also provides an overview of the assessment framework that has been

used when developing the final recommendations.

2.1 Problem to be addressed by the new framework

During the Examination shippers raised a number of concerns about the behaviour of

pipeline operators and made clear their belief that the majority of existing pipeline

operators have market power and are using that power to engage in monopoly pricing to

the detriment of shippers and economic efficiency.17 Shippers also claimed that:

the absence of adequate publicly available information on prices and other terms and

conditions of access, the method used to determine prices and the costs incurred by

pipeline operators in providing services, mean that it is difficult to assess the

reasonableness of offers made by pipeline operators;18 and

the existing test for regulation (the coverage test) does not pose a credible threat to

pipeline operators and is not therefore constraining their behaviour.19

The concerns raised by shippers about monopoly pricing and the coverage test were

consistent with the findings of the ACCC’s Inquiry into the East Coast Gas Market

(Inquiry) and other analysis carried out as part of the Examination, including Independent

analysis conducted by JP Morgan’s Equity Research Team.20 The views expressed about

the coverage test were also consistent with the ACCC’s and the Examination’s

observations that the coverage test does not pose a credible threat of regulation to

pipeline operators.21

While a change to the coverage test was explored with stakeholders during the

Examination, most shippers made it clear they were not looking for a traditional regulatory

solution. Rather, most shippers wanted to find a way to reduce the imbalance in

bargaining power they can face in negotiations with pipeline operators and pose a

constraint on the exercise of market power.22

_________________________________

17 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 10 and 78. 18 Ibid, p. 10. 19 Ibid, p. 80. 20 This analysis was carried out to test whether in an environment where market power exists, higher than average

returns were being generated. In short, this analysis showed the returns being earned by one pipeline operator were double that of the average regulated electricity network operator and the difference could not be fully explained by differences in risk characteristics between the sectors. As JP Morgan noted, some difference in returns is to be expected when comparing regulated assets with that of an unregulated monopoly. Some difference can also be expected given the different risk characteristics between the businesses, however, it is not believed that this is sufficient to explain the difference in returns. As noted in the Examination, the analysis was not commissioned to target specific companies, but rather to demonstrate that in an environment where market power exists it is evident that higher than average returns are being generated. Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 45-46.

21 Ibid, pp, 12-13. 22 Ibid, p. 78.

19

The Examination therefore recommended steps be taken to strengthen the bargaining

power of shippers by introducing a new information disclosure and binding arbitration

framework into the NGL and NGR that would:23

provide reasonable access to open access pipelines;

support timely and effective commercial negotiations between parties;

provide a credible threat of intervention if a dispute arises, which when coupled with

greater transparency, should pose a constraint on the behaviour of the pipeline

operators and discourage exercises of market power; and

preserve the incentives for investment and innovation in the provision of services by

adopting a commercially oriented disclosure and arbitration framework.

The Examination also recommended that the appropriateness of amending the coverage

test be reviewed again within five years of new framework becoming operational. This

recommendation was accepted by Council, although it decided that a review of

subsequent measures should be carried out two years after the implementation.24

2.2 Objective of the new framework

Reflecting the nature of the problems outlined above, the overarching objective of the new

information disclosure and arbitration framework is to facilitate access to services

provided by non-scheme pipelines on reasonable terms, which is taken to mean at prices

and on terms and conditions that so far as practical reflect the outcomes that would occur

in a workably competitive market (see Box 2.1).

To that end, in order to reduce the imbalance in bargaining power that shippers can face

when negotiating with pipeline operators and pose a constraint on the exercise of market

power by pipeline operators, the new framework is intended to:

provide for the publication and exchange of information to facilitate timely and effective

commercial negotiations;

provide an effective and binding commercially oriented arbitration process to resolve

disputes about proposed terms and conditions of access in a cost-effective and

efficient manner; and

set out the principles an arbitrator would be required to have regard to when

determining disputes, which should be consistent with the outcomes that would be

expected in a workably competitive market.

In the GMRG’s view the workably competitive market construct is the appropriate

benchmark to apply in this context given the concerns that were raised during the

Examination and in the ACCC’s Inquiry, because it will pose a more effective constraint on

monopoly pricing. Posing a constraint on this behaviour will result in the prices charged for

pipeline services better reflecting the cost of service provision, which will benefit upstream

and downstream users of non-scheme pipelines and should also encourage more efficient

investment in, and efficient operation and use of, natural gas services. The ultimate

_________________________________

23 Ibid, pp. 13-15. 24 COAG Energy Council, Meeting Communique, 14 December 2016, p. 1.

20

beneficiaries of these improvements will be consumers of natural gas. The adoption of this

benchmark can therefore be expected to promote the NGO.

Box 2.1: Workable competition concept

The concept of workable competition, which underpins a number of access regimes in Australia, was described by the Independent Committee of Inquiry on National Competition Policy (the Hilmer Committee) in 1993 as follows:25

“In markets characterised by workable competition charging prices above the level of long run average costs will not be possible over a sustained period, for higher returns will attract new market entrants or lead customers to choose a rival supplier or product…

Where the conditions for workable competition are absent — such as where a firm has a legislated or natural monopoly, or the market is otherwise poorly contestable — firms may be able to charge prices above the efficient level for periods beyond those justified by past investments and risks taken or beyond a time when a competitive response might reasonably be expected. Such "monopoly pricing" is seen as detrimental to consumers and to the community as a whole.”

It has also been described by the Australian Competition Tribunal (Tribunal) in Re Queensland Co-operative Milling Association; Re Defiance Holdings (1976) 25 FLR 169 at 188 as follows:

“As was said by the U.S. Attorney General’s National Committee to study the Antitrust Laws in its report of 1955 (at p. 320): ‘The basic characteristic of effective competition in the economic sense is that no one seller, and no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more. Where there is workable competition, rival sellers, whether existing competitors or new or potential entrants in the field, would keep this power in check by offering or threatening to offer effective inducements…’.”

More recently it was described by the Tribunal as follows:26

“Perhaps the best shorthand description of workable competition is to envisage a market with a sufficient number of firms (at least four or more), where there is no significant concentration, where all firms are constrained by their rivals from exercising any market power, where pricing is flexible, where barriers to entry and expansion are low, where there is no collusion, and where profit rates reflect risk and efficiency.”

In a similar vein, the New Zealand High Court has previously observed that:27

“…the tendencies in workably competitive markets will be towards the outcomes produced in strongly competitive markets. The process of rivalry is what creates incentives for efficient investment, for innovation, and for improved efficiency. The process of rivalry prevents the keeping of all the gains of improved efficiency from consumers, and similarly limits the ability to extract excessive profits”.

_________________________________

25 Independent Committee of Inquiry on National Competition Policy, National Competition Policy Review, 25 August 1993, p. 269.

26 Application by Chime Communications Pty Ltd (No. 2) [2009] ACompT 2, para 37. 27 Wellington International Airport Ltd & Ors v Commerce Commission [2013] NZHC [11 December 2013], para 22.

21

2.3 Assessment framework

There are a number of different options that could be used to implement the new

information disclosure and arbitration framework, the scope of which can differ

substantially. When assessing these options, the GMRG has considered the extent to

which they are likely to achieve the outcomes sought.

The GMRG has also had regard to the rule making test that the AEMC is required to

consider when exercising its rule making functions, which states that:28

the AEMC may only make a rule if it is satisfied it will, or is likely to, contribute to the

achievement of the NGO; and

the AEMC may give such weight to any aspect of the NGO as it considers appropriate

in all the circumstances, having regard to any relevant Council statement of policy

principles.

In keeping with this test, the GMRG has had regard to the NGO, which is to: 29

“…promote efficient investment in, and efficient operation and use of, natural gas services

for the long term interests of consumers of natural gas with respect to price, quality, safety,

reliability and security of supply of natural gas”.

Where relevant, the GMRG has also had regard to the Council’s Vision, which provides a

high-level policy statement on the direction gas market development should take to meet

the NGO:30

“The Council’s vision is for the establishment of a liquid wholesale gas market that provides

market signals for investment and supply, where responses to those signals are facilitated

by a supportive investment and regulatory environment, where trade is focused at a point

that best serves the needs of participants, where an efficient reference price is established,

and producers, consumers and trading markets are connected to infrastructure that

enables participants the opportunity to readily trade between locations and arbitrage

trading opportunities.”

As the AEMC has previously observed, quantifying the costs and benefits associated with

the types of reforms contemplated in this paper can be difficult.31 The assessment of the

final design has therefore been carried out qualitatively.

_________________________________

28 See section 291 of the NGL. 29 The NGO is set out in section 23 of the NGL. 30 COAG Energy Council, Australian Gas Market Vision, December 2014. 31 AEMC, Stage 2 Final Report: Information Provision, May 2016, p. 4.

22

3. Design options and stakeholder feedback

There are a number of different forms the new information disclosure and arbitration

framework could take, the scope of which can differ quite substantially depending on:

the nature of the information disclosure requirements that pipeline operators will be

subject to;

the type of arbitration mechanism that will be available to shippers and pipeline

operators if commercial agreement cannot be reached; and

the guiding principles that the arbitrator will be required to have regard to when making

its decision.

The Options Paper identified a number of options for these three elements of the new

framework and also set out the GMRG’s preliminary view on the package of options that

could be adopted. Further detail on the options that were canvassed in this paper, the

feedback stakeholders have provided on these options and the GMRG’s consideration of

this feedback is provided below.

3.1 Options for the new framework

The new information disclosure and arbitration framework is, as noted in Chapter 2,

intended to reduce the imbalance in bargaining power that shippers can face when

negotiating with pipeline operators and pose a constraint on the exercise of market power

by pipeline operators during these negotiations.

Consistent with these objectives, the Options Paper identified a number of different

options for the information disclosure requirements, the arbitration mechanism and

principles to guide the arbitrator’s decision making. These options are summarised in

Table 3.1.

The Options Paper also set out the GMRG’s preliminary view on the package of

information disclosure requirements, arbitration mechanism and pricing principles options

that should be implemented, which is summarised in Table 3.2. As noted in the Options

Paper, the inclusion of the GMRG’s preliminary view in the Options Paper was intended to

facilitate consultation and was not intended to represent the concluded positions of the

GMRG.

23

Table 3.1: Options Paper design options Option Description

Information Disclosure

Disclosure of information to enable shippers

to determine whether to seek access to a

pipeline service

Disclosure of information to enable

shippers to assess the reasonableness

of a pipeline operator’s offer

Option 1 Base level of information on:

the services offered by the pipeline and the

availability of those services;

the standing offers for the services provided

by the pipeline, which is to include

information on the price and non-price terms

and conditions for the services, the

methodology used to calculate the prices

and any other policies the pipeline operator

employs that may affect a shipper’s access

or use;

the technical characteristics of the pipeline

that may affect a shipper’s access or use, or

the price payable; and

the negotiation framework that will apply if

the shipper requests access.

n.a.

Option 2 Financial reports + demand information

Option 3 Financial reports + demand information +

detailed cost information

Option 4 Financial reports + demand information +

prices paid by other shippers

Option 5 Financial reports + demand information +

detailed cost information + prices paid by

other shippers

Arbitration Mechanism

Arbitration to be available in the event a dispute arises: when a prospective shipper is seeking access to a

service; when an existing shipper seeks to add a new service to their existing contract; and when an

existing shipper is renegotiating a new contract to take effect on the expiry of their existing GTA.

Option 1 Conventional arbitration that closely reflects commercial arbitration

Option 2 Conventional arbitration limited to disputes regarding price

Option 3 Conventional arbitration with additional procedural protections and partial transparency

Option 4 Final offer arbitration, which requires the arbitrator to select one of the disputant’s final offers.

Option 5 Combined arbitration, which combines elements of conventional and final offer arbitrations

Arbitration Principles

Pricing principles Other guiding principles

Option 1 Arbitrator to have broad discretion to

determine whether the price offered is

reasonable having regard to the other guiding

principles

The other guiding principles were as follows:

the legitimate business interests of the

pipeline operator, and the pipeline

operator’s investment in the pipeline;

the interests of all persons who have

rights to use the service;

the value to the provider of extensions

including expansions of capacity and

expansions of geographical reach whose

cost is borne by someone else;

the value to the provider of

interconnections to the facility whose cost

is borne by someone else;

the operational and technical

requirements necessary for the safe and

reliable operation of the facility; and

the level of competition for the provision

of the service and the price and other

terms and conditions of any competing

services.

Option 2a Pricing principles based on price payable for

comparable pipeline services (including

principles on how the prices of derivative and

ancillary services should be determined).

Option 2b Pricing principles based on the cost of service

provision (including a commercial rate of

return).

Separate principles used to determine how the

prices of derivative and ancillary services

Option 3a Option 2a with further guidance in the pricing

principles on how the comparison of the prices

of comparable services is to be carried out.

Option 3b Option 2b with further guidance in pricing

principles on how the cost of service provision

(including the commercial rate of return) is to

be determined.

24

Table 3.2: Preliminary view on the options Information disclosure requirements Arbitration mechanism Arbitration principles

Purpose

Reduce the information asymmetry shippers can

face in negotiations and, in so doing, facilitate more

timely and effective negotiations. Limit the reliance

that needs to be placed on the arbitration

mechanism.

Provide a credible threat of intervention to ensure appropriate behaviour from gas

pipeline operators during commercial negotiations. It is the threat that controls

behaviour. For arbitration to pose a credible threat it must provide for the final

resolution of commercial disputes by impartial arbitration without unnecessary

delay or expense.

Preferred

option

Option 2: Option 1 and financial reporting

Non-scheme pipeline operators would be required

to disclose on their website:

The base level of information that shippers

require when considering whether to seek

access to a pipeline.

Independently verified financial reports for each

pipeline (prepared on an individual pipeline

basis), and a breakdown of demand (by

service). This information would need to be

published on an annual basis four months after

the end of the financial year. The verified

financial reports would include:

– an income statement with revenue broken

down by service type and expenditure by

major categories;

– a statement of comprehensive income;

– a statement of changes in equity;

– a statement of cash flows; and

– notes to the financial report, which, amongst

other things, should include information on

the methodologies or principles the pipeline

operator has used to determine the value of

the assets and the depreciation allowance

as well as detail on their computation, and

detail of cost allocation methods.

Option 3: Conventional Arbitration with

enhanced procedural protections and

partial transparency

Key design elements associated with this

option are:

Arbitration could be used to settle

disputes in relation to all aspects of

access to all types of services offered

(excluding extensions).

Documentation provided to the arbitrator

must be directly relevant to the matter/s

in dispute.

The arbitrator, at the commencement of

the arbitration, must provide the cut-off

date and time for provision of information.

The arbitrator may also limit the amount

of documentation provided and provide a

list of questions for the parties to address.

The arbitrator can seek administrative or

technical support from the AER.

Information on the existence of the

arbitration would be published on the

AER website.

Option 2b: Pricing principles

based on the actual cost of

service provision supplemented

by other principles

The pricing principles would

state that the arbitrator’s

assessment of the

reasonableness of the offer is to

be based upon a comparison

with the costs the pipeline

operator actually incurs in

providing the service (including

a commercial rate of return).

The arbitrator would be left to

decide how to carry out the test.

The pricing principles for

derivative and ancillary services,

would be based on the

opportunity cost / benefit and, in

the case of derivative services,

delivering a reasonable

contribution to joint and common

costs.

The pricing principles would be

supplemented by a number of

other principles

25

3.2 Stakeholder feedback

Feedback on the options outlined above was received from a range of stakeholders with

interests across the gas supply chain, industry representatives (including the Australian

Petroleum Production and Exploration Association (APPEA), the Australian Pipeline and

Gas Association (APGA), the Energy Users Association of Australia (EUAA), Chemistry

Australia and Major Energy Users (MEU)), the ACCC and the AER. The GMRG received

27 written submissions in response to the Options Paper. A list of the stakeholders that

provided submissions in at Appendix C. A series of industry roundtables were also held in

early April and attended by 24 organisations with interests in non-scheme pipelines,

upstream production, retailing, generation and industrial gas use. Feedback on the design

of the new framework has also been provided through extensive bilateral discussions with

stakeholders.

Figure 3.1 provides a snapshot of the feedback stakeholders provided on the options

presented in the Options Paper. In general, stakeholders were supportive of the

development of the new framework. Mixed views were, however, expressed about the

design of the framework and, in particular, the information disclosure requirements and

the arbitration principles. Further detail on the feedback provided on these elements of the

framework is provided below.

3.2.1 Information disclosure

While there was broad agreement that pipeline operators should be required to publish

the base level of information on their websites, there was considerable debate about the

information that should be provided to shippers to enable them to assess whether an offer

is reasonable. The diversity of views can be seen in Figure 3.1, which shows that of the

23 stakeholders that expressed a view on this issue:

six stakeholders (five pipeline operators and APGA) believe that pipeline operators

should publish the base level of information (Option 1) and a weighted average price

(calculated by dividing revenue generated from the provision of the service by demand

for the service);32

six stakeholders (five shippers and the ACCC)33 believe that pipeline operators should

also be required to publish verified financial reports (Option 2); 34

six stakeholders (four shippers, APPEA and the AER) believe that pipeline operators

should also be required to provide the shipper with detailed cost information (including

forecast cost and demand information) (Option 3); 35 and

five stakeholders (two shippers and three user associations) believe that pipeline

operators should be required to publish detailed cost information and the prices paid

by other shippers (Option 5). 36

_________________________________

32 See the submissions of AGN, APA, DBP, Epic, Jemena and APGA. 33 The ACCC’s view on this issue was subject to the caveat that the information disclosed through the financial reports

would need to be capable of being used to calculate cost-reflective prices. 34 See the submissions of Origin Energy, EnergyAustralia, Tristar Petroleum, Senex, Central Petroleum and the ACCC. 35 See the submissions of Tas Gas Retail, Shell, APLNG, APPEA and the AER. 36 See the submissions of Qenos, CSR, MEU, EUAA and Chemistry Australia.

26

Figure 3.1: Stakeholder feedback on preferred design options

27

Relevance of financial reports and cost information

As the summary above highlights, pipeline operators were, in most cases, opposed to

releasing financial or cost information, with a number claiming that the financial reports

could be misunderstood by shippers and complicate the negotiations. DBP Transmission

(DBP), for example, noted that there may be legitimate reasons for differences between

accounting based measures of costs and the costs used in the calculation of prices.37

Some pipeline operators also claimed that the cost of publishing such information was ‘not

insignificant’, with Epic Energy (Epic), for example, claiming that if would cost it $200,000

p.a. per pipeline.38 APA also noted that it does not currently publish financial reports at a

pipeline level and indicated there would be complexities involved in doing so.39

In contrast to the position taken by pipeline operators, shippers, the ACCC and AER were

of the view that the information provided to shippers must be consistent with the

information the arbitrator would require to apply the arbitration principles (i.e. so parties

can assess their likely success). It was in this context that a number of stakeholders

claimed that financial reports, on their own, were inadequate and that to determine if a

price is reasonable, shippers would also require specific information on the cost of

providing the service (including forecast information).40

In relation to the financial reports, a number of stakeholders noted that if it is to be relied

upon by shippers to estimate a reasonable cost-based tariff, it would need to contain

information on things such as asset valuation, the fixed and variable operating costs,

capital expenditure, historic and forecast gas throughput and capacities, the original

construction costs and depreciation and the cost of capital.41 The ACCC also emphasised

the importance of financial information being capable of being used to estimate cost-

reflective prices and having a clear link to the pricing principles.

A number of stakeholders also noted that the form and content of the financial reports

would need to be specified in a guideline that provided clear guidance on matters, such

as:

the asset valuation methods to be used by pipeline operators and require sufficient

information to be published to understand the method employed on a particular

pipeline;

how joint and common costs are to be treated; and

the depreciation methodologies to be used.

The ACCC and the AER also noted that the guideline should prohibit pipeline operators

from revaluing their assets over time. Elaborating on this further, the ACCC noted that it

has “serious concerns” about financial reporting that allows the asset valuations to be

_________________________________

37 DBP, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 38 Epic, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,

p. 14. 39 APA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 40 See, for example, the submissions of APLNG and APPEA. 41 See, for example, the submissions of Shell, EUAA, MEU and Hydro Tasmania.

28

undertaken at a pipeline operator’s own discretion and based on its experience in airports

claimed that:42

“…leaving scope for pipeline operators to use different methodologies for calculating asset

valuation and other key inputs too broad, runs the risk of continual asset revaluation and

changes in methodologies in order to either create uncertainty about arbitral outcomes

(such that shippers may agree to prices substantially above reasonable costs) and/or

continued recovery of monopoly prices for use of gas pipelines, which would leave the

underlying issue of economic inefficiency unaddressed.”

Relevance of the prices paid by other shippers

A number of pipeline operators have suggested that there could be value in publishing a

weighted average price for each of the services they offer, so that shippers can quickly

determine whether the offer is reasonable relative to what others are paying.43

The concept of a weighted average price was supported by some shippers,44 while others

thought that it may not result in the provision of meaningful information.45 There was also

support from some shippers for the publication of the prices paid by each shipper on a

pipeline. Those stakeholders that advocated the provision of information on prices noted

that, on its own, this information would not be sufficient to assess the reasonableness of

an offer. They did, however, think the provision of this information would enable them to

quickly compare the prices being offered. The EUAA also noted that over time the prices

determined under the new framework may better reflect the cost of providing the service

and have greater informational power over time.46

To address the confidentiality concerns that may arise from the publication of this

information, the EUAA suggested that the price information could be provided on a

confidential basis to the shipper seeking access.47 Other stakeholders, however,

suggested the information be published.48 APPEA and Shell also noted that if the prices

paid by shippers are not to be published, they should be reported to an independent body,

such as the AER, ACCC or AEMO, to monitor pricing outcomes. The ACCC noted in its

submission that the publication of transportation charges is likely to fall within the scope of

the recently announced gas market transparency measures and could be further explored

and developed by the ACCC and GMRG through that review (see Appendix B).49

Other information

In addition to the information outlined above, stakeholders noted that there may be value

in publishing some other information. For example:

_________________________________

42 ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 10.

