Gas Pipeline Information
Disclosure and Arbitration
Framework
Final Design Recommendation
June 2017
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
i
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)
ii
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.
_________________________________
1
2
3
4
5
ACCC, Inquiry into the East Coast Gas Market, April 2016, pp. 18-20.
Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 9-10.
Ibid, pp. 12-13.
ibid, p. 78.
Ibid, pp. 13-15.
1
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.
2
Table 1.1: Options Paper design options
Option
Option 1
Option 2
Option 3
Option 4
Option 5
Option 1
Option 2
Option 3
Option 4
Option 5
Option 1
Option 2a
Option 2b
Option 3a
Option 3b
Description
Information Disclosure
Information to enable shippers to
Information to enable shippers to assess
determine whether to seek access
reasonableness of an offer
Base level of information on:
n.a.
o the services offered by the pipeline and
Financial reports + demand information
the availability of those services;
Financial reports + demand information +
o the standing offers for the services
detailed cost information
provided by the pipeline;
Financial reports + demand information +
o the technical characteristics of the
prices paid by other shippers
pipeline that may affect access; and
Financial reports + demand information +
o the negotiation framework that will apply
detailed cost information + prices paid by other
if the shipper requests access.
shippers
Arbitration Mechanism
Conventional arbitration that more closely reflects commercial arbitration
Conventional arbitration limited to disputes regarding price
Conventional arbitration with additional procedural protections and partial transparency
Final offer arbitration
Combined arbitration (elements of conventional arbitration and final offer arbitration)
Arbitration Principles
Broad discretion in pricing principles supplemented by other guiding principles
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).
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 2a with further guidance in the pricing principles on how the comparison of the prices of
comparable services is to be carried out.
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.
_________________________________
6
Public submissions can be accessed on the GMRG website: http://gmrg.coagenergycouncil.gov.au/publications/gaspipeline-information-disclosure-and-arbitration-framework-implementation-options.
3
Figure 1.1: Stakeholder feedback on preferred design options
4
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 pricebased, with:
o
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
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
5
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.
_________________________________
7
8
9
The NGO is set out in section 23 of the NGL.
COAG Energy Council, Australian Gas Market Vision, December 2014.
Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78.
6
Table 1.2: Final recommendation on the design of the information disclosure and arbitration framework
Objective
Purpose
Detail
Information disclosure and arbitration 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 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
Reduce the information asymmetry shippers
Provide a credible threat of intervention to constrain the exercise of market power by pipeline operators during commercial
can face in negotiations and, in so doing,
negotiations. To pose a credible threat, arbitration must provide for the final resolution of commercial disputes without
facilitate more timely and effective negotiations.
unnecessary delay or expense.
Non-scheme pipeline operators would be
The arbitration mechanism is to be based
Pricing principles:
required to publish the following information on
on the conventional arbitration with partial
 Firm transportation services, ancillary services and augmentations: When
their website:
transparency model. Key design elements
assessing the reasonableness of the offer for these types of services, the
 The base level of information shippers
include:
arbitrator is to have regard to the cost of providing the service, which is to
require when considering whether to seek
 Arbitration could be used to settle
include a commercial rate of return that reflects the risks the pipeline operator
access, which is to include information on
disputes in relation to all aspects of
faces in providing the service. When determining the value of any assets
the pricing methodology and the inputs
access to all types of services offered
used in the provision of the service, the arbitrator can have regard to any
used to calculate the standing offers for
(excluding extensions).
asset valuation techniques it considers are consistent with the workably
each service offered by the pipeline
competitive market objective, including those that take into account past
 Arbitration would be ‘on the papers’
 The weighted average price paid for each
recoveries of capital.
using information exchanged by parties
service (published on an annual basis).
in negotiations (Stage 2). The arbitrator
 Derivative services (i.e. services that utilise the capacity of the pipeline but
 Independently verified financial reports for
would have the discretion to conduct
are priced as a multiple of, or discount to, the firm transportation service):
each pipeline (prepared on an individual
hearings and request further
When assessing the reasonableness of the offer for these services, the
pipeline basis), and a breakdown of
information if required, but the parties
arbitrator is to have regard to the opportunity cost and/or benefit of providing
demand (by service). This information
would not have the right to introduce
the service relative to the firm service (taking into account effects on cost
would be published on an annual basis
additional information on their own
and/or capacity) and provide a reasonable contribution to joint and common
four months after the end of the financial
volition.
costs.
year and include information on the

