Gas Pipeline Information Disclosure and Arbitration Framework - Final Design Recommendation

Gas Pipeline Information Disclosure and Arbitration Framework

Final Design Recommendation

June 2017

Contents

Abbreviationsii

1.Introduction and Summary1

1.1Objective of the new framework2

1.2Work on the development of the new framework2

1.3Final recommendation on design of the new framework6

1.4Forward process15

1.5Implementation and transitional arrangements15

1.6Structure of the report17

2.Objectives of the new framework18

2.1Problem to be addressed by the new framework18

2.2Objective of the new framework19

2.3Assessment framework21

3.Design options and stakeholder feedback22

3.1Options for the new framework22

3.2Stakeholder feedback25

3.3GMRG’s consideration of stakeholder feedback43

4.Final recommendation on the design of the new information disclosure arbitration framework55

4.1Final design of the new framework56

4.2Consistency of the new framework with the NGO and Vision78

5.Implementation and transitional arrangements80

5.1Implementation of the information disclosure requirements80

5.2Implementation of the arbitration mechanism81

5.3Expected timing83

Appendix AOptions canvassed in the Options Paper84

Appendix BInteractions with other reviews and reforms88

Appendix CList of stakeholder submissions93

Appendix DAPA’s proposed negotiate/arbitrate model94

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)

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.[footnoteRef:2] [2: ACCC, Inquiry into the East Coast Gas Market, April 2016, pp. 18-20.]

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);[footnoteRef:3] and [3: Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 9-10.]

the test for regulation (the coverage test) did not appear to be posing a credible threat to pipeline operators.[footnoteRef:4] [4: Ibid, pp. 12-13.]

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.[footnoteRef:5] 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:[footnoteRef:6] [5: ibid, p. 78.] [6: Ibid, pp. 13-15.]

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.

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.

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.

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.

Table 1.1: Options Paper design options

Option

Description

Information Disclosure

Information to enable shippers to determine whether to seek access

Information to enable shippers to assess reasonableness of an offer

Option 1

Base level of information on:

the services offered by the pipeline and the availability of those services;

the standing offers for the services provided by the pipeline;

the technical characteristics of the pipeline that may affect access; and

the negotiation framework that will apply if the shipper requests access.

n.a.

Option 2

Financial reports + demand information

Option 3

Financial reports + demand information + detailed cost information

Option 4

Financial reports + demand information + prices paid by other shippers

Option 5

Financial reports + demand information + detailed cost information + prices paid by other shippers

Arbitration Mechanism

Option 1

Conventional arbitration that more closely reflects commercial arbitration

Option 2

Conventional arbitration limited to disputes regarding price

Option 3

Conventional arbitration with additional procedural protections and partial transparency

Option 4

Final offer arbitration

Option 5

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

Arbitration Principles

Option 1

Broad discretion in pricing principles supplemented by other guiding principles

Option 2a

Pricing principles based on price payable for comparable pipeline services supplemented by other guiding principles (including principles on how the prices of derivative and ancillary services should be determined).

Option 2b

Pricing principles based on the cost of service provision (including a commercial rate of return, which reflects the level of risk borne by the pipeline operator) supplemented by other guiding principles (including principles on how the prices of derivative and ancillary services should be determined).

Option 3a

Option 2a with further guidance in the pricing principles on how the comparison of the prices of comparable services is to be carried out.

Option 3b

Option 2b with further guidance in pricing principles on how the actual cost of service provision (including the commercial rate of return) is to be determined.

Stakeholders were provided over three weeks to provide written feedback on the options presented in the Options Paper and were also invited to attend a series of industry roundtable discussions. The roundtables were attended by 24 organisations with interests in non-scheme pipelines, upstream production, retailing, generation and industrial gas use. Written submissions were also received from 27 organisations with interests across the supply chain and from both the Australian Competition and Consumer Commission (ACCC) and the Australian Energy Regulator (AER).[footnoteRef:7] Feedback on the design of the new framework has also been provided through extensive bilateral discussions with stakeholders. [7: Public submissions can be accessed on the GMRG website: http://gmrg.coagenergycouncil.gov.au/publications/gas-pipeline-information-disclosure-and-arbitration-framework-implementation-options.]

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.

Figure 1.1: Stakeholder feedback on preferred design options

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.

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).

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:

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

pipeline operators stating that the likelihood of reaching a commercial agreement would be increased if the principles were higher level, because it would create more uncertainty about the arbitration outcome and incentivise parties to reach agreement.