43 See the submissions of Jemena, Epic and DBP. 44 See, for example, the submission of Hydro Tasmania. 45 See, for example, the submissions of Shell. 46 EUAA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April

2017. 47 Ibid. 48 See, for example, the submissions of CSR, APPEA and Shell. 49 ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April

2017, p. 10.

29

APA suggested that in addition to publishing their pricing methodology, pipeline

operators should publish sufficient information to enable shippers to determine

whether the standing offer reflects the application of this methodology.50

A number of pipeline operators suggested that shippers should be required to reveal

their willingness to pay so that the disclosure requirements are symmetric.51

EnergyAustralia noted that some information on the Bulletin Board (e.g. on

uncontracted capacity) is currently only reported over a 12 month period and

suggested that this information would be more useful if projections closer to 10 years

forward were provided.52

Qenos also recommended that the information disclosure requirements extend to

processing plants, compression stations, hubs and storage facilities.53

Staged approach to information disclosure

On the issue of how information should be provided to shippers, the EUAA, MEU, APA

and DBP suggested there could be value in adopting a staged approach to information

provision, with basic information published on a pipeline operator’s website on an ongoing

basis and other information provided to the shipper during negotiations and/or when

arbitration is initiated. DBP, for example, drew a distinction between:54

the requirements for ongoing disclosure, which it noted would include base level

information and the weighted average price; and

the requirements during negotiation, which it noted would include all the information

that would go to an arbitrator.

APA proposed a similar two stage information disclosure model to DBP.55

The MEU, on the other hand, noted there could be three stages of information provision.

Under this proposal, basic information would be available in the first stage, information on

the cost of providing the service would be available in the second stage when the shipper

is assessing the offered prices and more detailed information (equivalent to the

information that would be available to the AER) would be available when the arbitration is

initiated.56

The EUAA suggested a two-tier disclosure process. Under this proposal, the first tier of

information provision would provide for the publication of the base level information,

financial reports and cost information on the pipeline operator’s website. The second tier

would then provide for information on the prices paid by other shippers to a shipper that is

negotiating with the pipeline operator under a confidentiality agreement.57

_________________________________

50 APA, Alternative proposal, undated. 51 See the submissions of DBP and APA. 52 EnergyAustralia, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 19 April

2017. 53 Qenos, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 12 April 2017. 54 DBP, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 55 APA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 56 MEU, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 57 EUAA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p.

7.

30

Other implementation issues

In the Options Paper, stakeholders were also asked to provide their views on whether the

information disclosure requirements should be:

Classified as a civil penalty provision: In this case, most pipeline operators were of the

view that they should not be civil penalty provisions, while shippers, the ACCC and the

AER thought they should be.

Classified as a conduct provision: There was no support for this proposal.

Subject to a reporting standard: Stakeholders were broadly supportive of this proposal,

although some pipeline operators questioned the need for such a standard.

3.2.2 Arbitration mechanism

As highlighted in Figure 3.1, the vast majority of stakeholders (17 organisations across all

stakeholder groups (large users, pipeline operators, producers/explorers, retailers and

regulators)), agreed with the GMRG’s preliminary view that a conventional arbitration with

enhanced procedural protections and partial transparency (Option 3) should be

implemented. Chemistry Australia58 noted that this option seems the most likely to deliver

a balanced outcome, while the EUAA thought additional procedural safeguards (such as

preventing legal representation in arbitration) should be put place to protect small users.59

Central Petroleum, on the other hand, was of the view that the final-offer arbitration model

(Option 4) should be adopted, because it believed it would facilitate more constructive

commercial negotiations, with less reliance on arbitration, which it noted was important for

smaller shippers that do not have the same resources or financial capacity as pipelines.60

DBP also expressed some support for this option.61 Through the roundtable discussion

and bilateral meetings, a number of other stakeholders also noted the appeal of this

option in terms of timeliness and simplicity.

Of the remaining stakeholders that expressed a view on this issue:

APA supported a conventional arbitration model that more closely reflects commercial

arbitration should be adopted (Option 1); and

APGA and Jemena supported a conventional arbitration model limited to price

disputes (Option 2).

Proposed arbitration components

In the Options Paper stakeholders were also asked their view on a range of arbitration

design components, including access proposals, protection of existing contractual rights,

safeguards to avoid distorting investment, the role of the AER, the selection of the

arbitrator, the binding nature of determinations, costs, termination, and the process for

correcting errors. Stakeholder feedback on these design components is outlined in Table

3.3.

_________________________________

58 Chemistry Australia, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.

59 EUAA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017. 60 Central Petroleum, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13

April 2017. 61 DBP, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.

31

Table 3.3: Stakeholder feedback on proposed arbitration design components

Summary of proposed approach Stakeholder feedback

Access proposals

An access request to be made in writing and in accordance with the negotiation framework of the operator of the non-scheme pipeline for which the access is sought.

APA, Epic and DBP support the proposed approach. The EUAA agreed in principle to the approach but was concerned that the negotiation framework could be gamed by pipeline operators. Similarly, Tas Gas Retail indicated that pipeline operators could use the timeframes to game the system. It noted for example, that the Tasmanian Gas Pipeline’s access application process gives it three months to respond to any request, which Tas Gas Retail considered is unacceptable for routine requests for access. Accordingly, Tas Gas Retail recommended the framework stipulate reasonable timeframes for access applications and negotiation framework.

Protecting existing contractual rights

The draft Amendment Bill provides adequate safeguards to protect existing contractual rights. Nothing further is intended to be included in the Rules on this matter.

All stakeholders agree that existing contractual rights and obligations must be protected.62 Epic recommended that consideration be given to the impact of arbitrated outcomes on Most Favoured Nation (MFN) clauses. APA contended that pipeline operators only agree to MFN clauses where they consider that there is a very low risk of economic regulation. APA indicated that the arbitration regime removes the right for pipeline operators to manage their risks in relation to MFNs (by being able to decide on prices paid by other shippers for similar services) and will have a fundamental impact on returns.

Safeguards to avoid distorting investment

The Rules to state that:

the pipeline operator cannot be required to carry out an augmentation unless the shipper funds the augmentation in its entirety, and the augmentation is technically and economically feasible and consistent with the safe and reliable operation of the pipeline; and

a shipper would acquire no interest in a pipeline by funding an expansion of capacity of a scheme pipeline in accordance with an access determination unless the pipeline operator agrees.

APA, DBP, Epic and Tas Gas Retail agreed with the proposed safeguards.

Epic noted that the safeguards fail to protect pipeline operators when they augment the pipeline on the basis of customers’ intended actions because of the uncertainty created by arbitration. Further it indicated that this may result in pipeline operators not readily expanding the network.

While APA welcomed the exclusion of extensions, it did not understand why the likelihood of competition argument does not apply to some other services offered by pipeline operators such as capacity trading services. DBP indicated that the exclusion of extensions should also be reflected in the pricing principles.

Scope of arbitration: Shippers and pipeline operators should be able to access arbitration in the event of a dispute in relation to services that require the use of existing capacity, or require further investment, with the exclusion of extensions. In the event there is competition for the services, including importantly in the investment sought, the arbitrator can consider this in making its determination.

Most stakeholders agreed with the scope of arbitration proposed, including the exclusion of exemptions.63 Epic indicated that augmentations can be included if the pipeline operator remains responsible for making decisions regarding safety and operational efficiency and the augmentation is fully funded.

Conversely, Jemena is of the view that the framework should only apply to existing infrastructure and not apply to any form of augmentation (including expansions). Jemena noted that if augmentations are to be included then appropriate protections should be included, including requiring shippers to pay for the works in full at the commencement of the augmentation.

Selection of arbitrator

1. The AER should establish and maintain a list of arbitrators, in consultation with relevant institutions, such as the Resolution Institute and the Australian Disputes Centre.

2. Specific timeframes for the selection of the arbitrator should be provided in the Rules to ensure an arbitrator is appointed within 15 business days from when the AER is notified of an access dispute.

Stakeholders generally agreed to the establishment of a list of pre-approved and appropriately qualified and impartial arbitrators from which shippers and pipeline operators can agree an arbitrator.64

APA reinforced the need for the arbitrator to have experience in commercial business negotiations and commercial dispute resolution, reflecting the nature of the decisions that the arbitrator would make under this scheme (rather than regulatory or legal expertise). It also indicated that there would be value in appointing a panel of arbitrators to consider matters under dispute, to provide a diversity of experience, ability to manage workload and backup if a particular arbitrator was not able to complete an arbitration.

Similarly, APGA and DBP argued that the AER should not be responsible for publishing and maintaining a list of approved arbitrators, rather the list should be kept by an arbitration institute. APGA indicated that an AER list may lead

_________________________________

62 See the submissions of Epic, Jemena, APA, Tas Gas Retail and EUAA. 63 See the submissions of APA and Epic. 64 See the submissions of Tas Gas Retail, Senex Energy, APGA, APA and DBP.

32

Summary of proposed approach Stakeholder feedback

3. The Rules will provide parties wishing to make a fresh appointment of the arbitrator in the event arbitrator does not complete an arbitration they are required to do so within 10 days of arbitration period lapsing. If the parties do not make a fresh appointment within the 10 day period but at least one party wishes to continue with arbitration, they must notify the AER. The AER must, after consultation with parties, make a fresh appointment within 5 days

to pre-selection of arbitrators that have a bias towards regulatory approaches. Further, APGA noted that parties should be able to draw on arbitrators that are not on the list.

Binding nature

1. As outlined in the Amendment Bill,65 the shipper should not be bound to seek access to the service in which an access determination relates, but if access is sought or obtained then the shipper is bound by any relevant provision of the access determination.

2. Grounds of non-enforcement of the access determination are limited to section 271 of the NGL (as applied by the draft Amendment Bill) and the Rules will not provide for anything further on this matter.

Tas Gas Retail and the EUAA agreed to the proposed approach.

Pipeline operators, on the other hand, thought that the arbitration determination should be binding on both parties, rather than allow a shipper to walk away if it chooses not to seek access.66 For example, APGA contended that the ability of the shipper to not seek access if it is unsatisfied with the outcome of the arbitration substantially limits any risk faced by a shipper during arbitration, which increases its incentives to proceed to arbitration. APGA went on to suggest that the perverse incentive can be partially mitigated by:

requiring a shipper that chooses not to seek access after arbitration pay the full costs of the arbitration; and

barring the shipper from seeking arbitration for a substantially similar service from the pipeline service provide for a

period of five years.

Origin, on the other hand, supports the ability for shippers to ‘opt-out’ of accessing the requested service as a shipper should not be forced into seeking access if the price or terms and conditions associated with the determination would cause financial distress or are simply too onerous to meet. If this did occur the risks associated with entering arbitration would likely see shippers avoid the process entirely, undermining its role as a credible threat to regulation.

Epic believes that a ‘first pass the post’ principle should be incorporated into the NGR, which would enable pipelines to contract capacity to another access seeker where the access seeker that took the case to arbitration is yet to accept the arbitrator’s award as a binding agreement. Epic claim this would protect the pipeline operator and other access seekers from foregoing legitimate access requests.

Costs

1. Provision should be made for parties to agree otherwise to the splitting of costs, or for the arbitrator to apportion the arbitration costs in specified circumstances, taking into account matters such as: the negotiating and arbitration behaviour of parties and if an access seeker elects not to be bound by the determination.

2. The Rules should require the arbitrator to seek agreement from the parties on the cost limit for expert advice in advance of obtaining it.

3. The AER should have the ability to, but is not required to, fix or cap the fee to be paid to an arbitrator.

Most stakeholders agreed the arbitrator should have the discretion to apportion costs,67 although DBP was of the view that costs should be shared equally rather than be up to the discretion of the arbitrator based on vague factors.

While the AER agreed the arbitrator should be able to have regard to the party's capacity to pay, APA and DBP raised concerns with this approach. APA was concerned that a pipeline operator would bear the costs of arbitration for small shippers. Similarly, APA, Epic and Jemena supported the suggestion that, where a shipper elects not to be bound by an arbitration, it must bear the full costs of the arbitration. In the absence of the arbitration being binding on the shipper, this may provide some incentives to negotiate. Epic also contended that the arbitrator should have an ability to award something other than the equal sharing of costs where excess costs are incurred by one party, or if there is an unreasonable delay in proceedings linked to one party.

The EUAA agreed that the AER should cap the arbitrator’s fee.

_________________________________

65 See section 216Q(2). 66 See the submissions of APA, Epic, Jemena, DBP and APGA. 67 See the submissions of the ACCC, AER, EUAA, APA and Epic.

33

Summary of proposed approach Stakeholder feedback

Role of the AER

The AER is to provide oversight and administration of the framework.

1. The Rules should provide that the AER may only join a party to an access dispute on the agreement of the parties involved.

2. The AER should be required under the Rules to publish a guide on the AER website providing guidance to arbitrators in arbitrating disputes in relation to non-scheme pipelines under the NGL.

3. The AER should publish information on its website explaining the arbitration mechanism, including key design components.

Pipeline operators generally do not support the AER’s involvement and noted that the AER’s role should be confined to the functions specified in the Amendment Bill.68 APA noted that the AER’s role should be limited to compliance and enforcement and was concerned with seeking to rely on the AER’s ‘expertise’ to develop relevant guidelines and to support the arbitrator because this will bring with it a regulatory overlay. Epic claimed that AER does not have the function, expertise or capability to facilitate commercial negotiations or determine appropriate commercial returns. Jemena indicated it does not support the AER allowing third parties to join, providing technical support or varying the arbitral award.

Tas Gas Retail and EUAA agreed with the proposed approach. The ACCC supported the proposal for the AER to develop guidelines to provide the arbitrator and disputing parties with guidance on the process, but suggested that the GMRG consider the legal status of these guidelines to ensure they are not considered binding.

Variations

Parties wishing to vary an arbitration agreement should apply to the AER and provide evidence of agreement between both parties to the variation. If parties cannot agree to a variation they are not permitted to apply for arbitration under the NGL, unless the variation is seeking the provision of a new service to the GTA that applies the access determination.

The EUAA agreed with the proposed approach. Similarly, the ACCC and AER noted that if agreement cannot be reached regarding the variation a further arbitral determination should be permitted provided it relates to a new matter or a significant change in circumstances.

Termination

1. The arbitrator should have the ability to terminate an arbitration if it considers the dispute could be more effectively resolved by some means other than an access determination and provides notice of the alternative means of resolving the dispute to the parties. The arbitrator must consult with the parties and may consult with the AER on appropriateness of alternative means of resolution.

2. Nothing further included on the access seekers right to terminate.

APA indicated that arbitration should be able to be terminated by the arbitrator or on the agreement of parties. It considers that where the arbitrator or the access seeker terminates the arbitration, the reasons for doing so should be reflected in the allocation of costs associated with the arbitration.

DBP does not agree with the proposal that the AER be consulted upon in relation to alternative means of resolution.

Epic suggested an ability to terminate the arbitration if capacity is no longer available due to another party contracting the capacity.

Correction of errors

The Rules should stipulate that:

If an access determination requires a correction in accordance with section 216T, they must notify the parties, the AER and the arbitrator (as the case may be).

The AER may only vary the determination if it has first consulted with the relevant parties and the arbitrator that made the determination.

The AER will vary the access arrangement, only in so far as necessary to correct the relevant error or deficiency.

APA and Tas Gas Retail agreed with proposed approach.

However, DBP contended that the power to correct errors should not be a matter for the AER. Instead a determination should only be varied by mutual consent other than in the case of obvious errors or slips in which case the determination can be amended by the arbitrator.

_________________________________

68 See, for example, the submissions of DBP, Epic, APA and Jemena.

34

3.2.3 Arbitration principles

In a similar manner to information disclosure, stakeholders expressed a range of views

about the arbitration principles and, in particular, the pricing principles. One of the more

fundamental issues that stakeholders debated, was the effect that the pricing principles

could have on the incentives parties have to negotiate and to reach a commercial

agreement, with:

some shippers stating that the likelihood of reaching a commercial agreement would

be higher if the pricing principles were well specified, because parties would have

greater certainty about the outcome;69 and

pipeline operators stating that the likelihood of reaching a commercial agreement

would be higher if the pricing principles were higher level, because it would create

more uncertainty about the arbitration outcome and therefore incentivise parties to

reach agreement.70

There was also significant debate about whether the pricing principles should be cost- or

price-based, as highlighted by Figure 3.1. Of the 23 stakeholders that expressed a view

on this issue:

18 stakeholders (11 shippers, one pipeline operator, the EUAA, MEU, Chemistry

Australia, APPEA, the ACCC and AER) supported the use of cost reflective pricing

principles. Of the 17 stakeholders:

o Nine stakeholders (eight shippers and Chemistry Australia) supported the adoption

of a high-level cost-based test (Option 2b).71

o Eight stakeholders (three shippers, the EUAA, the MEU, APPEA, the ACCC and

the AER), thought that the pricing principles should provide the arbitrator with

further guidance on how to apply the cost-based test (Option 3b).72 Some of the

matters that this group thought the arbitrator may require further guidance on

included asset valuation, the rate of return and depreciation methods, although the

main focus was around asset valuation, which stakeholders noted would be

contentious.73 The AER also noted in its submission that there may be value in

either:74

– having the GMRG (or another body) estimate the starting asset values for

pipelines and prescribing the starting values in the NGR; or

– including guidance on how the starting asset value is to be estimated in either

the NGR or in a binding guideline, which could draw on the existing

arrangements set out in the NGR.

_________________________________

69 See, for example, the submissions of Shell and EUAA. 70 See, for example, the submissions of DBP, AGN, APA and APGA. 71 See the submissions of Tas Gas Retail, Origin, Energy Australia, Tri Star, Senex, APLNG, Qenos, Hydro Tasmania

and Chemistry Australia. 72 See the submissions of ACCC, AER, Shell, CSR, MEU, EUAA, Central Petroleum and APPEA. 73 See the submissions of EUAA, AER, MEU, Shell, and ACCC. Origin also noted the value in developing a guideline on

asset valuation techniques. 74 AER, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.

35

While Origin supported Option 2b, it also noted that there may be value in a

guideline on asset valuation being developed:75

“A key point of contention with administering such an approach will be determining

an appropriate starting asset value for a pipeline. It is recognised that a prescriptive

approach to determining asset valuations may not be consistent with the overall

desire to deliver commercial, rather than regulated outcomes. But there may be

merit in at least preparing a guideline on asset valuation techniques to both assist

the arbitrator and provide some clarity to shippers/pipeline businesses as to what is

likely to be considered. With this in mind, the guideline could potentially be used to

provide a default case for asset valuations, though the arbitrator would have the

discretion to consider alternative approaches that may be better suited to the

circumstances of a particular pipeline.”

Five stakeholders (four pipeline operators and APGA) were opposed to the use of cost

reflective pricing principles and suggested an alternative approach should be used. Of

the five stakeholders:

o Three (Jemena, APA and APGA) suggested that the reasonableness of the

pipeline operator’s offer be carried out having regard to the prices payable for

comparable pipeline services (Option 2a). The key strengths of this option cited by

these stakeholders are that the assessment can be carried out relatively quickly

having recourse to factual information and it avoids the complexities that would be

associated with a cost-based test.76 Box 3.1 provides an overview of how Jemena

thought a price-based approach would work.

o Two (Epic and DBP) suggested the arbitrator be given broad discretion to

determine whether the pipeline operator’s offer is reasonable (Option 1).

Some pipeline operators also suggested that the arbitrator be required to have regard

to the shipper’s willingness or capacity to pay (or the value to the shipper).77

The pipeline operators that were opposed to cost-reflective pricing principles claimed it

was a “quasi regulatory” approach and did not reflect the commercial approach that the

new framework was intended to emulate. They also noted that applying this type of

principle would be complex, contentious and that it could have an adverse effect on

pipeline investment.78 A number of pipeline operators also noted that they would be

exposed to greater risk under this framework than they would be under regulation,

because they would not be able to have recourse to the limited merits review mechanism

and some of the other inflation and demand related safeguards they consider are

embodied in the NGR.79

_________________________________

75 Origin Energy, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 19 April 2017, p. 2.

76 See the submissions of Jemena, APA and APGA. 77 See, for example, the submissions of DBP and APA. 78 See, for example, the submissions of APGA, APA and Epic. 79 See, for example, the submissions of APA, Epic and Jemena.

36

Box 3.1: Jemena’s price-based proposal

In its submission, Jemena proposed the use of a ‘price-based’ approach to assessing the

reasonableness of a pipeline operator’s offer and submitted a letter from HoustonKemp in

support of this proposal.

Under this proposal, the arbitrator would be required to determine the appropriate price for the

services subject to arbitration, by reference to ‘prices paid’ for other services of a similar nature

and supplied under similar terms and conditions. Elaborating on this further, Jemena noted

that:80

“In making such a determination, the pricing principles should clarify that in comparing prices for services offered on the same or similar pipelines, the arbitrator may take into account:

• differences in the nature of the service being provided, and in the circumstances of the pipeline and shippers at the time those prices were struck;

• any evidence to the effect that a particular price may have been affected by substantial market power on the part of either the pipeline owner or the shipper; and

• in comparing prices for services offered on the same or other pipelines, the arbitrator may take into account that prices agreed between a pipeline and its foundation shippers at the time the pipeline was developed can be presumed not to have been affected by substantial market power on the part of either the pipeline owner or the shipper.

Further, in making a determination in relation to the price for derivative any/or ancillary services, the arbitrator may take into account:

• the opportunity cost or benefit associated with the service relative to the principal, forward haul pipeline service.

The reference to ‘prices paid’ in the proposed pricing principles above focuses the arbitrator’s assessment on factual evidence as to what shippers are actually paying for the same or similar transportation agreements. The arbitrator’s focus would therefore be on questions such as the weight to be given to various price observations, having regard to the degree of similarity of the service they represent.