If
the
dispute
is
price-related,
the
Non-price
terms and conditions principles:
methods or principles the pipeline operator
parties would be required to provide
 When assessing the reasonableness of any non-price terms and conditions
has used to determine the value of the
their final offers to the arbitrator and the
of the pipeline operator’s offer to provide a service or services, the arbitrator
assets, depreciation allowance and cost
respective offers would become the
is to have regard, as far as practicable, to what would likely prevail in a
allocation.
bounds of the arbitrator’s determination.
workably competitive market.
If access is sought, the pipeline operator would
 The arbitrator may seek administrative
be incentivised to provide the shipper with
Guiding principles:
support from the AER.
information on the cost of providing the service
 The arbitrator will also be required to have regard to the pipeline operator’s
as the information exchanged during
 Information on the existence of the
legitimate business interests, the interests of other persons who have rights
negotiations will form the basis for any
arbitration would be published on the
to use the service, the value to the providers of extensions including
arbitration.
AER website.
expansions of capacity whose cost is borne by someone else, the value to
The information disclosure requirements would
the provider of interconnections to the facility whose cost is borne by
be subject to a reporting standard and
someone else and the operational and technical requirements necessary for
classified as civil penalty provisions.
the safe and reliable operation of the facility.
7
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 nonscheme 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 bidirectional 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;
_________________________________
10
11
Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 10.
ibid, p. 80.
8
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
_________________________________
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.
9
“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
10
Stage 3: If negotiations
fail, either party may
seek arbitration.
Arbitrator to make
decision having regard
to the arbitration
principles
Table 1.3: Staged approach to information disclosure, negotiations and arbitration
Stage
Stage 1:
Shipper
considers
whether to
seek access
Stage 2:
Request for
service and
commercial
negotiation
Stage 3:
Arbitration
Detail
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.
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.
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
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 nonscheme 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.
11
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.
12
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
14
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.
ACCC, submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 8.
13
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.
14
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
15
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.
_________________________________

16
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.
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.
16
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.
17
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
18
19
20
21
22
Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 10 and 78.
Ibid, p. 10.
Ibid, p. 80.
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.
Ibid, pp, 12-13.
Ibid, p. 78.
18
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
24
Ibid, pp. 13-15.
COAG Energy Council, Meeting Communique, 14 December 2016, p. 1.
19
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
26
27
Independent Committee of Inquiry on National Competition Policy, National Competition Policy Review, 25 August
1993, p. 269.
Application by Chime Communications Pty Ltd (No. 2) [2009] ACompT 2, para 37.
Wellington International Airport Ltd & Ors v Commerce Commission [2013] NZHC [11 December 2013], para 22.
20
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
29
30
31
See section 291 of the NGL.
The NGO is set out in section 23 of the NGL.
COAG Energy Council, Australian Gas Market Vision, December 2014.
AEMC, Stage 2 Final Report: Information Provision, May 2016, p. 4.
21
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.
22
Table 3.1: Options Paper design options
Option
Option 1
Option 2
Option 3
Option 4
Option 5
Description
Information Disclosure
Disclosure of information to enable shippers Disclosure of information to enable
to determine whether to seek access to a
shippers to assess the reasonableness
pipeline service
of a pipeline operator’s offer
Base level of information on:
n.a.
Financial reports + demand information
 the services offered by the pipeline and the
Financial reports + demand information +
availability of those services;
detailed cost information
 the standing offers for the services provided
Financial reports + demand information +
by the pipeline, which is to include
information on the price and non-price terms prices paid by other shippers
Financial reports + demand information +
and conditions for the services, the
detailed cost information + prices paid by
methodology used to calculate the prices
other shippers
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.
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
The other guiding principles were as follows:
determine whether the price offered is
reasonable having regard to the other guiding  the legitimate business interests of the
principles
pipeline operator, and the pipeline
operator’s investment in the pipeline;
Option 2a Pricing principles based on price payable for
comparable pipeline services (including
 the interests of all persons who have
principles on how the prices of derivative and
rights to use the service;
ancillary services should be determined).
 the value to the provider of extensions
Option 2b Pricing principles based on the cost of service
including expansions of capacity and
provision (including a commercial rate of
expansions of geographical reach whose
return).
cost is borne by someone else;
Separate principles used to determine how the
 the value to the provider of
prices of derivative and ancillary services
interconnections to the facility whose cost
Option 3a Option 2a with further guidance in the pricing
is borne by someone else;
principles on how the comparison of the prices
 the operational and technical
of comparable services is to be carried out.
requirements necessary for the safe and
Option 3b Option 2b with further guidance in pricing
reliable operation of the facility; and
principles on how the cost of service provision
(including the commercial rate of return) is to
 the level of competition for the provision
be determined.
of the service and the price and other
terms and conditions of any competing
services.
23
Table 3.2: Preliminary view on the options
Purpose
Information disclosure requirements
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.
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
Preferred
option
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.
Arbitration mechanism
Arbitration principles
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.
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
24
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
33
34
35
36
See the submissions of AGN, APA, DBP, Epic, Jemena and APGA.
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.
See the submissions of Origin Energy, EnergyAustralia, Tristar Petroleum, Senex, Central Petroleum and the ACCC.
See the submissions of Tas Gas Retail, Shell, APLNG, APPEA and the AER.
See the submissions of Qenos, CSR, MEU, EUAA and Chemistry Australia.
25
Figure 3.1: Stakeholder feedback on preferred design options
26
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 costreflective 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
38
39
40
41
DBP, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
Epic, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,
p. 14.
APA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
See, for example, the submissions of APLNG and APPEA.
See, for example, the submissions of Shell, EUAA, MEU and Hydro Tasmania.
27
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
43
44
45
46
47
48
49
ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 10.
See the submissions of Jemena, Epic and DBP.
See, for example, the submission of Hydro Tasmania.
See, for example, the submissions of Shell.
EUAA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017.
Ibid.
See, for example, the submissions of CSR, APPEA and Shell.
ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 10.
28