There was also debate about whether the pricing principles should be cost- or price-based, with:

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 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.

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;[footnoteRef:8] and [8: The NGO is set out in section 23 of the NGL.]

where relevant, the Council’s Vision.[footnoteRef:9] [9: COAG Energy Council, Australian Gas Market Vision, December 2014.]

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.[footnoteRef:10] 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. [10: Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78.]

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.

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

Information disclosure and arbitration framework

Objective

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

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

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

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

Information disclosure requirements

Arbitration mechanism

Arbitration principles

Purpose

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

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

Detail

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

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

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

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

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

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

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

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

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

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

· The arbitrator may seek administrative support from the AER.

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

Pricing principles:

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

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

Non-price terms and conditions principles:

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

Guiding principles:

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

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.[footnoteRef:11] 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: [11: Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 10.]

Considering whether to seek access to a pipeline: To enable shippers to make an informed decision about whether to seek access, the final design provides for pipeline operators to publish on their websites the base level information outlined in Table 1.1.

Assessing the reasonableness of a pipeline operator’s offer: To enable shippers to assess the reasonableness of the standing offer, the final design provides for non-scheme pipeline operators to publish on their websites independently verified financial reports and demand information (by pipeline), the weighted average prices received for each service and the inputs used in the calculation of the standing offers. Pipeline operators will also be expected to provide shippers with information on the cost of providing the specific service sought by a shipper during negotiations.

In keeping with the suggestion made by a number of shippers, the ACCC and the AER, the final design provides for greater alignment between the information to be disclosed to the shipper during the negotiations with the information that an arbitrator would require if negotiations fail and the arbitration mechanism is triggered.

Arbitration mechanism

In the Examination, concerns were also raised about the absence of any constraint on the behaviour of pipeline operators during negotiations.[footnoteRef:12] 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: [12: ibid, p. 80.]

a prospective shipper is seeking access to a service;

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

an existing shipper is negotiating a new contract.

The arbitration mechanism will be available to resolve disputes on any matter, including price or other terms and conditions, associated with seeking access to the following types of services:

services that require the use of the existing capacity of the pipeline, including transportation (firm, as available, interruptible, backhaul (if not operating on a bi-directional basis), park and loan and ancillary services (e.g. in-pipe trading services, capacity trading services, redirection services, separate compression services); and

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

an expansion is required;

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

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

an interconnection with another pipeline or pipelines is required.

It will not, however, be available for extensions.[footnoteRef:13] [13: 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.

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.

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 “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.

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

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

Stage

Detail

Stage 1:

Shipper considers whether to seek access

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

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

· the pipeline’s financial reports and demand information; and

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

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

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

Stage 2: Request for service and commercial negotiation

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

Access request and response

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

Negotiation

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

Stage 3: Arbitration

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

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

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

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

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

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

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

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

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

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.

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.[footnoteRef:14] 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. [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. ]

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:[footnoteRef:15] [15: ACCC, submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 8.]

“…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”.

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.

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

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 guides[footnoteRef:16] for the arbitrator and disputing parties on the arbitration process. [16: 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; andthe 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. ]

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.[footnoteRef:17] [17: 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.]

The GMRG has considered a number of potential transitional issues associated with the implementation of the arbitration mechanism, including if the arbitration mechanism should be available to parties immediately in the absence of parties having met the requirements that will be set out in the Rules. The GMRG recognises that a transitional arrangement will likely be required in the Rules to deal with disputes that commenced before the new framework comes into effect, the details of which need to be considered further during the development of the Rules.

The GMRG expects that a fast-track arbitration could apply, which would waive the requirement for shippers and pipeline operators to comply with any requirements in stages 1 and 2 of the framework. Under such an arrangement, the arbitrator would likely be required to request, potentially significant, additional information from parties to apply the arbitration principles in the absence of the information published in Stage 1 and the exchange of cost and other relevant information in Stage 2. More time may also be required for the determination to be made.

The 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.

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.

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.

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.[footnoteRef:18] Shippers also claimed that: [18: Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 10 and 78.]

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;[footnoteRef:19] and [19: Ibid, p. 10.]

the existing test for regulation (the coverage test) does not pose a credible threat to pipeline operators and is not therefore constraining their behaviour.[footnoteRef:20] [20: Ibid, p. 80.]

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.[footnoteRef:21] 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.[footnoteRef:22] [21: 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.] [22: Ibid, pp, 12-13.]

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.[footnoteRef:23] [23: Ibid, p. 78.]