A detailed analysis of expected future market supply and demand conditions to determine a true “market price” is likely to be impractical within the required arbitration timeframe. However, in the same way that the parties themselves will set their price expectations based on future demand and supply considerations as well as historical reference points, such factors may be borne in mind when assessing what weight to attach to the examples given.”

Jemena also provided an additional submission on how this test could be applied and noted that the arbitrator’s consideration would not be formulaic, but would take into account differences in factors such as the length of the contract, the flexibility requested by the shipper and the extent to which the service required an expansion and/or was required in a demanding time scale. Jemena also noted that the arbitrator would be able to consider the average price of similar services on regulated and unregulated pipelines and could “choose to give less weight to some of the available price information, where it considers that there is a reasonable basis to conclude that they may reflect market power”.81

Those stakeholders that supported the use of cost reflective pricing principles

acknowledged the complexities that would be associated with applying this type of

_________________________________

80 Jemena, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 26.

37

principle, but stated that it was the only way to pose a constraint on monopoly pricing. The

ACCC also noted that this test would result in more economically efficient outcomes,

consistent with the NGO.82 A number of stakeholders also pointed to the shortcomings

associated with the prices payable for comparable services test. APPEA and Shell, for

example, claimed that basing the arbitration on comparable prices would be problematic

given the limited competition and common ownership of pipelines. The EUAA also

claimed that if this alternative test was employed, shippers would not know if the prices

contained an element of monopoly rent. The EUAA added that “end users are not

interested in a low cost arbitration methodology that leaves them with a monopoly price

under their transport contract”.83

In relation to the specification of the cost-based test, Hydro Tasmania and Tas Gas Retail

noted that if the test was to be based on the ‘actual costs incurred by the pipeline

operator’ then it may result in unreasonable or anomalous outcomes in some

circumstances (e.g. if demand is falling and/or if a pipeline has redundant capital). CSR,

the EUAA and MEU also raised concerns about the potential for an ‘actual cost’ standard

to encourage inefficiency and suggested that the test be based on the efficient cost of

service provision or an industry best practice standard.

On the topic of derivative services, there was general support from shippers and pipeline

operators that separate principles should be included for these services.84

A number of stakeholders also suggested some refinements to the other guiding

principles that the arbitrator would be required to have regard to. For example:

The ACCC suggested the arbitrator be required to take into account the “value to

parties of a timely decision on the pricing of the relevant service for a particular period

of time” to properly recognise the commercial nature of the arbitration.85

CSR suggested that the arbitrator be required to have regard to ‘industry best practice’

in relation to costs, the rate of return and the pipeline’s “excess return” above the

weighted average cost of capital.86

The MEU suggested that the arbitrator’s assessment of the costs of providing services

be augmented by a comparison of prices of comparable pipelines to “ensure the cost

of service approach delivers efficient outcomes”.87

Tas Gas Retail suggested that the arbitrator be required to consider the “interests of

all persons that have rights to use the service (including downstream users) that have

made legitimate investments on the basis of reasonable price and access”.88

_________________________________

81 Jemena, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 15 May 2017, p. 5.

82 ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 18.

83 EUAA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 9.

84 See, for example, the submissions of APA, Jemena and EUAA. 85 ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April

2017, p. 18. 86 CSR, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,

p. 1. 87 MEU, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,

p. 14. 88 Tas Gas Retail, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13

April 2017, p. 12.

38

Hydro Tasmania suggested that when assessing the reasonableness of an offer, the

arbitrator should have regard to the prices that would prevail in a workably competitive

market, the prices paid historically on that pipeline, the price and non-price terms and

conditions on other pipelines and the actual cost to the pipeline (including the

opportunity cost) of moving from standard terms and conditions.89

APA, DBP, Epic, Jemena and APGA suggested that the arbitrator be required to

consider the “value of the service to the shipper” and supported the proposal that

consideration be given to the prices struck in foundation contracts. APA, APGA, Epic

and Jemena also suggested that the following principles be excluded from the list of

other guiding principles:

o the value to the provider of extensions including expansions of capacity and

expansions of geographical reach whose cost is borne by someone else; and

o the value to the provider of interconnections to the facility whose cost is borne by

someone else.

3.2.4 Exemptions

The Options Paper canvassed a number of potential exemptions from the information

disclosure requirements and from the arbitration mechanism. With the exception of Shell

and the MEU, who did not think there was a need for exemptions, most stakeholders

indicated that some types of pipelines should be exempt. However, stakeholders had

mixed views on type of exemptions that should be available under the Rules.

With regard to the information disclosure requirements, stakeholders noted that

exemptions may be appropriate if the pipeline is:

not providing third party access (i.e. the service provider and shipper are related

parties): This exemption category was supported by APLNG, DBP, Origin, Tas Gas

Retail and the EUAA. The ACCC and the AER also supported this exemption

category, although they suggested it should be restricted to pipelines that do not have

any spare capacity.

servicing a single shipper: This exemption category was supported by APLNG,

DBP, Tas Gas Retail and the EUAA. The ACCC and the AER also supported this

exemption category, although they suggested it should be restricted to pipelines that

do not have any spare capacity.

subject to a 15 year no coverage decision: This exemption category was supported

by APLNG, Gladstone LNG (GLNG) and DBP.

a distribution pipeline: This exemption category was supported by DBP, ENA, Tas

Gas Retail and Australian Gas Networks (AGN).

a small pipeline: This exemption category was supported by AGN, APGA, ENA, Epic,

Origin, Tas Gas Retail, the EUAA, the ACCC and the AER, but opposed by

EnergyAustralia. Amongst those stakeholders that agreed with this exemption

category, three suggested that ‘small’ should be defined using a 30 TJ/day nameplate

_________________________________

89 Hydro Tasmania, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.

39

capacity rating,90 one suggested it should be based on a 20 TJ/day capacity rating and

the remainder agreed with a 10 TJ/day nameplate capacity rating.

constructed following a competitive process: This exemption category was

supported by Jemena.

subject to an access arrangement agreed with a State or Territory: This

exemption category was supported by Jemena.

The ACCC also suggested that consideration be given to an information disclosure rule

that states that if a pipeline operator is required to publish information on at least one

pipeline it owns, or has an interest in, the operator should be required to report on all of its

pipelines (regardless of whether an exemption applies). The ACCC stated that this could

overcome cost shifting between exempt and non-exempt pipelines.

Some stakeholders, including the ACCC, recommended the same exemptions apply in

relation to the arbitration mechanism as the information disclosure requirements, while

others stated that exemptions from arbitration should be more limited. For example:

The ACCC suggested that the scope of exemptions should be limited to:

o pipelines servicing a single shipper if there is no capacity for third parties;

o pipelines that do not provide third party access if there is no capacity for third

parties; and

o services and prices contracted for under foundation contracts on greenfield

pipelines.

Epic and Tas Gas Retail supported an exemption for pipelines not providing third party

access.

APA stated that dedicated pipelines servicing a single shipper, such as connection

assets, should not be subject to any type of requirement given they do not provide

third party access to other shippers. APA went on to note that the application of the

framework to these types of pipelines will not benefit commercial negotiations. GLNG

argued that single shipper pipelines should be exempt regardless of whether there is

capacity available on the pipeline and/or if it was purposely built for use by a single

shipper.

A number of pipeline operators and representative bodies argued that small

transmission pipelines and distribution pipelines should be exempt.91

o APGA cautioned imposing information disclosure and arbitration requirements on

small distribution pipelines and some transmission pipelines, given the increased

costs likely to be involved for these ‘low value assets’. APGA went on to argue that

the availability of other energy sources in the case of non-scheme distribution

networks, and ‘the fact small non-scheme transmission pipelines can be

considered akin to distribution trunk mains, with one or two shippers at most’

constrains the market power of these types of pipelines.

o Energy Networks Australia (ENA) claimed that distribution pipelines should be

exempt given their lack of market power, limited shippers and customers, and that

_________________________________

90 See the submissions of AGN, APGA and ENA. 91 See the submissions of AGN, Tas Gas Networks, APGA and ENA.

40

costs and resources associated with the arbitration process are unlikely to be

commensurate with the value of services or contracts being considered. ENA

noted that the costs associated with arbitration are likely to outweigh the benefits.

o Tas Gas Networks also indicated that the cost of compliance will likely outweigh

the benefits and the cost of arbitration could be significant to a business the size of

Tas Gas Networks. Given the small size of the distribution network, small number

of customers, low level of demand for gas and limited shippers, Tas Gas Networks

indicated that the concerns identified in the Examination are unlikely to arise.

Further, Tas Gas Networks stated that the costs imposed would increase the cost

of services in a market where demand for gas is already declining, potentially

affecting its ability to compete with alternate energy sources.

The AER, on the other hand, thought that distribution pipelines should not be exempt.

Epic also suggested exemptions be available if shippers have countervailing market

power.

Owners of greenfield pipelines subject to a 15 year no-coverage determination stated

that these pipelines should to be exempt, including APLNG and GLNG.

Jemena also indicated that exemptions should apply to greenfield pipelines developed

through a competitive process or to pipelines that are subject to access arrangements

by way of binding agreements with the relevant State or Territory Government.

With the exception of one or two stakeholders, 92 there was broad agreement that the AER

was the appropriate body to oversee the exemption framework.

3.2.5 Implementation timeframes

During the roundtable discussions and in subsequent bilateral meetings, most

stakeholders indicated their support for the framework to commence as soon as

practically possible without jeopardising the quality of the design process.

In relation to the commencement of information disclosure requirements, Jemena

supported the 1 January 2018 timeline for the publication of the base level of information

and tariffs, with additional information to be published once the guideline has been

finalised. APA, on the other hand, suggested a 1 February 2018 timeline because it

believes 1 January deadlines are difficult to implement in practice and are unlikely to

deliver any material benefit over a 1 February 2018 deadline.

In relation to the publication of financial reports, there was broad support for the GMRG’s

proposal to accelerate the development of the guideline for financial reporting with the

assistance of a suitably qualified consulting firm.

3.2.6 Transitional arrangements

EnergyAustralia and Tas Gas Retail were the only stakeholders to provide feedback on

the transitional arrangements proposed by the GMRG in the Options Paper.

_________________________________

92 See the submissions of ENA and DBP.

41

EnergyAustralia outlined its concerns with a new arbitration process being available in the

latter part of this year without the benefit of the information disclosure obligations.

EnergyAustralia added that given renegotiations may occur during that period, some

thought needs to be given to ensuring that the benefits of the framework are available

from the start date. Specifically, EnergyAustralia noted that: 93

“…it may be an option to require that in the case of any failed negotiations, the previous

pricing regime would apply as an interim arrangement until such time as an arbitration process

based on the full information disclosure obligations could occur. In essence there would be a 6

month period that an existing arrangement would apply until the full implementation of the new

information and arbitration mechanism was in place.”

Tas Gas Retail also raised concerns about this issue and noted the framework should

commence as soon as possible to provide a credible threat to pipeline operators who are

negotiating GTAs in 2017. Tas Gas Retail also suggested that the arbitration framework

should apply retrospectively and that it: 94

“…be available to shippers from 1 August 2017 and that shippers who contend that a

pipeline operator has inappropriately used their market power for pricing and terms and

conditions for new gas transportation agreement or an amendment to an existing gas

transportation agreement from May 2017 be able to access arbitration for a retrospective

decision.”

Tas Gas Retail recommended that the transitional arrangements allow shippers to apply

for arbitration where it is demonstrated that they have complied with a pipeline operator’s

negotiation framework, or if there is no negotiation framework, that shippers be able to

apply to access arbitration on the basis of demonstrated negotiations or attempts to

negotiate made in good faith. If agreement cannot be reached before the expiry of an

existing transportation agreement, Tas Gas Retail recommended that: 95

“…shippers are able to apply for a determination regarding the continuance of services at

historic rates until a new gas transportation agreement is entered into. With relevant prices

being backdated to the commencement date.”

Tas Gas Retail proposed that the AER oversee the transitional arrangements (i.e. for

granting access approval for arbitration and setting out the terms for supply and price

continuance). During the transitional period, Tas Gas Retail also indicated their support for

the arbitrator to have the power to obtain additional confidential information if required to

make a determination.

3.2.7 Alternative model proposed by APA

Following the completion of the formal consultation period, the GMRG received an

alternative proposal from APA, which differed substantially from the options contained in

the GMRG’s Options Paper. This proposal was provided to the GMRG on an informal

basis.

_________________________________

93 EnergyAustralia, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Implementation Options Paper, 19 April 2017, p. 2.

94 Tas Gas Retail, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Implementation Options Paper, 13 April 2017, p. 14.

95 Ibid.

42

The objective of the alternative model was described by APA as being to “get more

commercially viable deals done, and maximise investment across the supply chain” and to

“incentivise truth telling and information provision so deals get done so there is no need to

go to arbitration”. Under the proposed model, the prices could fall anywhere within the

“Deal Zone”, which was described by APA as being the range established by:

the floor price, which was defined by APA as the ‘retention value for the pipeliner’

(described as the higher of the opportunity cost and the incremental cost); and

the ceiling price, which was defined by APA as the ‘walk away value to for the shipper’

(described as being the lower of the net incremental revenue the shipper expects to

earn from its project and the price of any competitive alternatives available to the

shipper).

APA also noted that a critical pre-condition for this model was for pipeline operators to be

able to engage in price discrimination.

To give effect to this model, APA proposed a three-phase process, under which the

following would occur:

In phase one, the pipeline operator would disclose base level information, the standing

offer and supporting pricing methodology and parties would negotiate.

In phase two, the parties would exchange detailed information justifying the floor and

ceiling price and the “basis on respective share of deal value”. If the negotiations are

unsuccessful, each party would be required to submit their final offers.

In phase three, the arbitrator would determine the final price within the ‘Deal Zone’,

with the “sharing of deal value to be based on factors including investment made,

capex recovery, incentives for future investment and risk”. The arbitration would be ‘on

the papers’ exchanged in Phase 2.

A diagram setting out how APA’s proposed model is intended to operate is set out in

Appendix C.

Consultation on the alternative model

The GMRG consulted with range of shippers (large users, retailers, producers and

explorers), pipeline operators, the ACCC and AER staff on the alternative model. The

overwhelming feedback from these stakeholders was that it would not achieve the stated

objective of the new framework, which is to:

reduce the imbalance in bargaining power that shippers can face; and

pose a constraint on the exercise of market power by pipeline operators.

Further, shippers indicated the model would likely facilitate, rather than eliminate, the

exercise of market power by pipelines, allowing pipeline operators to continue to extract

economic rents from shippers and to do so in a more informed manner. Shippers also

noted that where it is in their interests to reveal their walk away price then they will do so,

but they should not be compelled to do so. A number of shippers also raised concerns

about the proposal to allow pipeline operators to engage in price discrimination. In short,

all of the stakeholders that were spoken to reinforced their desire to have a cost-based

43

approach to the arbitration pricing principles and to continue to progress the options

presented in the GMRG’s Options Paper.

While other pipeline operators agreed with certain elements of APA’s model (for example,

that shippers provide information to the pipeline operator during negotiation to justify their

position) they indicated that they do not agree with the model in its entirety.

Having tested the alternative model with stakeholders, the GMRG is not satisfied that the

proposal would achieve the stated objectives of the new framework and does not

therefore advocate its use. The main concern the GMRG has with the model is that rather

than posing a constraint on the exercise of market power and the incidence of monopoly

pricing, it could further entrench this type of behaviour, which would have a detrimental

effect on economic efficiency and consumers more generally, contrary to the NGO.

Setting this issue aside, the GMRG does think that some of the process and information

disclosure aspects of this proposal have merit because they will facilitate more timely and

effective negotiations and arbitrations. For example, the GMRG believes there would be

value in:

adopting a staged approach to information provision, the negotiation and arbitration

processes;

requiring the arbitration to be ‘on the papers’ (subject to some caveats);

requiring the arbitrator’s decision to fall within the bounds established by the pipeline

operator’s final offer and the shipper’s counter offer for price disputes; and

requiring pipeline operators to publish more information on how the pricing

methodology has been used to calculate the standing offer.

3.3 GMRG’s consideration of stakeholder feedback

The GMRG has considered the issues raised by stakeholders when forming its final

recommendations on the form that the new framework should take. In doing so, the

GMRG has considered the objectives of the new framework outlined in Chapter 2. The

remainder of this section sets out the GMRG’s views on the issues raised by stakeholders

in relation to the information disclosure requirements, the arbitration mechanism, the

arbitration principles and exemptions. Further detail on the GMRG’s final

recommendations on these elements of the new framework and how the new framework

is intended to operate can be found in Chapter 4, while further detail on the transitional

arrangements can be found in Chapter 5.

3.3.1 Information disclosure

The purpose of the information disclosure requirements is to provide greater disclosure

and transparency of the information shippers require when:

considering whether to seek access to a pipeline; and

assessing the reasonableness of a pipeline operator’s offer.

44

As a number of stakeholders have pointed out, the information disclosure requirements

should be aligned with the arbitration principles and ensure that shippers have access to

the same information that an arbitrator would be expected to consider when applying the

arbitration principles. This is of particular importance if the arbitration is to be on the

papers, as a number of stakeholders have suggested and the GMRG is now

recommending (see section 3.3.2). The GMRG has therefore given further thought to the

information that should be made available to shippers. In keeping with the staged

approach proposed by DBP, APA, MEU and the EUAA, the GMRG has considered the

information that non-scheme pipeline operators should:

publish on an ongoing basis so that shippers can determine whether to seek access

(Stage 1); and

provide to shippers during the commercial negotiation stage (Stage 2).

The GMRG has also had regard to the form that the arbitration principles will take, as set

out in section 3.3.3.

In terms of the information shippers require when considering whether to seek access, the

GMRG agrees with stakeholders that pipeline operators should be required to publish on

their websites on an ongoing basis the base level of information (which, amongst other

things, includes information on the services provided by the pipeline operator and the

standing offers96 for those services) set out in Table 3.1. The publication of this

information will reduce search and transaction costs currently associated with shippers

trying to understand the services available on each pipeline and the likely prices

associated with seeking access to these services. It will also allow shippers to compare

standing offers across pipelines.

As to the information that shippers require when considering the reasonableness of an

offer, the GMRG can see merit in requiring pipeline operators to:

publish the following information on their websites on an ongoing basis to enable

shippers to conduct a high-level assessment of the reasonableness of standing offers:

o independently verified financial reports (prepared on an individual pipeline basis)

that will be prepared in accordance with a binding guideline and a breakdown of

demand (by service);

o the weighted average price received by the pipeline operator for each of the

services it provides (to maintain confidentiality, this requirement would only apply if

there are more than two shippers);and

o the methodology and inputs used in the calculation of the standing offers; and

provide a shipper that is seeking access with information on the cost of providing the

service it is seeking during the negotiation stage (Stage 2).

In relation to the weighted average price, the GMRG recognises that the value of this type

of information is somewhat limited in the absence of transparency around the terms and

conditions associated with prices. It does, however, provide some transparency of the

_________________________________

96 The term ‘standing offer’ is used in this context to refer to an offer to supply a standard service at a pre-determined price under set terms and conditions. As a shipper’s service requirements may not perfectly align with the standard service, there may be scope for further negotiation on the price and non-price terms and conditions of access.

45

prices actually being paid by existing shippers (while also protecting the confidentiality of

individual shippers) and may provide a means by which shippers can quickly compare the

pipeline operator’s standing offers with the prices being paid by other shippers for

equivalent services. The provision of this information is supported by the majority of

pipeline operators and a number of shippers and in the GMRG’s view is a low-cost, no

regrets option.

In relation to the financial reports, the GMRG remains of the view that there is value in

pipeline operators preparing and publishing accounts on a pipeline by pipeline basis

because while this information could not be used to carry out a detailed bottom-up cost of

service analysis, it would provide shippers with a good indication of the costs incurred,

revenue earned and return on assets generated by the pipeline. It could therefore be used

by shippers to carry out a high-level assessment of the cost reflectivity of the standing

offers. Even if the shipper does not use the information in this way, the publication of this

information can be expected to impose greater discipline on pipeline operators when

setting prices, because it will be clearer to market participants and policy makers if the

pipeline is generating excessive returns.

As outlined in the Options Paper the GMRG intends to develop a binding guideline for the

preparation of financial reports, in conjunction with the AER and a consulting firm with

relevant expertise in financial reporting requirements. The guideline will deal with many of

the issues that stakeholders have raised, including specifying how the reports are to be

prepared, the information to be disclosed and the level of detail required in the notes to

the financial statements regarding matters such as asset valuation, depreciation, cost

allocation methodologies and other matters identified by stakeholders. As part of this

process the GMRG will also consider the concerns raised by the AER and the ACCC

about asset revaluations. It is also worth noting that the GMRG’s current expectation is

that if an arbitrator determines the value of a pipeline then the pipeline operator would be

required to publish this information in its financial reports.

Consistent with the views expressed by most stakeholders, the GMRG is also

recommending that:

a reporting standard be included in the initial Rules, which, at a minimum, will state

that the information provided by the pipeline operator must not be knowingly false or

misleading; and

the disclosure requirements be classified as civil penalty provisions97 but not conduct

provisions.

The GMRG understands that pipeline operators will incur costs in providing this

information, but it expects the benefits associated with the reduction in information

asymmetries (i.e. more timely and effective negotiations and reduced risk of a dispute) to

outweigh the costs. The GMRG is also of the view that this level of disclosure is targeted

and proportionate to the information asymmetries it is intended to address.

As to the suggestion that pipeline operators publish the prices payable by individual

shippers (or provide this information on a confidential basis to access seekers), the

_________________________________

97 Classifying these provisions as civil penalty provisions means that if pipeline operators do not comply with the obligations the AER will be able to issue an infringement notice to the pipeline operator, or institute civil proceedings in the Federal Court seeking an order that the penalty be paid.