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
51
APA, Alternative proposal, undated.
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.
DBP, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
APA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
MEU, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
EUAA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p.
7.
54
55
56
57
29
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
59
60
61
Chemistry Australia, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13
April 2017.
EUAA, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
Central Petroleum, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13
April 2017.
DBP, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
30
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.
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.
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.
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.
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.
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.
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.
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.
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
63
64
See the submissions of Epic, Jemena, APA, Tas Gas Retail and EUAA.
See the submissions of APA and Epic.
See the submissions of Tas Gas Retail, Senex Energy, APGA, APA and DBP.
31
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
66
67
See section 216Q(2).
See the submissions of APA, Epic, Jemena, DBP and APGA.
See the submissions of the ACCC, AER, EUAA, APA and Epic.
32
Summary of proposed approach
Stakeholder feedback
Role of the AER
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.
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.
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.
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.
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.
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.
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.
2. Nothing further included on the access seekers right to terminate.
Correction of errors
APA and Tas Gas Retail agreed with proposed approach.
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).
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.
 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.
_________________________________
68
See, for example, the submissions of DBP, Epic, APA and Jemena.
33
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
70
71
72
73
74
See, for example, the submissions of Shell and EUAA.
See, for example, the submissions of DBP, AGN, APA and APGA.
See the submissions of Tas Gas Retail, Origin, Energy Australia, Tri Star, Senex, APLNG, Qenos, Hydro Tasmania
and Chemistry Australia.
See the submissions of ACCC, AER, Shell, CSR, MEU, EUAA, Central Petroleum and APPEA.
See the submissions of EUAA, AER, MEU, Shell, and ACCC. Origin also noted the value in developing a guideline on
asset valuation techniques.
AER, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.
34
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
76
77
78
79
Origin Energy, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 19
April 2017, p. 2.
See the submissions of Jemena, APA and APGA.
See, for example, the submissions of DBP and APA.
See, for example, the submissions of APGA, APA and Epic.
See, for example, the submissions of APA, Epic and Jemena.
35
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.
36
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
82
83
84
85
86
87
88
Jemena, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 15 May
2017, p. 5.
ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 18.
EUAA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 9.
See, for example, the submissions of APA, Jemena and EUAA.
ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 18.
CSR, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,
p. 1.
MEU, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017,
p. 14.
Tas Gas Retail, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13
April 2017, p. 12.
37

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.
38
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
91
See the submissions of AGN, APGA and ENA.
See the submissions of AGN, Tas Gas Networks, APGA and ENA.
39
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.
40
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
94
95
EnergyAustralia, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Implementation
Options Paper, 19 April 2017, p. 2.
Tas Gas Retail, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Implementation
Options Paper, 13 April 2017, p. 14.
Ibid.
41
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
42
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.
43
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.
44
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.
45
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.
46
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
47
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.
48

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
49
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.
50
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 costreflective 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.
51
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.
52

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 nocoverage 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 singleshipper 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 nonscheme 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
53
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
104
ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April
2017, p. 14.
Central Petroleum, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper,
13 April 2017.
54
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
106
107
Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78,
The NGO is set out in section 23 of the NGL.
COAG Energy Council, Australian Gas Market Vision, December 2014.
55

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 costeffective 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:
56