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:[footnoteRef:24] [24: Ibid, pp. 13-15.]

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.[footnoteRef:25] [25: COAG Energy Council, Meeting Communique, 14 December 2016, p. 1.]

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 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:[footnoteRef:26] [26: Independent Committee of Inquiry on National Competition Policy, National Competition Policy Review, 25 August 1993, p. 269. ]

“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:[footnoteRef:27] [27: Application by Chime Communications Pty Ltd (No. 2) [2009] ACompT 2, para 37.]

“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:[footnoteRef:28] [28: Wellington International Airport Ltd & Ors v Commerce Commission [2013] NZHC [11 December 2013], para 22.]

“…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”.

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:[footnoteRef:29] [29: See section 291 of the NGL.]

· 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: [footnoteRef:30] [30: The NGO is set out in section 23 of the NGL.]

“…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:[footnoteRef:31] [31: COAG Energy Council, Australian Gas Market Vision, December 2014.]

“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.[footnoteRef:32] The assessment of the final design has therefore been carried out qualitatively. [32: AEMC, Stage 2 Final Report: Information Provision, May 2016, p. 4.]

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.

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.

Table 3.1: Options Paper design options

Option

Description

Information Disclosure

Disclosure of information to enable shippers to determine whether to seek access to a pipeline service

Disclosure of information to enable shippers to assess the reasonableness of a pipeline operator’s offer

Option 1

Base level of information on:

the services offered by the pipeline and the availability of those services;

the standing offers for the services provided by the pipeline, which is to include information on the price and non-price terms and conditions for the services, the methodology used to calculate the prices and any other policies the pipeline operator employs that may affect a shipper’s access or use;

the technical characteristics of the pipeline that may affect a shipper’s access or use, or the price payable; and

the negotiation framework that will apply if the shipper requests access.

n.a.

Option 2

Financial reports + demand information

Option 3

Financial reports + demand information + detailed cost information

Option 4

Financial reports + demand information + prices paid by other shippers

Option 5

Financial reports + demand information + detailed cost information + prices paid by other shippers

Arbitration Mechanism

Arbitration to be available in the event a dispute arises: when a prospective shipper is seeking access to a service; when an existing shipper seeks to add a new service to their existing contract; and when an existing shipper is renegotiating a new contract to take effect on the expiry of their existing GTA.

Option 1

Conventional arbitration that closely reflects commercial arbitration

Option 2

Conventional arbitration limited to disputes regarding price

Option 3

Conventional arbitration with additional procedural protections and partial transparency

Option 4

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

Option 5

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

Arbitration Principles

Pricing principles

Other guiding principles

Option 1

Arbitrator to have broad discretion to determine whether the price offered is reasonable having regard to the other guiding principles

The other guiding principles were as follows:

the legitimate business interests of the pipeline operator, and the pipeline operator’s investment in the pipeline;

the interests of all persons who have rights to use the service;

the value to the provider of extensions including expansions of capacity and expansions of geographical reach whose cost is borne by someone else;

the value to the provider of interconnections to the facility whose cost is borne by someone else;

the operational and technical requirements necessary for the safe and reliable operation of the facility; and

the level of competition for the provision of the service and the price and other terms and conditions of any competing services.

Option 2a

Pricing principles based on price payable for comparable pipeline services (including principles on how the prices of derivative and ancillary services should be determined).

Option 2b

Pricing principles based on the cost of service provision (including a commercial rate of return).Separate principles used to determine how the prices of derivative and ancillary services

Option 3a

Option 2a with further guidance in the pricing principles on how the comparison of the prices of comparable services is to be carried out.

Option 3b

Option 2b with further guidance in pricing principles on how the cost of service provision (including the commercial rate of return) is to be determined.

19

Table 3.2: Preliminary view on the options

Information disclosure requirements

Arbitration mechanism

Arbitration principles

Purpose

Reduce the information asymmetry shippers can face in negotiations and, in so doing, facilitate more timely and effective negotiations. Limit the reliance that needs to be placed on the arbitration mechanism.

Provide a credible threat of intervention to ensure appropriate behaviour from gas pipeline operators during commercial negotiations. It is the threat that controls behaviour. For arbitration to pose a credible threat it must provide for the final resolution of commercial disputes by impartial arbitration without unnecessary delay or expense.

Preferred option

Option 2: Option 1 and financial reporting

Non-scheme pipeline operators would be required to disclose on their website:

The base level of information that shippers require when considering whether to seek access to a pipeline.