46

GMRG is not convinced that the publication of this information at this point in time would

help to inform a shipper’s assessment of the reasonableness of an offer, given the

genesis for this new framework (i.e. concerns about monopoly pricing) (see Chapter 2).

That is not to say that over time this information may not have more informational power,

or that there may not be a broader benefit to the market of publishing this information.

However, the GMRG is not satisfied that the publication of this information, for the

purposes of assessing the reasonableness of a pipeline operator's offer, will yield

sufficient benefits under this framework to outweigh the costs at this point in time. The

GMRG intends, however, to consider this issue further with the ACCC as part of the

review of market transparency measures (See Appendix B).

The GMRG is also not satisfied of the need to require shippers to provide pipeline

operators with information on their willingness or capacity to pay, as some pipeline

operators have proposed, and notes that if this was introduced into the framework then it

could facilitate, rather than eliminate, the exercise of market power by pipelines. That is

not to say that the framework should prevent shippers from providing this type of

information to pipeline operators during negotiations if they wish to, because there may be

cases where it is in the interest of the shipper to do so (for example, if a shipper had a

viable bypass option that is cheaper than pipeline operator’s offer). The decision to reveal

this information should, however, be up to the shipper, rather than being mandated.

Finally, the GMRG notes that some of the other information gaps that have been identified

through this process by, for example, Qenos, could be considered by the AEMC as part of

the Bulletin Board rule change request that it has recently received from Council (see

Appendix B).

3.3.2 Arbitration mechanism

The purpose of the arbitration mechanism is to pose a constraint on the exercise of

market power during negotiations, by providing a credible threat of intervention.

Reflecting the widespread stakeholder support for Option 3, the GMRG is of the view that

conventional arbitration with adequate procedural protections and partial transparency be

implemented. However, the GMRG agrees with stakeholders that there are elements of

final offer arbitration (FOA) that are appealing, including limiting the arbitrator’s bounds to

the pipeline operator’s final offer and the shipper’s counter offer and the simplicity and

timeliness of such a mechanism.

The GMRG also agrees with the suggestion that the arbitration should be conducted ‘on

the papers’ (subject to some caveats) and a number of other refinements to the arbitration

mechanism, to facilitate the timely resolution of an arbitration.

As highlighted in section 3.2.2, the key areas of debate between stakeholders on the

arbitration mechanism were primarily in relation to:

access proposals;

the binding nature of determinations; and

the role of the AER.

47

Some questions were also raised about joining proceedings.

Access proposals

As reflected in the Options Paper, the GMRG was initially hesitant to prescribe in the

Rules how an access proposal should be made given that the circumstances of parties

and pipeline operators will vary considerably. However, a number of stakeholders

indicated during the consultation that leaving the negotiation framework (including how an

access request must be made and responded to) to pipeline operators to determine may

risk it being gamed. For example, a pipeline operator’s negotiation framework may provide

for unreasonably long timeframes in which to respond to even simple access requests.

While the GMRG is of the view that the Rules need to provide for some flexibility to allow

for different types of access requests to be effectively dealt with, it does think there is

benefit in providing some clarity to the process for making an initial access request with

further detail to be required to be outlined in a pipeline operator’s access policy. This issue

is discussed further at section 4.1.2.

Binding nature of the determination

While pipeline operators strongly argued that a shipper that is party to an access

determination should be bound to enter into an access contract, the GMRG is of the view

that a shipper should not be forced into doing so, given the potential for the determination

not to be economically viable for the shipper. While shippers will not be bound to accept

the determination, the pipeline operator will be. This is intended to provide pipeline

operators a strong incentive to effectively negotiate with shippers and come to commercial

solutions, avoiding arbitration altogether.

The GMRG recognises that allowing shippers to walk away in the event they are

unsatisfied with the determination limits the risk faced by a shipper during arbitration,

potentially incentivising shippers to go to arbitration. Accordingly, the GMRG has

considered various design components that could mitigate this problem and has amended

the design to:

allow the arbitrator to take into account whether a shipper chooses to seek access

when apportioning the costs of the arbitration; and

prevent a shipper from seeking arbitration for a substantially similar service for one

year.

In the GMRG’s view, these measures should reduce the risks raised by pipeline

operators.

Role to be played by the AER

The AER will play an important role in relation to the arbitration mechanism, both as the

scheme administrator and the regulator. In its role as scheme administrator, the AER will

provide oversight and administration of the arbitration framework in accordance with the

Amendment Bill. In its role as regulator, the AER will be responsible for granting

exemptions, compliance and enforcement.

The GMRG is of the view that the arbitrator should be permitted to seek administrative

support from the AER in undertaking the arbitration. Further, the GMRG is of the view that

48

the AER, in its role as scheme administrator, should develop and publish on its website a

non-binding arbitration guide providing procedural guidance to an arbitrator and potential

parties to an arbitration. This recognises that the AER has administrative oversight of the

arbitration mechanism and should help ensure potential parties and arbitrators understand

the procedural requirements.

In relation to whether the AER could provide the arbitrator with technical support, the

GMRG has given further thought to this issue and is of the view that it would be more

appropriate for the arbitrator to seek the assistance of an independent expert if it requires

assistance during an arbitration. One of the main advantages of this approach is that the

AER would not have to keep resources on standby in the event an arbitration is called. It

will also mean there is no confusion about the AER’s role as scheme administrator.

Joining arbitrations

A number of stakeholders questioned whether the arbitration mechanism would provide

for joint arbitrations. APPEA, for example, noted that parties seeking to ship gas through

multiple jurisdictions often have to enter into transportation agreements with at least two

transporters and joint arbitration may be a means of dealing with a scenario where there

are matters that need to go to arbitration on both pipelines.

Under the Amendment Bill, the AER has the power to join parties if it is of the opinion that

the resolution of the access dispute may involve requiring another person to do something

and that it is appropriate that the person be joined as a party.98 While recognising that joint

arbitrations could provide efficiencies for shippers (whether pipeline operators or shippers

are joined), the GMRG is of the view that the appropriateness of joining parties is complex

and requires further consideration, particularly in relation to how confidentiality concerns

would be overcome if different pipeline operators or shippers were permitted to be joined

to a dispute. The likelihood of arbitrations involving a single pipeline operator and multiple

shippers being capable of being joined is also likely to be limited, given the majority of

GTAs do not expire at the same time.

For these reasons, the GMRG has decided not to make any provision in the Rules

regarding joining parties to a dispute. The appropriateness of joining parties could be

further considered during the two-year review of the framework by SCO.

3.3.3 Arbitration principles

The arbitration principles are a critical element of the new framework, because they

establish the basis on which shippers should expect to be able to access the services

provided by non-scheme pipelines. Under the proposed framework, the arbitration

principles will consist of:

pricing principles, which will apply to firm transportation services, augmentations,

ancillary services and derivative services;

non-price principles, which will apply if the dispute relates to the non-price terms and

conditions; and

_________________________________

98 National Gas (South Australia) (Pipelines Access—Arbitration) Amendment Bill 2017, section 216I.

49

other guiding principles, that in a pricing dispute will be subordinate to the pricing

principles but in other disputes will be the only principles the arbitrator is required to

consider.

Pricing principles

As the discussion in section 3.2.3 highlights, there was considerable debate amongst

stakeholders about whether:

the arbitrator should have broad discretion, or should be required to apply specific

pricing principles when assessing the reasonableness of an offer;

the pricing principles should require the arbitrator to assess the reasonableness of the

pipeline operator’s offer having regard to:

o the prices charged by the pipeline or other pipelines for comparable services; or

o the cost of providing the service, including a commercial rate of return that reflects

the risks associated with providing the service; and

the level of guidance that should be provided to the arbitrator in the principles.

On the first of these matters, the GMRG is of the view that providing the arbitrator with

broad discretion would not provide for an effective or efficient manner of resolving

disputes and undermine the effectiveness of the intervention. The GMRG is therefore of

the view that the arbitrator should be provided with some guidance on the test that it is to

apply when assessing the reasonableness of a pipeline operator’s offer.

As to the form that test takes, it is worth reiterating that the objective of the new framework

is to facilitate access on reasonable terms to the services provided by non-scheme

pipelines, where the term ‘reasonable’ means at prices and on terms and conditions that,

so far as practical, reflect the outcomes of a workably competitive market. In a workably

competitive market, rivalry between competing firms can be expected in the longer-run to

drive prices down to a cost reflective level, where firms are covering their costs plus a rate

of return that reflects the risk faced by the firm.

If the services offered by non-scheme pipelines were provided in a workably competitive

market, then the prices payable by shippers for these services could be relied upon to

assess whether the price offered by a pipeline operator is reasonable. Setting aside

greenfields pipelines developed following a competitive process, the services offered by

non-scheme pipelines are in most cases not subject to effective competition. The prices

charged for these services cannot therefore be relied upon by shippers or an arbitrator to

determine whether an offer is reasonable, as highlighted by the ACCC’s Inquiry and

analysis carried out by JP Morgan as part of the Examination (see section 2.1).

The other concern the GMRG has with this option is that an arbitrator is likely to face

some difficulties establishing a set of comparable set of contracts that it can assess the

reasonableness of an offer against given the bespoke nature of contract terms and

circumstances surrounding contracts. While APA and Jemena have sought to downplay

this issue, the transportation charges cited in the ACCC's Inquiry highlights the range of

50

prices that shippers are currently paying on some pipelines. For example, shippers on

the:99

Queensland Gas Pipeline were paying $0.71/GJ-$1.23/GJ for firm transportation

services in 2015;

Tasmanian Gas Pipeline were paying $1.91/GJ-$3.38/GJ for firm transportation

services in 2015; and

QSN Link-South West Queensland Pipeline in an easterly direction were paying

$1.16/GJ-$1.36/GJ, while in a westerly direction were paying $0.87/GJ-$1.23/GJ in

2015.

While the GMRG understands from analysis provided by Jemena that there may be

genuine reasons for these differences, the breadth of the ranges outlined above highlight

the difficulties an arbitrator would face if it had to rely on the prices struck in other

contracts to assess the reasonableness of an offer. The GMRG does not therefore

support the adoption of the price-based pricing principles proposed by APA, Jemena and

APGA.

In the GMRG’s view, in markets where workable competition is absent, the most

appropriate basis for testing whether the price offered by a pipeline operator is reasonable

is to have regard to the cost of providing the service, which should include a commercial

rate of return that reflects the risks associated with providing the service. Apart from

emulating what would occur in a workably competitive market, the use of this test will

ensure that pipeline operators can earn a commercial rate of return that reflects the risks

of providing the services, which should preserve incentives for investment and innovation

in pipelines. The GMRG is therefore of the view that the new framework should include

cost reflective pricing principles.

In the Options Paper, it was suggested that a cost-based pricing principle could require

the arbitrator to have regard to the costs the pipeline operator “actually incurs in providing

the service (including a commercial rate of return)”. The GMRG understands from the

feedback provided by stakeholders that the use of the term “actually incurs” may

encourage inefficient expenditure, or have some other unintended consequences. The

GMRG is therefore recommending that this term be removed and that the pricing

principles just refer to the ‘cost of providing the service, including a commercial rate of

return that reflects the risk of providing the service’.

The GMRG understands that there are likely to be some complexities associated with

applying a cost-based test, particularly in relation to establishing the value of the asset

base. The GMRG is, however, reluctant to include prescriptive rules on how this and

other elements of the cost of providing the service are to be determined, because it will

reduce the flexibility the arbitrator has to consider the issues before it. Having said that,

the GMRG does think there is merit in providing some additional direction on asset

valuation in the pricing principles. Specifically, the GMRG believes there would be value in

stating that the arbitrator can have regard to any asset valuation techniques it considers

are consistent with the workably competitive market objective, including, for the avoidance

of doubt, those that allow past recoveries of capital to be taken into account.

_________________________________

99 ACCC, Inquiry into the East Coast Gas Market Report, April 2016, p 17.

51

In relation to derivative services, which are services that utilise the capacity of the pipeline

but are priced as a multiple of, or discount to, the firm transportation service, the GMRG

remains of the view that separate pricing principles should be applied to these services

and take into account the opportunity cost (benefit) of the service relative to the firm

transportation service, having regard to any effect on cost and / or capacity. In the Options

Paper, it was noted that the services included in this category could, for example, include

backhaul services and park and loan services. While the GMRG is satisfied that park and

loan services fall into this category, it understands that backhaul services do not actually

involve the use of the pipeline’s capacity and should be viewed as ancillary services. The

GMRG would therefore expect the price of this service to be determined using the cost-

reflective pricing principles outlined above.

Non-price principles

If a dispute relates to the non-price terms and conditions offered by a pipeline operator,

then, in keeping with the objectives set out in Chapter 2, the GMRG believes the arbitrator

should be required to assess the reasonableness of the pipeline’s offer having regard, as

far as practicable, to what would likely prevail in a workably competitive market.

Other guiding principles

In the Options Paper, the GMRG suggested that the pricing principles be supplemented

by the following principles (see Table 3.1).

(a) the legitimate business interests of the pipeline operator, and the pipeline operator’s

investment in the pipeline;

(b) the interests of all persons who have rights to use the service;

(c) the value to the provider of extensions whose cost is borne by someone else;

(d) the value to the provider of interconnections to the facility whose cost is borne by

someone else;

(e) the operational and technical requirements necessary for the safe and reliable

operation of the facility; and

(f) the level of competition for the provision of the service and the price and other terms

and conditions of any competing services

The GMRG has considered the feedback provided by some pipeline operators about the

principles in (c) and (d) and, in particular, the suggestion that they may distort investment

in the pipelines. However, this interpretation appears to be predicated on a

misunderstanding of what these principles are intended to achieve. As the ACCC noted

in its Services Sydney and Sydney Water Arbitration decision these two principles are

intended to deal with cases where an extension or interconnection is built by another

party and the operator derives a benefit from the investment.100 In these cases, the

principles would allow the price of access to be reduced to reflect the value the pipeline

operator derives from these investments.101 In the GMRG’s view these are legitimate

_________________________________

100 ACCC, Arbitration Report: Access dispute between Services Sydney Pty Ltd and Sydney Water Corporation, 10 July 2007, p. 22.

101 The ACCC’s Arbitration Report, including the final determination and statement of reasons, is available at: http://registers.accc.gov.au/content/index.phtml/itemId/867741.

52

factors to take into account and should not distort the pipeline operator’s investment in

the pipeline. The GMRG is therefore recommending these principles be retained.

The GMRG has also considered the suggestion by other stakeholders that the principles

should include some other factors. However, the GMRG does not consider it necessary to

include these other principles, because in its view they are either:

inconsistent with the overarching objective of the new framework (e.g. the proposal by

pipeline operators to include the ‘value to the shipper’ in the principles); or

are already reflected in the pricing principles, the other guiding principles, the

overarching objective or other elements of the framework.102

Finally, the GMRG has considered whether principle (f), which does not form part of the

principles in the Competition Principles Agreement (CPA) and was proposed in the

Options Paper, should be retained. On reflection, it is not clear what role this principle

could play in pricing disputes that are focused on whether the price is cost-reflective. The

GMRG is therefore no longer recommending the inclusion of this principle.

3.3.4 Exemptions

The GMRG has considered the issues raised by stakeholders about exemptions and

notes the following:

Pipelines not providing third party access: In the GMRG’s view an exemption from

the information disclosure and arbitration mechanism is appropriate in those cases

where the pipeline operator is not providing third party access (i.e. the service provider

and shipper are related parties), because in its view a third party shipper wanting

access to such a pipeline should be required to apply for coverage. While coverage is

often thought about as the test for regulation, it is also the process by which third

parties can try and obtain access to facilities that would not otherwise provide that

access. In the GMRG’s view this is still the appropriate means by which third party

access to a pipeline that is not already providing that access should be sought. Some

examples of the types of pipelines that could fall into this category include:

o pipelines servicing gas fired generators, where the pipeline operator and gas fired

generator are related parties; and

o pipelines servicing LNG facilities, where the pipeline operator and LNG proponents

are related parties.

Single shipper pipelines: In the GMRG’s view the costs of requiring the operators of

single shipper pipelines to publish the Stage 1 information will outweigh the benefits,

so it is recommending an exemption from the information disclosure requirements in

this stage. The operators of these pipelines will, however, still be required to disclose

information if another shipper approaches it seeking access, or if the existing shipper’s

contract expires or it wants to add another service. The operators of these pipelines

will also be subject to the arbitration mechanism.

_________________________________

102 For example, the GMRG has sought to address the concerns about the timely resolution of decisions through the information disclosure requirements and the processes leading up to arbitration. The replacement of the term ‘actual cost’ with ‘cost’ and the emphasis placed on workably competitive markets addresses the gaps raised by CSR and the MEU. In relation to Tas Gas Retail’s proposal, the GMRG believes that this is also effectively provided for by requiring access on reasonable terms, which is to reflect what would occur in a workably competitive market.

53

Pipelines subject to a 15 year no coverage decision: The GMRG has considered

the suggestion by some stakeholders that pipelines subject to a 15 year no coverage

decision should be exempt from this new framework, but is of the view that the new

framework should still apply to these pipelines because new shippers and existing

shippers that want to negotiate access to new services are likely to face the same

imbalance in bargaining power as shippers on other pipelines. While a specific

exemption would not be available to pipelines subject to a 15-year no-coverage

determination, the GMRG expects the majority of pipelines subject to a 15-year no-

coverage determination to be able to seek an exemption on the basis that the pipeline

does not provide third party access. In this situation, arbitration is highly unlikely to be

relied upon. Further, most pipelines subject to a no-coverage determination are single-

shipper pipelines and may be able to obtain an exemption from the information

disclosure requirements on that basis.

Small pipelines: The GMRG agrees with those stakeholders that indicated their

support for providing an exemption from information disclosure for small pipelines

where the costs of information disclosure are likely to outweigh the benefits. In the

case of the base level information and weighted average price per service, the GMRG

expects the cost of this disclosure to be relatively low and is therefore recommending

that this information be published. In the case of the financial information, however,

the GMRG recognises that the costs of providing this information could outweigh the

benefits. It is therefore only proposing to provide an exemption from the publication of

financial reports. Like single shipper pipelines, the operators of these pipelines would

still be required to provide shippers with information in stage 2 if a request for access

is made and will still be subject to the arbitration mechanism.

In relation to the minimum threshold, while some pipeline operators suggested the

threshold should be 20TJ/day or 30 TJ/day, a number of shippers, the AER and the

ACCC supported the 10TJ/day threshold put forward in the Options Paper. The

GMRG is of the view that the reporting threshold should be aligned with the Bulletin

Board reporting threshold. In Western Australia, the minimum reporting threshold is

currently 10 TJ/day (nameplate capacity), while in eastern Australia it is 20 TJ/day but

under the proposed rule change (see Appendix B) would be reduced to 10 TJ/day.

Consistent with the proposed rule change, the GMRG recommends an exemption

from the requirement to publish financial and demand information be available for non-

scheme pipelines with a nameplate capacity rating less than 10 TJ/day.

Distribution pipelines: In the GMRG’s view there is no reason to distinguish between

transmission and distribution pipelines given they can both exert market power. A

specific exemption would not therefore be available to non-scheme distribution

pipelines. It is worth noting though that given the majority of distribution pipelines are

scheme pipelines and some fall below 10 TJ/day the GMRG does not expect many

distribution pipelines will be subject to the full suite of information requirements.

The GMRG does not believe that the additional exemption categories suggested by

stakeholders. Should a dispute arise in relation pipelines with these characteristics, these

matters would likely be considered by the arbitrator in making a determination.

Finally, it is worth noting that the staged approach to information disclosure means that it

is not necessary for the information disclosure exemptions and arbitration exemptions to

align. This is because even if a pipeline is exempt from providing all of the information

54

required in Stage 1 (such as in the case of a single shipper pipeline), if a new shipper

seeks access or the existing shipper is seeking a new service, information would be

disclosed during the commercial negotiations in Stage 2.

The exemptions proposed in relation to information provision are primarily designed to

ensure that the benefits of provision outweigh the costs of disclosure. There are, however,

no direct costs associated with making arbitration more widely available. Further, Stage 2

will allow for information to be disclosed in advance of arbitration, limiting the party’s costs

associated with the arbitration itself to the cost of the arbitrator. The arbitration mechanism

is designed to provide a credible threat of interference to encourage effective commercial

negotiations, limiting its application would undermine the legitimacy of the threat. For

example, the GMRG is of the view that a single shipper should be able to seek arbitration

in the event of a dispute when renegotiating a contract or should they wish to seek access

to a new service. Further, if a single shipper pipeline has capacity available for third party

access, a prospective shipper should be permitted to seek arbitration in the event of an

access dispute.

3.3.5 Other matters

The ACCC noted in its submission that the implementation of the new framework would

give rise to inconsistencies between the treatment of covered pipelines subject to light

regulation and non-scheme pipelines (see Figure 1.3) and could result in forum shopping.

The ACCC therefore recommended that the GMRG “immediately commence work to

identify measures to address the issues around the effectiveness of the threat of

regulation under the NGL and NGR to constrain market behaviour and prevent ‘forum

shopping”.103

While the GMRG considers this risk to be relatively low, it is nevertheless a risk. Given the

accelerated pace with which the Council has requested the Examination’s

recommendations be implemented, it has not been possible to consider this issue in any

detail as part of this process. Making changes to the existing regulatory framework also

goes beyond the scope of the task directed by the Council. The GMRG therefore suggests

that this issue be considered by the AEMC as part of its Review of Parts 8-12 of the NGR.

As part of this review, the AEMC could also consider whether:

the light regulation option should be retained; and

the access dispute mechanism applying to covered pipelines should:

o mirror the arbitration mechanism developed through this process; or

o allow shippers and the operators of covered pipelines the option to use either the

existing mechanism or the arbitration mechanism developed through this process.