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.
57
Table 4.1: Final recommendation on the design of the information disclosure and arbitration framework
Objective
Purpose
Detail
Information disclosure and arbitration 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 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
Reduce the information asymmetry shippers
Provide a credible threat of intervention to constrain the exercise of market power by pipeline operators during
face in negotiations and facilitate more timely
commercial negotiations. To pose a credible threat, arbitration must provide for the final resolution of commercial
and effective negotiations.
disputes without unnecessary delay or expense.
Non-scheme pipeline operators would be
The arbitration mechanism is to be
Pricing principles:
required to publish the following information on
based on the conventional arbitration
 Firm transportation services, ancillary services and augmentations:
their website:
with partial transparency model. Key
When assessing the reasonableness of the offer for these types of
design elements include:
services, the arbitrator is to have regard to the cost of providing the
 The base level of information shippers
require when considering whether to seek
 Arbitration could be used to settle
service, which is to include a commercial rate of return that reflects the
disputes in relation to all aspects of
risks the pipeline operator faces in providing the service. When
access, which is to include information on
access to all types of services offered
determining the value of any assets used in the provision of the service,
the pricing methodology and the inputs
(excluding extensions).
the arbitrator can have regard to any asset valuation techniques it
used to calculate the standing offers for
 Arbitration would be ‘on the papers’
considers are consistent with the workably competitive market
each service offered by the pipeline
using information exchanged by
objective, including those that take into account past recoveries of
 The weighted average price paid for each
parties in negotiations (Stage 2). The
capital.
service (published annually).
arbitrator would have the discretion to  Derivative services (i.e. services that utilise the capacity of the pipeline
 Independently verified financial reports for
conduct hearings and request further
but are priced as a multiple of, or discount to, the firm transportation
each pipeline (prepared on an individual
information if required, but the parties
service): When assessing the reasonableness of the offer for these
pipeline basis), and a breakdown of
would not have the right to introduce
services, the arbitrator is to have regard to the opportunity cost and/or
demand (by service). This information
additional information on their own
benefit of providing the service relative to the firm service (taking into
would be published on an annual basis
volition.
account effects on cost and/or capacity) and provide a reasonable
four months after the end of the financial
 If the dispute is price-related, the
contribution to joint and common costs.
year and include information on the
parties would be required to provide
Non-price terms and conditions principles:
methods or principles the pipeline operator
their final offers to the arbitrator and
 When assessing the reasonableness of any non-price terms and
has used to determine the value of the
the respective offers would become
conditions of the pipeline operator’s offer to provide a service or
assets, depreciation allowance and cost
the bounds of the arbitrator’s
services, the arbitrator is to have regard, as far as practicable, to what
allocation.
determination.
would likely prevail in a workably competitive market.
If access is sought, the pipeline operator would
 The arbitrator may seek
Guiding principles:
be incentivised to provide the shipper with
administrative support from the AER.
 The arbitrator will also be required to have regard to the pipeline
information on the cost of providing the service
 Information on the existence of the
operator’s legitimate business interests, the interests of other persons
as the information exchanged during
arbitration would be published on the
who have rights to use the service, the value to the providers of
negotiations will form the basis for any
AER website.
extensions including expansions of capacity whose cost is borne by
arbitration.
someone else, the value to the provider of interconnections to the
The information disclosure requirements would
facility whose cost is borne by someone else and the operational and
be subject to a reporting standard and classified
technical requirements necessary for the safe and reliable operation of
as civil penalty provisions.
the facility.
58
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
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
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.
59
Table 4.2: Staged approach to information disclosure, negotiations and arbitration
Stage
Stage 1:
Shipper
considers
whether to seek
access
Stage 2:
Request for
service and
commercial
negotiation
Stage 3:
Arbitration
Detail
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.
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.
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
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 nonscheme 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.
60
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.
61
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 pipelinespecific 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.
62
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 multipipeline 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.
63
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
64
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.
65
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
66
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 highlevel 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).
67
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 bidirectional 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
68
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 cutoff 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
69
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 nonscheme 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.
70
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.
71
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.
72
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.

Costs
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.
 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
115
This is consistent with access determinations in relation to scheme pipelines in accordance with NGR 118.
See section 216N and 216U of the Amendment Bill.
73
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.
74
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.
75
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.
76
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.
_________________________________
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.
77
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.
78
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.
79
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
123
The initial Rules for the new framework will be made by the South Australian Minister.
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.
80
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 halfyearly 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
81

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.
82
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).
83
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.
84
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 bidirectional 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.
85

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.
86
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.
87
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
88
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 nonscheme 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.
89

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
_________________________________
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 .
128
90
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
94