Independently verified financial reports for each pipeline (prepared on an individual pipeline basis), and a breakdown of demand (by service). This information would need to be published on an annual basis four months after the end of the financial year. The verified financial reports would include:

an income statement with revenue broken down by service type and expenditure by major categories;

a statement of comprehensive income;

a statement of changes in equity;

a statement of cash flows; and

notes to the financial report, which, amongst other things, should include information on the methodologies or principles the pipeline operator has used to determine the value of the assets and the depreciation allowance as well as detail on their computation, and detail of cost allocation methods.

Option 3: Conventional Arbitration with enhanced procedural protections and partial transparency

Key design elements associated with this option are:

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

· Documentation provided to the arbitrator must be directly relevant to the matter/s in dispute.

· The arbitrator, at the commencement of the arbitration, must provide the cut-off date and time for provision of information.

· The arbitrator may also limit the amount of documentation provided and provide a list of questions for the parties to address.

· The arbitrator can seek administrative or technical support from the AER.

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

Option 2b: Pricing principles based on the actual cost of service provision supplemented by other principles

The pricing principles would state that the arbitrator’s assessment of the reasonableness of the offer is to be based upon a comparison with the costs the pipeline operator actually incurs in providing the service (including a commercial rate of return). The arbitrator would be left to decide how to carry out the test.

The pricing principles for derivative and ancillary services, would be based on the opportunity cost / benefit and, in the case of derivative services, delivering a reasonable contribution to joint and common costs.

The pricing principles would be supplemented by a number of other principles

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.

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);[footnoteRef:33] [33: See the submissions of AGN, APA, DBP, Epic, Jemena and APGA.]

six stakeholders (five shippers and the ACCC)[footnoteRef:34] believe that pipeline operators should also be required to publish verified financial reports (Option 2); [footnoteRef:35] [34: 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. ] [35: See the submissions of Origin Energy, EnergyAustralia, Tristar Petroleum, Senex, Central Petroleum and the ACCC.]

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); [footnoteRef:36] and [36: See the submissions of Tas Gas Retail, Shell, APLNG, APPEA and the AER.]

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). [footnoteRef:37] [37: See the submissions of Qenos, CSR, MEU, EUAA and Chemistry Australia.]

Figure 3.1: Stakeholder feedback on preferred design options

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.[footnoteRef:38] 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.[footnoteRef:39] 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.[footnoteRef:40] [38: DBP, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.] [39: Epic, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 14.] [40: APA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.]

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).[footnoteRef:41] [41: See, for example, the submissions of APLNG and APPEA.]

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.[footnoteRef:42] The ACCC also emphasised the importance of financial information being capable of being used to estimate cost-reflective prices and having a clear link to the pricing principles. [42: See, for example, the submissions of Shell, EUAA, MEU and Hydro Tasmania.]

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 undertaken at a pipeline operator’s own discretion and based on its experience in airports claimed that:[footnoteRef:43] [43: ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 10.]

“…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.[footnoteRef:44] [44: See the submissions of Jemena, Epic and DBP.]

The concept of a weighted average price was supported by some shippers,[footnoteRef:45] while others thought that it may not result in the provision of meaningful information.[footnoteRef:46] 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.[footnoteRef:47] [45: See, for example, the submission of Hydro Tasmania.] [46: See, for example, the submissions of Shell.] [47: EUAA, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017.]

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.[footnoteRef:48] Other stakeholders, however, suggested the information be published.[footnoteRef:49] 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).[footnoteRef:50] [48: Ibid.] [49: See, for example, the submissions of CSR, APPEA and Shell.] [50: ACCC, Submission to the Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 13 April 2017, p. 10.]

Other information

In addition to the information outlined above, stakeholders noted that there may be value in publishing some other information. For example:

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.[footnoteRef:51] [51: APA, Alternative proposal, undated.]

A number of pipeline operators suggested that shippers should be required to reveal their willingness to pay so that the disclosure requirements are symmetric.[footnoteRef:52] [52: See the submissions of DBP and APA.]

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.[footnoteRef:53] [53: EnergyAustralia, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 19 April 2017.]

Qenos also recommended that the information disclosure requirements extend to processing plants, compression stations, hubs and storage facilities.[footnoteRef:54] [54: Qenos, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Options Paper, 12 April 2017.]

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:[footnoteRef:55] [55: DBP, Submission to Gas Pipeline Information Disclosure and Arbitration Framework Optio