If the latter option was adopted, then it could address the concerns that Central Petroleum

has raised about the new framework not applying to light regulation pipelines.104

_________________________________

103 ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 14.

104 Central Petroleum, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.

55

4. Final recommendation on the design of the new

information disclosure arbitration framework

Having regard to the overarching objectives of the new framework (see Chapter 2) and

the feedback provided by stakeholders (see Chapter 3), the GMRG has developed its final

recommendations on the design of the new information disclosure and arbitration

framework.

In developing these recommendations, the GMRG has been cognisant of the feedback

shippers provided during the Examination, which was that they had little appetite for

heavy-handed regulatory solutions and were looking for a mechanism that would reduce

the imbalance in bargaining power and pose more of a constraint on the behaviour of

pipeline operators.105 The final design of the new framework is not therefore intended to

replicate the prescriptive rules that apply to pipelines subject to full regulation. It is

intended to support commercial negotiations and outcomes that are consistent with what

would prevail in a workably competitive market.

In keeping with the assessment framework outlined in section 2.3, the GMRG has had

regard to the following factors when developing its recommendations:

the rule making test the AEMC is required to consider when exercising its rule making

functions, which requires consideration to be given to the NGO;106 and

where relevant, the Council’s Vision.107

It has also had regard to the following principles that the AEMC usually employs when

carrying out rule changes and reviews under the NGL:

Where it is required, regulation should be targeted, fit-for-purpose, provide incentives

that imitate the outcomes of a workably competitive market, and involve regulatory

costs proportionate to the materiality of issue.

Risk allocation and the accountability for investment decisions should rest with those

parties best placed to manage them.

Regulatory frameworks should be flexible and provide firms with a clear and consistent

set of rules that allow them to independently develop strategies and adjust to changes

in the market.

In the GMRG’s view, the final design is fit for purpose, targeted and proportionate to the

issues it is intended to address and will not impose an excessive burden on non-scheme

pipeline operators. The GMRG also expects the final design to:

support and improve the timeliness and effectiveness of commercial negotiations

between pipeline operators and shippers;

provide a credible threat of intervention if a dispute arises, which when coupled with

greater transparency, should pose a constraint on the behaviour of non-scheme

pipeline operators and discourage the exercise of market power; and

_________________________________

105 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78, 106 The NGO is set out in section 23 of the NGL. 107 COAG Energy Council, Australian Gas Market Vision, December 2014.

56

preserve the incentives for investment and innovation in the provision of services by

adopting a commercially oriented disclosure and arbitration framework and by allowing

pipeline operators to recover a commercial rate of return that reflects the risks the

pipeline operator faces in providing the service.

The new framework can therefore be expected to result in:

more efficient investment in, and efficient operation and use of, natural gas services;

and

the prices charged for pipeline services better reflecting the cost of service provision

and the prices that would prevail in a workably competitive market.

The ultimate beneficiaries of these improvements will be consumers of natural gas, which

is consistent with the NGO.

The design of the new framework is also expected to promote the NGO in a more cost-

effective and targeted manner than the other options that were identified in the Options

Paper and through the consultation process and to make a greater contribution to the

Council’s Vision and the next phase of gas market reforms.

While the GMRG has sought to strike the right balance in its final recommendations, it

understands that some stakeholders may think that the final design does not go far

enough in terms of information provision and the pricing principles, while others may think

it goes too far. In the GMRG’s view, the review that SCO is scheduled to carry out two

years after the implementation of the new framework will provide a good opportunity for

market participants and policy makers to step back and consider whether the new

framework is achieving its stated objective, or if more fundamental changes to the

coverage test or this framework are required.

The ACCC’s inquiry into the eastern Australian gas market and the AEMC’s review of

Parts 8-12 of the NGR will also provide opportunities to address some of the other gaps

that have been identified through this process, both in relation to information disclosure

requirements and the arbitration mechanism applying to covered pipelines. The GMRG

intends therefore to work closely with the ACCC and AEMC to address some of the other

gaps through their respective reviews. Further detail on these reviews is provided in

Appendix B.

The remainder of this chapter sets out the GMRG’s final recommendations on the design

of the new information disclosure and arbitration framework and how it is intended to

operate in practice.

4.1 Final design of the new framework

The overarching objective of the new framework is, as noted in Chapter 2, to facilitate

access to services provided by non-scheme pipelines on reasonable terms – which is

taken to mean at prices and on terms and conditions that so far as practical to reflect the

outcomes of a workably competitive market. To that end, in order to reduce the imbalance

in bargaining power that shippers can face when negotiating with pipeline operators and

pose a constraint on the exercise of market power by pipeline operators, the framework

will:

57

provide for the publication and exchange of information to facilitate timely and effective

commercial negotiations;

provide an effective and binding process to resolve disputes about proposed terms of

access in a cost-effective and efficient manner; and

set out principles for determining disputes consistent with the outcomes reasonably to

be expected in a workably competitive market.

In keeping with this objective, the final design provides for:

The inclusion of an objects clause in the Rules, which will ensure that all parties

(including arbitrators) have a good understanding of the objectives of the new regime

and how the Rules, including the arbitration principles, are intended to be applied.

A clearly defined information disclosure regime that will provide for greater disclosure

on the part of non-scheme pipeline operators and transparency of the information

shippers require when:

o considering whether to seek access to a pipeline; and

o assessing the reasonableness of a pipeline operator’s offer.

A robust and commercially oriented arbitration mechanism that will provide a credible

threat of intervention to constrain the exercise of market power during negotiations,

while also providing for the cost-effective and efficient resolution of disputes.

Well specified price, non-price and other guiding principles that the arbitrator will be

required to have regard to when resolving price and non-price disputes, which embody

the workably competitive market concept and also recognise the legitimate interests of

the pipeline operator, other users and the safe and reliable operation of the pipeline.

Consistent with the positions that were reached on each of these elements in section 1.3,

the GMRG has developed its final recommendations on the design of the information

disclosure and arbitration framework. These recommendations are summarised in Table

4.1.

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Table 4.1: Final recommendation on the design of the information disclosure and arbitration framework Information disclosure and arbitration framework

Objective

The overarching objective of the new information disclosure and arbitration framework is to facilitate access on reasonable terms to services provided by non-scheme pipelines – which for the purposes of the framework, will be taken to mean at prices and on terms and conditions that so far as practical to reflect the outcomes of a workably competitive market. To that end, in order to reduce the imbalance in bargaining power that shippers can face when negotiating with pipeline operators and pose a constraint on the exercise of market power by pipeline operators, the framework will: provide for the publication and exchange of information to facilitate timely and effective commercial negotiations; provide an effective and binding process to resolve disputes about proposed terms of access in a cost-effective and efficient manner; and set out principles for determining disputes consistent with the outcomes reasonably to be expected in a workably competitive market.

Information disclosure requirements Arbitration mechanism Arbitration principles

Purpose Reduce the information asymmetry shippers face in negotiations and facilitate more timely and effective negotiations.

Provide a credible threat of intervention to constrain the exercise of market power by pipeline operators during commercial negotiations. To pose a credible threat, arbitration must provide for the final resolution of commercial disputes without unnecessary delay or expense.

Detail

Non-scheme pipeline operators would be required to publish the following information on their website: The base level of information shippers

require when considering whether to seek access, which is to include information on the pricing methodology and the inputs used to calculate the standing offers for each service offered by the pipeline

The weighted average price paid for each service (published annually).

Independently verified financial reports for each pipeline (prepared on an individual pipeline basis), and a breakdown of demand (by service). This information would be published on an annual basis four months after the end of the financial year and include information on the methods or principles the pipeline operator has used to determine the value of the assets, depreciation allowance and cost allocation.

If access is sought, the pipeline operator would be incentivised to provide the shipper with information on the cost of providing the service as the information exchanged during negotiations will form the basis for any arbitration.

The information disclosure requirements would be subject to a reporting standard and classified as civil penalty provisions.

The arbitration mechanism is to be based on the conventional arbitration with partial transparency model. Key design elements include: Arbitration could be used to settle

disputes in relation to all aspects of access to all types of services offered (excluding extensions).

Arbitration would be ‘on the papers’ using information exchanged by parties in negotiations (Stage 2). The arbitrator would have the discretion to conduct hearings and request further information if required, but the parties would not have the right to introduce additional information on their own volition.

If the dispute is price-related, the parties would be required to provide their final offers to the arbitrator and the respective offers would become the bounds of the arbitrator’s determination.

The arbitrator may seek administrative support from the AER.

Information on the existence of the arbitration would be published on the AER website.

Pricing principles: Firm transportation services, ancillary services and augmentations:

When assessing the reasonableness of the offer for these types of services, the arbitrator is to have regard to the cost of providing the service, which is to include a commercial rate of return that reflects the risks the pipeline operator faces in providing the service. When determining the value of any assets used in the provision of the service, the arbitrator can have regard to any asset valuation techniques it considers are consistent with the workably competitive market objective, including those that take into account past recoveries of capital.

Derivative services (i.e. services that utilise the capacity of the pipeline but are priced as a multiple of, or discount to, the firm transportation service): When assessing the reasonableness of the offer for these services, the arbitrator is to have regard to the opportunity cost and/or benefit of providing the service relative to the firm service (taking into account effects on cost and/or capacity) and provide a reasonable contribution to joint and common costs.

Non-price terms and conditions principles: When assessing the reasonableness of any non-price terms and

conditions of the pipeline operator’s offer to provide a service or services, the arbitrator is to have regard, as far as practicable, to what would likely prevail in a workably competitive market.

Guiding principles: The arbitrator will also be required to have regard to the pipeline

operator’s legitimate business interests, the interests of other persons who have rights to use the service, the value to the providers of extensions including expansions of capacity whose cost is borne by someone else, the value to the provider of interconnections to the facility whose cost is borne by someone else and the operational and technical requirements necessary for the safe and reliable operation of the facility.

59

While not shown in Table 4.1, the final recommendation provides for a staged approach to

information disclosure and the negotiation and arbitration processes, with the obligations of

each party, and the processes to be followed in each stage, to be specified in the initial

Rules. The stages, which are shown in Figure 4.1, are as follows:

Stage 1: In this stage, the shipper would consider whether to seek access to the services

offered by a non-scheme pipeline operator. This would be informed by information that

the non-scheme pipeline operator would be required to make available on its website,

which would include the base level information (including the pipeline operator's standing

offers108 for each of the services offered by the pipeline) and other information that the

pipeline operator will be required to publish to enable the shipper to carry out a high-level

assessment of the reasonableness of the standing offer.

Stage 2: If the shipper decides to seek access, then it would progress to Stage 2 and

make an access request to the non-scheme pipeline operator and commence

negotiations. The negotiations would be informed by further information exchanges

between the parties, which should include further detail on the costs associated with

providing the service sought by the shipper.

Stage 3: If a commercial agreement cannot be reached, then the arbitration mechanism

could be triggered. The arbitration will be conducted using information exchanged in

Stage 2, unless the arbitrator requests additional information.

Figure 4.1: Stages for information disclosure, negotiation and arbitration

Table 4.2 provides a summary of what each stage will involve, with further detail on each of

the stages provided below.

_________________________________

108 The standing offers for the services provided by the pipeline would include information on the price and non-price terms and conditions for the services, the methodology used to calculate the prices and any other policies the pipeline operator employs that may affect a shipper’s access or use.

Stage 1: Shipper considers whether to seek access having

regard to basic information published by pipeline operator

Stage 2: Shipper requests access and enters into

commercial negotiations with pipeline operator.

Negotiations informed by further information

exchanges

Stage 3: If negotiations fail,

either party may seek arbitration. Arbitrator

to make decision having regard to the arbitration principles

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Table 4.2: Staged approach to information disclosure, negotiations and arbitration

Stage Detail

Stage 1:

Shipper considers whether to seek access

In this stage, non-scheme pipeline operators would be required to publish the following information on their website unless it is subject to an exemption:

the base level of information shippers require when considering whether to seek access to a pipeline, including the pipeline’s standing offer for each service;

the pipeline’s financial reports and demand information; and

the weighted average price received for each service if there are more than two shippers using the pipeline (this limitation is required to maintain confidentiality).

This information would allow shippers to make an informed decision about whether to seek access and to carry out a high-level assessment of whether the pipeline operator’s standing offers are reasonable, having regard to the pipeline’s financial reports, the weighted average price per service and information published by the pipeline operator on how the standing offers for each of the services offered by the pipeline have been calculated.

Exemptions: Pipelines that are not providing third party access (i.e. the service provider and shipper are related parties) or are servicing a single shipper will be able to apply for an exemption from the information disclosure requirements in Stage 1. An exemption from the requirement to publish financial reports will also be available to pipelines with a nameplate capacity rating of less than 10 TJ/day. If any of these conditions change, the exemption will be extinguished.

Stage 2: Request for service and commercial negotiation

This stage is designed to facilitate timely and effective commercial negotiations and minimise the reliance on arbitration. It involves two key steps:

Access request and response

The Rules would set out the general requirements that would apply to a shipper making an initial access request, as well as a pipeline operator in responding to an access request, with further detail to be required to be outlined in a pipeline operator’s access policy (published in Stage 1)

Negotiation

The pipeline operator and the shipper would exchange information to try to reach a negotiated outcome. During negotiations, the parties would be required to disclose all of the information, including expert reports, that they would seek to rely on in an arbitration to demonstrate the pipeline’s offer or the shipper’s counter offer is reasonable. Thus, the pipeline operator would be required to provide the shipper with detailed information on the cost of providing the service sought by the shipper. The Rules would contain provisions to incentivise the parties to articulate their case and disclose all relevant information before the dispute is referred to the arbitrator. If the parties cannot reach an agreement then they can proceed to Stage 3.

Stage 3: Arbitration

The arbitration mechanism provides a backstop, or last resort, for overcoming disputes that cannot be settled through negotiation (Stage 2).

Availability: Arbitration would be available when: a shipper is seeking access; when an existing shipper is seeking to add a new service to an existing contract; or when an existing shipper seeks a new contract to take effect on expiry of the existing Gas Transportation Agreement (GTA). Arbitration would not be available for disputes about services already contracted under a GTA or for variations to the service terms for those services and would not be available for extensions

Documentation: Arbitration would be ‘on the papers’ using information exchanged in Stage 2. The arbitrator may request further information and conduct a hearing if required.

Determination: The arbitrator would make a determination with respect to the access sought by the shipper; within the bounds of the final offers put forward by the parties if it is a price-related dispute, and having regard to the pricing and other guiding principles outlined in the Rules.

Timeframe: The arbitrator would have 50 business days to make a determination, or a maximum of 90 days on the agreement of parties to extend.

Binding nature: The shipper must notify the pipeline operator and the AER within 30 days if it intends to proceed with access on the basis determined by the arbitrator. A shipper declining access may seek access at any future time but cannot seek arbitration for a substantially similar service for a period of one year following the determination.

Partial confidentiality: Information on the existence of the arbitration would be published on the AER website after the arbitration has concluded, including: the non-scheme pipeline involved; the parties to the arbitration (subject to the consent of the shipper); the name of the arbitrator; and the time taken for arbitration.

Exemption: Non-scheme pipelines that do not provide third party access (i.e. the service provider and shipper are related parties) would be exempt from arbitration. If third party access is provided the exemption would be extinguished.

AER role: The AER would provide oversight and administration of the framework, including establishing the panel of arbitrators, providing administrative support to the arbitrator and/or parties, publishing information about the arbitration, and publishing a non-binding procedural guide providing for arbitrators and parties to disputes. The AER would also be responsible for granting exemptions, compliance and enforcement.

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4.1.1 Stage 1: Shipper considers whether to seek access and assesses the

reasonableness of the standing offer

This stage is intended to provide a shipper that is considering whether to access a

pipeline with adequate information to consider whether it should seek access to services

on a non-scheme pipeline and assess the reasonableness of the pipeline operator’s

standing offer, as well as terms and conditions associated with the services available.

As articulated in the Examination, the information asymmetries faced by shippers can be

reduced by increasing the level of disclosure and transparency of the information shippers

require when: 109

considering whether to seek access to a pipeline; and

assessing the reasonableness of a pipeline operator’s offer.

As evidenced by stakeholder submissions, shippers and pipeline operators alike support

disclosure of information to assist shippers when considering whether to seek access to a

pipeline. There is broad consensus that this information should be publicly available and

readily accessible by shippers at all times, rather than being provided only in response to

a specific access request. Greater transparency in this area will enable shippers to make

more informed decisions about whether to seek access to a particular pipeline and

facilitate more timely and effective negotiations.

The information that the GMRG recommends be disclosed by non-scheme pipeline

operators in this stage, include:

the base level of information that shippers require when considering whether to seek

access to a pipeline, which amongst other things includes:

o information on the services offered by the pipeline and the availability of those

services;

o the standing offers for these services, which will include information on the price

and non-price terms and conditions for the services offered by the pipeline, the

methodology and inputs used to calculate the prices and any other policies the

pipeline operator employs that may affect a shipper’s access or use;

o the pipeline operator’s access policy;

o demand information; and

o information on the technical characteristics of the pipeline that may affect a

shipper’s access or use of the pipeline.

the pipeline’s independently verified financial reports, demand information and the

weighted average price per service offered, which shippers can use to assess the

reasonableness of the pipeline operator’s standing offers.

This information would be published on each non-scheme pipeline operator’s website.

Non-scheme pipeline operators would be required to publish independently verified

financial information for each pipeline in accordance with relevant Australian Accounting

_________________________________

109 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 13-14.

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Standards and a guideline prepared under the NGR. Under the guideline for the financial

reports, pipeline operators would be required to provide the information needed for parties

to determine a risk-adjusted rate of return. This would allow parties to form a pipeline-

specific view of whether the operator is generating excessive returns.

The GMRG would accelerate the development of the guideline by commissioning the

assistance of a consulting firm with expertise and experience in financial reporting

requirements, who would work closely with the GMRG and the AER on the development

of the guideline. Once the guideline is finalised, the AER would be responsible for

monitoring the compliance of non-scheme pipeline operators with the guideline and for

making any future changes to the guideline.

The disclosure of this information will allow shippers to make an informed decision about

whether to seek access and to carry out a high-level assessment of whether the standing

offer by the pipeline operator is reasonable, having regard to the pipeline’s financial

reports and the weighted average price per service. It may not however, provide

information on whether the price offered is cost reflective (as this will depend on the

methodology the pipeline operator uses determine its standing offers), which is expected

to be disclosed in Stage 2.

While there are costs associated with the provision of information, its disclosure is

expected to substantially strengthen the bargaining position of shippers and impose

greater discipline on pipeline operators when setting prices. It is also expected to facilitate

more timely and effective negotiations and reduce the risk of a dispute. The GMRG

therefore expects the benefits of the reduction in information asymmetries to exceed the

costs.

Further detail on the information that would be disclosed in Stage 1, the manner and form

in which it is to be provided, the exemptions that would be available and the compliance

framework that would apply is provided in Table 4.3.

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Table 4.3: Recommended information disclosure design (Stage 1)

Design Recommendation

Information to be

disclosed to

enable shippers to

assess whether to

seek access

Non-scheme pipeline operators to disclose the following information on their website:

Information on the range of services offered by the pipeline, including multi-

pipeline service offerings where available.

Information on the availability of the services offered by the pipeline, which could

include information on the current volume of contracted capacity for that service, a

medium-term outlook for uncontracted capacity for that service and/or historic flow

information.

Actual demand for each service (volume of capacity utilised).

The standing offers110 for the services that can be provided using the existing

capacity of the pipeline, which includes information on:

– the price and non-price terms and conditions on which the pipeline operator will

offer to provide the services; and

– the methodology and inputs used by the pipeline operator to calculate the price

of each of the services.

Information on the technical characteristics of the pipeline that may affect a

shipper’s access or use of the pipeline, or the price payable for services.

Information on the pipeline’s access policy, including procedural requirements that

will apply if a shipper seeks access (which must be in accordance with Rules),

indicative timeframes for the negotiation and the ability for parties to have

recourse to the arbitration framework.

Any other policies the pipeline operator employs that may affect a shipper’s

access to, or use of, the pipeline.

Information to be

disclosed to

enable shippers to

assess the

reasonableness of

the offer

Financial information

Non-scheme pipeline operators to publish independently verified financial reports,

which would include, for example:

an income statement with revenue broken down by service type and expenditure

broken down by major categories;

a statement of comprehensive income;

a statement of financial position;

a statement of changes in equity;

a statement of cash flows; and

notes to the financial report, which, amongst other things, will include information

on the methodologies the pipeline operator has used to determine the value of the

assets, the depreciation allowance and cost allocation, as well as detail on their

computation. The notes will also be required to include reporting of

expenses/costs at a level of disaggregation sufficient to meet the needs of parties

and, if an arbitration results in the determination of the pipeline’s asset value, the

operator will also be required to report this information.

The guideline would also require pipeline operators to report the information parties

require to calculate the rate of return they have generated.

The financial information would need to be prepared in accordance with relevant

Australian Accounting Standards and the guideline prepared under the NGR. The

AER would have responsibility for the guideline and the financial reports would be

subject to the compliance framework outlined below, including that the reporting

requirements be classified as civil penalty provisions and subject to a reporting

standard.

_________________________________

110 The term ‘standing offer’ is used in this context to refer to an offer to supply a standard service at a pre-determined price under set terms and conditions. As a shipper’s service requirements may not perfectly align with the standard service, there may be scope for further negotiation on the price and non-price terms and conditions of access.

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Design Recommendation

Weighted average price per service

Non-scheme pipelines that are servicing more than two shippers to publish the

weighted average price for each service offered by the pipeline on its website.

The pipeline operator would be required to publish the methodology it has used to

calculate the weighted average price and the inputs used in the calculation.111

The method used to calculate the weighted average price should result in a price that

is directly comparable to the standing offer. So, for example, if a pipeline operator

utilises a postage stamp tariff structure then the weighted average price should be

expressed on the same basis.

Implementation Issues

Exemption

Framework

An exemption framework should be included in the NGR and provide for the AER to

grant in response to an application for exemption from a non-scheme pipeline:

an exemption from all the information disclosure requirements in Stage 1 if the

non-scheme pipeline is:

– not providing third party access; or

– a single shipper pipeline.

an exemption from the requirement to publish financial reports and demand, if the

nameplate capacity rating of the non-scheme pipeline falls below 10 TJ/day.

If any of these conditions change, the pipeline operator would be required to notify

the AER and the exemption extinguished.

Of the 45 non-scheme pipelines that have been identified, it would appear from

publicly available information that 11 are not providing third party access, 16 are

single shipper pipelines and one or two have a capacity rating of less than 10 TJ/day.

In relation to the single shipper and small pipelines, it is worth noting that the

exemption only applies in stage 1. So if a shipper seeks access to these pipelines,

the pipeline operator would be required to provide it with information in Stage 2.

Compliance

Framework

The AER should monitor the compliance of non-scheme pipeline operators with the

information disclosure requirements and the information disclosure provisions should

be classified as civil penalty provisions.

A reporting standard should also be included in the disclosure framework, which at a

minimum would state that the information provided by the pipeline operator must not

be knowingly false or misleading.

Manner, form and

frequency with

which information

reported

Pipeline operators should be required to publish the information specified in the NGR

on their website and should also be required to:

make the information that shippers require when considering whether to access a

pipeline available at all times and keep the information up to date; and

publish the independently verified financial reports, demand and weighted average

price information on an annual basis within four months of the end of the pipeline’s

financial year.

Confidentiality

mechanism

If a pipeline is servicing less than three shippers, then to maintain the confidentiality

of shippers it would not be required to publish the weighted average price. This

confidentiality regime would need to be overseen by the AER.

_________________________________

111 The methods are likely to differ depending on whether the service has a capacity based charge, or a throughput or per

unit based charge. For example:

if the service is a firm forward haul service that is charged on a $/GJ of MDQ basis, then the weighted average

price is likely to be calculated as the revenue received from the provision of that service in the last year divided by

the capacity that shippers using that service had reserved over the same period; and

if the service is an interruptible transportation service that is charged on a $/GJ basis, then the weighted average

price is likely to be calculated as the revenue received from the provision of that service in the last year divided by

the volume of gas transported under the interruptible service over the same period

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4.1.2 Stage 2: Request for access and commercial negotiations

If a shipper decides to seek access then it would proceed to Stage 2. In this stage, the

shipper would submit an initial request for access to the pipeline operator. The pipeline

operator would then be required to respond to the shipper with an initial offer and

commercial negotiations will commence. Given the arbitration mechanism is to provide for

disputes to be resolved using the information provided in this stage (subject to some

caveats), the pipeline operator and shipper would be incentivised to exchange any

information that they may want to rely upon in an arbitration during this stage. This will

allow the commercial negotiations to be carried out on a more informed basis than they

otherwise might and is intended to facilitate timely and effective commercial negotiations.

Importantly, the framework is not intended to dictate how commercial negotiation takes

place or the processes used. Negotiations with shippers will vary depending upon the

complexity of their needs, the physical limitations of the pipeline and the sophistication of

the party. Negotiations surrounding augmentations to pipelines will also vary in their

complexity and the time required to properly respond to the request. The negotiations will

also likely vary depending on the size of the shipper.

Rather than prescribing in detail how negotiations for access should take place, the

GMRG recommends that the Rules set out the general requirements for making an initial

access request and provide for information to be exchanged between parties during

negotiations. Accordingly, Stage 2 of the framework involves three key steps:

the means by which a shipper is required to request access and a pipeline operator is

to respond;

the negotiations that follow on the offer that is made by a pipeline operator in response

to a request; and

exchange of information, including expert reports, before the dispute is referred to

arbitration.

Access request and response

Section 216F of the Amendment Bill states that the Rules may contain provisions for, or

with respect to, seeking access to a pipeline service provided by means of a non-scheme

pipeline. Further, section 216H(1) makes the ability of a party to notify the AER of an

access dispute dependent upon a request for access being made in accordance with the

Rules.

Reflecting on stakeholder feedback, the GMRG is of the view that there is benefit in

providing some clarity in the Rules as to the process for making an initial access request

with further detail to be required to be outlined in a pipeline operator’s access policy (as

indicated in Table 4.2). This would require parties seeking access to submit a request in

accordance with the Rules and with the pipeline operator’s access policy before they can

submit an access dispute notification to the AER.112

_________________________________

112 Note there may be a transitional arrangement that would allow parties to bypass this step. Further information on this potential transitional arrangement is provided in Chapter 5.

66

This will provide pipeline operators with some flexibility to determine their own access

policy and provide shippers with certainty around the overall access request and

negotiation process. Combined with the requirement for parties to negotiate in good faith

under section 216G of the Amendment Bill, this should in practice prevent shippers from

bypassing commercial negotiations and going straight to arbitration.

The GMRG recommends a preliminary inquiry/indicative response phase with short time

frames be introduced to enable a shipper to find out quickly if the service they seek is

available on the standard terms at the time sought. The general requirements for making

an initial access request should reflect the following:

A shipper may make a preliminary request for access and the pipeline operator must

respond.

The request is to be made in writing and provide information on the shipper’s specific

requirements (for example, the duration required; the capacity sought; the receipt

and/or delivery points; other relevant technical details; and other terms and conditions

it is seeking).

The pipeline operator must, within 20 business days after the request, respond to the

request indicating if it can provide the service and the applicable terms and conditions,

or by informing the shipper that further investigation is required and the nature and

likely costs the shipper would be expected to meet in carrying out the investigation.

If the pipeline operator indicates that it can provide the service, it must provide

information to the shipper on how the offer has been calculated, including the inputs

and assumptions relied upon (for example, if a cost based pricing methodology is

used, this should include the asset value).

If no further investigation is required and the shipper wishes to proceed on the basis of

the information provided (i.e. no further information is needed), it can notify the

pipeline operator to put in place the necessary arrangements. If no further

investigation is required but the shipper requires further information to assess the

reasonableness of the offer, then the parties will undertake negotiations.

If further investigation is required, the pipeline operator and shipper must undertake

good faith negotiations about the terms on which that must be carried out. The

investigation must be completed within an agreed timeframe. Costs must be agreed in

advance and be actual reasonable verified costs.

On completion of the investigation, the pipeline operator must give the results of the

investigation to the shipper, and indicate if it can provide the service and the price and

non-price terms and conditions it is offering.

Further details on how these requirements apply, for example what form the request

should take and the specific information required to be provided by a shipper, should be

included in the pipeline operators access policy, which is published on their website as

part of the Stage 1 information disclosure requirements.

Commercial negotiations

The shipper could request negotiations commence on the offer made (or if the pipeline

operator indicates it cannot provide the access sought, that decision). This negotiation

would occur in line with normal commercial negotiations. Given the arbitration mechanism

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provides for the arbitration to be on the papers (subject to some caveats), parties will be

incentivised to share relevant information to come to a negotiated outcome.

It is recognised that a shipper seeking access may need more information than the high-

level information disclosed in Stage 1 to assess the reasonableness of the offer made in

response to a particular request. In this stage, the pipeline operator and the shipper would

provide any other information that they would seek to rely on in an arbitration to

demonstrate its offer is reasonable or in relation to the other guiding principles. Given the

GMRG proposes that the arbitrator be required to apply cost-based pricing principles in

making a determination, pipeline operators will be incentivised to disclose cost-based

information to the shipper both in an attempt to avoid arbitration but also to protect

themselves should the dispute proceed to arbitration.

This stage of the process is intended to have minimal prescription and oversight, other

than enforcement of obligations to exchange information and to provide parties with a right

of reply to information disclosed. Shippers and pipeline operators would decide their own

timing and needs in this stage, subject to the rules about information provision, access

proposals and negotiations in good faith. The GMRG recognises that there may be good

reasons why it may suit a shipper to take their time in this stage, for example if they are

undertaking a complex new project. This approach would be consistent with good faith

requirements under section 216G of the Amendment Bill as long as the parties keep each

other informed and do not unnecessarily delay the process.

Pre-dispute information

The GMRG recommends that a pre-dispute information disclosure phase be included in

the framework as a means of attempting to resolve disputes without relying on arbitration.

To ensure parties have adequate opportunity to disclose the information they would seek

to rely on in arbitration, the GMRG recommends that parties to a negotiation be required

to provide a written notice to the other party stating their intention to submit a dispute

notification to the AER in accordance with section 216H of the Amendment Bill. Following

the provision of a notice of intent, the other party should be permitted to disclose any

additional information it would seek to rely on in arbitration and continue negotiations. The

minimum time period between the provision of a notice of intent to the other party and the

submission of a dispute notification to the AER should be specified to ensure there is

sufficient time for relevant information to be disclosed, and (if required) responded to. This

is particularly important given that the arbitration will be based on information exchanged

in advance of the arbitration, and the arbitrator will have the discretion to draw adverse

inferences if information is not provided or excessive information is provided.

Additional confidential information exchanged between parties in this stage would form the

basis of the arbitration record, incentivising parties to exchange all relevant information

during this stage or risk an ill-informed arbitration outcome.

If at the end of the negotiations the shipper and pipeline operator agree, then the pipeline

operator must carry out the provision of the service(s) in accordance with agreement (as

reflected in GTA). If, however, the parties cannot reach an agreement then they may

proceed to arbitration (Stage 3).

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4.1.3 Stage 3: Arbitration

If the parties are unable to reach a commercial agreement in Stage 2, then the arbitration

mechanism could be triggered by one of the parties submitting a notice to the AER and

the parties will proceed to Stage 3. The arbitration mechanism would be available in the

event that a dispute arises when:

a prospective shipper is seeking access to a service;

an existing shipper seeks to add a new service to their existing contract; and

an existing shipper is renegotiating a new contract.

The arbitration mechanism would be available to resolve disputes on any matter, including

price or other terms and conditions, associated with seeking access to the following types

of services:

services that require the use of the existing capacity of the pipeline, including

transportation (firm, as available, interruptible, backhaul (if not operating on a bi-

directional basis), park and loan and ancillary services (e.g. in-pipe trading services,

capacity trading services, redirection services, separate compression services); and

services that require further augmentation of the pipeline, which may occur if:

o an expansion is required;

o the pipeline needs to be converted to a bi-directional pipeline;

o a new receipt or delivery point is required (or points need to be expanded); or

o an interconnection with another pipeline or pipelines is required.

It would not, however, be available for extensions. This exclusion is consistent with rule

118 of the NGR. It is understood that this exclusion exists because there can be

competition for the construction and operation of extensions from a range of parties,

whereas, expansions can only be provided by the pipeline operator. Therefore, the market

power that can be exercised in negotiations for extensions should be constrained by

competition from other parties, similarly to the development of new pipelines. Consistent

with rule 118, the GMRG recommends excluding disputes in relation to pipeline

extensions from being eligible to access the arbitration framework under the Rules.

While the arbitration mechanism is a key element of the new framework, it is intended that

commercial negotiation will continue as the principal means by which access terms and

conditions are determined and that the arbitration mechanism will rarely be triggered. That

is, it is intended that the threat of arbitration will be sufficient to encourage the parties to

reach a commercial agreement.

Arbitration mechanism

As reflected in section 216E of the Amendment Bill, parties are still free to resolve their

disputes in any manner they deem appropriate. The provision of a voluntary arbitration

mechanism does not limit how a dispute about access to a pipeline service can be raised

or dealt with.

Having examined a range of options, the GMRG recommends that a conventional

arbitration model that provides for partial transparency be adopted. While this

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recommendation is consistent with preliminary view outlined in the Options Paper, the

GMRG has made some amendments to the model to address concerns raised by

stakeholders, and ensure it facilitates the timely, cost-effective and efficient resolution

disputes, including:

The parties would be required to provide their final offer as an input to the arbitrator

and the respective offers become the bounds of the arbitration’s determination,

assuming access is granted.

The arbitration would be based on the information (including expert reports)

exchanged in advance of the arbitration, incentivising parties to exchange information

in Stage 2. The arbitrator would also have the discretion to request further information

if required to make a determination. The Rules will allow the arbitrator to draw adverse

inferences if information is not provided or excessive information is provided.

Beyond the limitations imposed by the scope of arbitration, the GMRG does not

propose including any explicit or discretionary threshold that would permit the

arbitrator not to proceed with arbitration. No additional guidance will be provided in the

Rules in relation to if an arbitration should not proceed (in accordance with section

216O the Amendment Bill). Instead, the arbitrator will have the discretion to determine

what represents a ‘good reason’ not to proceed with arbitration.

Given that the emphasis of the staged approach is for stakeholders to disclose all

relevant information to one another during negotiations, the GMRG expects that

access disputes involving lower financial values would be unlikely to proceed to

arbitration. Further, the costs associated with the arbitrator will be fixed allowing

parties to assess the likely costs versus the potential benefit of arbitration with regard

to the value of the services sought.

The GMRG previously proposed that the arbitrator should have the discretion to not

proceed with arbitration in the event of the inability of the pipeline operator to provide

the service(s) sought. Under the staged approach proposed, the pipeline operator

would be expected to justify its inability to provide the service sought during the

negotiations, including through the provision of additional information and/or expert

reports in Stage 2.

The GMRG is of the view that the procedural protections previously emphasised in the

conventional arbitration model to ensure the arbitration is not gamed by the parties with

the most resources may no longer be required under the proposed staged approach. The

procedural protections previously proposed related to:

requiring that the documentation provided by parties to the arbitrator be directly

relevant to the matter(s) in dispute;

requiring the arbitrator at the commencement of the arbitration to provide for the cut-

off date and time for provision of information; and

providing the arbitrator with the discretion to limit the amount of documentation

provided and focus parties on the key issues by providing a list of questions for the

parties to address.

Given the arbitration will be based on the information exchanged through the negotiations,

these procedural protections may not be required to limit the amount of documentation

provided. Parties will be incentivised to articulate their case and disclose all relevant

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information and exchange expert opinions in advance of arbitration as this would form the

basis of the arbitration. While parties could deliberately delay Stage 2 negotiations by

either providing inadequate or excessive information, it would likely be to their detriment to

do so. The GMRG intends that some of these procedural protections may be provided for

in the Rules in relation to the exchange on information at the end of Stage 2. Further, the

arbitrator would be free to make these types of orders if required.

The arbitrator would have the procedural flexibility to run the arbitration how they wish to

do so to ensure it is completed within the stipulated 50 business day period. The intention

of the proposed arbitration mechanism is that the arbitrator may make a determination

based on written material alone. The arbitrator would have the discretion to determine

whether to hold a hearing and if so, how the hearing should be held.

The reputational harm to parties that may arise as a result of publishing information on the

existence of the arbitration on the AER website should further incentivise commercial

agreements.

The design of the arbitration mechanism consists of various components. The GMRG’s

final recommendations on these components is set out in Table 4.4.

Table 4.4: Recommended arbitration mechanism design

Design component Recommendation

Form of arbitration Conventional arbitration with partial transparency

Types of services in dispute

Arbitration would be available for disputes in relation to access to services that require the use of existing capacity of a non-scheme pipeline, or require further investment in a non-scheme pipeline, with the exclusion of extensions.

Availability

Arbitration would be available when a shipper is seeking access; when an existing shipper is seeking to add a new service to an existing contract; or when an existing shipper seeks a new contract to take effect on expiry of the existing GTA.

Arbitration would not be available for disputes about services already contracted under a GTA or for variations to the service terms for those services. It would also not be available for pipeline extensions.

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Design component Recommendation

Selection of the arbitrator

The AER should be required under the Rules to establish and maintain a panel of

qualified arbitrators and the terms of appointment for those arbitrators including agreed

fixed fees. This list could be provided in a similar format to the list of the pool of experts

from which panels are selected in relation to wholesale energy market dispute resolution

processes, provided under Chapter 15C of the NGR and Chapter 8 of the NER,

published on the AER website.

Specific timeframes for the selection of the arbitrator or replacement arbitrator should be

provided in the Rules to ensure an arbitrator is appointed within a maximum of ten

business days from when the AER is notified of an access dispute. The following steps

would need to completed in the maximum of 15 business days:

– The AER would be required to refer the dispute to arbitration within a specified

number of business days of receiving the notification of the access dispute. The AER

must provide a written notification of referral to the parties of the dispute.

– Upon receiving the notification of referral from the AER, the parties should have a

specified time to mutually agree to, and appoint, an arbitrator from the panel. Within

that specified period the parties must notify the AER of the arbitrator appointed or,

alternatively notify the AER that they are unable to agree on an arbitrator.

– In the event parties have notified the AER that they cannot agree to an arbitrator, the

AER must consult with parties and select an arbitrator within a specified time of being

notified that the parties are unable to agree.

The Rules would provide parties wishing to make a fresh appointment of the arbitrator in

the event the arbitrator does not complete an arbitration they are required to do so within

10 days of the arbitration period lapsing. If the parties do not make a fresh appointment

within the 10 day period but the shipper wishes to continue with arbitration, they must

notify the AER. The AER must, after consultation with the parties, make a fresh

appointment within five days of being notified of the need for the fresh appointment.

Role of the AER In its role as scheme administrator, the AER is to provide oversight and administration of the arbitration framework in accordance with the Amendment Bill.

In this role the AER would be required to establish the panel of arbitrators, deal with referrals to arbitration, provide administrative support to the arbitrator and/or parties, publish information about the arbitration as described below, manage the process for correction of errors in access determinations and publish a non-binding guide on the AER website providing procedural guidance to arbitrators and the disputing parties. 113

In its role as regulator, the AER would be responsible for granting exemptions, compliance and enforcement.

_________________________________

113 Note that while the Rules will set out the procedural requirements of the arbitration, the GMRG thinks there would be value having guides that the arbitrator and disputing parties can have regard to so that they have a better understanding of the steps and processes involved. The guides are expected to provide:

the arbitrator with procedural information on the arbitration framework, key steps, timeframes and the

determination form/content and provide links to relevant arbitration rules; and

the disputing parties with information on the eligibility for arbitration, including on how an access proposal must be

made, the dispute notice provided, the process for selecting the arbitrator, the steps, procedural rules and

timeframes involved and how costs will be treated.

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Design component Recommendation

Rules of procedure

Arbitrator to have the flexibility to determine the rules of procedure in accordance with Chapter 6, Part 6 of the NGL.

Hearing: Chapter 6, Part 6 of the NGL gives the arbitrator discretion to determine if an oral hearing is required.

Information: The Rules would contain provisions intended to incentivise the parties to the dispute to articulate their case and disclose all relevant information and exchange expert opinions before the dispute is referred to the arbitrator. These may include provisions as to:

the information expected to be exchanged between the parties before the reference to

arbitration including expert reports;

a process for identifying early in the arbitration what information has not been provided

or where excessive information has been provided;

the arbitrator’s ability to rely only on information exchanged between parties in advance

of arbitration and to draw adverse inferences if that information is not provided or

excessive information is provided;

the arbitrator’s ability to request more information from the parties and seek expert

advice if required, or to limit the information provided;

the arbitrator’s ability to require experts to confer and to provide statements of matters

agreed or not agreed; and

simultaneous exchange of material, written arguments and replies.

Support: The arbitrator and/or parties may seek administrative support from the AER.

Termination of arbitration

The Rules should outline that the arbitration is terminated under section 216O by the

arbitrator giving notice of termination to: the parties to the arbitration; and the scheme

administrator.

Nothing further to be included on the shipper’s right to terminate arbitration in the Rules.

Determination

Form: The arbitrator’s access determination is to be made in writing, and must be provided to the parties to the arbitration and the scheme administrator. The arbitrator may make an interim determination in accordance with section 199(2) of the NGL.

Content: The arbitrator is to make a determination:

with respect to the access (service, service duration, service characteristic) sought by

the shipper;

within the bounds of the final offers put forward by the parties (if it is a price-related

dispute); and

having regard to the price, non-price and other guiding principles outlined in the Rules

and guided by the objects clause.

Reasons: The arbitrator must provide reasons for the determination. The arbitrator will have the discretion to make the determination and give reasons within 30 days.

Timeframe: The arbitrator has 50 business days following appointment (whether from the AER being notified of its appointment or from AER appointment, as the case may be), to make a determination, with the ability to extend to a maximum of 90 days on the agreement of parties.

Operation: The determination takes effect from the day it is made (but can allow for adjustments for any interim determination) or later if determined by the arbitrator and remains in effect for the period determined by the arbitrator.

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Design component Recommendation

Binding nature The Rules should require that if a shipper decides not to seek access to the service in

accordance with section 216Q(2) it must:

– Notify the pipeline operator and the AER within 30 days of the arbitrator making the

determination if it intends to seek access.

– Not seek arbitration for a substantially similar service from the pipeline operator for a

period of one year.

Parties may agree between themselves to vary an access determination (as provided for

by section 216R(1) of the Amendment Bill). The Rules would not deal further with

variations (except for corrections under section 216T) and in particular would not allow

for disputes about variations to go to arbitration under the Rules.

Enforcement of the access determination is provided for in section 216Q of the

Amendment Bill and section 271 of the NGL (as applied by the Amendment Bill) and the

Rules will not provide for anything further on this matter.

Confidentiality The outcome of the arbitration would be confidential (but made available to the AER) and not publicly released.

Information on the existence of the arbitration would be published on the AER website after the arbitration has concluded, including: the non-scheme pipeline involved; the parties to the arbitration, subject to the consent of the shipper; the name of the arbitrator; and the time taken for the arbitration. Further, to minimise repeat arbitrations on the same issue, the asset valuation determination should also be made publicly available.

Costs Provision would be made in the Rules for the arbitrator to apportion the arbitration costs

(costs of the arbitrator) in specified circumstances, which will include the negotiation and

arbitration behaviour of parties; and if a shipper elects not to be bound by the

determination.

The Rules would not provide for the arbitrator to order payment by one party of the other

party’s costs.

Correction of errors The Rules to state that:

If an access determination is found by a party to the arbitration, the arbitrator responsible for the determination or the AER as scheme administrator, to require correction in accordance with section 216T, they must notify the parties, the AER and the arbitrator (as the case may be).

The AER may only vary the access determination if it has first consulted with the relevant parties and where necessary and practical the arbitrator that made the determination.

The AER will vary the access determination, only in so far as necessary to correct the relevant error or deficiency.

Safeguards to avoid distorting investment

The Rules to state that:

a pipeline operator cannot be required to carry out an augmentation unless the shipper funds the augmentation in its entirety, and the augmentation is technically and economically feasible and consistent with the safe and reliable operation of the pipeline; and

a shipper would acquire no interest in a pipeline by funding an expansion of capacity of a scheme pipeline in accordance with an access determination unless the pipeline operator agrees.114

Protecting existing contractual rights

The Amendment Bill115 provides adequate safeguards to protect the contractual rights of existing users. Nothing further is intended to be included in the Rules on this matter.

Exemption framework

The Rules should provide for pipeline operators to be able to apply to the AER (as regulator) for an exemption in relation to non-scheme pipelines that do not provide third party access. However, if pipeline services do become available to third parties the exemption should expire and pipeline operators would be required to notify the AER of their change in circumstances as soon as practicable.

_________________________________

114 This is consistent with access determinations in relation to scheme pipelines in accordance with NGR 118. 115 See section 216N and 216U of the Amendment Bill.

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Arbitration principles

The arbitration principles are a critical element of the new framework, because they

establish the basis on which shippers should expect to be able to access the services

provided by non-scheme pipelines. As noted in the introduction to this section, the

objective of the new framework is to pose a constraint on the exercise of market power by

pipeline operators by facilitating access to the services provided by these pipelines on

reasonable terms. The term ‘reasonable’ is taken in this context to mean at prices and on

terms and conditions that, so far as practical, reflect the outcomes of a workably

competitive market.

In a workably competitive market, rivalry between competing firms can be expected in the

longer-run to drive prices down to a cost reflective level, where firms are covering their

costs plus a rate of return that reflects the risk faced by the firm. In keeping with this

concept, the final design provides for the adoption of cost reflective pricing principles

(which the arbitrator will be left to determine how to apply) and a number of other

subordinate guiding principles (see Table 4.5).

In the GMRG’s view, the cost reflective pricing principles (which provide for the recovery

of a commercial rate of return that reflects the risks faced by the pipeline operator) are

consistent with what would occur in a workably competitive market. Enabling pipeline

operators to earn a commercial rate of return on their investments should also preserve

incentives for investment and innovation in pipelines, which shippers have made clear is

of considerable importance to the market.

In keeping with the principles set out in Table 4.5, if a dispute relates to the price of

access to:

Firm transportation services, augmentations and ancillary services (i.e. services that

are provided through separately identifiable assets or activities), then the arbitrator

would be required to assess the reasonableness of the price offered by the pipeline

operator having regard to the cost of providing that particular service, which is to

include a commercial rate of return that reflects the risks the pipeline operator faces in

providing the service. When determining the value of any assets used in the provision

of the service, the arbitrator can have regard to any asset valuation techniques it

considers are consistent with the workably competitive market objective, including

those that take into account past recoveries of capital.

Derivative services (i.e. services that utilise the capacity of the pipeline but are priced

as a multiple of, or discount to, the firm transportation service), then the arbitrator

would be required to have regard to opportunity cost / benefit of the derivative service

relative to the firm transportation service (having regard to any effect on cost and / or

capacity) and provide for a reasonable contribution to joint and common costs.

In both of these cases it would be up to the arbitrator to determine how to apply these cost

reflective pricing principles.

In relation to disputes that arise in relation to non-price terms and conditions, the arbitrator

would be required to assess the reasonableness of the pipeline’s offer having regard, as

far as practicable, to what would likely prevail in a workably competitive market.

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Table 4.5: Recommended arbitration principles

Service Recommended principles

Pricing Principles

Firm transportation services, ancillary

services (i.e. services provided

through separately identifiable assets

or activities)116 and augmentations

When assessing the reasonableness of the offer for these types of

services, the arbitrator is to have regard to the cost of providing the

service, which is to include a commercial rate of return that reflects

the risks the pipeline operator faces in providing the service. When

determining the value of any assets used in the provision of the

service, the arbitrator can have regard to any asset valuation

techniques it considers are consistent with the workably competitive

market objective, including those that take into account past

recoveries of capital.

Derivative services (i.e. services that

utilise the capacity of the pipeline but

are priced as a multiple of, or

discount to, the firm transportation

service).

When assessing the reasonableness of the pipeline operator’s offer

for these types of services, the arbitrator is to have regard to the

opportunity cost and/or benefit of providing the service relative to the

firm service (taking into account any effect on cost and/or capacity)

and provide for a reasonable contribution to joint and common costs.

Non-Price Terms and Conditions Principle

When assessing the reasonableness of any non-price terms and conditions of the pipeline operator’s offer to

provide a service or services, the arbitrator is to have regard, as far as practicable, to what would likely

prevail in a workably competitive market.

Guiding Principles

Subordinate principles that assist the

arbitrator when considering disputes

about price and non-price terms and

conditions

The arbitrator must also have regard to:

the legitimate business interests of the pipeline operator, and the

pipeline operator’s investment in the pipeline;

the interests of all persons who have rights to use the service;

the value to the provider of extensions including expansions of

capacity and expansions of geographical reach whose cost is

borne by someone else;

the value to the provider of interconnections to the facility whose

cost is borne by someone else; and

the operational and technical requirements necessary for the

safe and reliable operation of the facility.

In addition to these principles, the arbitrator would be required to have regard to the

guiding principles listed in Table 4.5 which are based on the principles set out in the CPA

and the Competition and Consumer Act 2010 (Cth) (CCA).117 The way in which these

provisions have previously been interpreted in the context of an access dispute under Part

IIIA of the CCA is outlined in Box 4.1. These guiding principles would be subordinate to

the pricing and non-price terms and conditions principles outlined above.

When applying these principles, the arbitrator would be expected to do so consistently

with and in light of, furthering the overarching objective of the framework.

_________________________________

116 As noted in section 3.3.3 this category would include backhaul services that do not involve the physical use of the pipeline (i.e. they just involve a notional swap).

117 This list mirrors the list of principles in the CPA although the GMRG has removed two principles (i.e. the direct costs of providing access to the service and the economically efficient operation of the pipeline) because they are already reflected in the pricing principles.

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Box 4.1: Interpretation of guiding principles

On 19 July 2007, the ACCC issued its Arbitration Report regarding an access dispute between Services Sydney Pty Ltd and Sydney Water Corporation. The dispute related to the methodology for pricing access to declared (under the then Trade Practices Act 1974) sewage transportation services supplied by Sydney Water by means of its North Head, Bondi and Malabar sewerage reticulation networks. The ACCC interpreted the relevant principles as follows:118

Legitimate business interests of the provider, and the provider’s investment in the facility

“The term ‘legitimate business interests of the provider’ refers to the commercial considerations of the service provider such as the provider’s obligations to shareholders and other stakeholders, including the need to earn normal commercial returns on the facility. The term ‘…and the provider’s investment in the facility’ reinforces that the access provider should be able to recover the costs (including earning a normal commercial return) of its efficient investment in the facility. Consideration of section 44X(1)(a) also includes ensuring that the access provider has appropriate incentives to maintain, improve and invest in the efficient provision of the facility”.

The interests of all persons who have rights to use the service

“All persons that have rights to use the service refers to the access provider, current users of the service and future potential access seekers. The Commission considers that access prices should reflect efficient provision of the service and should not incorporate pricing designed to generate monopoly profits or to artificially favour some persons who have rights to use the service over other such persons”.

The value to the provider of extensions whose cost is borne by someone else

“This criterion requires that if an extension is made to the facility at the cost of someone other than the access provider, then access terms and conditions should take into account the economic value to the access provider of the extension. For example, if an access seeker bears the cost of extending the facility, and this extension is expected to provide benefits to the access provider, then the access price could be lower than it would otherwise be, so as to reflect the value to the provider of such benefits”.

The value to the provider of interconnections whose cost is borne by someone else

“This criterion operates in a similar fashion to section 44X(1)(e). It requires that if an interconnection is made to the facility at the cost of someone other than the access provider, then the access terms and conditions should take into account the economic value to the access provider of the interconnection”.

Operational and technical requirements necessary for safe and reliable operation

“The Commission notes in the ACCC’s guide to the resolution of telecommunications access disputes that an access price should not lead to arrangements between access providers and access seekers that encourage the unsafe or unreliable operation of a facility. This criterion may often be more relevant to the consideration of non-price terms and conditions.”

4.1.4 Exemptions

The GMRG recommends that an exemption mechanism be incorporated into the new

disclosure framework to allow non-scheme pipeline operators to seek an exemption from

the arbitration mechanism and some or all the information reporting requirements in

certain circumstances. The exemptions the GMRG recommends should be available

under the framework are outlined below in Table 4.6 (see section 3.3.4 for more detail).

_________________________________

118 The ACCC’s Arbitration Report, including the final determination and statement of reasons, is available at: http://registers.accc.gov.au/content/index.phtml/itemId/867741.

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As this table highlights, exemptions would be available to pipelines not providing third

party access (i.e. pipelines where the service provider and shipper are related parties)

from both the information disclosure and arbitration mechanism, single shipper pipelines

from the Stage 1 information disclosure requirements and small pipelines from the

financial reporting requirements. For the reasons set out in section 3.3.4, specific

exemptions would not be available to:

non-scheme distribution pipelines – while an exemption would not be available to

distribution pipelines, the new framework is not expected to affect many distribution

pipelines because the majority are scheme pipelines and some fall below the 10

TJ/day threshold; or

pipelines with a 15-year no-coverage determination – while an exemption would not be

available to pipelines on this basis, the information disclosure requirements are not

expected to affect many of these pipelines because in most cases the pipeline would

fall into either the ‘not providing third party access’ or ‘single shipper’ pipeline

category.

Table 4.6: Recommended exemption framework

Type of exemption Availability

Information Disclosure

Exemption from all the information disclosure

requirements in Stage 1

If the non-scheme pipeline is:

not providing third party access (i.e. the pipeline

operator and shipper are related parties); or

a single shipper pipeline.

Exemption from the requirement to publish

financial reports and demand

If the nameplate capacity rating of the non-scheme

pipeline falls below 10 TJ/day.

Arbitration Mechanism

Exemption from arbitration (Stage 3) Non-scheme pipelines that do not provide third party

access.

If a pipeline operator is granted an exemption and the conditions of the non-scheme

pipeline change such that it should no longer be exempt, the pipeline operator will be

required to notify the AER as soon as practicable and the exemption will be extinguished.

Of the 45 non-scheme pipelines that have been identified,119 it would appear from publicly

available information that 11 are not providing third party access (i.e. the service provider

and shipper are related parties), 16 are single shipper pipelines and one or two have a

capacity rating of less than 10 TJ/day. In relation to the single shipper and small pipelines,

it is worth noting that the exemption would only apply in Stage 1 and in the case of small

pipelines would only apply to financial reporting.120 Thus, if a shipper seeks access to

these pipelines, the pipeline operator would be required to provide it with information in

Stage 2 and the shipper would also be able to have recourse to the arbitration

mechanism.

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119 See Table 3.1 on page 20 of the Options Paper. 120 This exemption has been included because the GMRG recognises that there will be costs associated with publishing

the financial reports and the benefits of doing so may not outweigh the costs in relation to these small pipelines.

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The exemption framework will be overseen by the AER and non-scheme pipeline

operators would be required to apply for an exemption in accordance with the Rules.

Automatic exemptions will not be provided for under the framework.

4.2 Consistency of the new framework with the NGO and Vision

As the AEMC has previously observed, quantifying the costs and benefits associated with

these types of reforms can be difficult.121 The assessment of the final design has therefore

been carried out qualitatively, having regard to the outcomes sought under the framework.

The results of this assessment are summarised in Table 4.7.

As this table highlights, the final design is fit for purpose, targeted and proportionate to the

issues it is intended to address and will not impose an excessive burden on non-scheme

pipeline operators. It can also be expected to:

support and improve the timeliness and effectiveness of commercial negotiations

between pipeline operators and shippers;

provide a credible threat of intervention if a dispute arises, which when coupled with

greater transparency, should pose a constraint on the behaviour of non-scheme

pipeline operators and discourage the exercise of market power; and

preserve the incentives for investment and innovation in the provision of services by

adopting a commercially oriented disclosure and arbitration framework and by allowing

pipeline operators to recover a commercial rate of return that reflects the risks the

pipeline operator faces in providing the service.

The final design of new framework can therefore be expected to result in:

more efficient investment in, and efficient operation and use of, natural gas services;

and

the prices charged for pipeline services better reflecting the cost of service provision

and the prices that would prevail in a workably competitive market.

The ultimate beneficiaries of these improvements will be consumers of natural gas. The

introduction of the new framework into the NGL and NGR can therefore be expected to

promote the NGO and contribute to the Council’s Vision. Relative to the other options that

were canvassed in the Options Paper and by stakeholders, the final design is also

expected to promote the NGO in a more cost-effective and targeted manner and make a

greater contribution to the Council’s Vision and the next phase of gas market reforms.

_________________________________

121 AEMC, Stage 2 Final Report: Information Provision, May 2016, p. 4.

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Table 4.7: Outcomes expected to be achieved under the new framework

Information disclosure

The final design of the information disclosure requirements, which provide for the publication and

exchange of information, will reduce the degree of information asymmetry shippers can face in

negotiations and, in so doing, facilitate more timely and effective negotiations. The disclosure

requirements will also:

reduce search and transaction costs;

allow shippers to more readily identify any attempted exercise of market power;

place a constraint on the pricing practices of pipeline operators; and

limit the reliance that needs to be placed on the arbitration mechanism (i.e. by requiring all

information to be disclosed during the negotiations).

The staged approach to information provision is also intended to ensure that an excessive burden is

not placed on non-scheme pipelines and the information that is disclosed is targeted and proportionate

to the issue it is intended to address.

Arbitration mechanism

The final design of the arbitration mechanism will provide a credible threat of intervention and

constrain the behaviour of non-scheme pipeline operators in negotiations. For arbitration to pose a

credible threat, the party seeking arbitration must have reasonable certainty about the costs of

arbitration, the time taken to reach a decision and the principles to be applied in making the

determination. To encourage good faith negotiations, there must also be consequences in the

arbitration process for failure to provide information (or for excessive information).

To achieve these objectives, the arbitration mechanism:

requires the parties to exchange all the material information they seek to rely on in support of their

case before the arbitration starts;

facilitates referral to arbitration with limited or no opportunity to delay the process through

disagreement about the choice of arbitrator or the terms of appointment;

gives the arbitrator a broad discretion as to how it conducts the arbitration, including whether it

holds hearings, requires additional information from the parties and how it deals with lay evidence

and expert evidence;

allows the arbitrator to take into account the negotiating behaviour of the parties, such as failure to

provide information required in the negotiation phase or the provision of excessive information;

provides the arbitrator with clear principles on the matters to be taken into account when making its

decision, including pricing, non-price terms and conditions and guiding principles;

provides for expeditious dispute resolution that can be completed in approximately three months;

and

limits the costs associated with arbitration.

Arbitration principles

The final design of the arbitration principles is intended to ensure that if a dispute does arise, the

arbitrator’s determination will provide for access on prices and terms and conditions that, so far as

practical, reflect the outcomes of a workably competitive market. That is:

prices that are cost reflective and include a rate of return that is commensurate with the risks faced

by the pipeline operator in providing the service; and

the non-price terms and conditions are reasonable.

While these principles only apply in the arbitration stage, they can also be expected to influence the

behaviour of pipeline operators during the negotiation stage.

The adoption of these principles is therefore expected to pose a constraint on the exercise of market

power by pipeline operators when negotiating with shippers.

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5. Implementation and transitional arrangements

To give effect to the recommendations set out in Chapter 4, a draft set of initial Rules will

need to be developed. Following review and agreement by officials to release the draft

Rules, stakeholders will have three weeks to provide their feedback. The stakeholder

consultation period is expected to commence in late June.

Following the incorporation of stakeholder feedback, the final set of initial Rules will then

be provided to Council for its consideration and approval. As a result of diverging

stakeholder views on key elements of the framework and the late provision of an

alternative proposal by APA, Council consideration of the initial Rules is now expected to

take place out-of-session in early August, rather than at the mid-July meeting as

previously advised.

Assuming the initial Rules are considered by Energy Ministers in early-August, the GMRG

expects the Rules to be effective as soon as possible thereafter (1 September).122

Once the initial Rules are implemented, the following will need to occur:

(1) Pipeline operators will need to publish on their website the base level information

required by shippers.

(2) Pipeline operators will need to amend their financial reporting systems to enable them

to provide separate financial information.

(3) A number of guidelines and guides will need to be prepared, including:

(a) a binding guideline on the preparation of financial reports;

(b) a procedural (non-binding) arbitration guide or guides for the arbitrator on the

arbitration process and disputing parties. 123

5.1 Implementation of the information disclosure requirements

If the initial Rules are assumed to be in effect from 1 September 2017, pipeline operators

should be in a position to publish the information set out in (1) on their websites by

1 February 2018. It will, however, take longer for pipeline operators to be in a position to

publish financial reports, because before this information can be published:

the guideline on the preparation of financial reports will need to be published; and

pipeline operators may need time to amend their financial reporting systems to be able

to produce the information required and to comply with the guideline.

If the standard consultation procedures in the NGR are employed, then it could take the

AER nine months to prepare the guideline. If it is also assumed that pipeline operators are

_________________________________

122 The initial Rules for the new framework will be made by the South Australian Minister. 123 While the Rules will set out the procedural requirements of the arbitration, the guides will provide:

the arbitrator with procedural information on the arbitration framework, key steps, timeframes and the

determination form/content and provide links to relevant arbitration rules; and

the disputing parties with information on the eligibility for arbitration, including on how an access proposal must be

made, the dispute notice provided, the process for selecting the arbitrator, the steps, procedural rules and

timeframes involved and how costs will be treated.

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provided a further two months to amend their reporting systems, then they are unlikely to

be in a position to start collecting the information until 1 July 2018. The first annual report

would not therefore be published until October 2019. While it is possible that as a

transitional arrangement pipeline operators could be required to publish an initial half-

yearly report, this information would only likely be available in April 2019, which is 21

months after the new Rules are expected to be implemented.

In the GMRG’s view, the disclosure of some cost and financial based information is

required sooner than April 2019 to enable shippers to assess the reasonableness of

standing offers and to provide market participants and policy makers with greater clarity

about the returns being earned by non-scheme pipeline operators. The GMRG has

identified two approaches that could be taken to require the publication of financial reports

sooner than April 2019:

1. The GMRG could accelerate the development of the guideline by commissioning the

assistance of a consulting firm with expertise and experience in financial reporting

requirements, who could work closely with the GMRG and the AER on the

development of the guideline. Once the guideline is finalised, the AER would be

responsible for overseeing compliance with the guideline and making any changes

that may be required in the future.

2. A draft guideline could be developed by the AER within three months of the new Rules

coming into effect and interim reporting to commence on 1 January 2018. This would

allow pipeline operators to determine the exact nature and format of the information

disclosed, guided by the draft guideline. The AER could then take into account the

information published in drafting the final guideline.

The GMRG is concerned that the second approach may require pipeline operators to

amend their financial reporting systems twice, initially to report information interpreting the

draft guideline and then to comply with the final guideline, imposing additional costs.

Therefore, the GMRG recommends that the first option be pursued, which would allow

financial reporting to commence as early as 30 October 2018.

Accordingly, the GMRG intends to commission the assistance of a suitably experienced

consulting firm to start working with the AER and the GMRG to draft the guideline as a

matter of priority. If this occurs then all of the information required under Stage 1 would be

available by 30 October 2018 (with base level information and weighted average prices

available from 1 February 2018 and the initial financial reports available from 30 October

2018).

5.2 Implementation of the arbitration mechanism

Rather than delaying the commencement of the arbitration mechanism until Stage 1

information is available, the GMRG recommends that:

the mechanism come into effect immediately (1 September 2017); and

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the arbitrator be provided with the ability to request parties provide any additional

information it requires to apply the pricing principles and make a determination,

including cost and financial information.124

There are a number of transitional issues associated with the arbitration mechanism that

the GMRG has considered, including whether:

The arbitration mechanism should be available to parties immediately (September

2017) in the absence of parties having met the requirements that will be set out in the

Rules regarding stages 1 and 2.

In the case where an existing GTA is set to conclude over the course of the arbitration,

the arbitrator should be permitted to make an interim determination to continue a

shipper’s access to a pipeline on existing terms and conditions until a determination is

made (assuming the capacity is still available). This could be a transitional

arrangement only to encourage parties to commence negotiations well in advance of

contracts concluding, or be available at the discretion of the arbitrator under the

framework. For example, if the arbitrator is of the view there are legitimate reasons

why the dispute was not brought forward to arbitration earlier (as provided by section

199(2) of the NGL, as applied by section 216S of the Amendment Bill).

If the arbitration should be made to operate retrospectively, so that parties who have

been required to enter new GTAs between a certain time period (for example when

the Amendment Bill passes South Australian Parliament to when the Rules are in

place), could access arbitration so that the arbitrator could make a determination on

the reasonableness of the contract provisions.

In relation to the first point, the GMRG accepts that a transitional arrangement will likely

be required in the Rules to deal with disputes that commenced before the new framework

comes into effect. The details of such an arrangement need to be considered further

during the development of the Rules. The GMRG expects that a fast-track arbitration

could apply, which would waive the requirement for shippers and pipeline operators to

comply with stages 1 and 2 of the framework (for example that the shippers request for

access be consistent with the Rules, which was not in place when access was sought).

However, the GMRG notes that given the staged approach to the framework and the

emphasis of information being disclosed in Stage 2, such an approach risks the timeliness

and potential outcome of the arbitration. The arbitrator would likely be required to request,

potentially significant, additional information from parties to a ‘fast-tracked’ arbitration to

apply the arbitration principles in the absence of the information published in Stage 1

(which would not be published until 1 February 2018), and the exchange of cost and other

relevant information in Stage 2.

In relation to contracts that conclude while the arbitration is underway (for example, a

contract concludes in October and arbitration is brought in September), the GMRG is of

the view that that an arbitrator should be provided with the discretion to provide an interim

determination to continue a shipper’s access on existing terms and conditions, including

price, until a determination is made (assuming the pipeline is technically capable of

continuing to provide access on the existing terms).

_________________________________

124 While the pipeline operator may not be in a position to provide information in the manner specified in the AER’s guideline, it should still be in a position to provide the arbitrator with the information it requires to apply the pricing principles.

83

The GMRG is of the view that making the framework available retrospectively to apply to

an existing contract, would undermine one of the fundamental characteristics of the

framework – that it is not intended to interfere with existing contractual arrangements.

In terms of the timing of the procedural (non-binding) arbitration guide or guides for the

arbitrator on the arbitration process and for disputing parties, these should be in place on

commencement of the Rules (1 September 2017). The GMRG will work in conjunction

with the AER to ensure these guides are developed and made available on the AER

website by 1 September 2017.

5.3 Expected timing

The table below provides a summary of the GMRG’s expected timelines for the

implementation of the new framework. These timeframes are based upon the initial Rules

being submitted to Council out-of-session in early August and a 1 September 2017

commencement date. This commencement date will be dependent upon Ministers voting

promptly. Alternatively, Ministers could consider the final Rules at their 8 September

meeting. However, this would likely prevent the Rules from being operational until at least

mid-September, or potentially as late as 1 October 2017, precluding the arbitration

mechanism from being accessed by parties in the meantime.

Table 5.1: Expected time lines for implementation of the new framework

Date Process

1 September 2017 New Rules come into effect.

Arbitration mechanism commences.

Procedural arbitration guides for the arbitrator and disputing parties are

available on the AER website.

GMRG, in consultation with the AER, progresses work on the financial

reporting guideline.

1 February 2018 Pipeline operators publish base level information and the weighted

average price per service on their websites.

30 October 2018 Pipeline operators publish first half yearly financial reports (for the

period 1 January 2018 – 30 June 2018).

30 October 2019 Pipeline operators publish first full year financial reports (1 July 2018 –

30 June 2019).

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Appendix A Options canvassed in the Options Paper

The Options Paper identified a number of forms that the information disclosure, arbitration

mechanism and arbitration principles could take. Further detail on the options that were

presented in this paper is provided below.

A.1 Information disclosure options

One of the key recommendations of the Examination was that steps be taken to reduce

the information asymmetries that shippers can face when negotiating with pipeline

operators by increasing the level of disclosure and transparency of information shippers

require when: 125

considering whether to seek access to a pipeline; and

assessing the reasonableness of a pipeline operator’s offer.

In keeping with this recommendation, the Options Paper identified the following

information disclosure options:

Option 1: Disclosure of a base level of information that shippers require when

considering whether to seek access to a pipeline, which includes information on:

o the services offered by the pipeline and the availability of those services;

o the standing offers for the services provided by the pipeline, which will set out the

terms and conditions of access, the pipeline’s pricing methodology and any

policies that may affect a shipper’s access to, or use of, the pipeline;

o technical characteristics of the pipeline that may affect access or prices; and

o the access policy that will apply if the shipper is to request access.

Option 2: Disclosure of the base level of information plus verified financial reports and

demand information.

Option 3: Disclosure of the base level of information plus verified financial reports,

demand and detailed cost information.

Option 4: Disclosure of the base level of information plus verified financial reports,

demand information and information on the prices paid by other shippers under

existing contracts.

Option 5: Disclosure of the base level of information plus verified financial reports,

demand information, detailed cost information and the information on the prices paid

by other shippers for services.

Common to each of these options was the requirement that pipeline operators disclose

the base level information that shippers require when considering whether or not to seek

access to a service. The main difference between the options was therefore whether

pipeline operators are also required to publish financial reports, demand information,

detailed cost information and/or the prices paid by shippers under existing contracts to

enable shippers to assess the reasonableness of the offer.

_________________________________

125 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 13-14.

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A.2 Arbitration mechanism

The other key recommendation from the Examination was that a framework for binding

arbitration be introduced into the NGL to provide a credible threat of intervention in the

event commercial negotiations fail. When coupled with appropriate information disclosure,

the threat of intervention is expected to incentivise parties to reach agreement through

commercial negotiations and thus rarely be triggered.

To reflect the key characteristics of the arbitration mechanism outlined in the Examination

and draft Amendment Bill, the Options Paper identified a range of approaches for

particular design components, including in relation to access proposals, the services to be

arbitrated, the role to be played by the AER, the binding nature of the arbitration,

investment safeguards and exemption framework.126

The Options Paper also identified a number of options for the key components of the

arbitration mechanism, including in relation to the form, availability, rules of procedure and

confidentiality of the arbitration. These key components vary in the five arbitration

mechanism options that have been developed, which include:

Option 1: Conventional arbitration that closely reflects commercial arbitration that is

provided for under some gas transportation contracts and Commercial Arbitration

Acts. Similarly with options 3-5, arbitration would be available to resolve disputes on

any matter, including price or other terms and conditions, associated with seeking

access to the following types of services:

o Services that require the use of the existing capacity of the pipeline, including

transportation (firm, as available, interruptible, backhaul (if not operating on a bi-

directional basis), park and loan and ancillary services (e.g. in-pipe trading

services, capacity trading services, redirection services, separate compression

services); and

o Services that require further augmentation of the pipeline, which may occur if:

an expansion is required;

the pipeline needs to be converted to a bi-directional pipeline;

a new receipt or delivery point is required (or these points need to be

expanded); or

an interconnection with another pipeline or pipelines is required.

The arbitrator would have the flexibility to determine the rules of procedure in

accordance with Chapter 6, Part 6 of the NGL and may consider an arbitration guide

provided by the AER (which could be procedural or provide guidance on applying the

pricing principles). This option would not allow the arbitrator to seek administrative or

technical assistance from the AER.

_________________________________

126 The Options Paper also outlined how existing contractual rights could be protected, how the arbitrator would be selected, the binding nature of the arbitration, how costs could be allocated, how arbitration could be terminated and errors corrected.

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Option 2: Conventional arbitration limited to disputes regarding price. This option is

similar to Option 1, except that that arbitration would only be available to resolve

disputes relating to price, or matters directly related to price.

Option 3: Conventional arbitration with additional procedural protections and partial

transparency. The primary differences between Option 1 and this option is that:

o further procedural guidance is provided to the arbitrator, including, among other

things, requiring the arbitrator to, at the commencement of the arbitration, outline

the cut-off date and time for provision of information;

o the arbitrator could seek administrative or technical support from the AER; and

o information on the existence of the arbitration would be provided on the AER

website.

Option 4: Final offer arbitration (FOA), whereby the arbitrator is constrained to

selecting one of the disputant’s final offers. The arbitrator would not provide reasons

for the selected offer, but parties could request reasons within 5 days of notice of the

determination. Under this option, the AER could also provide administrative or

technical assistance if requested by the arbitrator. This option is based primarily on the

FOA provided for under the Canada Transportation Act and the UNCITRAL Rules of

FOA.

Option 5: Combined arbitration, which, as the name suggests, combines elements of

conventional arbitration and FOA. Similarly to FOA, parties submit their final offers to

the arbitrator. If the arbitrator believes a fair and reasonable settlement lies between

the disputant’s final offers, the rules of FOA are used. If it falls outside the range

provided by the final offers, conventional arbitration rules are used.

All the options presented enabled arbitration to be available in the event a dispute arises

in the following circumstances:

when a prospective shipper is seeking access to a service;

when an existing shipper seeks to add a new service to their existing contract; and

when an existing shipper is renegotiating a new contract to take effect on the expiry of

their existing GTA.

A.3 Arbitration principles

The Options Paper also outlined a number of options for the pricing principles and other

guiding principles that an arbitrator would be required to have regard to when making its

determination.

In relation to pricing principles, the Options Paper noted that in other commercial dispute

mechanisms and access regimes, these principles range from relatively high level

principles that accord the arbitrator with broad discretion to more prescriptive principles

that limit the arbitrator’s discretion by requiring the assessment to be carried out by

reference to either:

the prices payable for comparable services; or

the costs the operator incurs in providing the service.

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The Options Paper identified five options for the pricing principles, all of which also

required the arbitrator to have regard to:

the legitimate business interests of the pipeline operator and its investment;

the interests of all persons who have rights to use the service;

the value to the provider of extensions including expansions of capacity and

expansions of geographical reach whose cost is borne by someone else;

the value to providers of interconnections whose cost is borne by someone else;

the operational and technical requirements necessary for the safe and reliable

operation of the facility; and

the level of competition for the provision of the service and the price and other terms

and conditions of any competing services.

The five options that were identified in the Options Paper included:

Option 1: The pricing principles would accord the arbitrator with broad discretion to

determine whether the price offered by the pipeline operator is reasonable. Other than

the broad factors outlined above, the arbitrator would not be provided with any

guidance or constraints upon its decision.

Option 2a: The pricing principles would require the arbitrator to determine whether the

price offered by the pipeline operator is reasonable by comparing it with the prices

payable for comparable pipeline services, but it would be left to the arbitrator to

determine how to carry out this comparison.

Option 2b: The pricing principles would require the arbitrator to determine whether the

price offered by the pipeline operator is reasonable by comparing it with the actual

costs (including a commercial rate of return) incurred by the pipeline operator in

providing the service, but it would be left to the arbitrator to determine how to carry out

this comparison.

Options 3a and 3b: These options are identical to options 2a and 2b but would

provide the arbitrator with further guidance in the pricing principles (or in guidelines

prepared by the AER) on how the comparison is to be carried out.

Options 2a, 2b, 3a and 3b also provided for the inclusion of separate pricing principles to

deal with derivative and ancillary services. These principles required the price of derivative

services to be based on the opportunity cost / benefit and delivering a reasonable

contribution to joint and common costs, while the price of ancillary services was to be

based on the cost of providing the service including a commercial rate of return.

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Appendix B Interactions with other reviews and

reforms

A range of gas market reviews and reforms are currently underway, including Council and

Australian Government led initiatives. The GMRG has taken these reviews and reforms

into account when developing its final recommendations on the new information

disclosure and arbitration framework.

The GMRG is working closely with the Australian Government and energy market

institutions to ensure consistency with future gas market reform measures and avoid

duplication of efforts.

Further detail on these other reviews and reforms is provided below.

B.1 AEMC Review of Parts 8-12 of NGR

The AEMC’s Review of Parts 8-12 of the NGR has been commissioned by the Council in

response to the ACCC’s Inquiry, which found that even if a pipeline is subject to full

regulation, the way in which the regulatory arrangements operate mean that pipeline

operators may still be able to exercise market power. Some of the features of the current

arrangements that the ACCC noted could be allowing this, include:

the rules used to determine which services will be subject to ex ante regulation, which

focus on whether the service is likely to be sought by a ‘significant part of the market’,

rather than on whether there is any competition for that service; and

the rules relating to expansions, which can result in expanded capacity not forming

part of the covered pipeline and therefore outside the scope of regulation.

The ACCC also noted that the dispute resolution framework may not be providing an

effective constraint on the behaviour of pipeline operators. In doing so, the ACCC noted

that the costs and resources associated with an access dispute, coupled with uncertainty

surrounding the final outcome, may be discouraging shippers from triggering these

provisions.

On 19 August 2016, the Council agreed to task the AEMC to review Parts 8-12 of the

NGR. The Review is now underway with the terms of reference provided to the AEMC on

5 May 2017. Under the Terms of Reference, the AEMC is required to publish an issues

paper in the first half of 2017 and draft report for consultation in early 2018, with a final

report and recommendations provided to the Council by June 2018.

The Examination recognised that the information disclosure and dispute resolution

mechanisms applying to scheme pipelines may not be posing an effective constraint on

their behaviour. Making changes to these aspects of the existing regulatory framework

would go beyond the scope of the task directed by the Council. The GMRG therefore

encourages the AEMC to consider these issues further.

The Examination also identified the need for further consideration to be given to whether

changes to the existing regulatory arrangements would be required once the new

framework is in place, including whether the light regulation option for covered pipelines is

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maintained. Given the accelerated pace in which Council requested the Examination’s

recommendations be implemented, there has not been time to consider this issue as part

of this process. The GMRG encourages the AEMC as a part of its review to consider the

inconsistencies between the treatment of pipelines subject to light regulation and non-

scheme pipelines (see Figure 1.2 for an overview of the differences), including if the light

regulation option should be retained. The findings and any recommendation by the AEMC

could then be further considered by SCO when they carry out their review of the

effectiveness of the measures, which will occur two years after the new framework is

implemented.

B.2 SCO review of subsequent measures

At the 14 December 2016 Council meeting, it was agreed that SCO would review the

need for subsequent measures two years after the implementation of the new information

disclosure and arbitration framework. As part of this review, SCO are likely to consider

whether the coverage test should be amended and if the light regulation option should be

retained.

This review will also provide SCO and other stakeholders the opportunity to stand back

and take stock of whether:

the new information disclosure requirements that are implemented through this

process have gone far enough to address the information asymmetries faced by

shippers, or if greater transparency and information disclosure is required; and

the arbitration mechanism, as implemented, is providing a credible threat and posing a

constraint on the behaviour of the pipeline operators, or if further changes need to be

made to the mechanism and/or the coverage test.

B.3 Australian Government measures for cheaper, more

reliable gas

On 15 March 2017, the Prime Minister, the Hon Malcolm Turnbull MP, and the gas

industry agreed to the following measures, which are intended to provide for cheaper and

more reliable gas supplies to the domestic market:127

Peak Electricity Demand - Gas Supply Guarantee: Gas producers guaranteed that

gas would be available to meet peak demand periods in the National Electricity Market

(such as during heat waves). Implementation arrangements are to be developed with

the market bodies and other industry participants and AEMO will be given a power to

direct the market. This arrangement is to be in place in time for next summer.

New gas production: Gas producers have agreed to make more gas available to the

domestic market as soon as possible, to keep downward pressure on prices.

Producers also agreed to revise their domestic gas production forecasts and to

provide that information to AEMO so that it can produce an updated supply outlook.

Two of the LNG exporters gave a commitment to being net domestic gas contributors,

as part of their social licence. The third took the matter on notice.

_________________________________

127 The Hon Malcolm Turnbull, Prime Minister of Australia, ‘Measures agreed for cheaper, more reliable gas’, Media Release, 15 March 2017, https://www.pm.gov.au/media/2017-03-15/measures-agreed-cheaper-more-reliable-gas.

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Market transparency: The ACCC and Dr Mike Vertigan to advise on options to

quickly improve transparency in the gas market, to facilitate competition between

producers and information for purchasers. The scope is to include the full supply chain

- producers, transporters, retailers.

State regulation: The meeting called on the state and territory governments to revisit

restrictions on gas exploration and development.

Community support: Industry acknowledged the importance of community support.

Gas market reform: Gas market reforms arising from the recent AEMC gas review

are to be accelerated. These reforms will improve pipeline capacity trading and gas

trading markets. Further reforms to improve the gas market will be urgently

considered.

Implementation arrangements: The Government agreed to establish a Taskforce

that will manage implementation of the above outcomes, and report to the Cabinet

Energy Committee. The Taskforce will include key Departments (PM&C, Energy,

Industry, Treasury) and agencies (Geoscience Australia) and energy market bodies

(AEMO, ACCC/AER, AEMC).

Of particular relevance to this process are the market transparency and gas market reform

measures, which the GMRG will be working on alongside a number of other agencies.

On 19 April 2017, the Prime Minister, Deputy Prime Minister and Ministers Frydenberg,

Canavan and Sinodinos also met with gas industry executives and AEMO Chief

Executive, to work through both the short term and long term challenges facing

households and business in getting access to gas at reasonable prices.128 During the

meeting the gas industry executives indicated that:

they have worked with AEMO to develop a framework to make sure gas is delivered at

times of peak electricity demand to prevent blackouts and the arrangement will be in

place by 1 October this year; and

supply and production figures have been revised, which, subject to further study by

AEMO, will help address projected shortfalls.

The meeting also discussed the agreement of the Council to accelerate gas market and

pipeline reforms and the critical role of the states and territories in enabling gas

exploration and development.

B.4 ACCC monitoring of the eastern Australian gas market

On 19 April 2017, the Treasurer, the Hon Scott Morrison MP, directed the ACCC to

conduct an inquiry to improve transparency and to monitor gas supply in Australia

pursuant to subsection 95H(1) of the Competition and Consumer Act 2010 (CCA).

The inquiry is intended to improve the transparency of, and support the efficient operation

of, the gas market. It will also monitor the gas supply market and help to identify if gas

_________________________________

128 The Hon Malcolm Turnbull, Prime Minister of Australia, ‘Gas Supply’, Media Release, 19 April 2017, https://www.pm.gov.au/media/2017-04-19/gas-supply-0 .

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suppliers are net contributors to the domestic gas market and are delivering on the gas

supply guarantee. The matters to be monitored and considered by the inquiry will include:

the pricing and availability of offers to supply gas;

the volumes of gas supplied or available for current or future supply, including natural

gas extracted or produced in Australia, or imported into Australia;

the pricing, volume and availability of gas for domestic supply compared to the pricing,

volume and availability of gas for export; and

the pricing, volume and availability of other goods or services, such as goods or

services for drilling, storing or processing gas, that enable, assist or facilitate the

supply of gas or gas transportation services in Australia.

The inquiry commenced immediately and will continue for three years. The Terms of

Reference for the inquiry requires the ACCC to submit interim reports at least every six

months, with the first report due October 2017, and provide more regular information to

the market as appropriate. A final report is required to be submitted to the Treasurer by 30

April 2020.

The ACCC will also work with the GMRG to recommend longer term transparency

measures. The scope of this work will cover the full supply chain, including producers,

transporters and retailers.

The Terms of Reference for the review are available here:

https://www.accc.gov.au/system/files/Gas%20market%20transparency%20measures%20

Terms%20of%20reference.pdf

B.5 Improvements to the Natural Gas Bulletin Board

The AEMC recommended a number of changes to Natural Gas Services Bulletin Board in

its East Coast Review. These recommendations were endorsed by the Council at its

August 2016 meeting129 and are being progressed by SCO in two phases.

Phase one provides details of the issues identified by the AEMC and the proposed rule

changes that the SCO is seeking to make to address these issues that do not first require

changes to the NGL or Regulations.

A rule change request was submitted by SCO to the AEMC on 18 April 2017. The purpose

of this rule change request is to:

clarify the purpose of the Bulletin Board;

remove the current zonal model and establish a new reporting model;

exempt remote pipelines from reporting obligations;

include regional pipelines and facilities and facilities attached to distribution pipelines;

establish a new registration framework and threshold;

_________________________________

129 COAG Energy Council, Gas Market Reform Package Appendix A – Energy Council response to ACCC and AEMC’s reports, August 2016.

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include a reporting standard;

remove the market participant and Australian Energy Market Operator (AEMO) cost

recovery provisions; and

add a new biennial reporting requirement for AEMO.

A second rule change request (Phase Two) will be submitted to the AEMC once changes

to the NGL and Regulations have been made to add new reporting entities to the Bulletin

Board framework, as agreed by Council.

B.6 Transportation capacity trading reforms

As part of its East Coast Review, the AEMC recommended:130

the introduction of a day-ahead auction of contracted but un-nominated pipeline

capacity and a capacity trading platform(s) with exchange based trading;

the standardisation of key contract terms in primary and secondary capacity related

transportation contracts; and

the introduction of a new reporting framework, which would require the prices struck in

secondary capacity trades and the auction to be published.

These reforms, which are being progressed by the GMRG, are expected to result in a

greater level of transparency about:

the terms and conditions of access to non-scheme transmission pipelines; and

the value of secondary capacity, which could be used to inform a shipper’s

assessment of the prices offered for as available or interruptible services.

The implementation of the new framework will not adversely affect the capacity trading

reforms. Should a shipper wish to seek access to the pipeline service/s in accordance with

an arbitration determination it will enter a contract with the pipeline operator that reflects

the determination outcome. Nothing is expected to prevent the shipper from engaging in

secondary capacity trading if it chooses to do so.

_________________________________

130 AEMC, Stage 2 Final Report: East Coast Wholesale Gas Market and Pipeline Frameworks Review, 23 May 2016, p. viii.

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Appendix C List of stakeholder submissions

The GMRG received submissions responding to the Options Paper from the following

stakeholders:

Australian Competition and Consumer Commission (ACCC)

Australian Energy Regulator (AER)

Australian Gas Networks (AGN)

APA Group

Australian Pipelines and Gas Association (APGA)

Australia Pacific LNG (APLNG)

Australian Petroleum Production and Exploration Association (APPEA)

ATCO Australia

Central Petroleum

Chemistry Australia

CSR

DBP Transmission

EnergyAustralia

Epic Energy

Energy Users Association of Australia (EUAA)

Gladstone LNG (GLNG)

Hydro Tasmania

Jemena

Major Energy Users (MEU) Inc.

Origin Energy

Qenos

Senex Energy

Shell

Tas Gas Retail

Tas Gas Networks

Tri-Star Petroleum

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Appendix D APA’s proposed negotiate/arbitrate model